Marijuana Investment: Legal Information About Marijuana Stocks

By FindLaw Staff | Legally reviewed by Amber Sheppard, Esq. | Last reviewed September 08, 2023

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The most notable risk associated with this business is that possession and sale of marijuana remain illegal under federal law. This means the federal government can prosecute marijuana businesses and dispensaries operating in states where adult-use cannabis is legal. In other words, by investing in a marijuana company, you are investing in a business that faces the risk of prosecution.

Business owners have the opportunity to invest in and become a part of the marijuana industry as states continue to shift toward legalization. More than two-thirds of states allow some form of medical marijuana as of 2023, and almost half have legalized recreational marijuana. As cannabis sales grow, new business owners have plenty of opportunities to invest in and become a part of the cannabis market.

But this business comes with its own risks, mainly since cannabis is still illegal at the federal level. Although the Biden administration has backed off from prosecuting marijuana businesses at the federal level, this can change with a new administration.

How Can I Invest in the Marijuana Industry?

As is the case with any investment, you need to do your due diligence before investing in marijuana stocks. Among other things, you need to understand the cannabis product in which you are investing and the regulatory differences among categories like medical cannabis, recreational cannabis, and CBD. You should also consider the cannabis company's growth potential and the market cap of the company's shares.

Marijuana Stocks

Marijuana companies in the U.S. and Canada began listing on Nasdaq and the New York Stock Exchange in 2018. Many businesses have now opted to go public and have made their shares available for sale on the stock market. This means investors can purchase stock in publicly traded cannabis companies.

There are three primary types of cannabis stocks:

  • Marijuana-focused biotech companies
  • Ancillary service and product providers
  • Marijuana growers and retailers

You can also invest in stocks with cannabis-related businesses. For instance, an investor might buy stocks from Abbvie Inc., which is normally a pharmaceutical stock. The company, however, also markets Marinol, a synthetic cannabinoid. Marinol can be prescribed by a health care provider and is used to help AIDS and cancer patients who suffer from vomiting and nausea.

Here are some of the most well-known marijuana stocks in exchange-traded funds (ETF), a few of which are Canadian, on the market:

Before investing in any of the companies mentioned in this article, make sure you speak with a brokerage firm or someone experienced with ETF. The market and stock valuations change rapidly.

What Should I Look for in a Marijuana Stock?

Pot stocks are like other stocks. You should do your research to see how profitable the stock is before you make a purchase. This includes:

  • Assessing the financial status of the cannabis stock you are considering purchasing
  • Checking the stock's valuations
  • Researching the company's business strategy to see whether it has a solid business plan
  • Checking the track records of the executives

Understand the Risks Associated With Investing

Federal law also places strict restrictions on financial institutions and banks dealing with cannabis-related businesses. This makes it difficult for cannabis businesses to raise capital, which could affect your financial investment as a shareholder. In addition, most marijuana stocks are only available over-the-counter (OTC), so they come with a higher degree of financial risk.

The government may also revoke your security clearance if you invest in marijuana stocks. The U.S. Department of Defense issues memorandums that explain the government policy on revoking security clearances for people engaged in the cannabis industry.

Make Sure to Monitor Cannabis Laws and Regulations

The cannabis industry is constantly evolving. States continue to decriminalize or legalize cannabis. It is very important that you keep up to date on your state's laws and regulations to ensure you remain compliant. You should also enlist a brokerage firm to obtain personalized investment advice on trending marijuana stocks.

Additional Resources

Thinking About Investing in Marijuana Stocks and ETF? You May Want to Speak to an Attorney

Laws and regulations related to the marijuana market are very complex and constantly changing. In addition, marijuana remains illegal under federal law. If you are thinking of investing in marijuana stocks and cannabis exchange-traded funds, it is best to speak to an attorney familiar with the nuances of marijuana law to ensure you comply with the changing laws.

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Restrictive federal laws and ever-changing state laws make the marijuana industry a dynamic environment for cannabis business owners. Before you open a cannabis business, make sure it is legal in your state, and follow your state laws. Once you decide on an LLC, S-corp, or C-corp business, you can register your business entity online using DIY business formation forms.

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