Canada Investment Watchdog Warns of Medical Marijuana Scams, Risks

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By Esther Tanquintic-Misa | June 17, 2014 2:54 PM EST

Canadian Securities Administrators on Monday warned investors to be cautious when investing in medical marijuana stocks.

It noted stock prices of companies that have soared after simply announcing their "intention" to grow and sell pot.

The Canadian government, effective April 1, barred the home cultivation of medical marijuana in favor of large commercial greenhouses in the country.

But the move may put investors at risk if they buy into small or previously inactive stocks seeking to enter the medical marijuana business.

"In many of these cases, just the announcement of intent to develop a medical marijuana business has resulted in an immediate rise in a company's stock price," the CSA said.

"The CSA is concerned investors may face financial harm by purchasing such shares at an inflated price before there is a viable business."

A marijuana plant is seen at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)
A marijuana plant is seen at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)

Investors interested to place investment in marijuana stocks should know that only 13 companies so far have been licensed by the Health Canada, a federal department, to cultivate marijuana and market it to patients who have a doctor's prescription.

"Investors should be aware that companies cannot legally conduct a medical marijuana business without a license from Health Canada, and that there is likely significant time and cost required to obtain such a license," the CSA said in the statement.

Health Canada announced in May that it has received a total of 858 applications. However, out of the total number of applications, 370 were returned as incomplete, 149 were refused and 30 withdrawn.

Section Grower Morgan Blenk inspects a marijuana plant clone before planting it at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)
Section Grower Morgan Blenk inspects a marijuana plant clone before planting it at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)

The federal department said it takes significant time to scrutinise the applications. Suffice to say, "there is no assurance" that a company will be successful in obtaining a license.

CSA's warning was prompted by the marijuana-related stocks investor alerts issued by the U.S. Securities and Exchange Commission and the U.S. Financial Industry Regulatory Authority. "With medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention -- including the attention of scammers," FINRA said on its Web site.

"It's kind of like the dot-com era," Bruce Linton, chairman of Ottawa-based Tweed Marijuana Inc. (TWD), told Bloomberg. "There are going to be those who talk about doing and those that are doing."

 Marijuana is pictured for sale during the annual 4/20 day, which promotes the use of marijuana, in Vancouver, British Columbia April 20, 2013. REUTERS/Ben Nelms
Marijuana is pictured for sale during the annual 4/20 day, which promotes the use of marijuana, in Vancouver, British Columbia April 20, 2013. REUTERS/Ben Nelms

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(Photo: / )
Production Assistant Dan Brennan collects marijuana plant clones to be moved into a growing room at Tweed Marijuana Inc in Smith's Falls, Ontario, February 20, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken February 20, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)
(Photo: / )
A marijuana plant is seen at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)
(Photo: / )
Section Grower Morgan Blenk inspects a marijuana plant clone before planting it at Tweed Marijuana Inc in Smith's Falls, Ontario, March 19, 2014. By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor. About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said. Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Picture taken March 19, 2014. REUTERS/Blair Gable (CANADA - Tags: HEALTH DRUGS SOCIETY BUSINESS AGRICULTURE)
(Photo: / )
Marijuana is pictured for sale during the annual 4/20 day, which promotes the use of marijuana, in Vancouver, British Columbia April 20, 2013. REUTERS/Ben Nelms
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