Source:  Benzinga, 420 Investor Alan Brochstein May 23 2014

This is part three of a four-part series with 420 Investor Alan Brochstein. Read part two here.

FINRA and the SEC have clearly cracked down on the marijuana stocks.

While FINRA’s interaction with the market previously was to provide warnings, the firm has clearly waved their big stick over the past 10 weeks; working with the SEC to suspend seven stocks –from small, relatively unknown companies to sector leaders.

While many are frustrated that the sector seems to be under attack, it’s easy to support the mission of promoting transparency and integrity.

FINRA has shared some specific advice to investors so that they can avoid becoming victims of investment scams.

The recent marijuana alert that was reiterated in January shared some generic advice – all of which makes a lot of sense.

The suggestions are what you might expect. They ask investors to take into account the company’s filing status with the SEC and to take caution regarding frequent changes in the business focus.

Related: Marijuana Investors Beware: SEC Warns Traders Of Fraud In The Industry

The 420 Investor community sees the longer-term appeal of the marijuana sector, spending a great deal of time looking for issues involving a lack of transparency, manipulation and signs of management not acting in the best interests of outside shareholders. Unfortunately, many in the space value a quick-buck over creating long-term value.

Take A Long, Hard Look

The focus at 420 Investor is to assess the people involved with the organization, including the members of the board of directors and the officers. 420 Investor also examines outside investors to learn more about the companies.

However, 420 Investor doesn’t only examine the people, it also examines the financial condition of the companies and their business models. As far as the people, the community is interested in finding a good balance of experience and capabilities both within the marijuana industry,  and an understanding of the capital markets.

Many of the companies in the space have relied upon third-party providers of capital at onerous terms, whether it is highly dilutive convertible notes, or very low priced restricted stock. Investors should look for companies with adequate access to capital.

Finally, in terms of a business model, the concept has to make sense. Hemp, Inc. (OTC: HEMP), for instance, has been trading publicly for three years now, but it has never had a consistent plan or real revenues. In 2014, the company has done 10 deals with other publicly-traded penny stocks, but was late on filing its Q1 disclosure with OTC Markets.

The best bet is that the large amount of revenue that the company pre-announced will be a function of payments in stock rather than cash. Last year, Hemp did a similar deal only to see the stock tank with no material sales ever recognized from the partnership.

Be Prepared, Do Your Research

Beyond the initial vetting, it’s important to take precautions. The fact that a company files with the SEC is not protection from either suspension (several have been SEC filers) or from potential chicanery. Investors should first look to the filings at, or if the company doesn’t file, the disclosures at

The next visit should be the company website. Many of the companies in the space don’t have operating websites. Others have them, but they lack information like the names of the people who work at the company or even an address or phone number. Press releases are another source of information. Vague or highly promotional press releases are a red flag. Similarly, a constant barrage of press releases can be the sign of a potential scam.

An example of a particularly concerning marijuana stock is Smart Ventures (OTC: SMVR). The company, which is operated out of a residence in Houston and has historically been in the oil & gas industry (and still is purportedly), has posted several press releases over the past two months.

The emails to the addresses provided in the press releases bounce back, and phone calls to the number provided (which goes straight to voice mail) are not returned. Unfortunately, this is one of just many examples that suggest that the work of FINRA and the SEC is not yet done.

Don’t forget to register for the 1st Annual Cannabis Investor Conference… check it out here!


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