Now that Cannabis stocks are suddenly shooting through the roof and even bears are jumping on board as whiskey, vodka and beer companies start buying stakes, the SEC is worried.
This could end up being the next big hotbed of manipulation, the SEC said in a warning to investors on Thursday.
“Scam artists often exploit ‘hot’ industries to trick investors, including by making false promises of high returns with low risks,” the SEC said, and its Office of Investor Education and Advocacy (OIEA) “regularly receives complaints about marijuana-related investments.”
The SEC is most concerned about unlicensed, unregistered sellers targeting individual, Main Street investor. It’s also worried about promises of guaranteed returns and claims of no risk. Finally, unsolicited offers are also a red flag, particularly with the prevalence of social media as a new boiler room tool.
And there’s every reason to be concerned. When even uber-bears and major short-sellers suddenly start getting in on marijuana stocks, things can get a bit out of hand.
The catalyst for the big run, of course, was Canada’s legalization of recreational marijuana when it was finally approved in June. Canada will become the first industrialized nation in the world to have legalized pot, recreationally. And it goes into effect on October 17th.
Since June, everyone’s started lining things up in earnest. Major international companies are looking to strike mega deals with cannabis companies. Related: Cryptos Pummeled Again On New SEC Attack
Now, it’s more than a big run from a great catalyst—it’s a pure rampage that was launched when Diageo PLC, the maker of Johnnie Walker and Smirnoff—revealed it was in talks with three Canadian pot companies for a stake or partnership in the last week of August. Right before that, Constellation, the maker of Corona Beer, invested $4 billion in Canopy Growth, raising its stake in the cannabis producer from 9.9 percent to 38 percent.
This is what the last month has looked like for the Global Cannabis Stock Index:
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Canopy Growth (NYSE:CGC) is already trading at over $52, up from under $30 a month ago.
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Aurora Cannabis Inc (OTCQX:ACBFF) is now trading over $8 a share, up from under $6 a month ago. And then there’s Tilray (NASDAQ:TLRY), which only went public in July has seen its market value more than triple. It now has a $7.87 billion market cap.
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The Canadian-listed marijuana ETF, Horizons Marijuana Life Sciences Index ETF (HMMJ), has passed the $1 billion mark in assets as of last Friday.
So, yes, everyone’s getting excited—and that’s exactly where the SEC feels it needs to step in with a bit of advice to calm everyone down.
This is where the SEC plays parental unit to investor FOMO. The concern is for those who feel they have missed the boat on this first round, when they played it safe and watched on the sidelines as Canada legalized recreational pot.
But are the SEC concerns justified?
A hedge-funder that bet big against the housing market prior to the 2008 crash says cannabis is “the big long.”
Danny Moses' short-selling exploits have been chronicled in Michael Lewis' best-seller "The Big Short: Inside the Doomsday Machine," as well as Academy Award-winning movie “The Big Short.”
Now, Moses has backed up his faith in pot stocks by investing in private equity firm Merida Capital, which is focusing on the burgeoning legal cannabis sector.
As Moses advised, patience is the name of the game. Maybe only ultra-longs need apply.
By David Craggen for Safehaven.com
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