Warning to Investors About Spike in Marijuana Stocks

Marijuana-related securities have blossomed in the past few years, taking the form of over-the-counter or penny stocks and special funds for accredited investors. This is because marijuana has been legalized at the state level in some states, but the fact remains that it is still not legal at the federal level. The feds still have the right to arrest any business that tries to get in on the selling of the product. In May 2014, the Securities and Exchange Commission (SEC) issued an investor alert about marijuana-related investments, in which it said “marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution. Nothwithstanding the federal ban, as of the date of this guidance, 20 states and the District of Columbia have legalized certain marijuana-related activity.” This week the Wall Street Journal published an article warning about the risks associated with Marijuana stocks.

Funds that specialize in marijuana-related securities such as the High Times Growth Fund and Marijuana Investment Co., are not public, and are currently open only to accredited investors, although Marijuana Investment Co is planning to file for an initial public offering. Mutual funds and exchange-traded funds will be looking into marijuana-related businesses soon. Says Alan Brochstein, a financial adviser who runs the newsletter “420 Investor,” “I don’t think there will be funds and ETFs in the cannabis sector for at least a couple of years. Liquidity in this space is poor, so mostly you have over-the-counter stocks trading publicly.” Legal sales of marijuana are expected to quintuple to as much as $8 billion in 2019 from $1.6 billion in 2013, according to Marijuana Business Daily.