Savvy investors know that emerging, high-growth industries are often where the biggest returns might lie — and with the Trump administration issuing an executive order in December 2025 regarding the softening of federal law targeting cannabis (moving cannabis to a Schedule III controlled substance rather than Schedule I), the next era in the marijuana business could be appealing to those looking to broaden their portfolio.
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But, that doesn’t mean it’s a wise idea to invest without considering the potential pitfalls. Here are some red flags would-be cannabis investors should look out for.
IRS Schedule 280E Still in Effect, So Watch Out for Businesses Who Claim Otherwise
While the rescheduling of cannabis is planned, it remains a Schedule I controlled substance as of this writing — and that means stores selling cannabis products cannot claim any deductions or credits tied to trade or business. That’s a significant hurdle to clear.
Beware of companies dodging any tax-related questions in this regard, or who are not entirely transparent about their tax bills given the current legal landscape. Also, keep in mind that future federal reform (and to a lesser extent, state-level reform) is by no means guaranteed.
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Debt and Cash Flow Are Essential Indicators To Track for Cannabis Investors
Debt is backing nearly all legal cannabis operators in the U.S., and in 2025, a whopping ~95% of capital raised by licensed operators came through debt financing, MJBizDaily reported.
That’s a concerning number, and potential investors in the cannabis business should ask serious questions of potential investment targets — largely targeting cash flow versus what’s left owing on the ledger.
Larger multi-state operators, as a rule, tend to have the most success in securing debt refinancing terms versus smaller MSOs, which could be a clue as to their perceived solvency and future prospects. Several enterprises have expressed doubt as to their ability to stay in business as a “going concern” as a result, per the U.S. Securities and Exchange Commission (SEC).
Watch Out for Booming Markets, Now Going Bust
As marijuana markets mature, what once may have been seen as a sure thing could end up being a trap.
Take Colorado, for example. Often heralded as a cannabis mecca — a market in which every year set new, lofty sales records — a false sense of security has since faded in the aftermath of the COVID-19 era, The Washington Post reported. Nearby states legalizing, oversupply, high taxes and strict regulation, and competing products have taken the shine off.
Cannabis Investment Scams Can Also Follow Traditional Avenues
Dishonest actors or scammers also abound in the cannabis industry, luring investors to buy in with incorrect or distorted information, according to Silver Law. Especially beware of microcap or penny stocks tied to the business, with less publicly disclosed information it can be difficult to perform due diligence prior to investment.
Other common red flags included a trading suspension from the SEC, a name change or business plan coming from the company, or fabricated or inflated press releases or newsroom items issued by the cannabis company in question.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: 4 Red Flags Every Cannabis Investor Should Spot
