Source:  By By Nathan Vardi, Forbes May 27, 2014

A regulatory crackdown on the controversial sector has dealt a severe blow to some of the most popular names.

By Nathan Vardi, Forbes

The Wall Street Journal last week made a big deal about the explosion of average monthly trading volume on nation’s penny-stock market, but the Securities & Exchange Commission’s limited crackdown on the most controversial corner of that market might have already crushed the companies that best represent the risky small outfits typically known as penny stocks.

To the degree that there has been a penny stock market boom in the U.S., it has been led by the marijuana sector. These are the dozens of companies that are trying to cash in on investor interest that has been sparked by recent changes in various state laws regarding medical marijuana and even recreational marijuana. Pot stocks are very different than the other companies fueling the Over The Counter bulletin board these days, namely Fannie Mae (FNMA +2.77%), Freddie Mac (FMCC +1.85%) and the foreign companies that are not listed on a major exchange.

But pot stocks have come under siege in recent weeks by the SEC. The SEC has temporarily halted eight pot stocks in recent months because of regulatory concern over serious issues, like “manipulative transactions” and “unlawful distribution of securities.’

Some of the companies that saw their shares temporarily halted were the most popularly-traded pot stocks, such as GrowLife (PHOT +38.89%), which has seen its stock drop by 88 percent since its highs in March. Much of that crash occurred after the stock resumed trading following the temporary halt.

Earlier this month, the SEC struck a severe blow against pot stocks by issuing an investor alert “warning about possible scams involving marijuana-related investment” and noting that “fraudsters often exploit the latest growth industry to lure investors with the promise of high returns.” Back in August 2013, The Financial Industry Regulatory Authority had issued a similar investor alert over marijuana stocks, but it did not have much of a negative effect on the sector.

The impact of the SEC’s moves against pot stocks has been drastic. The 420 Marijuana index has plunged by 62 percent since hitting its peak in March. It’s still higher than where it was at the end of 2013, but the pot stock bubble that emerged between January and March has seriously deflated.

On the surface, it seems the SEC played an important role in the selloff of pot stocks that has taken place since it temporarily halted a prominent pot stock called Advanced Cannabis Solutions (CANN +2.86%) in late March. There have been other factors, like critical press. Shares of CannaVest (CANV -3.01%), which traded for as much as $201 and now change hands for $18.30, crashed after Forbes reported in March that the first penny pot stock billionaire said there was probably a bubble in CannaVest’s stock.

For now, pot stock players are begging for mercy. Kyle Tracey, the former president of GrowLife who is now the chief executive of a pot stock called Vape Holdings (VAPE +14.97%), issued a letter to shareholders last week saying the halting of pot stocks by the SEC “has resulted in rampant uncertainty within the sector” and has had “an impact on shareholder value.” Shares of Vape have fallen from a high of $41.25 in March to $1.87.

John Germinario, who in April became chairman of pot stock Creative Edge Nutrition (FITX +2.48%), last week wrote a letter to the SEC saying he was “appalled” with the SEC’s shot gun approach against the pot stock sector. “It has resonating effects on the entire industry which include companies that are not involved in the investigations,” wrote Germinario. “The investor alert targeting the marijuana industry has caused my company’s share price unjustifiable reduction of over 50% in a few days. This is unacceptable!”

The SEC’s actions may have deflated the pot stock bubble and tarred the industry with a broad brush, but its limited crackdown has allowed some pot stocks to continue trading tens of millions of shares following temporary halts with no regulatory follow up about some pretty serious accusations. Those shares now trade on the so-called gray market, meaning that investors are operating largely in the dark and can only see the last market price for a stock — they can’t see recent bid or ask quotes.

The allure of combining marijuana with penny stocks is strong, but for now investors seem to be spooked — worried that if their investments won’t be undermined by a penny stock huckster, it will be by securities regulators.


Article source:–sec-pops-the-pot-stock-bubble