In November 2022, FINRA warned of an increase in the amount of small-cap IPOs that worked a lot like classic “pump-and-dump” schemes. FINRA saw a lot of foreign activity that manipulated the stock price of smaller issuers in the days after the company was listed on an exchange. And often there was a social media component, where the bad actors used social media messaging to find their victims.
In the notice, FINRA detailed several items that these IPO frauds have in common:
1. They’re small: usually less than $25 million raised and fewer than 20 million shares.
2. These issuers are not US-based. They’re often from China.
3. Foreign broker dealers, especially in Hong Kong, are allocated huge amounts of the shares–90% or more. This limits the supply available to the public and makes the stock easier to pump (and dump).
4. Huge numbers of shares get allocated to a small number of investors. Risky for same reason as #3.
5. Suspicious accounts opened in the name of foreign nationals. The accounts are then used to inflate the share price.
6. Foreign omnibus accounts (i.e., a collection of many individual accounts) that manage to sell all their shares at the top of the pump.
7. Big spikes in the share price in the days after the shares are listed with no connection to news or other important events that typically move a stock’s price. Then, the price plummets.
8. Use of social media to find investors. Sometimes bad actors use a misdirected social media message to start a relationship with someone they hope will eventually invest in the IPO.
Read FINRA’s notice here: https://www.finra.org/sites/default/files/2022-11/Regulatory-Notice-22-25.pdf
And contact us if you think you’ve been defrauded.
