5 Tips to Avoid Penny Stock Scams

The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority released Thursday an alert warning investors that some penny stocks being aggressively promoted as great investment opportunities may in fact be stocks of dormant shell companies with little to no business operations.

The investor alert provides five tips to avoid pump-and-dump schemes in which fraudsters deliberately buy shares of very low-priced, thinly traded stocks and then spread false or misleading information to pump up the price. The fraudsters then dump their shares, causing the prices to drop and leaving investors with worthless or nearly worthless shares of stock.

“Fraudsters continue to try to use dormant shell company scams to manipulate stock prices to the detriment of everyday investors,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, in a statement. “Before investing in any company, investors should always remember to check out the company thoroughly.”

Investors should be on the lookout for press releases, tweets or posts “aggressively promoting companies poised for explosive growth because of their ‘hot’ new product,” added Gerri Walsh, FINRA’s Senior Vice President for Investor Education. “In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet.”

Here are the alert’s five tips to help investors avoid scams involving dormant shell companies:

1. Research whether the company has been dormant – and brought back to life.  You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports.

2. 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.

3. Be wary of frequent changes to a company's name or business focus.  Name changes and the potential for manipulation often go hand in hand.

4. Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.

5. Know that “Q” is for caution.  A stock symbol with a fifth letter “Q” at the end denotes that the company has filed for bankruptcy.

Source: ThinkAdvisor

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