Will Denver soon become the new Amsterdam? Since January, Colorado residents have no longer needed to fly to the Netherlands to legally purchase and imbibe marijuana for recreational uses. While 18 other states including California have legalized the drug for medicinal purposes, Colorado is only one of two states (the other being Washington) where citizens can legally light up for fun.

Yet when it comes to the Colorado marijuana industry, business may be getting in the way of pleasure – especially for investors buying up stock in companies who do business in the drug.

Last week, the Securities and Exchange Commission suspended trading at Denver-based Fusion Pharm Inc. (FSPM), a company who sells “indoor commercial cultivation solutions.” The company dubiously touts its “plug and grow” devices, PharmPods, as the “most exciting thing since the KFC Double Down.”

Why the crackdown? In the case of Fusion Pharm, the SEC raised concerns regarding the company’s financial statements, assets and revenues, calling into question the overall accuracy of its stated financial picture.

Approach With Caution

This isn’t an isolated case. Investors hungry to jump into the marijuana market may want to stave off the munchies and consider the recent slew of SEC suspensions among cannabis micro-cap companies: at least five have been forced to halt trading in the past several months. SEC officials have warned investors to approach potential investments in this arena with prudence.

Due to growing concerns about potential abuses in the micro-cap market, the SEC formed a task force to proactively address unlawful practices. Companies in the market will generally show modest assets, as well as low – and often unstable – stock prices, making them a risky proposition for investors even aside from the potential for fraud.

Inevitably, as state marijuana laws continue to evolve, new windows for fraud will open. With an increase in stock fraud among marijuana companies on the rise, securities regulators have warned consumers about penny stock fraud, illegal sales, and companies that have convicted criminals holding leadership positions.

Illegal practices surfaced, perhaps unsurprisingly, not long after the marijuana market’s emergence as a legal business in many states. As far back as last summer, allegations of “pump and dump” stock schemes were among the allegations made by the Financial Industry Regulatory Authority (FINRA), warning investors to look out for companies practicing unlawful market manipulation.

The Bottom Line:

When it comes to the quickly evolving marijuana sector, stay wary, heed SEC warnings and do your research. Without exercising due diligence, investing in the volatile micro-cap market could end up being as prudent as rolling your money and smoking it.

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