Why Colorado Is Warning People Against Investing in Marijuana

The marijuana business is booming in Colorado, with pot sales topping $100 million for the first time in August.

But should investors put their money into the cannabis industry?

The State of Colorado doesn't quite say "no," but it comes close.

Colorado's Division of Securities has issued an "investor alert" that warns folks against pouring their cash into the "next big thing." And the document includes marijuana alongside binary options and digital currency such as bitcoin as business opportunities that may turn into money losers, not big winners.

“At first glance, these products appear to have no real connection to one another, Securities Commissioner Gerald Rome is quoted as saying in a division news release. "But what they all have in common is their recent emergence as three investments that both sellers and buyers hope will become the ‘next big thing.’ Before you consider investing, make sure you understand what these products are, their benefits, and their risks."

We've included the complete alert below, but here are four bullet points from the section about marijuana investments.

• The emerging marijuana market is highly volatile and only semi-legitimate because regulations for medical and recreational use vary greatly between states and jurisdictions. For this reason, the secondary market for these kinds of investments is limited and investors may have difficulty recouping their money. In some cases, the business may be forced to cease operations by law enforcement, leaving investors with no recourse to recover their funds.

• The standard information investors use to make informed financial decisions is limited for many marijuana investments. For example, since this is an emerging market there would be no specific data on historical trends, making all forecasted profits extremely speculative.

• Due to marijuana’s questionable legal status, there are limited traditional financial avenues for day-to-day and necessary business operational transactions. For example, most banks refuse to open business accounts for these companies, forcing them to transact on a cash-only basis with suppliers and other service providers.

• Marijuana investment opportunities could be particularly susceptible to scams, such as “pump-and-dump,” which use misinformation to pressure investors to get in on the “ground floor” thereby pumping up the company’s share prices.

Colorado didn't come up with these cautions on its own. As pointed out by a post in a publication called Crypto Coin News, Colorado and Washington state put out identically worded warnings at the same time. They appear to duplicate an early heads-up issued by the North American Securities Administrators Association, of which the Colorado Division of Securities is a member.

Nonetheless, Commissioner Rome and company have clearly given their blessing to the notion that marijuana investments are among the riskiest current investments. But that doesn't seem to have stopped many people from putting their money where the buds are.

Here's the complete Division of Securities alert.

Colorado Marijuana Investor Alert