Some of the most high-flying marijuana stocks have gone up in smoke since topping out around this time last year. Indeed, marijuana stocks that once put up gains of more than 3,000% have given up as much as 98% from their year-ago all-time highs.

Don’t say we didn’t warn you.

Marijuana stocks always were high-risk, not to mention dodgy. After all, they trade on the over-the-counter market (OTC).

Sure, there are some legitimate companies trading OTC — notably American depositary receipts of large foreign concerns like Nestle SA (OTCMKTS:NSRGY) or Samsung Electronics Co. Ltd. (OTCMKTS:SSNLF), to name just a couple.

There are legitimate reasons to trade OTC. If these companies listed on a major exchange, they would have to prepare two sets of financials — one according to U.S. accounting standards, and one for international standards. It also helps keep out activist investors — ADRs don’t have voting rights — or any other U.S. entity looking to build a big stake in their firms.

For the most part, however, the OTC market is a bog of almost unregulated companies. It’s not hard to find stocks with no sales or profits trading at crazy high valuations. OTC is also the preferred market for pump-and-dump schemes are other forms of securities fraud.

So when marijuana stocks started going bonkers shortly after legalization went into effect in Colorado and Washington, it was clear that something very dangerous was going on. Stocks such as Medical Marijuana Inc (OTCMKTS:MJNA), Cannabis Science Inc (OTCMKTS:CBIS) and Growlife Inc (OTCMKTS:PHOT) burst onto the trading scene, garnering plenty of attention — and warnings — from the financial media.

Indeed, the sudden interest in marijuana stocks prompted the Securities and Exchange Commission to issue a warning:

“Fraudsters often exploit the latest innovation, technology, product, or growth industry — in this case, marijuana — to lure investors with the promise of high returns. Also, for marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances. When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors.”

Marijuana Stocks Up in Smoke

Soon after, the SEC put trading halts on a couple of marijuana stocks while it investigated the possibility of securities fraud. Although regulators and law enforcement didn’t come up with anything, the shares never recovered from the blow.

The real story, however, is that marijuana stocks have given up almost all of their stratospheric gains — even that didn’t get body slammed by the SEC. Over the last 52 weeks, the biggest marijuana stocks by market capitalization have essentially imploded.

MJNA and CBIS, for example, have each lost about 75% since peaking early last year. And PHOT has lost 96% since hitting an all-time high exactly one year ago. The list goes on.

It was clear at the time that these stocks could never hold on to their gains. Even if they were on the up-and-up, the valuations were nuts. CANV, for example, at one point had a market cap of more than $1 billion on revenue of $2 million and zero profits.

If marijuana is ever legalized at the Federal level, sure, there could be some good investments to be made. Private equity backers are already supporting their favorite names.

But the marijuana stocks trading on the OTC market are a terrible way to bet on that outcome.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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