The U.S. marijuana industry is booming. Medical marijuana is now legal in 23 states and the District of Columbia. Recreational use is legalized in four states, with others eyeing legislation. Research firm GreenWave Advisors estimates the U.S. market could be worth $35 billion by 2020 if it is legalized federally.
But that industry growth has come with a dangerous trend: Pot stocks are scamming investors by trying to pass themselves off as the next hot marijuana startup.
This has become so common in fact, the SEC has issued several warnings.
In May 2014 the commission sent an investor alert warning of marijuana-related investments because "fraudsters often exploit the latest growth industry to lure investors with the promise of high returns."
That leads to companies changing names or business plans completely. A company that once had nothing to do with pot tries to pass itself off as a major player in the market.
Here's a look at three pot stocks that used the hype surrounding the marijuana industry to cash in - and then quickly cash out...
Top Pot Stocks to Avoid No. 1: MediJane Holdings Inc. (OTCMKTS: MJMD)
MediJane Holdings Inc. (OTCMKTS: MJMD) describes itself as a distributor of transdermal patches, capsules, and sublingual sprays in the medical marijuana industry. It provides smokeless alternatives to patients with marijuana prescriptions.
The first red flag is the company's name change. The firm was formerly known as Mokita Inc. as recently as March 2014. Suspiciously, the company is filed with the OTC Markets under the "Crude Petroleum and Natural Gas" industry code. The company also offered a 10-to-1 stock split in late 2013.
The company's financial reporting is worrisome too. In a November 2014 financial statement, MJMD reported just $8,000 in revenue. On top of that, it has just three employees.
Following the name change, a promotional advertisement from "Undervalued Quarterly" touted the potential of pot stocks like MJMD with gains of "381%... 592%... 768%... or higher."
Shortly after, shares of MJMD climbed as high as $1.53 in March 2014. They had been worth just $0.34 earlier that month. Today, they are worth less than $0.01 each. This activity mirrors that of a "pump-and-dump" scheme, one of the worst penny stock scams on the market.
Pump and dump schemes are when penny stock promotors create excitement around a hot, new company and push the share value higher. At that point, the shares are unloaded for a huge profit. Those who were duped are left with worthless shares.
And that's only one of our pot stocks to avoid. Here's a look at two more...
Top Pot Stocks to Avoid No. 2: Growlife Inc. (OTCMKTS: PHOT)
Investors researching Growlife Inc. (OTCMKTS: PHOT) on the OTC Markets official site find a stern warning.
"Buyer beware," the OTC says. "There is a public interest concern associated with the company, which may include a spam campaign, questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive corporate actions."
Like MediJane, Growlife has also changed its name. Prior to March 2011, the company was known as Catalyst Lighting Group. After that it was Phototron Holdings Inc.
In August 2012, it became Growlife Inc. Now, the company claims to market high-end progressive horticulture and lifestyle products.
In March 2014, shares of PHOT soared to $0.80. In April, the SEC halted trading and began a fraud investigation.
In May, the company's directors were slapped with a derivative shareholder lawsuit after the CEO was accused of dumping 5.7 million shares for $0.50 each. The suit claims that PHOT's directors issued themselves additional shares for $0.01 to $0.02 each instead of the $0.58 price where they had been trading.
Today, PHOT shares are worth just $0.04. According to the plaintiff in the case, all of Growlife's business partners have severed ties with the company.
Top Pot Stocks to Avoid No. 3: Advanced Cannabis Solutions Inc. (OTCMKTS: CANN)
Advanced Cannabis Solutions Inc. (OTCMKTS: CANN) describes itself as a leaser of growing space and related facilities for marijuana growers and dispensaries. Like GrowLife, Advanced Cannabis also comes with a "Buyer Beware" warning from the OTC market index.
On the company's OTC page, it lists itself as an oil and gas field services company. The company was known as Promap Corp. until October 2013. Before switching to the marijuana industry, Promap provided production maps for petroleum and coal basins in the U.S. and Canada.
According to officials, Promap completed a reverse merger with Advanced Cannabis, and took the latter's namesake.
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The company did not report any revenue in 2013. It also had a net income loss of $711,000.
Even with no revenue, CANN stock climbed as high as $64.64 per share in March 2014. Shortly thereafter, the SEC suspended trading of CANN shares after it fell to $29.99. Once trading resumed, the stock fell to a low of $1.05.
According to MarketWatch, company officials were aware that unauthorized trading of the stock had occurred, and CANN "settled the matter." For the company the matter may be settled, but investors were left with $1 shares.
Today the shares are higher, at $4.50. But avoiding CANN is the best bet.
Not All Penny Stocks Are Dangerous Investments... Some small companies have the type of revolutionary technology that can transform your portfolio. But first, you need to know how to pinpoint the right type of penny stocks to buy, while avoiding the ones that can ruin your nest-egg. Here are the four tips for successful penny stock investing, along with the five best penny stocks to buy now...
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