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FINRA And The SEC Deflate Marijuana Stocks, For Now

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

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Can Marijuana Traders Handle A Stock Meltdown?

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This is part one of a four-part series with <a href="http://420investor.com">420 Investor</a> Alan Brochstein.

	Through most of the first quarter, cannabis stocks were on fire. 

	Unfortunately, the cannabis-rally has fizzled. Although the sector, as measured by the <a href="http://www.benzinga.com/index/$BZMJ" style="font-size: 13px;">Benzinga 420 Marijuana Index</a>, has more than doubled since the end of 2013, and is up 300 percent from the end of 2012, it has dropped about 60 percent since peaking eight weeks ago. Most stocks have returned to their longer-term moving averages.

	Though momentum stocks have been under pressure across the market, the cannabis collapse ties in closely with recently elevated efforts by FINRA and the SEC. While the SEC&#39;s intent to weed out bad actors is a good thing for the sector on a long-term basis, the recent actions have left a cloud of uncertainty -- that has led to a broad lack of investor confidence.&nbsp;

	Related: <a href="http://www.benzinga.com/news/14/05/4563162/marijuana-investors-beware-sec-warns-traders-of-fraud-in-the-industry">Marijuana Investors Beware: SEC Warns Traders Of Fraud In The Industry</a>

	It <a href="http://www.benzinga.com/news/14/02/4335253/3-things-that-could-extinguish-the-reefer-rally">has been speculated</a> the SEC could step up its involvement in the sector, and recent haltings have proven to be bad for the sector. Since early March, seven marijuana-related companies have been suspended:

	Mar. 5: Aventura Equities (OTC: <a class="ticker" href="/stock/avne#OTC">AVNE</a>)

	Mar. 14: Petrotech Oil and Gas (OTC: <a class="ticker" href="/stock/ptog#OTC">PTOG</a>)

	Mar. 21: Citadel EFT (OTC: <a class="ticker" href="/stock/cdft#OTC">CDFT</a>)

	Mar. 27:Advanced Cannabis Solutions (OTC: <a class="ticker" href="/stock/cann#OTC">CANN</a>)

	Apr. 10: GrowLife (OTC: <a class="ticker" href="/stock/phot#OTC">PHOT</a>)

	May 7: Cannabusiness Group (OTC: <a class="ticker" href="/stock/cbgi#OTC">CBGI</a>)

	May 16: Fusion Pharm (OTC: <a class="ticker" href="/stock/fspm#OTC">FSPM</a>)

	The first three suspensions didn&#39;t really faze the market, since none of those companies were considered market leaders. The suspension of Advanced Cannabis Solutions was a shock to traders, however, as it is one of the largest companies in terms of market-cap.

	The <a href="http://www.sec.gov/litigation/suspensions/2014/34-71814-o.pdf">announcement from the SEC</a> also introduced a new twist: The SEC can suspend a company&#39;s trading even when the company itself has not been accused of wrong-doing. In the case of Advanced Cannabis Solutions, the SEC pointed to the potential actions of a third-party.

	The next and most damaging suspension was GrowLife, considering they were likely the most widely held stock in the sector. The company, which is a frequent filer with the SEC, had run up from a Q3 low near $0.03 to a $0.78 high in March. Share prices soared because investors embraced <a href="http://www.theglobeandmail.com/globe-investor/news-sources/?mid=prnews.20131014.LA96701">the company&rsquo;s &quot;GIFT&quot;</a> strategy that provides capital to growers.

	The <a href="http://www.sec.gov/litigation/suspensions/2014/34-71924-o.pdf">SEC halt announcement</a> cited&nbsp; &quot;concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife&rsquo;s common stock.&quot;

	The sixth suspension, Cannabusiness Group, was less disruptive since the company was not widely held, but Friday&rsquo;s Fusion Pharm suspension pushed the market to recent lows. The <a href="http://www.sec.gov/litigation/suspensions/2014/34-72177-o.pdf">SEC order</a> was much more specific, calling into question the company&rsquo;s accounting.

