The gradual decriminalization of marijuana in several states around the country has created unusual legal pitfalls. The U.S. Securities and Exchange Commission (SEC) has taken an interest in efforts to attract investors to the legal marijuana trade. This is practically unexplored legal territory, since such investments would have been unambiguously illegal just a few years ago. The SEC recently filed a civil complaint for securities fraud against a California company involved in legal marijuana sales, as well as its founder and two corporate officers. The founder and the corporation settled with the SEC, which is the civil equivalent of pleading no contest. SEC v. Notis Global, Inc., et al., No. 2:17-cv-01905, final judgment (C.D. Cal., Mar. 21, 2017).
“Securities fraud” encompasses a wide range of activities. The Securities Act of 1933, 15 U.S.C. § 77a et seq., regulates the issuance of new securities, including corporate stocks. The Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., deals with the trading of securities after they have been issued, such as in the various stock exchanges. Both statutes prohibit fraudulent statements and other deceptive acts in connection with the sale or purchase of securities. Violations may result in civil liability and, in some situations, criminal penalties. 15 U.S.C. §§ 77x, 78ff; see also 18 U.S.C. §§ 1348, 3301.
Lawmakers and law enforcement must often figure out how to reconcile new marijuana laws with old systems. One state might have removed criminal penalties for the production, distribution, sale, and possession of marijuana, but financial institutions subject to federal regulations might still shy away from doing business with them. In 2014, the SEC issued a memorandum about potential microcap investment scams, also known as penny stock fraud, in the marijuana business. The memo sought to warn investors about “pump-and-dump” scams, which involve making false or misleading statements about a company in order to artificially inflate its stock price.