Marijuana penny stocks can offer explosive triple-digit gains in a matter of days, but the investment opportunity in the $6.7 billion legal North American industry is also leading to scams.
Money Morning believes the right pot stocks will still reward forward-thinking investors, but you just have to be careful with where you invest your money.
Here's more about an example of one cannabis company accused of fraud, plus two tips on how to avoid marijuana penny stock scams in 2018...
How to Avoid Marijuana Penny Stock Scams
CV Sciences Inc. (OTCMKTS: CVSI), formerly known as CannaVest, was charged with fraud by the U.S. Securities and Exchange Commission (SEC) on June 16, 2017.
The SEC alleges CVSI falsified its 2013 balance sheets.
Specifically, CV Sciences said it paid $35 million for biotech company PhytoSPHERE Systems in 2013.
Breaking: California Marijuana Legislation Sparks the Most Profitable Opportunity of 2018. Click Here for Details...
However, the SEC alleges CVSI paid just $8 million. It's financial fraud when a company intentionally records the wrong numbers on its financial reports, according to the SEC.
While trading hasn't been suspended on CVSI, it's still a possibility should the company and CVSI CEO Michael Mona, Jr., be found guilty.
Of course, there's no way to completely avoid marijuana penny stock scams.
But our two cannabis investing tips can help protect you and your portfolio. And knowing these tips are imperative for safely investing in marijuana penny stocks.
Marijuana Penny Stocks Investing Tip, No. 2: Watch for Name Changes
Before investing in any marijuana penny stock, always research both the stock and the company's history.
Companies committing scams are known to frequently change their names in order to fly under the radar.
The Financial Industry Regulatory Authority (FINRA) says that a company frequently changing its name is becoming synonymous with fraud in penny stocks. FINRA has not provided a list of specific companies that use this tactic.
Did Jeff Sessions Just Admit He Can't Stop Marijuana Legalization?
However, the financial regulator did say one company has changed its name four times in the last 10 years.
To find these name changes, FINRA suggests investors look through a company's press releases and quarterly reports.
Aside from avoiding companies with frequent name changes, this is the other most important tip to safely invest in cannabis penny stocks in 2018...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Marijuana Penny Stocks Investing Tip, No. 1: Understand OTC Risks
Most cannabis companies do not meet the minimum requirements to be listed on the Nasdaq or New York Stock Exchange (NYSE).
But over-the-counter (OTC) exchanges don't have many requirements...
According to OTCMarkets.com, a company wanting to sell shares on an OTC market only has to meet a few eligibility standards, including:
- Not be a shell company or blank-check company
- Not be subject to any bankruptcy or reorganization proceedings
- Must be duly organized, validly existing and in good standing under the laws of each jurisdiction in which the company is organized or does business
- Submit a letter of introduction form an OTCQX sponsor
The company also only has to have $2 million in tangible assets if it's been in business for three or more years to be listed on the OTCQX U.S. exchange.
Many of these companies fail to provide even basic information about their financial results or operations.
If a company doesn't seem transparent, you should avoid making an investment.
Collect a Colossal Payday Thanks to California's Legal Cannabis
We've already seen people accumulate massive gains from previous marijuana legalization announcements, but this event is about to blow the lid off of anything we've seen so far.
Are you positioned to profit?
Money Morning Director of Technology & Venture Capital Research - and penny pot stock expert - Michael Robinson recently held a crucial summit to show ordinary people how to make millions from California's impending marijuana legislation.
And he's narrowed his focus to three tiny California pot stocks expected to explode following legalization.
With billions of dollars in revenue projected to flow into this industry, learning how to get in on the ground floor - before these tiny stocks shoot up - is your best shot at life-altering gains. Go here now.
Follow Money Morning on Twitter @moneymorning, Facebook, and LinkedIn.