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Originally published Saturday, April 26, 2014 at 8:00 PM

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Legalized pot takes penny stock on wild ride

The boom in public companies in the pot business started in early 2013 as more states legalized medical marijuana.


The Orange County Register

Where to get help

• If you believe you’ve been defrauded or treated unfairly by a securities professional or firm, file a complaint with the Financial Industry Regulatory Authority at http://www.finra.org/Investors/ProtectYourself/p118628

• If you suspect that someone you know has been taken in by a scam, send a tip to http://www.finra.org/Industry/Tools/P006647

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Tips to avoid potential marijuana-related stock scams

Ask: “Why me?”

Why would a total stranger tell you about a really great investment opportunity? The answer is there likely is no true opportunity. In many scams, those who promote the stock are corporate insiders, paid promoters or substantial shareholders who profit if the company’s stock price goes up.

Consider the source.

It’s easy for companies or their promoters to make exaggerated claims about lucrative contracts, revenue, profits or future stock price. Be skeptical about companies that issue a barrage of news releases and promotions in a short period of time. The objective may be to pump up the stock price. Likewise, be wary of information that only focuses on a stock’s upside with no mention of risk.

Do your research.

Search the names of key corporate officials and major stakeholders, as well as the company itself. Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags.

Know where the stock trades.

Most unsolicited spam recommendations involve stocks quoted on an over-the-counter (OTC) quotation platform like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group. Generally, there are no minimum quantitative standards that a company must meet to have its securities quoted in the OTC market.

Read a company’s SEC filings.

Check the SEC’s EDGAR database — www.sec.gov — to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company.

Be wary of frequent changes to a company’s name or business focus.

Check out the person selling the stock or investment.

To check the background of a broker or investment adviser, use FINRA’s BrokerCheck. You can also call your state securities regulator. When using BrokerCheck, research the name of the person who contacted you, as well.

FINRA

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The news releases began to flow in February.

A Mission Viejo, Calif., penny-stock company announced it was leaving behind the world of nutritional supplements to enter “the growing billion-dollar marijuana industry.”

The newly rechristened CannaBusiness Group soon touted its purchase of The NorCal Connection, an online storefront for smell-proof marijuana containers. Next, the company announced it had acquired 17.3 acres in Butte County, Calif., which it said were already leased to a licensed medical-marijuana grower.

The push paid off. In a matter of weeks, CannaBusiness’ stock skyrocketed from around 2 cents a share to more than 40 cents per share. On March 17, the most frenetic day of trading, 46.8 million shares changed hands, or 82 percent of the shares outstanding.

The shares have bounced back toward Earth since then, losing three-quarters of their value off that peak. They still are priced higher, though, than when the company focused on diet and energy pills.

The wild ride of CannaBusiness and its CEO, Michael Cummings, provides a window into the “green rush” of investment dollars targeting anything associated with the newly legalized business of marijuana.

It also shines a light on the mercurial world of penny stocks — in this case, a company that’s reported a minor year-end profit just once in its 34-year history, using seven names and a series of reverse mergers and acquisitions to bounce among six different industries, from film distribution to professional baseball to marijuana.

“There are going to be some really amazing companies that come out of this,” said Troy Dayton, CEO of The ArcView Group, a San Francisco investor network focused on the marijuana industry. “It’s just hard to know which one’s which.”

The boom started in early 2013 as more states legalized medical marijuana. Pot stocks surged in over-the-counter markets but then quickly cooled, continuing that downward trend for the rest of the year.

Then 2014 hit.

Recreational marijuana became legal in Colorado, while Washington started ramping up to allow retail sales this summer. President Obama signed a farm bill that loosened rules prohibiting hemp production.

And, despite federal laws prohibiting it, 20 states plus Washington, D.C., had agreed to allow medicinal marijuana in some form.

“That’s when the flood began,” Dayton said. “They see this as the next great American industry.”

More established pot-related penny stocks began riding the resulting wave of price spikes and valleys. Meanwhile, many new players started jumping on the green bandwagon.

“In the past three months, there have been numerous penny stocks from all kinds of industries — gold and oil mining, biofuels, music rights, to name a few — that have decided to undergo yet another change of their business and came up with announcements about joining the marijuana industry,” said Georgi Kamburov, who follows the industry as a writer for HotStocked.com.

CannaBusiness’ Cummings, didn’t respond to requests over several weeks to be interviewed.

But frequent name changes, scarce financial data and a sudden volley of promotional materials should all be red flags to investors, said Gerri Walsh, senior vice president of investor education with the Financial Industry Regulatory Authority, a not-for-profit organization based in Washington, D.C., that helps regulate securities in the United States.

FINRA issued two alerts in the past seven months warning marijuana-stock investors to watch for “pump and dump” scams, where companies drive up prices and demand with lofty promises, then sell their shares and leave investors with worthless stock.

With so much attention focused on the marijuana boom, it’s not surprising that thinly traded penny pot stocks are increasingly drawing the attention of small investors, whipped up by websites such as 420Investor.com and MarijuanaIndex.org.

A dearth of reliable financial data makes penny stocks generally high-risk investments, said FINRA’s Walsh.

Along with reviewing any financial reports, Walsh said investors should compare those figures with what the company is promising in news releases. The filings are often quite forthright, she said, laying out the fact that company revenue is low or even negative.

Pot stocks carry their own set of risks, Walsh added, since the legality of marijuana itself is the subject of ongoing debate.

“For investors that are interested in getting in on the ground floor of any new opportunity, whatever that opportunity is, we always warn about the risks of startup ventures,” she said. “Many are widely successful but many more ultimately fail.”



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