Financial experts in California are warning of a potential penny stock scam involving marijuana.
A Nevada company called KUSH announced in March that it would donate $1 million in stock to a campaign to legalize marijuana for recreation. But rather than supporting legalization directly, experts say, the move appears to be a classic “pump and dump” scam.
Steve Kubby, a longtime cannabis activist and CEO of KUSH, said he is simply trying to help reform efforts. He insisted the proposed stock gift is not a con job.
CEO of KUSH denies allegations
“No good deed goes unpunished,” Kubby said. “We believe in it. We think it’s going to work out.”
Some experts disagree. The problem, they say, is that there is no way to accurately peg the real value of KUSH’s penny stocks. The stocks were originally offered for five cents each, while the company plans to go public in April, sell 50 million shares, and double the price.
But penny stocks are notoriously risky, and it is likely the activists behind the proposed Americans for Policy Reform – which is pushing for legalization in the November election – would end up with far less than $1 million.
At the same time, KUSH could try to claim a sizeable tax deduction for the gift. The company also could use a fraudulent transfer to drive up the price of its stock when it goes public. If investors believe KUSH stock is already as valuable as Kubby claims, they too could drive up its price.
Then, when the true valuation of the stock becomes public, its price would plummet and investors would lose large amounts of money. The point of a pump and dump scheme is for a company’s executives to cash in on the higher prices just before they crater.
KUSH announced March 8: “The Board of Directors of KUSH, a new player in the medical marijuana field, today authorized the donation of $1 million in KUSH stock to Americans for Policy Reform (AFPR) in support of their 2016 Marijuana Control Legalization and Revenue Act (MCLR) legalization project.”
The donation is questionable in part because of the campaign KUSH chose to help. The MCLR is obscure and is highly unlikely to make the November ballot. The only real chance for success lies with a much more serious proposal, the Adult Use of Marijuana Act. That effort has already raised more than $2 million – in real money.
KUSH claims in its press release that it has “discovered a revolutionary cryogenic extraction process,” that it offers “patent pending genetics,” and that it sells a “non-psychoactive nutraceutical – to provide a better quality of life for people suffering from cancer, gout, arthritis, heart disease, diabetes and other debilitating diseases.”
Penny stocks carry heavy risk
There is little oversight or regulation of penny stocks, despite their high risk, and the U.S. Securities and Exchange Commission regularly warns investors to avoid them. Kubby agreed his stocks are high-risk, and acknowledged there has been no government audit or approval from the SEC. The gift and IPO could be delayed significantly because of this, he said.
“It’s a very risky investment,” Kubby said. “Never invest in anything that you can’t afford to lose. There is a very real risk in this marketplace. What if the next attorney general is Chris Christie?”
But the stock is worse than risky, experts said. Alan Brochstein, a marijuana finance expert, said KUSH likely has little access to liquid cash, meaning its gift could leave it with no operational money.
“It’s a very stupid move to gift stock in a company that intends to be publicly traded but hasn’t begun trading and will likely have zero liquidity,” Brochstein said. “Knowing the circumstances fairly well, I expect that the $1 million is actually about $50,000 in realizable proceeds.”
The problem is less that AFPR will suffer than that investors will be cheated out of their money, experts said. But Kubby insists the company will have liquid finances when the stock goes public.
He predicted KUSH would have to sell about 10 million shares on the public markets before it could donate $1 million to cannabis legalization. But Doug McVay, an expert at DrugWarFacts, said that’s probably a vast underestimate.
“That’s a lot of shares of questionable real value that would have to be sold in order to realize any spendable cash,” McVay said.
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