Marijuana Investors Beware: SEC Warns Traders Of Fraud In The Industry

The SEC posted a press release warning investors of fraud in the sector Friday morning, following the seventh trading halt in two months in the marijuana sector.

The press release warns of "potential fraud in microcap companies that claim their operations relate to the marijuana industry," which confirms sector speculation that more halts are to come. The Microcap Fraud Task Force of the SEC Enforcement division will continue to "Scour the microcap market and proactively [identify] companies with publicly disseminated information that appear to be inadequate or potentially inaccurate." 

The fact that the SEC is pursing companies with inadequate or inaccurate information puts almost the entire industry at risk of being halted. A majority of marijuana stocks are traded on the Pink OTC market, where the required financial disclosure is incredibly minimal.

Related: Colorado Legislature Approves Banking System For Marijuana Businesses

Along with the press release warning investors of fraud in the sector, the SEC also posted a page titled "Investor Alert: Marijuana-Related Investments," which is basically the SEC version of a guide to investing the the marijuana industry. The alert notes in the opening paragraph how frequent haltings have become  and heavily stresses the risk involved in investing in the volatile marijuana market. It warns of investing in companies that have previously been halted by the SEC, securities that are used in pump-and-dump email scams, companies with large amounts of insider holdings, and frequent (and exaggerated) press releases. It also warns of unregistered offerings, which is very concerning considering many companies in the sector have never filed any documents with the SEC.

Since March, Cannabusiness Group CGBI, Growlife PHOT, Advanced Cannabis Solutions CANN, Aventura Equities AVNE, Citadel EFT CDFT and Petrotech Oil and Gas PTOG have all been brought to a halt.

As of Friday morning, Fusion Pharm FSPM became the seventh stock halted in the sector in under three months. The SEC press release noted that five marijuana-sector stocks have been halted, but it has actually been seven. 

Until Friday morning, all of the press releases announcing the halts have been vague, giving traders very limited information about what they are investigating.

The Fusion Pharm press release was the most specific, stating that the security was halted because the company was lacking "current and accurate information about the company because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things: (1) the company's assess; (2) the company's revenues; (3) the company's financial statements; (4) the companies business transactions; (5) the company's current financial condition."  The commission also advised traders to considering forgoing any information provided by the company that is currently available or is being made available in the coming days. 

To learn more about the marijuana industry, check out the 420 Investor and the Benzinga Marijuana Index.