As stock in Canadian cannabis company Tilray TLRY, -4.09% enjoyed a wild ride over the last several months ahead of recreational marijuana being legalized in Canada on Wednesday, investors are turning their attention to this sector.
But as people look at other lesser-known cannabis companies and private equity funds in the hopes they will yield some big gains over the coming months and years, the Securities and Exchange Commission has warned them to do their due diligence.
Last month, the SEC charged Texas-based cannabis fund Greenview Investment Partners LP with misappropriating $3.3 million of investors’ money to fund its founder’s “lavish personal expenses,” a complaint filed in the District Court for the Northern District of Texas said.
Greenview’s written offering materials and its website “were replete with lies,” the complaint alleged, and its founder and manager Michael E. Cone allegedly took on a false identity to mislead investors. (The fund could not be reached for comment.)
‘Fraudsters may try to use media coverage about the legalization of marijuana to promote an investment scam.’ The Securities and Exchange Commission
The SEC issued a consumer warning against investing in alleged scams like these, saying its Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force has identified several common red flags in the industry as it continues to grow.
Investors have been eager to jump into the sector as marijuana stocks have rallied in recent months. Recreational cannabis was a $6 billion industry in 2016 and, as more states move to legalize marijuana, it’s projected to reach $50 billion in annual legal sales by 2026.
In this particular case, Cone linked to articles on Greenview’s website that supposedly had appeared in credible publications, but were actually promotional releases written and paid for by Cone himself. While this is an extreme case, the SEC warns consumers to be wary of hype surrounding new products or companies. “Fraudsters may try to use media coverage about the legalization of marijuana to promote an investment scam,” the SEC said
After Sen. Chuck Schumer introduced a bill to legalize marijuana in April, investors have shown renewed interest. Canada is preparing to legalize recreational marijuana in October.
“Any hot sector attracts all sorts of interests, good and bad,” said Morgan Paxhia, co-founder and managing director of cannabis hedge fund Poseidon. “Cannabis is transitioning into a legal emerging sector of the global economy so interests are strong. There is a lot of opportunity out there but so is the risk.”
But even legal cannabis ventures carry risk for the investor. Here are some ways to ensure your investments go to safer places as the cannabis market matures:
Check for licenses
Check out the background of companies before investing in them and the licensing status of anyone recommending or selling an investment, the SEC suggests. This free tool allows users search through investment adviser firms registered with the SEC as well as FINRA’s BrokerCheck system, which verifies whether an entity is a brokerage firm.
Choose an exchange-listed company
Investors should also check that the company is legal and listed on a stock exchange. Check the New York Stock Exchange company index on the NYSE website or the NASDAQ COMP, +2.90% company list, which shows companies listed on NASDAQ and NYSE NYA, +1.46% and AMEX.
If a company is listed publicly, the SEC requires it o implement internal controls and practice financial reporting at all levels of the organization. It must file annual reports with a summary of business operations, information on number of shareholders, management team’s salaries, and financial statements.
Make sure companies you invest in are legal
The current legal framework for cannabis is a confusing patchwork across the United States. In some states, only certain cannabinoids (compounds derived from marijuana, like cannabidiol, which is also known as CBD) are legal, whereas other states allow Tetrahydrocannabinol, or THC (the component in weed that makes people high) and products that contain it.
Make sure a company is in compliance with local and federal regulations. If you are not sure, invest in ancillary businesses that sell products related to the cannabis industry, but do not produce or distribute any drugs or cannabis products themselves. This includes packaging, accessories like pipes and grinders, and gardening or greenhouse systems for growing the plants.
Get a daily roundup of the top reads in personal finance delivered to your inbox. Subscribe to MarketWatch's free Personal Finance Daily newsletter. Sign up here.
