Marijuana penny stock investing can be a quick way to earn double-digit or even triple-digit returns. For instance, Delta 9 Cannabis Inc. (OTCMKTS: VRNDF) climbed 50%, from $1.56 to $2.34, in just the first week of November.
5 Things Marijuana Investors Need to Know Now
But it's important to learn Money Morning's two rules for investing in marijuana penny stocks. These must-have rules will help you avoid the companies defrauding or flat-out lying to investors for their own gain.
Take the marijuana vaporizer company mCig Inc. (OTCMKTS: MCIG), for example. In February, market analyst and 420 Investor founder Alan Brochstein alleged the company committed insider selling.
You see, Brochstein was looking into mCig's 10-K filing - a report summarizing a company's financial performance. He realized the number of shares owned by the CEO, Paul Rosenberg, had changed from 23 million in 2015 to just under 21 million in 2016.
That indicates Rosenberg sold nearly 9% of his total stake in the company. More importantly, Brochstein realized that Rosenberg had never disclosed the sale of his shares, which is required by federal law...
When CEOs sell a significant portion of their shares, they're required to publicly disclose the sale by submitting a Form 4 to the U.S. Securities and Exchange Commission (SEC). By not disclosing his sale of 2 million shares, Rosenberg technically violated a federal law.
Even worse is how Rosenberg also violated his shareholders' trust. If MCIG shareholders knew he dumped 2 million shares, they likely would've assumed something was wrong and sold their shares as well. That would've sent the MCIG stock price plummeting - something no CEO ever wants to happen to their company's stock.
And we're following another marijuana company that's led the SEC to actually charge the CEO with fraud...
An Even Bigger Marijuana Penny Stock Scandal Than mCig
Back in June, the SEC charged CV Sciences Inc. (OTCMKTS: CVSI), also known as CannaVest, with fraud. The charges are related to the CEO intentionally reporting false finances in 2013.
In June, CV Sciences CEO Michael Mona, Jr., allegedly reported that the value of the firm's assets were higher than they actually were...
Specifically, he said his company acquired PhytoSPHERE Systems - a biotech that makes hemp-based cannabinoids - for $35 million. Although this was the number Mona officially reported in the first half of 2013, he allegedly knew the acquisition price tag was much lower.
In fact, CannaVest reported a different acquisition value of just $8 million during the third quarter of 2013. That was 77.1% lower than the $35 million initially reported. This popped up on the SEC's radar, and the agency found that CannaVest didn't acknowledge how the original $35 million was overstated in Q1 2013 and Q2 2013.
The SEC claims this deliberate false recording is grounds for fraud, which is why the agency charged Mona last June. Since that penny stock story broke on June 16, CV Sciences stock is down 30.4%, from $0.30 to $0.23.
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Although the SEC hasn't yet suspended trading on CVSI stock, it could if Mona and the company are found guilty.
If trading on CVSI is suspended, investors risk losing a lot of money. The stock has already plummeted 23.3% since the SEC filed charges on June 16. Investors could end up losing all of their initial investment due to CV Sciences' irresponsible and fraudulent conduct.
While marijuana penny stock scams like CannaVest can make you wary of the marijuana industry entirely, investors who stay out of it could be missing out on massive profits. There are easy ways to find out if a pot stock is safe enough for your money.
Our Money Morning experts are committed to making sure you know how to safely invest your hard-earned cash. That's why we're going to show you two easy tips for marijuana investing today...
2 Tips for Safe Marijuana Penny Stock Investing in 2018
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Our first marijuana investing tip is to beware of companies that frequently change their name.
According to the Financial Industry Regulatory Authority (FINRA), these firms are usually involved with fraud or manipulation.
And CannaVest, or CV Sciences, is the perfect example. The firm was originally named CannaVest during the stock's peak performance in 2013 and 2014. However, the name was eventually changed to CV Sciences after shares of the stock began to plummet in 2015 and 2016.
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Although FINRA doesn't disclose the names of companies that do this, it provided one anonymous example that changed its name four times in the last decade. Oftentimes, these firms change their names to alter their image when their stocks perform poorly.
To seek out these name changes, FINRA advises digging through press releases and quarterly reports. These can be found in the SEC's EDGAR filing database online.
The second tip is to recognize the risks of over-the-counter (OTC) exchanges.
Because marijuana is still illegal under federal law, it's considered a fringe market, meaning most of these companies don't meet the requirements needed to list on the Nasdaq or the New York Stock Exchange (NYSE). That's why most of them trade on OTC exchanges.
FINRA states that there are hardly any minimum requirements for being listed on OTC exchanges. This is a major reason why the majority of penny stocks trading for mere cents are listed on them.
However, marijuana penny stocks trading OTC can be extremely volatile. That's because their trading volume is lower than traditional stocks, meaning an investor may be tempted to quickly buy or sell a stock if he or she sees a spike in volume.
Since they're so volatile, investors should only buy these OTC marijuana penny stocks if they can afford some risk. According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, penny stocks in general should never make up more than 2% of your portfolio.
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