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Wall Street Weed Warning

In an interesting twist, it appears that some may be taking advantage of the “legalize marijuana” hype to offer less than honest stocks on Wall Street. According to the LA Times, investment pitches for marijuana-related stocks could be what are known as “pump and dumps.”

A pump-and-dump stock is one that has its price artificially inflated through hype instead of actual value. As the price rises, the early entrants (who bought the stock cheap and contributed to the hype) sell off – the ‘dump’ part of the operation. The Times cites one stock (unnamed) that received the hype treatment, even though the company hadn’t even offered a business plan and was losing money.

The appeal, for some investors, is to get in on the ground floor, and marijuana related businesses are a new and exciting category. While the potential for growth and profit is huge – provided money now going to the illegal market goes to legitimate companies – simply slapping the description of “ganja-preneur” on a company doesn’t mean that business will share in the coming boom times.

The warnings about potential fraud are coming from FINRA, the financial industry regulatory authority, so there’s certainly credibility there. However, no stocks were named as possibly fraudulent and the warning was focused on investors doing due diligence before purchasing in this new sector.

Added warnings were about company officials who had criminal pasts. Unlike other businesses, being an ex-con might work for someone in the marijuana industry, since time in jail for a drug crime might indicate experience and some expertise. Meanwhile, legitimate medical marijuana operations are turning to stocks and bonds because banks seem unwilling to lend them start-up capital – for good reason, in many states, the legal situation is in flux, with federal and state law in conflict. An industry operating in a legal gray zone comes with a substantial risk of arrest and forfeiture, leaving investors with no recourse.

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