Sponsored Content - FINRA is a not-for-profit organization dedicated to investor protection and market integrity. Under the oversight of the US Securities and Exchange Commission, FINRA regulates one critical part of the securities industry—brokerage firms doing business with the public in the US.
Shell companies — companies that have no or nominal business operations or non-cash assets for an extended period of time — can be used for legitimate purposes. However, they can also be used by fraudsters as vehicles for stock manipulation.
Market manipulation schemes, such as pump-and-dump schemes, related to shell companies aren’t new, but the industries involved are always shifting. For example, recently identified fraud in this space has involved Artificial Intelligence (AI) and crypto assets.
Fraudsters can be quite adept at manipulating public perception and discussion around a low-priced stock shell company. They might issue a company announcement, initiate discussions on social media, or use emails and texts to promote that the company is under new management, has been reincorporated — maybe under a new name — or both. The fraudsters might also tout a new business line or company focus, sometimes in a completely different industry. Those changes might coincide with a reverse stock split that makes it seem like the company’s shares have increased in value.
Any of those actions can cause public communication around the once-dormant company — including false or exaggerated press releases, social media and stock chat room discussion — to increase, thus “pumping” the stock up. Unfortunately, this is soon followed by the “dump,” leaving the investors who bought stock with hefty losses and worthless, or nearly worthless, stock.
Use these tips to avoid a scam:
1. Consider the source. Be skeptical of press releases, spam emails or texts, and promotional materials from unknown senders. They often come from paid company insiders or promoters to hype a company and its products. Be wary if you’re flooded with information over a short period of time, especially if the communications focus mostly on upside with limited mention of risk.
Promoters on social media could be working with the bad actors. Or they could be trying to take advantage of hype and the resulting stock increase by selling into the inflated market, unbeknownst to their followers.
Find out who’s at the controls of a company before you invest. Proceed with caution if you turn up indictments or convictions of company officials, find news reports that raise red flags, or learn of their affiliation with other speculative low-priced stocks.
2. Research whether the company has been dormant — and brought back to life. You can search the Securities and Exchange Commission’s (SEC’s) EDGAR database to see when the company last filed periodic reports, if ever. OTC Markets provides information about stocks that haven’t previously filed with the SEC, as well as red flag designations — including shell, shell risk, and bankruptcy — and a list of prohibited attorneys, accountants, and other service providers.
Another resource is the secretary of state's office in the state where the company was formed or incorporated. The charter documents filed with the state may provide details of the company's history. If possible, contact company management to determine why it ceased operations and why it decided to reinstate operations.
3. Know where the stock trades. Many pump-and-dump schemes involve stocks that trade over-the-counter (OTC). Companies quoted OTC face less rigorous, if any, standards compared to exchange-listed stocks. And OTC stocks have fewer disclosure and other requirements. It can be difficult for investors to adequately judge a stock traded OTC without access to information on the company’s earnings, debts, operating expenses, and other critical financial information.
4. Be wary of frequent changes to a company's name or business focus. The potential for manipulation often goes hand in hand with name and business focus changes. You can check out a company’s history of corporate actions, including symbol and name changes, through FINRA’s Daily List.
5. Check for very large or frequent reverse stock splits. A reverse stock split reduces the number of shares outstanding and increases the price per share without changing the total economic value of the shares. Investors should be wary of companies with a history of engaging in multiple reverse stock splits.
6. "Q" is for caution. A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy. Like other non-reporting shell companies, dormant bankrupt companies can be candidates for manipulation. Even without a “Q” designation, companies that have excessive debt or a history of engaging in convertible debt financing can be risky investments.
For further information on protecting your money or to file a tip or complaint, visit www.FINRA.org/MoneyShow.