	Denver-based Fusion Pharm appeared to be very busy filling customer orders, but has never filed any audited statements. Both Cannabusiness Group and Fusion Pharm traded on the OTC Pink Market.

	The cost of suspension, which leads to securities falling onto the Grey Sheets after their two-week halting, is quite high. Advanced Cannabis Solutions trades at about 50 percent of its price prior to suspension, while the other stocks that have reopened have lost 80 percent or more of their prior value.

	Suspension of trading is bad enough, but it appears the real punishment is in the aftermath, where investors must trade the stocks without bids and offers. Even if the SEC were to come out with a &quot;clean bill of health&quot;, which it doesn&#39;t offer, the company would still be required to reapply for a market, which takes substantial time.

	It is difficult to blame investors for moving to the sidelines in this environment. The bottom-line is that traders are better served than ever in this environment to double down on their fundamental efforts to make sure that the companies in which they are investing are legitimate.

	Don&#39;t forget to register for the first Annual Cannabis Investor Conference... check it out&nbsp;<a href="http://weedstockconference.com/">here</a>!
<ul><li><a href="http://www.benzinga.com/general/education/14/05/4574713/should-cannabis-investors-fight-the-sec#">Part 2: Should Cannabis Investors Fight The SEC?</a></li></ul>

The SEC posted a <a href="http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541842876#.U3YhmlhdVEl">press release</a> 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 &quot;potential fraud in microcap companies that claim their operations relate to the marijuana industry,&quot; which confirms sector speculation that more halts are to come. The Microcap Fraud Task Force of the SEC Enforcement division will continue to &quot;Scour the microcap market and proactively [identify] companies with publicly disseminated information that appear to be inadequate or potentially inaccurate.&quot;

	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: <a href="http://www.benzinga.com/top-stories/14/05/4543855/colorado-legislature-approves-banking-system-for-marijuana-businesses">Colorado Legislature Approves Banking System For Marijuana Businesses</a>

	Along with the press release warning investors of fraud in the sector, the SEC also posted a page titled &quot;<a href="http://investor.gov/news-alerts/investor-alerts/investor-alert-marijuana-related-investments#.U3YlaVhdVEl" style="font-size: 12.727272033691406px;">Investor Alert: Marijuana-Related Investments</a>,&quot;&nbsp;which is basically the SEC version of a guide to investing the the marijuana industry. The alert notes&nbsp;in the opening paragraph&nbsp;how frequent haltings have become &nbsp;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 (OTC: CGBI), Growlife (OTC: <a class="ticker" href="/stock/phot#OTC" style="font-size: 12.727272033691406px;">PHOT</a>), Advanced Cannabis Solutions (OTC: <a class="ticker" href="/stock/cann#OTC" style="font-size: 12.727272033691406px;">CANN</a>), Aventura Equities (OTC: <a class="ticker" href="/stock/avne#OTC" style="font-size: 12.727272033691406px;">AVNE</a>), Citadel EFT (OTC: <a class="ticker" href="/stock/cdft#OTC" style="font-size: 12.727272033691406px;">CDFT</a>) and Petrotech Oil and Gas (OTC: <a class="ticker" href="/stock/ptog#OTC" style="font-size: 12.727272033691406px;">PTOG</a>) have all been brought to a halt.

