Source: Nathan Vardi Forbes Staff May 16 2014
The penny stock market goes through cycles as promoters and stock peddlers back whatever investment trend is hot at a particular point of time—uranium, the Internet, oil. Without a doubt, the penny stock theme of the moment is marijuana and the Securities & Exchange Commission doesn’t like it.
The penny pot stock boom has been going on for a while, but on Friday the SEC issued an investor alert and warning about “possible scams involving marijuana-related investments” and noted that “fraudsters often exploit the latest growth industry to lure investors with the promise of high returns.”
“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud,” Elisha Frank, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force, said in a statement. “Wherever we see incomplete or misleading disclosures, we act quickly to protect investors.”
The SEC said on Friday that it has seen an increase in the number of investor complaints regarding marijuana-related investments. The Financial Industry Regulator Authority warned investors to be on the lookout for pot stock scams last year. But despite the warnings, temporary stock halts and negative press, investors continue to flock to pot stocks that trade mostly on the Over The Counter Bulletin Board and Pink Sheets.
Dozens of companies listed on the penny stock market have turned themselves into pot stocks in recent months, either through reverse mergers or a simple name change. In general, these companies don’t actually touch marijuana, but claim to be involved in the business of providing infrastructure and services to marijuana businesses or in the business of non-psychoactive CBD oil. Trading of the shares of some of these companies has been extremely volatile. Shares of CannaVest, for example, traded for as much as $201 this year; they now change hands for $18.50. One of men who helped launch the company, a Florida physiotherapist named Stuart Titus, pocketed $7 million in stock sales this year, SEC filings show.
The SEC’s approach to the pot stock game has baffled both promoters and critics of publicly-traded companies that claim to be in the marijuana and hemp industries. Some of the claims the SEC has made against certain companies while temporarily halting their stocks have been alarming, but two weeks after the temporary halts millions of shares of those companies are changing hands again, at a much lower price, without further action by the SEC.
In April for example, the SEC temporarily halted trading in shares of GrowLife, which trade under the ticker PHOT and is one of the most popularly-traded pot stocks in the sector. At the time, the SEC said it was halting trading of the company’s shares because of “potentially manipulative transactions in PHOT’s common stock.” The SEC did not communicate any more information about the potentially manipulative transactions, but GrowLife CEO Sterling Scott said in a statement that SEC staff had suggested to the company that regulators halted the stock because of concerns that 3rd party holders of Growlife stock were set to engage in some form of manipulative promotional activity. “I can confirm that GrowLife was not involved in the planning of any potentially manipulative promotional activity nor does it have any knowledge of any planned 3rd party promotional activity of any kind or type, proper or improper,” Scott said at the time. Shares of GrowLife plunged when they resumed trading in late April, but tens of millions of shares of the company continue to trade daily without any further clarification or action by the SEC.
Article source: http://www.forbes.com/sites/nathanvardi/2014/05/16/sec-warns-investors-about-pot-stocks-scams/