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The recent boom in pot penny stocks almost seems too good to be true - and according to the U.S. Securities & Exchange Commission, it might very well be.
In the past few weeks, the SEC has been investigating several pot stocks - eight of which have now been temporarily suspended. According to the SEC, the suspended marijuana stocks were in violation of serious regulations, including instances of "manipulative transactions" and "unlawful distribution of securities."
Those eight include Fortitude Group Inc. (OTCMKTS: FRTD), FusionPharm Inc. (OTCMKTS: FSPM), CannaBusiness Group Inc. (OTCMKTS: CBGI), GrowLife Inc. (OTCMKTS: PHOT), Advanced Cannabis Solutions Inc. (OTCMKTS: CANN), Petrotech Oil and Gas Inc. (OTCMKTS: PTOG), Aventura Equities Inc. (OTCMKTS: AVNE), and Citadel ETF Inc. (OTCMKTS: CDFT).
The suspension's effects slammed shares when trading resumed. GrowLife, a California-based hydroponics company, saw its stock drop by 88% since March, when it had reached record-breaking highs.
Although some companies were hit harder than others, pot stocks collectively suffered after the SEC warned investors about "possible scams involving marijuana-related investment." The commission further noted that fraud risks tend to be higher in newly successful industries.
Interestingly enough, the Financial Industry Regulatory Authority issued its own warning back in August 2013 to no effect. Meanwhile, the SEC began suspending stocks in late March, first targeting a popular pot stock called Advanced Cannabis Solutions.
What Falling Pot Penny Stocks Mean for Investors
Of course, everyone knows that investing in the stock market includes volatility and risk. However, the scale of these recent plunges for marijuana stocks is rare, as Forbes wrote last month. The 420 Marijuana Index has fallen 62% since March. The pot stock bubble that ballooned between January and March of this year has provided a nice cushion for the industry, but growth has clearly not been outweighing loss in recent weeks.
As the numbers have been showing, this information has many investors quickly selling their stocks and never looking back. But perhaps they've been a bit too hasty...