	As of Friday morning, Fusion Pharm (OTC: <a class="ticker" href="/stock/fspm#OTC" style="font-size: 12.727272033691406px;">FSPM</a>) 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.&nbsp;

	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 <a href="http://www.sec.gov/litigation/suspensions/2014/34-72177.pdf" style="font-size: 12.727272033691406px;">press release</a> was the most specific, stating that the security was halted because the company was lacking &quot;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&#39;s assess; (2) the company&#39;s revenues; (3) the company&#39;s financial statements; (4) the companies business transactions; (5) the company&#39;s current financial condition.&quot;

	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.&nbsp;

	To learn more about the marijuana industry, check out the <a href="http://420investor.com">420 Investor</a> and the <a href="http://www.benzinga.com/index/$BZMJ">Benzinga Marijuana Index</a>.&nbsp;

Even factoring in a rough conclusion, cannabis stocks had a phenomenal first quarter.&nbsp;

	Being bullish on this sector could lead to huge gains if correctly positioned, but it also could mean detrimental losses if the sector is misplayed.

	A lot of traders are &lsquo;all in&rsquo; on cannabis stocks. There is no reason not to be bullish on marijuana stocks, but traders must&nbsp; recognize the potential risks.&nbsp;

	The valuations of companies are challenging to understand for every stock in the sector.&nbsp; This isn&#39;t surprising, because canna-businesses are still in the very early stages of transforming from back-room operations to a publicly traded, big-money industry.&nbsp;

	There is a ton of money flowing into the market, and much of it comes from novice investors that want to cash in on the &lsquo;Green Rush.&rsquo;&nbsp;

	Investing in marijuana stocks is risky. Not only are valuations high (with off-the-charts positive sentiment), but with almost all of the stocks trading OTC (many &quot;Pink&quot;), disclosure is lacking.&nbsp;

	Consequently, traders have to worry not only about the companies will be winners, but how realistic the valuations are. But these risks are inherent to all penny-stock investing.

	Advanced Cannabis Solutions (OTC: <a class="ticker" href="/stock/cann#OTC">CANN</a>) and other marijuana companies that have been halted (such as Aventura Equities, Inc. (OTC: <a class="ticker" href="/stock/avne#OTC">AVNE</a>), PetroTech (OTC: <a class="ticker" href="/stock/ptog#OTC">PTOG</a>) and Citadel EFT (OTC: <a class="ticker" href="/stock/cdft#OTC">CDFT</a>)), have been a demonstration of the risk affiliated with trading marijuana stocks, serving as a great example of why traders must practice risk-management.&nbsp;

	See also: <a href="http://www.benzinga.com/news/14/02/4335253/3-things-that-could-extinguish-the-reefer-rally">3 Things That Could Extinguish The &#39;Reefer Rally&#39;</a>

	As with any new sector, cannabis stocks are likely to be very volatile. Traders must be prepared for this volatility. If not, it will be easy to buy high, panic and sell low. This is a sure-fire way to lose money. Traders that go all-in on the sector run the risk of seeing a pullback, and having no ability to buy low because they are already fully invested.

	And, pullbacks are inevitable.

	Traders that hold an individual security in large size take an even bigger risk. No one has a crystal ball, so diversified holdings are key.&nbsp;

	No matter how confident in the market, always be prepared for a downswing. Don&#39;t put everything into the sector, and make sure that you holdings are diversified.&nbsp;

	Understand valuations, use charts, and focus on quality (or at least understand where a company lacks it).&nbsp; Many of the dotcom winners are still below their crazy levels. &nbsp;

	Remember that a good company and a good stock aren&#39;t the same thing, and don&#39;t be afraid to take some profits along the way.&nbsp;

	Disclosure: The 420 Investor has no positions in any of the stocks mentioned.

Marijuana has seen an increase in <a href="http://www.gallup.com/poll/165539/first-time-americans-favor-legalizing-marijuana.aspx">cultural acceptance</a> recently, as well as grabbing the attention of medical professionals and the <a href="http://www.benzinga.com/news/14/03/4399775/feds-approve-first-ever-medicinal-marijuana-study">U.S. government</a>.

	The reach has even started making waves in the markets.

	&quot;It&#39;s drawing in people who have never invested and sometimes drawing back people who swore off trading after the last two crashes,&quot; Alan Brochstein told Benzinga.

