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SEC Warns of Marijuana Stock Scams

With more and more states relaxing regulations of both medical and recreational marijuana use, the potential for big profits have many people seeing green. Unfortunately, along with the growth in legitimate business looking to make money in the growing industry, scammers have followed closely behind, looking to con investors out of millions of dollars. 

Colorado and Washington have already legalized recreational use of marijuana. Oregon, Alaska and Washington DC all have November ballot measures that could decriminalize marijuana use. Along with the nearly two dozen states including Massachusetts, who have already legalized medical use of marijuana business cashing in on the crop stand to make a lot of money. State governments are also cashing in; Colorado made more than $7 million in taxes, licenses and fees in July 2014 alone.

The promises of profiting from the growing industry has raised the eye of federal investigators. The Securities and Exchange Commission (SEC) is investigating a number of money-losing marijuana industry companies. These companies include GrowLife, a supplier, DigiPath, a marijuana marketing consulting group, and GrowBlox Sciences, a seller of climate-controlled light chambers for growing the plants.

Although, to date, none of the companies have been accused of wrongdoing, there is concern that the people running the companies are putting out press releases and manipulating stocks. In fact, GrowLife had its trading halted by the SEC in April over concerns of "potentially manipulative transactions."

According to Randy Katz, a securities lawyer in Los Angeles, investors actions in GrowLife and DigiPath have raised a red flag. "The fact I'm going to issue stock at half a cent doesn't make me a fraudster, but if I issue a gazillion shares at half a cent, especially in a hot industry, then the odds are pretty good that I'm going to attract scrutiny," said Katz.

The Financial Industry Regulatory Authority (FINRA) has issued a press release warning of possible fraudulent marijuana stock scams. According to FINRA, many of these thinly traded stocks bear the hallmarks of "pump and dump" schemes. Typically, scammers will push their investments with aggressive or even false and misleading statements, which are intended to create an unwarranted demand for shares of the companies with no real history of financial success. Once the share prices rise, buoyed by unwary investors, the scammers sell off their shares at a profit, leaving the rest of the investors with worthless stock.

Many of these companies issue a number of misleading press releases, and spread their message through sponsored links or spam, to create a hollow buzz surrounding their industry. In reality, these companies show a history of losses, with little real chance for the company making the business profitable, and sometimes, without even a plan to make the company profitable.

The SEC has issued a press release warning investors of potentially fraudulent marijuana-based investment schemes. Both the SEC and FINRA offer a number of tips to avoid being conned by these fraudulent investment opportunities. The SEC suggests looking for red flags, including guaranteed high returns, pressure to buy now, no income requirements, and unsolicited offers sometimes through social media.

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