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Investor Alert

E-Cigarette Stock Scams: New Smoking Technology Could Light Up Pump-and-Dump Fraud

New technology such as electronic cigarettes, often called e-cigarettes, can give rise to legitimate investment opportunities. But sometimes it opens the door to fraud. The SEC recently issued a trading suspension for a company that purported to make disposable electronic cigarettes because of concerns about manipulative activity related to the company's common stock.

FINRA is issuing this Alert to warn investors to be wary of aggressive promotions touting stocks that claim to capitalize on various aspects of the e-cigarette and vaporizer, or "vape," market.

FINRA is concerned that enterprising fraudsters may attempt to entice investors into purchasing stock through a variety of activities including aggressive stock promotion, name changes and reverse mergers. These actions may culminate in a classic "pump and dump" fraud. Investors are lured with aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the company's shares (the pump). Once the share price and volume spike, the fraudsters behind the scam sell off their shares at a profit and stop hyping the stock, causing the price to fall and leaving investors with worthless, or near-worthless, stock (the dump).

8 Tips to Avoid an E-Cigarette Stock Scam

These tips can help you avoid being victimized by a potential e-cigarette stock scam.

  1. Consider the source. Be skeptical of press releases, "spam" emails, messages on social media sites and promotional materials such as newsletters and blogs from unknown senders, often paid by company insiders or promoters, to hype a company and its products. Companies and their promoters often make exaggerated claims about lucrative contracts or acquisitions, patent-pending technology, potential revenues, profits or future stock price. Be wary if you are flooded with information over a short period of time, especially if the communications only focus on a stock's upside with no mention of risk. Dozens of press releases issued over a short period of time and containing essentially the same news can be a serious red flag.
  2. Do some sleuthing. Find out who is at the controls of a company before you invest. A basic Internet search is a good place to start. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags. Likewise, try to contact the company and its personnel. Non-working phone numbers and bogus business addresses often can be revealed through a simple phone call or Internet search.
  3. Check for reverse merger activity. Some e-cigarette companies have come into existence through reverse mergers, which allow private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing U.S. public shell company. The Securities and Exchange Commission (SEC) noted in an Investor Bulletin: "Many companies either fail or struggle to remain viable following a reverse merger. Also, as with other kinds of investments, there have been instances of fraud and other abuses involving reverse merger companies."
  4. Don't fall for name dropping. Claims of being the next Apple or Amazon of a new industry seem to be part of the pump-and-dump playbook. Be skeptical about these claims and try to confirm their authenticity, for instance through respected media outlets or audited financial reports. Also be wary if a company claims that it has received a "seal of approval" or similar distinction for its products. In some cases, companies pay an annual fee for these accolades or to remain on an organization's "recommended products" list.
  5. Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc. Companies that list their stocks on registered exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on the OTCBB or OTC Link generally do not have to meet any minimum listing standards (although companies quoted on the OTCBB, OTC Link's OTCQX and OTCQB marketplaces are subject to some initial and ongoing requirements).
  6. Read a company's SEC filings. Most public companies file reports with the SEC, but many companies whose stock trades in the over-the-counter market are not required to file periodic reports, including financials, with the SEC because they are too small or have too few shareholders. Check the SEC's EDGAR database to find out whether the company files with the SEC. Verify these reports against promotional information the company or its promoters have sent you and exercise caution if they don't align. Also, be suspicious of solicitations to invest when products are still in the development stage, but no actual products are on the market, or if the company's balance sheets only show losses.
  7. Be wary of frequent changes to a company's name or business focus. Frequent name changes may be a sign that a company is engaged in a potential fraud. Name changes can turn up in company press releases, Internet searches and, if the company files periodic reports, in the SEC's EDGAR database. Changes to a company's business focus also may be an indication of a potential scam. Watch out for companies that frequently change their names or tout new product lines.
  8. Read the fine print. Pay attention to statements that accompany unsolicited information you read about a company. They may provide context so you can properly evaluate the information. Disclosure statements in promotional materials may reveal that the senders have been paid large sums of money to provide optimistic coverage of the stock.

If you're suspicious about an offer or if you think the claims might be exaggerated or misleading, please contact us. If you suspect that you or someone you know has been taken in by a scam, send a tip or file a complaint.

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