Investors in marijuana businesses face many risks. To name just a few: the subject of their investment is illegal under federal law; the businesses in which they are investing face heavy tax burdens because of IRC 280e; and the lack of access to banking services means businesses operate nearly exclusively cash, which makes tracking sales, expenses and profits more subject to falsification. And of course there are numerous unscrupulous operators in the industry who perpetrate various frauds on unsuspecting investors. One type of fraud is the cannabis Ponzi scheme.
The Ponzi scheme is named after Charles Ponzi, a con artist operating in the 1920s in the United States and Canada. A Ponzi scheme is a type of fraud in which early investors in supposed legitimate businesses are paid “returns” on their investments from the investments of later investors. Perhaps most recently made famous (or infamous?) by Bernie Madoff, Ponzi schemes can be particularly hard to stop until the flow of money into the scheme dries up. By then, the investor money is usually long gone. Even those who received “returns” may see that money clawed back.
The marijuana industry has seen its fair share of Ponzi scheme and Ponzi-like activity. In 2020, the SEC filed charges against two persons who sold purported ownership interests in a Washington State cannabis company. The perpetrators represented that investors’ money would be use to operate the business but in reality they spent nearly $2 million of investor funds on personal items like luxury cars and a yacht. In 2021, the DOJ charged two persons for running a Ponzi scheme that took in around $650 million from investors, who thought they were investing in cattle and/or marijuana businesses.
So how does a marijuana investor identify and avoid a Ponzi scheme?
Many Ponzi schemes, whether marijuana or not, have common “red flags.” These often include:
- The promise of high returns with little to no risk;
- Investment pitches that demand you “act now” or lose out;
- An inability to provide proper documentation of your investment and/or representations that the paperwork will “get done later”, and the important thing is to invest immediately;
- Unlicensed, unregistered sellers of securities;
- Financial documents with mistakes and/or ones that appear cobbled together;
- A willingness to show you documentation as opposed to providing you documentation;
- Flashy marketing and social media with little substance;
- The individual soliciting the investment discourages you from obtaining outside advice;
- No net worth or income requirements.
Ponzi schemes operate across a gamut of industries. Though new, emerging markets are particularly a target for scammers. The best advice on how not to get ensnared in a cannabis Ponzi scheme is cliché—and for good reason—if it seems to good to be true, it probably is.
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