Kip Tips


How to Avoid Marijuana Stock Scams

Cameron Huddleston

Use these steps to spot potential investment scams and to avoid becoming a victim of them.



The scammers are at it again. This time they're using the legalization of marijuana for recreational use in two states and for medical use in about 20 states to lure people into investing in potentially fraudulent growth opportunities in a new market.

SEE ALSO: How to Avoid Investment Scams on Twitter

These stock scams typically are pump-and-dump ploys, according to the Financial Industry Regulatory Authority (FINRA). Con artists promote shares of small companies with little or no history of financial success then sell off the shares after others invest and the stock price rises, leaving investors with worthless stock, according to FINRA. For example, one company sent out press releases and advertised on the Web that its stock could double its price soon -- although it didn't have a business plan and had only losses on its balance sheet.

To avoid marijuana-related stock scams -- as well as any investment ploys -- FINRA recommends that you take the following steps:

Be wary of stock tips from strangers. If you get an e-mail, fax or text message from someone you don't know touting a company's stock, you should be asking why a stranger is telling you about this investment opportunity. Most likely there is no opportunity, and the person who has contacted you is a paid promoter or company insider who is looking to profit from a spike in the stock price. You can use FINRA's Broker Check or call your state securities regulator to find out if the person selling the stock or investment is properly licensed and his or her firm is registered with FINRA, the Securities and Exchange Commission and a state regulator.

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Do your own research. Don't base your investment decision on a tip you received from a stranger. FINRA recommends doing an online search of the company and its officials to look for red flags, such as corporate name changes, and recent indictments or convictions of company officials. Use the Securities and Exchange Commission's EDGAR database to see if the company files reports with the SEC. If so, read those reports to verify any information you might have received about that company. However, small companies with less than $10 million generally don't have to file reports with the SEC, according to the agency. In this case, the SEC recommends calling your state securities regulator to find out whether it has information about the company. You also can contact the secretary of state where the company is incorporated to find out whether it is a corporation in good standing. See the SEC's guide to microcap stocks to learn more about getting information on small companies and pinpointing red flags.

Know where the stock trades. Most unsolicited investment recommendations involve stocks that don't trade on a major exchange, such as the NASDAQ Stock Market or New York Stock Exchange. Instead, they likely trade on the Over-the-Counter Bulletin Board or in the Pink Sheets. Although the OTCBB is overseen by FINRA, it doesn't require companies to meet any minimum listing standards -- such as minimum amounts of net assets and minimum numbers of shareholders. The Pink Sheets also don't require companies to have minimum assets or revenues. However, all companies quoted on the OTCBB -- but not the Pink Sheets -- must file financial information with the SEC or another regulatory agency. According to FINRA, many of the securities quoted in the OTC market are infrequently traded and can move up or down in price substantially from one trade to the next. So this can make it difficult to sell shares -- especially if the price drops dramatically.



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