Marijuana may be legal in some states, but regulators say investors should use moderation when buying pot stocks.
The Securities and Exchange Commission issued an alert Friday about the risk of fraud in thinly-traded shares of companies involved in the legal marijuana business.
The SEC warns that "fraudsters" may be using the excitement about the boom in recreational marijuana in states where the drug has been legalized, such as Colorado, to dupe investors in penny stocks.
"We know from experience that fraudsters follow the headlines," said Lori Schock, the official in charge of investor education at the SEC. "Given the attention that marijuana-related companies have attracted recently, we urge investors to exercise caution when looking at investments in this space."
The commission suspended trading in shares of Denver-based FusionPharm Inc. (FSPM), which makes "cultivation systems" for cannabis growers. The SEC said "questions have been raised" about the accuracy of FusionPharm's financial statements, including its revenue numbers.
The SEC has targeted five other "micro-cap" companies in the past two months that are involved in the legal weed business. It recently suspended trading in Cannabusiness Group Inc., GrowLife Inc. (PHOT), both based in California, and Advanced Cannabis Solutions Inc. in Colorado. The suspensions generally last for 10 days.
By most accounts, demand for marijuana has exploded since Colorado legalized it for non-medicinal use on New Year's Day.
Colorado expects to raise about $184 million in tax revenue from marijuana sales in the first 18 months. Washington also legalized marijuana for recreational use this year and a few other states are considering similar changes in regulation.
But the opportunities for investors are still largely limited to shares of small companies that trade over the counter, rather than on a large public exchange.
While all publicly traded companies are required to disclose certain information to the SEC, the commission says investors are often in the dark about the financial condition of companies that are not listed on the NYSE or Nasdaq.
"When publicly available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors," the SEC said in its alert.
In other words, investors should do their homework on pot stocks or else their portfolio might go up in smoke.
It might be best to keep business and personal separate, at least for two married couples in California.
The Securities and Exchange Commission settled insider trading charges with two men in unrelated cases Monday for acting on confidential information gleaned from overhearing their wives' business calls.
Related: SAC Capital's Martoma found guilty
In one case, the SEC alleges that Tyrone Hawk of Los Gatos, California snooped on work calls made by his wife, a finance manager at Oracle, related to MOREJesse Solomon - Mar 31, 2014 4:30 PM ET
Netflix CEO Reed Hastings caused a stir last year after he revealed that Netflix's monthly online viewing had exceeded one billion hours on his Facebook page instead of a press release or public filing. That raised concerns about whether social media posts were in compliance with the Securities and Exchange Commission's Regulation Fair Disclosure (Regulation FD) rules.
But following an investigation prompted by Hastings' post, the SEC has decided it's MOREHibah Yousuf - Apr 2, 2013 4:24 PM ET
The Securities and Exchange Commission approved Nasdaq's plan to pay $62 million to trading firms that incurred losses during Facebook's botched public debut last May.
The four major trading firms -- Knight Capital (KCG), Citadel, Citigroup (C) and UBS (UBS) -- lost a combined $500 million due to technical glitches at the Nasdaq during Facebook's initial public offering.
And while the accommodation plan won't compensate the firms in full, the SEC said it MOREHibah Yousuf - Mar 25, 2013 12:32 PM ET
Zillow's stock fell sharply Tuesday following the disclosure of previous correspondence between the company and the Securities and Exchange Commission regarding questions about the company's sales.
Shares of Zillow (Z), the real estate website, dropped as much as 10.2% in early trading, the biggest one-day decline since November, before trimming some of the losses. By the afternoon, Zillow was down about 4%.
The stock first began to fall after some written exchanges from August MOREHibah Yousuf - Oct 2, 2012 1:51 PM ET
Nasdaq can't seem to put the Facebook IPO debacle behind it.
Shortly after the botched IPO, Nasdaq proposed a $40 million settlement to compensate brokers who were affected by trading glitches on Facebook's opening day (May 18).
Nasdaq (NDAQ) upped that figure to $62 million in mid-July, and Nasdaq CEO Bob Greifeld called it "definitive" during a July 25 conference call with analysts.
Citigroup (C) and UBS (UBS) have come out swinging. In MOREMaureen Farrell - Aug 23, 2012 12:33 PM ET
Nasdaq is hopeful that its most recent compensation plan will satisfy the trading firms that incurred losses during Facebook's botched debut May.
During the company's earnings conference call with analysts Wednesday, Nasdaq CEO Robert Greifeld said its plan is "definitive" and said there haven't been any negative comments about it since Nasdaq boosted the size of the compensation fund to $62 million last week.
"I would definitely highlight the absence of negative comments MOREHibah Yousuf - Jul 25, 2012 2:25 PM ET
As it polices the seedy underbelly of Wall Street, the Securities and Exchange Commission is taking on financial wrongdoers of all sorts, including the Amish.
The SEC announced a deferred prosecution agreement Wednesday with the Amish Helping Fund, a not-for-profit organization that provides home loans to Amish families in Ohio.
The Amish financiers allegedly misled investors by failing to update the fund's offering memorandum, which was drafted when it was founded by MOREBen Rooney - Jul 18, 2012 1:44 PM ET
A battle is brewing over how the swaps or derivatives market is regulated.
As part of the Dodd-Frank Wall Street reform law, the Commodity Futures Trading Commission agency was tasked with the job of monitoring the $700 trillion derivatives market. Derivatives are the instruments behind JPMorgan's (JPM) recent loss of at least $2 billion and the trades that helped blow up AIG (AIG), Lehman Brothers and Bear Stearns.
But CFTC chairman Gary MOREMaureen Farrell - Jun 7, 2012 5:11 PM ET
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