New Jersey state legislators plan to vote on a bill by the end of 2018 that would legalize marijuana and lay the groundwork for a commercial weed industry in the state. The bill contains some of the following rules and regulations that would drastically alter the weed landscape in the state of New Jersey:

  • The bill would legalize possession and use of marijuana for people 21 and over.
  • Businesses with a marijuana retail license will be able to apply to have a weed consumption space on premises, if given local approval.
  • Businesses with a marijuana retail license will be able to request permission to deliver directly to consumers.
  • The proposed tax on marijuana will be 10 percent, which would be the lowest in the country.
  • The bill will also create a Cannabis Regulatory Commission, which will be the rule-making body of the New Jersey cannabis industry.
  • Twenty-five percent of licenses will be given to businesses owned by women, minorities, or veterans.

Earlier this year, Governor Phil Murphy stated that he was committed to getting marijuana legalization passed this year. State Senate President Stephen Sweeney has indicated that he believes that there will be enough votes to pass legalization. Lawmakers had hoped to vote on the legalization of marijuana on October 29th, but the vote has been postponed as lawmakers are still at odds with Governor Murphy on some specifics of the bill. However, Sweeney and Assembly Speaker Craig Coughlin believe the vote will happen before year-end.  

Thus, it seems that there is a very real possibility that some time in 2019, marijuana will be legal in New Jersey. New Jersey Policy Perspective anticipates that New Jersey would receive an estimated $300 million in sales tax revenues annually from the legalization of marijuana.  The report prepared by NJPP estimated that approximately 343,100 New Jerseyans would participate in the legal marketplace, spending approximately $1.2 billion per year.

In any scenario in which an industry is set to take off, there will inevitably be fraudsters attempting to take advantage of investors looking to make profits off the new industry. The marijuana industry is no different. With the legalization of marijuana seemingly on the horizon in New Jersey, here’s what you need to know about potential fraud risks in this industry.

Investment Warnings

SEC Investor Alert

In September 2018, the Securities and Exchange Commission issued an investor alert warning of the risks of investment fraud and market manipulation associated with marijuana-related investments.

Investment Fraud

Per the SEC, fraudsters will use the media attention surrounding the possibility of legalization of marijuana to publicize an investment scam. The SEC suggests looking for the following indications of fraud:

  • Unlicensed, unregistered sellers – research the background on individuals soliciting funds for investments before actually making an investment. This may seem obvious, but it is a good place to start. Investor.gov is a good resource when it comes to identifying legitimate sellers.
  • Guaranteed returns – any individuals that are guaranteeing high rates of return with very little risk are likely obscuring the truth about the investment.
  • Unsolicited offers – if an individual reaches out to you directly about an investment “opportunity”, it is likely a scam. If someone you haven’t spoken to since high school reaches out to you via Facebook Messenger about guaranteed returns on a marijuana investment, consider ignoring that message.

Market Manipulation

Be wary of fraudsters’ ability to manipulate stock prices by spreading inaccurate information about a company. Microcap stocks, which represent companies with less than $250 - $300 million in market capitalization, are especially susceptible to market manipulation as less information is available about these businesses. Additionally, many microcap companies tout products or services that are not market tested, and lack the resources and liquidity of larger businesses. Be aware of the following red flags if considering a marijuana-related investment:

  • Trading ability – check the SEC website to determine if trading of the stock has been suspended.
  • Company name or industry change – be skeptical if through your research you’ve determined that the company has changed its name and industry multiple times.
  • Press release plausibility – research press releases to determine accuracy – companies can create false press releases in order to pump up the stock price.

On the same date that the SEC released this investor alert, the SEC charged a Texas-based investment fund called Greenview Investment Partners L.P. and its founder, Michael E. Cone, with defrauding investors by promising huge returns in a marijuana-related business. Mr. Cone promised investors up to 24 percent annual returns from Greenview investments. In reality, Mr. Cone lied about his profit track record in marijuana-related investments and used investor funds to purchase designer clothes and luxury vehicles. In total, Mr. Cone raised more than $3.3 million from investors by lying about potential profits and holdings of the company.

NASAA Informed Investor Advisory

In addition to the alert from the SEC, the North American Securities Administrators Association just released an investment warning this month about schemes related to marijuana investments. The following are the investment schemes identified by NASAA:

  • Reverse merger scam – promoters of the marijuana-related company buy the stock of a publicly traded company that has no assets or operations. The publicly listed stock creates a false sense of security regarding the legitimacy of the business, and commissions are collected on sales of the stock to investors.
  • Pump and dump scheme – this is essentially market manipulation as identified by the SEC. Misinformation is used to hype an investment to increase the price of the stock, and once the stock price increases, the scammers will sell their shares.
  • Crowdfunding schemes – a marijuana-related company may turn to crowdfunding to raise capital for their start-up; these investments tend to be more speculative.
  • Jurisdiction-specific illegal marijuana schemes – fraudsters may lie about having insider information regarding the next state to legalization marijuana. This information entices investors to get in early on the investment and reap profits once new laws are passed. It is important to know who your information is coming from and whether the individual providing the information is trustworthy.

It is also important to remember that marijuana use is still illegal at the federal level, and that the federal government classifies marijuana as a schedule 1 drug, which means the government believes there is no currently accepted medical use for the drug and a high potential for abuse. The federal government’s stance on marijuana also impacts the value of a marijuana-related investment.

Like any investment, you can protect yourself from marijuana-related investment fraud by doing research, remaining skeptical, understanding the risks involved with the investment.