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If you use the internet, you have received “spam” or junk email recommending you invest in a stock, perhaps even invest in that stock before it is first publicly offered for sale in an Initial Public Offering (IPO) or allegedly disclosing to you “inside” information that will be disclosed soon and make the value of the stock skyrocket. If you get enough of these or they look legitimate, you may start to believe what you are being told.
Federal and state laws are supposed to protect consumers from misleading and unwanted spam. There are also regulations on the content of these messages that involve securities and what the senders must tell you. Yet, stock spams continue. Therefore, as the investor, you are the first and last line of defense. Just hit the delete key.What is Spam?
Spam is unsolicited electronic mail sent to a large number of addresses, usually advertising some of a boiler room sales operation in which someone who doesn’t know you tries to sell you securities, like penny stocks, or puts aggressive — and suspect — messages on an electronic message board to peak your interest in a company.Is Spam Regulated?
The simple answer is yes. Is it working? The obvious answer is no. Just look at your email every day. Federal legislation was enacted in 2003 to combat spam and a majority of states now have laws designed to control spam. You should know that although spam is regulated in a number of ways described below, many aspects of it are unregulated.Federal Laws
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act) requires unsolicited commercial email messages to be labeled and bans false or misleading header information. It also prohibits deceptive or misleading subject lines and requires that emails give recipients an opt-out option (an ability for the recipient to stop receiving future commercial messages from the sender). The law also requires commercial email to contain clear and conspicuous notice that the message is an advertisement or solicitation, and contain the emailer’s valid physical postal address.State Laws
Numerous states have adopted laws prohibiting unsolicited commercial email and false or misleading routing information. Many states also prohibit the distribution of software designed to falsify routing information. In addition, many states require that the spam identify the sender and tell how to opt out of getting more spam from that sender. However, just as with the federal law relating to these matters, it is not working.Securities And Exchange (SEC) Enforcement
More than a decade ago, the SEC created the Office of Internet Enforcement specifically to fight internet fraud, including schemes using spam. The SEC requires online communications touting or recommending stocks to disclose the person or entity that paid for the communication, including the amount and type of the payment. The SEC has brought scores of enforcement cases since August 1995 that involve violations of the law using spam. The SEC has investigated a variety of email frauds such as:
“Pump and Dump” scams where messages are sent urging readers to quickly buy a stock, based on a future company or economic development. The message senders may be insiders or paid promoters who gain by selling their shares after unsuspecting investors pump up the stock price.
Pyramid schemes where promoters claim that they could turn a small investment into a large investment within a short period of time, but participants make money solely by recruiting new participants into the program.
“Risk-free” or “guaranteed” investments in exotic-sounding investments. There is no “risk-free” investment. Offers of “guaranteed” investments should be viewed very suspiciously.
“Inside information.” Someone claims to have inside or non-public information about a company or product that will soon send the stock price soaring. This information is almost always false and designed to get people to invest when they otherwise wouldn’t. In any event, trading on “inside information” can be a violation of the law.
“Off-shore” deceptive investment schemes from another country targeting U.S. investors. Any foreign fraud is difficult for U.S. law enforcement agencies to investigate or rectify.
False promises of pending initial public offerings (IPOs). In one such case, a private company message announced its upcoming SEC-approved IPO. The company raised money fraudulently by offering “free stock” credits if you paid an administrative fee and saying that you could redeem your stock credits for common stock when the company completed the IPO. The SEC did not approve the offering, and the company never took real steps to issue an IPO.FINRA
Brokerage firms regulated by FINRA and their employees must abide by applicable federal and state anti-spam laws. In any communication with the public, FINRA rules require that a member identify itself and that investors be given enough information to make a sound investment. FINRA rules also prohibit statements making promises.
Remember, though, that FINRA can only regulate the actions of registered brokerage firms and their employees. While all U.S. brokerage firms have to be registered with FINRA to do business with the public, most problem spams are likely sent to you by non-regulated businesses or individuals.Additional Examples of Problem Spams Touting a Stock
The most common types of investment-related spam are those touting a stock. Remember that “tout” means to peddle in an aggressive or persistent way, but it also means to give a tip or solicit a bet on. These touts are sometimes made as part of a pump and dump scheme. Many touts look like they are giving unbiased news about an investment, but the spammer may own the stock and want others to buy it so the spammer’s stock will go up in price. Absolute strangers will not offer you a genuine “deal of a lifetime.”Touts and Other Spams on OTC Bulletin Board and Pink Sheet Stocks
Most touted stocks are infrequently traded, not well known and can move up or down in price quickly. They are usually quoted on the OTC Bulletin Board (OTCBB) or in the Pink Sheets. The OTCBB and the Pink Sheets are quotation mediums for broker-dealers that contain quotations for thousands of over-the-counter stocks not listed on any of the major stock markets. Neither the OTCBB nor the Pink Sheets require the companies to meet set minimum assets or revenues. Neither the OTCBB nor the Pink Sheets is an issuer listing service or a stock market, and they should not be confused with The Nasdaq Stock Market, Inc. or with a national securities exchange.Pre-IPO Spam
Many problem spams and other internet advertising involve IPO and pre-IPO investing. Pre-IPO investing is buying private placements of shares of stock in the hopes of selling the shares for a profit when the company goes public. Many of the statements in pre-IPO spams are promissory — no one knows if the company will actually do the IPO.
Some of the red flags in pre-IPO spams are predictions of large price gains, promising the ability to “get in on the ground floor,” and offering examples or projections of very profitable IPOs.
There are many risks of buying privately placed shares, especially when none of the company’s stock is publicly traded. You cannot be certain when or even if the company will ever take steps that could result in a public market for the securities. This means that you cannot be sure that if you purchase pre-IPO you will be able to sell your shares even if the company goes public, since privately purchased shares come with restrictions. It is difficult to determine a fair market value for the investment. Pre-IPO companies are often new and untested companies without revenue, a real product line or experienced management. So even when they are legitimate, they are highly risky.Spotting Problem Spam
Problem spams frequently include:
If you get spammed, don’t respond. It is not worth the risk and the illusory benefit.Contact Us
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.