Investors are hoping that US regulators will weed out cannabis scammers as they see their profits go up in smoke.
Staking cash in companies rooted in recreational cannabis applications promises big yields, but scores of investors are losing their money to bogus firms that disappear with their money.
US regulator the Securities and exchange Commission (SEC) has warned for years about the potential risks of investing in marijuana industry related companies after a rising trend of complaints.
Firms have been suspended and fined for misleading investors about their role in the industry.
The latest scammers were Medbox, a company planning to place cannabis vending machines on street corners.
Questions for stock pluggers
The firm falsely reported income from sales to raise share prices while a shell company bought and sold stock to inflate the value.
The SEC says the $12 million scam raised 90% of Medbox’s reported sales in 2014.
Although several US states are legalising cannabis, companies in the sector do not trade on major stock exchanges, so are not liable to meet their strict financial reporting rules.
Like other investment scams, anyone contacted by someone selling cannabis stocks should ask some simple questions:
- Why are you being offered the stock?
- Is the seller paid a commission for dumping shares?
- What are the facts that support the hype? Even if a company files financial reports with the SEC, the regulator will not check the details and it’s easy to pay an auditor to sign-off the accounts
The scammers are riding a wave of popularity with cannabis.
Women are main customers
Several states have voted to accept limited official sales of the drug, while Canada seems ready to follow, which would give a market of more than 100 million North American users.
Uruguay is the only other country where cannabis is legal.
Because the market is loosely regulated, banks turn away marijuana related businesses as customers and fraud is rife.
Sales in California, Nevada, Maine and Massachusetts, states where marijuana is legal for adults to use, could top $6.5 billion a year.
The main customers are aging hippies from the 60s and women who prefer to eat or drink the drug rather than smoke, said Professor John Quelch, of Harvard Business School and Harvard School of Public Health.
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