The Securities and Exchange Commission has made some of its boldest moves in years in the cannabis space with a fresh investor alert urging caution in the industry, as well as charging a roughly $3.3 million cannabis fund with defrauding investors.
The actions come as investor interest increases around cannabis while adult use markets come on line in California and Canada, and U.S. states with medical cannabis programs continue to grow.
The SEC on Wednesday issued an investor alert about scam artists that "exploit 'hot' industries to trick investors" as OTC-traded companies continue to pop up in the cannabis space.
The SEC reiterated some of the same advice it issued in an earlier investor alert back in 2014.
David Feldman, partner with Duane Morris, said the SEC's latest investor alert reads almost entirely like a bulletin that could be issued regarding the small and microcap markets generally. Feldman, a specialist in securities law, said the cannabis sector is getting more safe for investors overall as it becomes more mainstream.
"We are beginning to see a shakeout where more of the shaky and shady public cannabis companies are shutting down or facing investigations" Feldman said. "At the same time, we have a growing number of larger and successful multi-state operators benefiting from public status, raising hundreds of millions of dollars and enjoying nine figure market capitalizations."
Alan Brochstein, an analyst and portfolio manager who covers the cannabis industry, said investors should maintain caution when considering OTC stocks in general, including the cannabis sector.
"There are a lot more cannabis stocks trading on the OTC, and many of them don't inspire confidence," he said. "I like to say that opportunists go to where they see the opportunities, so this is not an indictment of the cannabis industry in any way. It's unfortunate that the publicly-traded sector is still filled with these questionable companies."
On Wednesday, the SEC announced enforcement actions against a Texas-based cannabis fund called Greenview Investment Partners for allegedly defrauding investors with "false promises of massive returns in cannabis-related businesses." One red flag the SEC cited for investors in this case was a promise of a guaranteed return from the fund.
The Dallas Business Journal reported that Greenview Investment Partners, founded by Michael Cone, shut down over the summer.
Greenview Investment Partners is being invested by the FBI, which has seized about $1.4 million in cash from the firm.
The SEC's complaint said Cone raised more than $3.3 million from investors, but made only one investment for $400,000 in a cannabis company that has not harvested a crop.
"Cone allegedly employed boiler room sales staff who made cold calls to investors and promised them up to 24% annual returns from investments in Greenview," the SEC said.
Cone was charged with spending investors' money on clothes and cars, as well as payments to earlier investors to prolong the alleged scam.
"Greenview allegedly exploited investor interest in the marijuana industry and lied about high returns and the backgrounds of its key executives," Shamoil Shipchandler, director of the SEC's Fort Worth office, said in a statement. "Investors must remain vigilant and not let the fear of missing out dupe them into making bad investment decisions."
The SEC filed its complaint in U.S. District Court for the Northern District of Texas. Cone has agreed to an officer-and-director bar and a permanent injunction, the SEC said. The court will determine disgorgement and prejudgment interest in the future.
Read my previous Real Money column on avoiding weed investing scams here.
