Canada securities watchdog warns of medical marijuana scams

Workers tend to medical marijuana plants at a new commercial operation in Smiths Falls, Ontario. (AFP/Michel Comte)

OTTAWA: Canada's securities watchdog warned on Monday against dud medical marijuana investments, saying stock prices of several shell companies have soared after simply announcing their "intention" to grow and sell pot.

This follows a new government scheme starting on April 1 that banned home cultivation of medical marijuana in favour of large commercial greenhouses in Canada.

The Canadian Securities Administrators (CSA) said in a statement it "is urging investors to be cautious when considering investing in medical marijuana stocks."

It said a "significant number" of small or inactive shell companies have attracted investment after saying they would enter this new and potentially lucrative sector.

"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."

The CSA reminded that a license to grow medical marijuana is required from Health Canada, and start-ups face significant time and costs.

And, it added, "there is no assurance" that a company will be successful in obtaining a license.

Health Canada is reviewing hundreds of applications for the new commercial licenses. So far only 13 companies have been approved.

The US Securities and Exchange Commission (SEC) issued a similar alert in May after suspending trading in a fifth American company touting dubious financial gains to be made in the marijuana industry.

The SEC warned then about "possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industry to lure investors with the promise of high returns."

Colorado this year became the second state in the United States, after Washington in the Pacific Northwest, to allow the retail sale of recreational cannabis.

Medical marijuana is already legal and regulated in 19 US states, and has been allowed in some cases for the past 20 years.

In Canada, recreational use of marijuana remains prohibited under Canadian law.