Stock Spams and Scams
You may 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).
Federal and state laws 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. In spite of these laws and regulations, stock spams continue to pose a risk to investors. This Investor Alert explains how to spot and protect yourself from spam problems.
What Is Spam?
Spam is unsolicited electronic mail sent to a large number of addresses, usually advertising some product, service, business, website, scheme or strategy. Stock spams are the electronic equivalent 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 spur your interest in a company.
Is Spam Regulated?
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.
The 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.
Numerous states have 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 also require that the spam identify the sender and tell how to opt out of getting more spam from that sender.
SEC (Securities and Exchange Commission) 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:
For more detail on these scams, see the SEC’s Internet Fraud: How to Avoid Internet Investment Scams.
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.
Problem Spams FINRA Has Seen
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. To learn more about the differences, go to the OTCBB website. To learn more about the Pink Sheets, go to the Pink Sheets website.
All companies that are quoted on the OTCBB—but not the Pink Sheets—must file financial and other information with the SEC or another regulatory authority. You can check out an OTCBB company’s SEC information on the SEC website.
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
A high-pressure sales pitch can mean trouble on the phone or on the Internet. Do not believe anyone who tells you, "Invest quickly or you will miss out on a once-in-a lifetime opportunity." If it sounds too good to be true, it is.
Regulators strive to protect investors as a whole and do not start cases for the sole purpose of getting money back to you following a fraud. You can hire a lawyer to try to get your money back, but you need to know that recovery is rare. By far the best protection is to stay away from bad deals in the first place. You, the investor, are in the best position to protect yourself.
Investigate before you invest. Find out who sent the message to you. Ask whether the claims can be documented. Verify whether the claims are true before you send a nickel of your money.
If you are suspicious about an offer or if you think the claims might be exaggerated or misleading, contact the SEC Investor Complaint Center. Use FINRA BrokerCheck to check if the firm or individual spamming you is currently or formerly registered with FINRA or a national securities exchange, or with a current or former investment adviser firm, or by calling our BrokerCheck hotline at (800) 289-9999. If you think that the problem spammers may be registered with FINRA, you can file a complaint at FINRA's Investor Complaint Center.
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