September has been a wild month for weed stocks.
On Sept. 19, Canadian cannabis company Tilray (TLRY) soared by as much as 90% after the CEO said Tilray is eyeing partnerships with pharmaceutical companies; Tilray briefly had a bigger market cap than giants like American Airlines, Chipotle, and Tiffany. Then shares plummeted, erasing the day’s gains, and finally Tilray ended the day up 40%. The next day, Sept. 20, Tilray fell 19%. It is still up more than 200% since its IPO in July. Canopy Growth (CGC) and Aurora (ACBFF) have also seen a bump since Tilray’s IPO, but have also been erratic on many days. Short-seller Whitney Tilson calls all the action “a case study I will teach for years.”
Amidst the cannabis stock fever, many investors see shades of crypto. It has become a popular sound bite: “Cannabis is the new crypto.”
The two spaces do have a lot in common: volatile trading action from day to day, with wild swings influenced heavily by media coverage and news announcements; excitement from millennials; regulatory uncertainty; and mainstream companies showing interest, like big beer brewers eyeing marijuana or tech giants implementing blockchain.
And Owen Donley III, chief counsel of the SEC’s Office of Investor Education and Advocacy, says there’s something else the two industries have in common: fraud.
“The fraud we’re seeing in that space [crypto] tracks the fraud we’re seeing in any other space,” Donley said on Yahoo Finance’s Final Round live show. “If you look at some of the crypto, ICO offerings that are guaranteeing returns, promising no losses, saying they’re going to change the world, with not a lot to back it up, we’re going to be worried. And of course that’s going to be with any industry, including marijuana. The fact that those two things are linked shouldn’t be surprising.”
This month, the SEC issued an investor warning about potential market manipulation of marijuana stocks.
“Scam artists often exploit ‘hot’ industries to trick investors,” the SEC warned on Sept. 5. “If you are thinking about investing in a marijuana-related company, you should beware of the risks of investment fraud and market manipulation… Fraudsters may try to use media coverage about the legalization of marijuana to promote an investment scam.”
To be sure, the SEC is by no means saying all weed or crypto companies are fraudulent; its biggest concern is everyday investors getting misled. In a section devoted to “guaranteed returns,” the alert adds: “If someone promises you a guaranteed high rate of return on your investment, especially along with a claim of no risk, it likely is a fraudulent scheme.”
Donley’s purview, he warned, is not cryptocurrency. But he cautioned, echoing the SEC warning, “Whether you’re talking about news around marijuana or the growth in the digital asset space, fraud will track to both those things.”