Penny Stock Investor Relations Firms have long been given a bad wrap and many times rightfully so. The depth of pump and dump schemes and stock promoters touting recent press releases to drive the stock of the price up is unprecedented.
Just a quick scroll through Twitter or penny stock industry websites like SeekingAlpha will yield a slew of promotions —some more outlandish than others. Many simply stating how a stock “jumped 500% and they are buying” and others referencing the latest press release with an opinion that the stock is a buy. To understand how this can be troublesome, we must look first at the regulatory body governing securities in the U.S. capital markets. The Securities & Exchange Commission mission is clearly stated:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.-Source
Notice that the beginning part of the mission statement states “to protect investors” and only at the end of the mission statement does it say “and facilitate capital formation”. This order of things has been taken literally by the S.E.C. and rule making and policing currently stay at the core of their function, with many industry experts and business people claiming that they are actually stiffening capital formation. Regardless penny stock companies take center stage with enforcement officers at the S.E.C. partially due to the historic manipulation and fraud that has taken place in gray markets, over the counter markets, the pink sheets (now OTCMarkets Inc) and private equity placement deals.
This means aggressive touting of the company’s stock or marketing projected financials may be viewed by the S.E.C. as fraud since there may be no basis for the assumption. This is especially the case in penny stocks where a newly listed company has limited, minimal or even non-material earnings or operations.
This becomes even more troublesome for investor relations agents working with penny stock companies. The main objective of an investor relations agency is to bring awareness to penny stocks which is done many times by investor introductions. The private placement of stock is generally the most effective means a company can raise money and sometimes the investor relations agents cross the line when “introducing” a company by handing a potential investor a prospectus or PPM. This now becomes an activity which may be classified as “dealing in securities” or “brokering securities” which is regulated again by the Securities and Exchange Commision.
In the United States, broker-dealers are regulated under the Securities Exchange Act of 1934 by the Securities and Exchange Commission (SEC), a unit of the U.S. government. All brokers and dealers that are registered with the SEC (pursuant to 15 U.S.C. § 78o), with a number of exceptions, are required to be members of the Securities Investor Protection Corporation (SIPC) (pursuant to 15 U.S.C. § 78ccc) and are subject to its regulations. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Many states also regulate broker-dealers under separate state securities laws (called “blue sky laws”).
Understanding that broker dealers and S.E.C. registered agents alone are able to actually sell the securities does not rub the investor relations industry right. Many investor relations, whom chose to call themselves consultants many times to evade any scrutiny regulation agencies either federal or State, take or demand a finders fee for placing an investment into the company from a third party. Many penny stock firms actually like this model since it incentivizes the penny stock investor relations firm to find them investment money. But this is beyond a gray area in securities regulation and such practices can put the investor relations agency and the penny stock company in front of legal liability in the form of S.E.C. action.
The Short: Penny Stock investor relations companies should focus on telling the story of the company versus the story of the stock or the financial structuring behind a deal. Companies should focus on getting introductions and placing the investment directly with an investor. If a company feels that an investor relations agent works best when commissioned or by sending out investment material, they should be brought in-house, which provides a loop hole as company executives can secure transactions with investors directly.
Cervitude Intelligent Relations offers penny stock investor relations services for companies trading on the Nasdaq, OTC Markets, ASX, TSX and more. Contact us.
