The SEC and Stock Promotion

In the over-the-counter equities market, paid stock promotion has long been of concern to the Securities and Exchange Commission (“SEC”) and to responsible market participants.  Recently the OTC Markets has taken an interest in the rules that apply to investor activities  and promotion of the issuers on their platform. Stock Promotion isn’t just a way of attracting attention to a company and its stock; it can also be a form of illegal stock manipulation.  That is because nearly all stock  promotions are financed by individuals or entities that hold large securities positions acquired at negligible cost or at a considerable discount to market price, who want to sell their shares for a hefty profit.  Those people may be former insiders, current insiders concealing the amount of their ownership, stock promoters paid in shares or toxic funders who lent money to the issuer in exchange for convertible notes.

The schemes in which they participate are called pump and dump operations.  Stock promoters use various means at their disposal—email blasts, phony “research reports” posted on a variety of websites, social media chatter talking up the “hidden gem” in question, and, even today, boiler rooms whose staff cold calls likely prospects—to send a stock skyward.  Sometimes management is in on the play, and helps it along by issuing an avalanche of press releases touting the company’s accomplishments and imaginary future projects.  The plan may be even more elaborate.  A group of unscrupulous individuals will purchase a shell company, or even create one from scratch, and spend a year or more setting it up as a vehicle for a pump and dump.  When the time is ripe, the pump will begin. Read More