Investor Beware - Marijuana's Hype Sets Stage For Pump And Dump Scams

Triggered by the recent liberalization of

laws, the media has been showcasing marijuana related stories. Many tout the economic boom the drug is bringing to

, which saw its rosy tax predictions exceeded by initial tax receipts. In light of such hype, it is no wonder that investors are eager to get a piece of the action. But, there are reasons to be cautious.

Marijuana is still untested as a legal product of mass consumption, and the plant’s illegal status on a federal level may prevent investors from getting the kind of information they need to make wise investment decisions. These factors don’t negate legitimate investment opportunities, but they increase the number of legitimate-seeming scams. Here we will take a look at some of the issues.

No Access to Banking

Despite recent guidance from theJustice Department which was intended to give banks more leeway when dealing with marijuana related businesses, banks are still extremely reluctant to overtly handle cash related to the sale of the plant and its derivatives.

As a result, most marijuana related businesses cannot accept debit or credit cards. Most would agree that rules which cause cannabis sales to be conducted almost 100% in cash have to change. But, until they do, the growth of the whole industry will be hampered by marijuana entrepreneurs’ lack of access to banking services.

Lack of Stabilized Price

Because marijuana is legalized in just two out of 50 states, states whose combined populations is a paltry 4% of the nation's total population, a true price for the drug has not yet been found.

Yes, 21 states have implemented varying marijuana marijuana laws in addition to the two recreational states. But only full legalization, or perhaps a Netherlands-style de facto legalization scheme, will reveal the market price for the various incarnations of marijuana, from the raw plant to the highly enriched form found in high quality edibles.

Unknown Market Size

For the same reason that it is impossible to know the true market value of marijuana, no one knows the size of the U.S. marijuana market. Admittedly, ample data is available in the form of historical marijuana use trends, trends seen in other countries which have liberalized marijuana laws, and polling data. But, just as the market for steak should not be conflated with the market for hamburgers, the varying forms of marijuana, and their respective prices, will likely play a role in shaping the drug's overall market in the years after liberalization.

Beware of Pump and Dump

The classic pump and dump scam is perhaps the most likely fraud for targeting the many would-be marijuana investors eager to get in on the action. Because so many would-be reputable companies continue to suffer from the lack of access to the credit markets, marijuana stocks overwhelmingly trade on OTC, and are penny stocks. Penny stocks are usually less transparent than their SEC regulated cousins, and are more easily manipulated due to their low per share prices. That makes it extremely difficult to tell the real winners from losers. As marijuana stocks continue to heat up, investors must beware of this heightened risk of pump and dump.

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