Fraud case has hemp in the news, unfortunately

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With CBD maker CV Sciences (CVS) joining Hemp Inc. last month as the second target of a federal fraud case in the USA, the question resurfaces: How much damage to the industry’s image? Critics have long railed against the entire penny-stock empire-building “strategy” (see: “Wolf of Wall Street” and tack on the subheadline: “Hemp investing for suckers”).

“All the small cap public companies are suspect, by their very nature,” consultant Richard Rose, the American hemp veteran, told us. “It’s always done to enrich the founders. Everyone else is gambling,” said Rose, a keen hemp industry observer who admits nonetheless that there may be some “best among the worst” hemp players on the risky over-the-counter markets.


“The CBD segment, as in many other segments traded publicly, has a few bad apples hurting the industry’s reputation; and the recent SEC investigations do not add positive vibes,” said Boaz Wachtel, who has steered two medical and health firms onto the Australian Stock Exchange (ASX), Australia’s primary securities exchange (i.e. NOT trading in penny stocks).

ASX-listed CresoPharma makes neutraceuticals while its forerunner on the exchange, MMJ Phytotech, develops medical marijuana applications, and holds a license for production of medical cannabis in Canada.

“We are at a stage in the industry that folks should check what they are buying and from whom,” Wachtel told us, noting his firms go to great lengths to provide transparency at all levels of the market, down to the consumer.

CV Sciences, Hemp Inc.

The CV Sciences charges are based on U.S. Securities and Exchange Commission (SEC) claims that the company (formerly CannaVest) and CEO Michael Mona, inflated the value of its assets as a result of the 2013 acquisition of PhytoSphere, a research and consulting firm.

Those charges follow an SEC complaint filed separately a year ago against Bruce Perlowin, CEO of publicly-traded Hemp Inc. (also a penny stock), who was charged with a “long-running fraud” through which the SEC says he sold hundreds of millions of unregistered Hemp Inc. shares.

Are these such bad guys?

In both these cases, the track records of the individuals involved are not necessarily sterling. But neither is the federal government’s when it comes to cannabis, notes hemp advocate Morris Beegle, owner at Colorado Hemp Company.

“Is the SEC being used as a tool by other government agencies to further disrupt the hemp and cannabis industries?” he asked.

Nonetheless, Beegle said he’s “not a big fan of the pink sheet approach to business and industry, regardless of hemp and cannabis related companies choosing that route.

“I’ve never quite understood the valuation method, IP (intellectual property) and so forth enough to know how much of it is just smoke and mirrors,” Beegle said.

Beegle notes that CV Sciences, to its credit, has done important R&D for the CBD sector. “They’ve played a key role in moving the industry toward the mainstream,” he said.

“I’ll wait and see how it all plays out in the courts rather than jumping on the bandwagon to throw these guys under the bus, like many in our industry are already doing,” Beegle said.

Savvy investors know

Unfortunately, as the SEC cases wind through the courts, they do cast a shadow over the industry. Cannabis and hemp are sexy and au courant, natural subjects for any bored assistant business editor. Mainstream coverage of the industry grows daily, exponentially, and is drastically magnified by social media. In other words, there’s no hiding or ignoring things.

But the unfortunate PR is not that worrying to Zev Paiss, former executive director at the National Hemp Association who now operates, a bulk hemp trading platform.

Savvy investors who already have stakes in the industry are fully aware of what’s happening at this level of the market, Paiss notes. “They understand the context in which these things are happening.” he said.

Continuing education

Where it hurts, Paiss said, is with potential new investment. “As we try to bring investors into the sector, the smart ones are going to bring this kind of thing up,” Paiss said. “So, I don’t think it helps, but I wonder if it has that much of an effect day to day.”

For certain, the SEC cases reflect a need for continuing education and outreach about cannabis and hemp, according to Paiss. “It just highlights that we’re in a brand new industry, and there’s a long way to go before the confusion is cleared up in some areas,” he said.

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