Why legal cannabis isn’t quite ready for public investment, and how to avoid weed’s new Wolves of Wall Street.

 

 

Everyone now knows marijuana is big business.  And one of the investors leading the charge is Troy Dayton, from The Arc View Group. His network of angel investors has put fifty-two million dollars into canna-businesses. Troy knows what he’s talking about.  And he gave us an inside tip: steer clear of investing in Pot Penny Stocks.

Penny stocks refer to public companies that trade “over the counter” in the so-called “pink sheets.” And they lack the reporting requirements of bigger, more established  companies. But Dayton says marijuana hype, combined with a tight investor landscape is fueling interest in pot penny stocks.

In 2014, the SEC charged four promoters with pumping and dumping weed penny stocks just like the scammers in Wolf of Wall St. Last year, the SEC  suspended trading in 5 pot stocks, and issued an investor alert about the budding business in buds. The news site Money Morning estimates pot penny stocks cost investors over twenty three billion dollars in 2014. It’s just too early for publicly traded weed companies, Dayton says. They can’t use banks. They have insane tax burdens. They’re involved with a federally illegal drug. None are profitable, motleyfool.com noted Sept. 11.

“The incentives are off,” says Dayton. “It becomes more advantageous to sell stock than it is to sell product. What you have is really lopsided organization writing press releases instead of building a business.”

For example, Medical Marijuana Inc (symbol: MJNA) —founded by two former drug smugglers — trades at four cents. Off from a peak of twenty-one cents.  Still, the company has issued nearly two billion shares. That’s just kooky.

“With a very nascent industry you’ve got a ripe situation for people to be hoodwinked. No companies have existing traction to look back on. Everybody is talking about what they are going to do — the good ones, bad ones and good ones ill prepared to succeed,” Dayton said.

So if and when you get a hype-filled email or Facebook message from someone with a ‘once in a lifetime opportunity’ to invest in weed — buy a sack instead. The buzz will last longer, guaranteed.

(Disclosures: The Hash is not invested in any cannabis companies, publicly traded or private.)