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.
Do you think legalization will encourage or discourage financial scams? Comment below.
I’m a small investor owner in Kush Inc., the subject of this article.
I want to set the record straight. I’m writing based on my research from public documents and Kush releases. I am not an attorney or CPA. All information shared is to the best of my knowledge.
I take offense to an article clearly intended to smear and damage a political opponent.
The competition between AUMA and MCLR has degenerated into dirty politics.
Is his article a hit piece arranged by the AUMA group?
Why else would the Author go after a charitable effort and undermine an upcoming IPO of a cannabis start-up? It’s easy to see his assertions are vague and unfounded.
No good deed goes unpunished…
First of all, as I understand it, the shares KUSH donated to MCLR aren’t free trading.
Those shares can’t be traded for six months after their date of issue.
That means two things.
First of all, unlike the assertion, the shares will have little effect on the proposed IPO date of 4/20. Secondly, when the shares ‘mature’ and can be sold, they will have a clear value.
Another problem is the idea Kush randomly chose a share price. While the ‘real’ value won’t be known for some time, the IPO and PPO values were suggested by the company’s SEC Attorney and Brokerage house, based on the business plan and other factors. They are named in their business plan and filings.
A third point: Kush sold $150,000 worth of shares in the first 24 hours of their PPO.
There is at least that much faith in the management team, business plan and intellectual property.
The idea of a ‘Canna-business’ IPO to kick off on April 20th, a key anniversary day for Cannabis enthusiasts, is pure genius. I understand Kush is confident they can pull it off.
This misleading and politically motivated article is unfair to Kush and its investors.
He says ‘experts’ say certain things, but doesn’t always name them.
What ever happened to naming your sources?
I highly doubt the Author has either read the offering or contacted anyone at Kush.
If he’s going to stoop as low as this, he might at least be sure of his facts before he tries to destroy the dreams of both the supporters of MCLR and KUSH Inc. Investors.
I own more than 5,000 and less than 10,000 shares of Kush at this time.
I have volunteered for CCHI, a different competing Cannabis Legalization Initiative.
The government (ie media) will do everything they can to keep cannabis illegal everywhere. Investors with real money do research and dont get biased by media trying to sway opinion. Keep up the hard work Steve!!
I Tend to believe Steve Kubby, as Opposed to this Fine Example of Yellow Journalism. There’s NO ‘Pump & Dump’ going on here, sorry, don’t believe it!
“We gave in good faith, the best way we could at this time, to try to get something on the ballot that would help all of us. To call our sincere effort to help a scam is outrageous. I have gone to jail for Prop. 215 and nearly died, so I am deeply offended by this horrible article.
PLEASE write to these folks and let them know we are the real deal. If you donate, contributions to folks like MCLR will disappear and our situation will become worse, not better. Also, you should know that since we made our contribution of KUSH stock, my other company CBDS has gone for $0.38 to $1.70. Does that sound like a scam to you? I’ve spent all of my adult life working for the legalization of medical cannabis.
This article is unfair, untrue, and will hurt our efforts to get true legalization passed with the MCLR voter initiative. We don’t get a penny from this deal. 100% of all the funds go to MCLR. We have no plans at this time to claim any tax deduction from our donation. Seriously, we need as many folks as possible to write letters and turn this around in time for us to still get our signatures and qualify for the ballot. If you don’t do right on our behalf, we will be stuck with the 62 pages of rules, regulations, fines, fees, and criminal penalties of the Parker Initiative. Our MCLR is one page, can be legally printed on a home printer, repeals our horrible pot laws, sets a taxation cap of 15% for adult use and ZERO taxes for medical cannabis.
Also, there are several outright falsehoods in this article. KUSH is NOT a new company. It was acquired by CBDS two years ago. We do licensing and branding for real products that we believe will save lives, such as our Wide Spectrum Cryogenic Extract.”
Let freedom grow,
I have to agree w/ Steve Kubby ! Once this goes to market its going to gets what it needs. I don’t see any other cannabis activist coming up with a million bucks to the cause. Steve is one of the people in this world that is a true visionar not an opportunist.
Oh these fake news sites are almost as bad as the supposed ‘experts’ themselves!
WHO is playing on the other side of these stocks? And who else benefits by putting out this drivel? Really, when will Cannabis come back to being about the health movement focusing on patients instead of just profits and the continuous foibles of government control?
How about a piece on THAT for a change!!!