Don’t Be a Marijuana Mooch!

This morning when I went to the gym before work, I put on an NPR podcast that delved into the story of the FTC’s bust of David Diamond. Diamond is an infamous Angeleno who defrauded hundreds of people via telemarketing scams. In the podcast, the interviewee does a great job of explaining the common scammer term, “mooch.” A mooch is, according to the podcast, “… someone who will essentially buy anything from anybody who calls [them] on the telephone.”

This got me thinking about the ideal marijuana mooch since so much fraud and bad behavior is rampant in the national marijuana marketplace. We’ve covered multiple marijuana scams here, here, and here (and have written about fraud and important red flags (and red herrings) in the industry multiple times in this past).

This time however, I want to dedicate this post to the top 5 red flags of which a marijuana mooch should be aware:

1.  Anyone who tells you to invest in cannabis at all costs because you might “miss the boat.”

News flash–big alcohol, big tobacco, and big pharma are not active in the U.S. cannabis space. Even though they may be thinking about it and may have future plans for it (and even if states may already creating “Big Marijuana” interests), there’s not one single U.S. cannabis company (that actually traffics in cannabis under state licensing laws) that’s tied officially or legitimately back to these big business interests. Normally, the mooch hustle is “You’re going to miss this once in a lifetime opportunity with cannabis since the bigger companies are flooding the space already, so you better invest all you have now, now, now.” Utilize your judgment to understand that this statement is not only overblown, but it’s untrue, and the source of the information is seriously suspect, even today. In any event, before you invest cannabis, which is an extremely volatile prospect, do your homework and determine whether there’s real value at the end of the elevator pitch.

2.  Marijuana penny stocks. 

Stay away from most marijuana penny stocks. As both we and the SEC keep pointing out, many (but not all) publicly traded cannabis companies are vehicles for investor fraud. As we have written before:

It almost seems that publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

All of which leads to pump and dump scams where “the group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell its position to make a large short-term gain.” Pump and dump scams with publicly traded marijuana companies are still quite popular, especially as more and more states have legalized and “medicalized.”

3.  Marijuana franchises. 

Most marijuana franchise “offers” are just plain garbage because they fail to account for all of the reporting, registration, and disclosure requirements required by federal and state franchise laws and regulations. Franchising is governed by FTC and various state agency rules. Because of the state and federal law conflict with cannabis, franchising a cannabis business is a very risky proposition, and we are finding that most cannabis “franchisors” are not providing their potential “franchisees” with nearly enough risk disclosures to really inform franchisees and their investors what they’re getting themselves into at the end of the day.

4.  Marijuana reverse mergers (ESPECIALLY CANADIAN ONES).

Seems like everyone and their mother is trying to accomplish a Canadian reverse merger in the U.S. cannabis industry. Reverse mergers are a relatively fast, cheap and easy way for a private company to “go public” without having to go through all of the SEC reporting, disclosure, and registration requirements required by a standard initial public offering. Just like penny stock fraud though, reverse merger stock fraud is nothing new. In the typical reverse merger transaction, a privately operating company seeks to acquire controlling shares in an already publicly traded company with the goal of acquiring the public company’s listing. In the reverse merger scam, the underlying publicly traded company is usually just a shell company with little or no assets or positive business history. Because the underlying publicly traded shell has no assets, no real management base, and oftentimes no business at all, the whole point of these scams is to acquire investors and raise capital based on pumped-up stock statistics, prices, and claims before everything eventually goes bust. These scams tend to involve the same subset of marginal accounting and law firms that assist by securing IRS and SEC reporting delays. Like anything else, if you’re looking at acquiring stock in a reverse merger company, do your due diligence and know the red flags.

5.  Marijuana crowdfunding.

Back in May of 2015, the SEC released new crowdfunding rules designed to let the small fry swim with the sharks. As of May 16, 2016, companies were able to solicit $2,000 from anyone (and more in many cases) in exchange for an equity stake in their business. Companies can now raise up to $1 million annually through these offerings, which fall under Title III of the 2012 JOBS Act. As we have written before, the SEC does not care whether your business is a pot business, so long as you follow its offerings rules. Though the SEC’s rules for crowdfunding advertising are incredibly strict, we know there are a wind of crowdfunding cannabis companies seeking to skirt these new rules to the detriment of investors and mooches.

Don’t be the marijuana mooch! For more on cannabis scams, check out the following: