Investors in marijuana businesses face many risks. To name just a few: the subject of their investment is illegal under federal law; the businesses in which they are investing face heavy tax burdens because of IRC 280e; and the lack of access to banking services means businesses operate nearly exclusively cash, which makes tracking sales, expenses and profits more subject to falsification. And of course there are numerous unscrupulous operators in the industry who perpetrate various frauds on unsuspecting investors. One type of fraud is the cannabis Ponzi scheme.
The Ponzi scheme is named after Charles Ponzi, a con artist operating in the 1920s in the United States and Canada. A Ponzi scheme is a type of fraud in which early investors in supposed legitimate businesses are paid “returns” on their investments from the investments of later investors. Perhaps most recently made famous (or infamous?) by Bernie Madoff, Ponzi schemes can be particularly hard to stop until the flow of money into the scheme dries up. By then, the investor money is usually long gone. Even those who received “returns” may see that money clawed back.
The marijuana industry has seen its fair share of Ponzi scheme and Ponzi-like activity. In 2020, the SEC filed charges against two persons who sold purported ownership interests in a Washington State cannabis company. The perpetrators represented that investors’ money would be use to operate the business but in reality they spent nearly $2 million…
