Cannabis is a growing industry around the country, ripe with investment and growth opportunities. Every new industry, however, comes with risks. “Hot” industries are always inundated with scams and rip-offs ready to take advantage of unwary parties. Below, we discuss a few of the more prominent investment scams that have already permeated the cannabis industry. For professional, considered advice on your marijuana business or cannabis investment opportunity, contact a knowledgeable California cannabis business attorney.
Cannabis Market Manipulation
Penny stocks are a risky investment at the best of times. Hollywood blockbuster The Wolf of Wall Street illustrated in vivid detail how unscrupulous brokers and other parties sell off nearly worthless stocks with the promise of large gains, thanks to the possibility of exponential growth. Such plans rarely pay off.
With the growth of the marijuana industry has come a bevy of new publicly-traded companies that purport to be engaged in the cannabis business, but which are actually vehicles for pump-and-dump schemes. The groups behind these schemes convince enough investors to buy the stock by overestimating the value and often openly misstating what the company actually does. Once the price is driven up by misled investors, the original stock owners “dump” their shares for a premium, leading to a sudden tanking of the share price costing regular investors all of their money.
Be wary of any publicly-traded cannabis company, as they are rife with investor fraud. Microcap stocks, including penny stocks and nanocap stocks, are especially easy to manipulate because the public has so little information about the company and the low price allows for higher volatility.
Crowdfunding for Cannabis Companies
Crowdfunding has become increasingly popular in recent years. Rather than limiting investment solicitations to established investment firms and angel investors, crowdfunding allows entrepreneurs to go directly to the public at large with investment “opportunities.” The SEC has rules regarding crowdfunding, including restrictions on advertisements and limits on investments per person, but crowdfunding for marijuana businesses is very much allowed.
Unfortunately, like penny stock pump-and-dump schemes, many crowdfunding campaigns are simply disguised means to swindle unsophisticated investors out of their cash. Companies offer an ownership stake in their business in exchange for cash, and then find creative ways to abscond with the investment without actually building or operating a cannabis enterprise. Even companies that actually do cannabis business may work to skirt SEC rules in order to keep a larger portion of the investment while granting a smaller stake in the business, while toeing the line regarding permissible marketing statements.
Illegal Cannabis Companies and Investment Fraud
Marijuana may be legalized in a number of states, but that does not make every cannabis company a legal, legitimate enterprise. Legitimate cannabis enterprises must adhere to a laundry list of state and local licensing rules, as well as restrictions on the nature of their businesses, their location, and other requirements. The lack of a legitimate business does not always stop a purported marijuana enterprise from soliciting investments, however.
Many unscrupulous parties use crowdfunding campaigns, cold-call solicitation, and other means to induce parties into investing in businesses that are actually illegal under state or local law. They may lack the proper licenses, or they may purport to engage in a business that is illegal under state law–such as marijuana delivery or online marijuana sales. California, for example, continues to prohibit the sale of alcohol on the same premises as marijuana. A company claiming to start a “weed and beer bar” is, at best, doomed to fail once a lawyer informs them that their planned enterprise is illegal and, at worst, intentionally misleading investors.
If you plan to invest in a marijuana company, make sure you get all relevant details about the enterprise before you give your hard-earned money away. Find out what business they plan to engage in, make sure that business is lawful, ensure they have (or are in the process of obtaining) all relevant business licenses, and do your research on the company itself. Can you find public details about the company? Have they changed names recently, especially on multiple occasions? Did they solicit your investment directly, through informal means such as social media? If you identify any red flags, keep your checkbook in the drawer.
Call a Seasoned, Experienced California Cannabis Business Lawyer for Help With Your Marijuana Business
If you are considering an investment in a cannabis business in California, or if you are dealing with regulatory, licensing, or other legal issues with your hemp, CBD, or cannabis business in Los Angeles or Southern California, call McReynolds Vardanyan, LLP, in Glendale at 818-855-2115. Our California cannabis business lawyers will work with you to get your budding business off the ground efficiently, effectively, and legally.