	Brochstein said that in his experience covering marijuana stocks, people investing in these stocks are passionate even if they&#39;re not consumers of the drug. As of January 2014, he believes there&#39;s about 100,000 people investing in marijuana stocks.

	&quot;I don&#39;t know what&#39;s driving it. [About a year ago] there was a lot of interest in Seeking Alpha and iHub,&quot; said Brochstein. &quot;Like anything where people start to make money, people give it attention. What&#39;s different [with marijuana trading] is the passion that goes with it, an emotional commitment. &#39;I believe in something and I can make money.&#39;&quot;

	Related: <a href="http://www.benzinga.com/general/education/14/03/4399685/marijuana-economy-has-plenty-of-room-to-grow">Marijuana Economy Has Plenty Of Room To Grow</a>

	The endeavor is not without risk, however.

	Medical marijuana is legal in 20 states, while recreational is legal in just Colorado (Washington will soon join). There are big companies bringing in major dollars, but most stocks themselves are still over-the-counter (OTC).

	OpenVape manufactures a product similar to an e-cigarette. Its vaporizing pen heats a cartridge filled with purified cannabis oil, allowing users to discreetly smoke marijuana. The company estimates it sells about one cartridge <a href="http://www.cnbc.com/id/101445913">every 30 seconds</a>.

	OpenVape Spokesman and Chief Revenue Officer Todd Mitchem told CNBC he&#39;s hopeful the company will be worth one billion dollars within the next two years, which Brochstein agreed could happen. But, the industry is still more-or-less in its infancy.

	Aventura Equities (OTC: <a class="ticker" href="/stock/avne#OTC">AVNE</a>) was halted in early March 2014 by the SEC, which had questions concerning the adequacy and accuracy of publicly available information.

	The stock for <a href="http://finance.yahoo.com/news/aventura-equities-signs-definitive-agreement-155200943.html">Aventura</a>, which holds marijuana-related intellectual property and licensing rights to a number of products currently sold by third parties in the California medical marijuana market, was down 85 percent on March 19.

	Businessmen, traders, investors and consumers should sill tread lightly. &quot;What companies are real or not,&quot; asked Brochstein. &quot;Like Warren Buffett said - you never know who&#39;s swimming naked until the tide goes out.&quot;

	New Guard And Old Guard Come Together

	The 420 Investor said he hadn&#39;t touched marijuana in over 25 years, until a recent trip to Colorado. He thinks people in their 40s, 50s and older might be amazed by the developments of the plant itself (how it&#39;s grown, treated, etc.) and the way it can be consumed.

	&quot;A lot of people like me tried it in college, then at some point had to stop (family, job screens, etc.),&quot; said Brochstein. &quot;Now they&#39;re older. The moves are changing. Some baby boomers will come back -- it&#39;s a simple and healthier process nowadays.&quot;

	Brochstein has nearly 70,000 followers on Seeking Alpha, most of anyone on the site. His <a href="http://marketfy.com/store/item/420investor/">Marketfy product</a> has gained over 1,000 subscribers since September 2013. One subscriber said that they turned $42 (the cost of the product) into $8,000 in one month.

	In a recent survey completed by 327 subscribers, over 30 percent said they were &#39;novice&#39; investors, while less than 20 percent said they were &#39;very experienced&#39; or &#39;professional.&#39; About a combined 33 percent were younger than 29 and older than 59 years old.

	More than 17 percent of respondents said that haven&#39;t used marijuana in over a decade.

	&quot;People get galvanized by this idea that this is people&#39;s fundamental right. You can be excited without being a user.&quot;

	This is one of a series of pieces with comments from leading industry analyst and <a href="http://marketfy.com/store/item/420investor/">420 Investor</a> Alan Brochstein. Check Benzinga for others news and insight into the marijuana industry.

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The 'Green Rush' Is Bringing Traders New And Old Into To The Fold Of Marijuana Stocks

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SEC Suspends Trading in Securities of Aventura Equities Until 11:59 PM ET on March 18

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