Marijuana

Marijuana Snake Oil: Six Marijuana Scams To Avoid

Keep your guard up.

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Hilary Bricken

Hilary Bricken

As a cannabis business attorney, I see and hear more than my share of kooky and downright bad business pitches. Bad business ideas are one thing, but total scams and rip-offs are another. Unfortunately, like any new and high growth industry with complicated and constantly changing rules and regulations, the marijuana industry is chalk full of scammers and con artists.

The following six marijuana scams are the ones I am seeing most often of late.

  1. Marijuana penny stocks. As the SEC keeps pointing out, many publicly traded cannabis companies are vehicles for investor fraud. We write about these time and time again on our blog:

Too many publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

All of which leads to pump and dump scams where “the group behind the scam increases the stock’s demand and its price, at which point the group sells out its positions to realize a massive gain. Pump and dump scams with publicly traded marijuana companies are quite popular, so be careful out there.

  1. Reverse merger marijuana stocks. Reverse merger stock fraud is nothing new. In the typical reverse merger transaction, a private company acquires controlling shares in an already publicly traded company to acquire the public company’s public listing. Reverse mergers are a relatively fast, cheap and easy way for private companies to “go public” without having to go through all of the SEC reporting, disclosure, and registration requirements required by a standard initial public offering. In the reverse merger scam, the underlying publicly traded company is usually just a shell company with little or no assets or positive business history. Because the underlying publicly traded shell has no assets, no real management base, and oftentimes no business at all, the whole point of these scams is to acquire investors and raise capital based on pumped-up stock statistics, prices, and claims before everything eventually goes bust. If you are looking to acquiring stock in a reverse merger company, do your due diligence.

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  1. Marijuana franchises. Most marijuana franchise “offers” fail to account for all of the reporting, registration, and disclosure requirements required by federal and state franchise laws and regulations. Franchising is governed by FTC and various state agency rules. Because of the state and federal law conflict with cannabis, franchising a cannabis business is a risky proposition and most cannabis “franchisors” fail to provide their potential “franchisees” with nearly enough risk disclosures.
  1. Some marijuana trademark licensing structures. Far too many marijuana companies offer trademark and intellectual property licensing agreements to cannabis cultivators, manufacturers, and retailers as a way to spread their brand over state lines. Too many of these licensing agreements are being drafted by lawyers who know nothing about the cannabis industry or intellectual property or IP licensing laws. This leads to licensing contracts rife with errors and omissions and that in the end fail to transfer any protectable IP assets or even lead to their forfeiture. I have also seen licensing agreements drafted so poorly as to accidentally trigger franchising requirements. For more on how to avoid a really bad IP licensing deal, check out Cannabis IP Licensing: It’s Complicated.
  1. Marijuana “crowdfunding.” In May of this year, the SEC released new crowdfunding rules designed to let small fry swim with the sharks. As of May 16, 2016, a company can solicit $2,000 from anyone (and more in many cases) in exchange for an equity stake in their business. Companies can raise up to $1 million annually through these offerings, which fall under Title III of the 2012 JOBS Act. The SEC does not careif your business is a pot business, so long as you follow its offerings rules. Though the SEC’s rules for crowdfunding advertising are incredibly strict, I am already hearing of crowdfunding cannabis companies seeking to skirt these new rules to the detriment of their investors.
  1. State-illegal marijuana companies. Not all marijuana companies are lawful under state or local marijuana laws, even in cannabis-legal states and I often see blatantly illegal cannabis companies seeking investors and raising funds. Many states outlaw marijuana delivery services, online sales and distributor companies, marijuana telemedicine, various types of marijuana events, and marijuana bars and vape lounges (see Oregonand Washington). Make sure you know what’s lawful under state and local law before you put your hard-earned funds or time into a company that’s only going to get shut down or be prosecuted shortly thereafter.

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Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at [email protected].

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