Massachusetts Secretary of the Commonwealth William Galvin has issued a warning to potential cannabis industry investors to be wary of scams and unscrupulous operators after filing fraud charges against two entrepreneurs in the state. In an alert released by Galvin’s office, the secretary urged investors to approach offers for unregistered securities from unlicensed sellers with caution, noting that the cannabis industry is not monitored by federal regulators or state-chartered banks.

“No one regulator can police this marketplace,” Galvin said in the statement. “My Securities Division intends to scrutinize these offerings to proactively prevent investor harm.”

Cannabis Entrepreneur Charged with Fraud

Galvin’s warning came after his office filed fraud charges against David Caputo and his marijuana cultivation company, Positronic Farms, Inc. According to the complaint in the case, Caputo raised $1.3 million from 40 investors for a recreational marijuana cultivation facility that would also lease space to other cannabis businesses. Caputo had solicited investments from at least 735 prospective investors using methods including press releases, videos, and an unspecified “online news portal.”

Caputo had allegedly tried to raise money “from just about any investor willing to contribute monies,” according to the complaint, which added that the company was in the process of obtaining a license for the venture. But according to records from the state Cannabis Control Commission, the company has yet to turn in a completed application.

In an online profile for the professional networking site LinkedIn, Caputo is described as an expert in search engine optimization and the founder of a cannabis company.

“I’ve been a salesman and a huckster my whole life, but I could never shill for a cause in which I didn’t believe,” Caputo said in his profile. “This is my strength, because it has tended to attract the kinds of projects that I want to work on in the first place.”

Charges in Separate Case Filed in April

In April, Galvin’s office filed fraud charges against Frederick V. McDonald, Jr., the CEO of the Beverly-based investment adviser US Advisory Group Inc., for raising more than $8 million from more than 100 investors to fund medical marijuana dispensaries that were never opened. McDonald had failed to disclose key risks inherent in the cannabis industry and failed to reveal critical information including his own conflict of interest in the deals.

“McDonald’s entire relationship with the emerging cannabis industry has been an improvised effort to learn as he goes, utilizing client funds and firm resources to experiment,” the complaint says. “He utterly failed to uphold the fiduciary duty he owed to (one investor) and took advantage of his advisory relationships to pursue these projects. McDonald further failed to educate himself regarding the unique and complex licensing process in Massachusetts, which resulted in the distribution of offering documents that failed to adequately disclose to investors the risks or difficulties the investment could face.”

Galvin’s office is seeking to censure McDonald and US Advisory Group from registering as an investment advisor or broker in the state, requesting that any profits be returned, and asks for restitution and an administrative fine to be paid.

“McDonald’s free-wheeling practices included cutting corners at every opportunity and lying to his own business partners and investors to cover his own mistakes,” the complaint against him added.

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