By Sarah N. Lynch
WASHINGTON, May 16 (Reuters) - U.S. securities regulators
warned investors on Friday to be careful about getting involved
in stock schemes involving small marijuana-related companies.
The Securities and Exchange Commission said it has already
suspended trading in five different cannabis microcap companies
in the past few months.
The latest crackdown Friday was against Fusion Pharm Inc.
, a Denver-based company purportedly selling
cultivation systems for marijuana.
Voters in Colorado and Washington legalized the possession
and use of small amounts of marijuana for recreational use in
2012. They are also among 20 different states that permit the
use of medical marijuana.
The first recreational cannabis shops opened in Colorado in
"Given the attention that marijuana-related companies have
attracted recently, we urge investors to exercise caution when
looking at investments in this space," said Lori Schock, the
head of the SEC's Office of Investor Education and Advocacy.
The SEC said it had decided to suspend trading in Fusion
Pharm because of questions about "the accuracy of assertions"
concerning its assets, revenues, financial statements, business
transactions and financial condition.
No one answered the phone at the company's Denver
headquarters, and e-mail inquiries were not returned.
"Recent changes in state laws concerning medical and
recreational marijuana have created new opportunities for penny
stock fraud," said Elisha Frank, a co-chair of the SEC
enforcement division's microcap task force.
"Whenever we see incomplete or misleading disclosures, we
act quickly to protect investors."
This marks the second time now since last year that
securities regulators have warned about a rise in marijuana
In August 2013, the Financial Industry Regulatory Authority,
which self-polices the brokerage industry, issued similar
warnings, saying it had seen examples of classic "pump and dump"
schemes and instances of firms being run by people with criminal
Of the five companies whose trading was recently suspended
by the SEC, the agency said several were targeted for concerns
about the accuracy of how they described their operations, and
two of them were suspected of illegal activity, including market
manipulation and unlawful sales.
The SEC in general has been ramping up its focus on
enforcement in the microcap fraud space, an area considered
highly risky for investors because it involves new companies
with no proven track record and volatile stock prices.
The microcap market is comprised of companies with small
amounts of assets and low stock prices, often with a market
capitalization of less than $250 million or $300 million.
The SEC formed the microcap task force last year to target
abusive practices and companies that fail to routinely publicly
report their financial results.
(Reporting by Sarah N. Lynch; editing by Andrew Hay)