One of the more commonly asked questions we get when we list a company on our "Dangerous Promotions" watch list, is whether we are suggesting that the company is "fake" or not in the line of business it is suggesting it is. The fact is that a Pump & Dump always has unscrupulous intentions and a promoted ticker should never be considered a real opportunity for a good investment. The best answer to the above question is that the company may occasionally be for real, but the stock is absolutely not.
All together now: "HUH?"
It's not really as confusing a distinction as you think. First you have to settle in your mind, that in the case of promoted penny stocks, the company's business asset, if it is for real, and its stock are two separate entities. Let's see if we can help you wrap you head around that fact. This is a lesson not only for novice penny stock players, but unsophisticated "idea" men and women, who are looking for funding and may fall prey to the unscrupulous. It is astounding how many "CEOs" have contacted us with tales of woe and how they've lost everything to a predator.
We'll start with the fact that there are essentially four kinds of penny stock companies in the Pump & Dump world: (1) the kind where the management is in on the scam and is directly knowledgeable and complicit with the intent to deceive the public; (2) the kind where some poor schmoe has a great idea (at least he thinks it is) that requires financing, and becomes the mark of a parasitic "funder" who makes all kinds of promises of unlimited monies and riches beyond the mark's wildest dream; (3) the kind where the company is absolutely for real but the shares have been hyped (sometimes hijacked) into ridiculous valuations; and, (4) a hijacked empty and inactive shell.
We'll say it again: the penny stock of any promoted company should never be considered an investment, no matter how real the company may be.
In the first instance, everybody is lying and you can bet that all involved will try to make as much money selling paper as humanly possible. Management will usually enable the scheme with a bunch of lies and innuendo to make the shares as attractive as possible. These schemes usually, but not always, die very quickly. In addition to the common signs of trouble we will talk about later, these schemes are often recognizable by the frequency in which the company changes names, ticker and/or lines of business. An additional telltale sign is the limited changing of management and Board members, in spite of the number of times the company changes its name and line of business. We've seen cases where a company has maintained the same President in spite of the fact that the company has dramatically changed its business several times in a few short years. Of course it is impossible for the operator of what is usually a one or two man operation to be an expert in so many varied fields. In other cases, the President or CEO will have passed from phony company to phony company, either because he owns the public shells or because he is a shill for hire. At the end of the scheme, phony convertible loans will aid the perpetrators to regain any sold stock and a reverse split is inevitable. In this instance, the company is not for real. Never was, never will be. The stock is nothing more than air.
In the second kind of penny stock company, the aforementioned schmoe is convinced to vend his asset or idea into a public company with no real assets (a shell) and is given pretend control of that shell with a bunch of restricted, perhaps non-voting, stock. In exchange for the shell, the company will often take on debt to the parasite who is perceived to be the seller of the shell. A few measly dollars by way of loans is provided as an inducement, usually just enough to keep the accounting and filings up to date and maybe a bare bones operation, putting the company further into debt. The real funding will come, the mark is told, from the selling of stock to the public. That promise will never be fulfilled, or at least not nearly in the amounts required. In the meantime, the company becomes deeper in debt to the parasite, who may have brought other parasites into the scheme to lend even more monies, thereby "spreading" the Pump & Dump. These additional loans are usually just enough to keep the accounting and SEC filings up to date. All of the debt can and will be converted into stock, which will eventually give control of the shell back to the parasite(s). This will all happen before the mark's control block of stock has its restrictions lifted, and he will never be able to sell any stock for any significant gains. In many cases, the parasite maintains control of the Board, "until he gets his money back", so he is free to issue whatever press releases he wishes in aid of a Pump & Dump scheme. A non-disclosure/non-disparagement agreement prevents the mark from ever being able to reveal a scheme, if he felt compelled to do so, and often the parasite's dubious connections keep the mark's actions in check with the threat of physical harm or financial devastation. By the time the mark's stock is restriction-free, it has either been reverse split to an insignificant number or the shares are valueless or even subjected to a trading halt. The parasite will regain all of the stock he sold off in the Pump & Dump by converting his debt into shares, usually at fractions of a penny. In this instance the company was intended to be real, but the stock never was, and the person who had the "good" idea in the first place, may have very well lost his asset to the parasite. Investors who sank their money into nothing but air, come out with the short end of the stick.
Instances (1) and (2) comprise the vast majority of Pump & Dump schemes. Check the SEC filings for the telltale signs we've described above. The OTCmarkets website makes it somewhat easier by providing a summary of the Company Info;
which will tell you how many times the company has changed names;
or; the number of times the shares have been reverse split.
The third (3) kind of promoted penny stock company, is in fact for real, or at least looks to be real, showing earnings and assets. Without a promotion, the stocks of these companies usually trade thinly. While the company has some intrinsic value, the stock itself is way over valued, especially during the course of a promotion. Think of it as paying $100 for a $10 bill. Or paying $1 million for a house that is worth $100,000. You will come out on the losing end of the deal. At times, management has no idea that the Pump & Dump campaign is going on until it is well underway, although if they don't publicly disavow the scheme, or take advantage of it by selling paper into it, they should be considered just as culpable.
Often, these real companies are foreign based making it hard to really confirm operations. Chinese companies which report significant assets and revenues are popular choices by promoters or their clients, who will front load cheap stock, or short it when they can, and then promote it, using the companies very real demographics to create hype and valuations which cannot be sustained. As soon as the perpetrators have unloaded their stock at the temporarily inflated prices, the promotion will end, and the share price will fall back to its previous levels or even lower as disappointed investors bail. Any short positions will then cover at these lower prices.
In other cases, the real operating company will have cheap stock issued in lieu of debt, and the lenders will hire promoters to create interest in the stock they are divesting, hopefully at significantly higher prices which will only last as long as the promotion.
In the fourth (4) instance, the promoter and/or his client will promote the intrinsically worthless paper of dead companies, which often were real deals at one point in their existence. These companies have since evaporated, often bankrupted. In these cases, most of the paper is held by investors who've long written it off and forgotten about it. Since they don't watch trading in the usually dormant stock, few, if any, of the stock holders notice the instantaneous trading until it is well underway and even fewer sell any shares. Therefore, there really is no significant amount of paper available, except for maybe a little that the perpetrators were able to front load over time. The shares purchased by the pigeons buying into the scheme is sometimes shares offered short by the perpetrators. Once the promotion, usually a one day effort in these instances, is over, the share price quickly falls back towards zero, perhaps aided by the selling of those paper holders who've caught wind of the temporary interest in the stock. The perpetrators then cover any short positions at much lower prices. Darth Trader and Research Driven Investor have been notorious for promoting these kind of Pump & Dump schemes in the past. Here is a Pump & Dump that we covered a couple of years back, where Darth Trader aka Penny Stock Psycho promoted the shares of a bankrupted and out-of-business bank.
The bottom line is that whether the company is real or not, it doesn't matter. The Pump & Dump is doomed to render the pumped shares near worthless, or at least to a fraction of the price achieved during the hype. In most cases an eventual reverse split will zero out those who bought stock during the promotions, so that the shell can be used once again to fleece the public in a process known on the street as "Wash. Rinse. Repeat."