posted on 01 August 2015
by Securities and Exchange Commission
The SEC's Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors about fraudsters who promote a stock to drive up the stock price and then sell their own shares at the inflated price, making money at investors' expense. Fraudsters who conduct stock promotions are often paid promoters or company insiders who stand to gain by selling their shares after creating a buying frenzy and pumping up the stock price. The promoters or insiders make profits for themselves while creating losses for unsuspecting investors.
Fraudsters may promote a stock in seemingly independent and unbiased sources including:
Microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), are more susceptible to stock price manipulation. Publicly-available information about microcap companies often is scarce, making it easier for fraudsters to spread false information. In addition, it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies ("liquid" investments are those that can be sold easily). Be especially cautious regarding stock promotions if there are any warning signs of microcap fraud including:
When considering any potential investment, be aware of these red flags of investment fraud:
Even if a promoter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may make such disclosures to create the false appearance that the promotion is legitimate. Additionally, the disclosures may not reveal that the underlying source of the compensation is a company insider or affiliate.
Do not take comfort because the promoter encourages you to buy the stock through your own brokerage account. Even if you do not give the promoter any money directly, your stock purchases may enable the organizers of the promotion to offload their otherwise valueless shares. The promoters may have gotten their shares privately at a very low cost with the intention to profit from their promotion rather than to invest in the company.
Before investing in a company based on a stock promotion, carefully research the investment (read Ask Questions) and keep in mind that the promoter may be trying to get you to buy into the hype in order to sell his or her own shares at your expense.
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The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
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