Investing in penny stocks and microcap companies is inherently risk. Common elements of microcap companies include trading over the counter, limited public information, limited liquidity and the risk of losing your entire investment.[1]
The S.E.C. has charged numerous “stock promoters” with pumping up a stock and then selling it in the middle of their promotions.
“Fraudsters who conduct stock promotions are often paid promoters or company insiders who stand to gain by selling their shares after creating a buying frenzy and pumping up the stock price. The promoters or insiders make profits for themselves while creating losses for unsuspecting investors.”[2]
Investor relations is a function inherent in public companies but for smaller public companies like penny stocks and micro-cap companies, the line between marketing agency and investor relations agent is blurred. Many investor relations agents offer traditional marketing for company clients including straight out advertising. While many of these penny stocks and microcap companies are still looking to raise money to fund their businesses, the advertising done many of the times is of the company’s management, the company’s business plan and the fact that the company is a public. While some promoters are more discreet about “touting” the fact that the company is public; others only promote the stock ticker (explicitly promoting the stock).
So, How Does Investor Relations Affects Penny Stocks & Micro Cap Company Investors?
There are a few ways. In part, it depends on what the investor relations agency is doing to market the company to the public. But some cause and effects of investor relations of penny stocks and microcap companies include:
- Investor relations agents that are focused on social media promotion will target a broad range of buyers world-wide. Even if the social media marketing is targeted many times the reach is global. Depending on the traffic driven by the social media investor relations campaign, companies and investors can expect movement of the company’s stock due to sales and purchases driven by the impressions of the company’s name and story.
- Depending on how the investor relations agent has been compensated there may be downward pressure on the stock. Many penny stocks and microcap companies seek investor relations agents that will take stock as compensation. This means the investor relations agents need to sell the stock in order to get paid. On confidence that their investor relations and marketing efforts will be successful, investor relations agents do their best to market a company and sell out afterwards. Keep in mind that investor relations agents that are selling the stock while they are promoting the stock will most likely be in violation of S.E.C. or Finra rules. This also classically called “The Pump & Dump Scheme”. [3]
- In some cases, investor relations programs are mainly based offline. This includes the more traditional investor relations functions like Wall Street Roadshows or Microcap Conferences. These investor relations campaigns introduce microcap companies directly to accredited investors or Wall Street investment firms. Likewise, many investor relations agents are hired to reach out to their existing network of industry insiders to make introductions to the penny stock company’s management. This can cause big outside investments in the penny stock or microcap stock and possibly lead to recapitalization. Or even possibly a reverse merger or buyout.
The short story is that including more investment professionals in any organization will have some effect on the company as a whole. In the practical application, when a penny stock or microcap company hires an investor relations firm, they are generally looking for investors and want the world to hear their story. This will cause many ripple effects that investors should be aware of.
To discuss how Cervitude Intelligent Relations can serve your investor relations needs, contact us today.
[1] https://www.sec.gov/investor/pubs/microcapstock.htm
[2] https://www.sec.gov/oiea/investor-alerts-bulletins/ia_promotions.html
