U.S. regulators on alert for marijuana company investment scams

WASHINGTON Fri May 16, 2014 12:35pm EDT

A participant practices rolling a joint at the Cannabis Carnivalus 4/20 event in Seattle, Washington April 20, 2014. REUTERS/Jason Redmond

A participant practices rolling a joint at the Cannabis Carnivalus 4/20 event in Seattle, Washington April 20, 2014.

Credit: Reuters/Jason Redmond

WASHINGTON (Reuters) - U.S. securities regulators warned investors on Friday to be careful about getting involved in stock schemes involving small marijuana-related companies.

The Securities and Exchange Commission said it has already suspended trading in five different cannabis microcap companies in the past few months.

The latest crackdown Friday was against Fusion Pharm Inc., a Denver-based company purportedly selling cultivation systems for marijuana.

Voters in Colorado and Washington legalized the possession and use of small amounts of marijuana for recreational use in 2012. They are also among 20 different states that permit the use of medical marijuana.

The first recreational cannabis shops opened in Colorado in January.

"Given the attention that marijuana-related companies have attracted recently, we urge investors to exercise caution when looking at investments in this space," said Lori Schock, the head of the SEC's Office of Investor Education and Advocacy.

The SEC said it had decided to suspend trading in Fusion Pharm because of questions about "the accuracy of assertions" concerning its assets, revenues, financial statements, business transactions and financial condition.

No one answered the phone at the company's Denver headquarters, and e-mail inquiries were not returned.

"Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud," said Elisha Frank, a co-chair of the SEC enforcement division's microcap task force.

"Whenever we see incomplete or misleading disclosures, we act quickly to protect investors."

This marks the second time now since last year that securities regulators have warned about a rise in marijuana investment schemes.

In August 2013, the Financial Industry Regulatory Authority, which self-polices the brokerage industry, issued similar warnings, saying it had seen examples of classic "pump and dump" schemes and instances of firms being run by people with criminal records.

Of the five companies whose trading was recently suspended by the SEC, the agency said several were targeted for concerns about the accuracy of how they described their operations, and two of them were suspected of illegal activity, including market manipulation and unlawful sales.

The SEC in general has been ramping up its focus on enforcement in the microcap fraud space, an area considered highly risky for investors because it involves new companies with no proven track record and volatile stock prices.

The microcap market is comprised of companies with small amounts of assets and low stock prices, often with a market capitalization of less than $250 million or $300 million.

The SEC formed the microcap task force last year to target abusive practices and companies that fail to routinely publicly report their financial results.

(Reporting by Sarah N. Lynch; editing by Andrew Hay)

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