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Pumps & Dumps 101
The Smell Test


Many wonder about the stated business operations of a company with a penny stock. Are they for real? While its true that a vast majority of promoted penny stocks are offering shares in a phony company, a few of these companies do have authentic operations, even though their book value is signifcantly lower than their market cap. We discuss the differences between a fraudulent company and a fraudulent stock within another lesson from our Pumps & Dumps 101 series: Does A Promotion Mean The Company Is a Fake?

So how do you determine whether the claimed operations are authentic? Well the truth is that many of the perpetrators of these penny stock frauds are so devious that they are able to make mirages appear, hampering your ability to make a rational decision. Here are some easy tests you can apply during the course of your research. While passing the smell test does not assure that the operation is authentic, failure of any these tests is pretty much a guarantee that something is fishy at the fish market.
1. Is the company's reported business address an actual place for operations? If it is just a place to receive mail; e.g. a lawyer's office, a UPS Store or a virtual office, then consider this test failed.
2. Does the company's listed phone number usually get answered by a live voice of someone who actually works at the company? If the only published phone number is disconnected, provides a fast busy, answered by an electronic service like Google Voice, or is answered by someone from Investor Relations, then this test is failed.
3. Is the President/CEO dedicated to this company? If this guy has traveled from penny stock to penny stock over that last few years or is running more than one company at a time, then he is probably one of the perpetrators of the fraud and this test fails miserably. 
4. What is the background of the CEO/President? You'd be surprised how many secretaries or housewives or hamburger flippers are named to run fraudulent companies with tens or hundreds of millions of dollars in market cap. Many are the buddies of the fraud artists actually running the show.
5. Does the company report having a proper amount of cash on hand? If you can run a business without any money then go get a job with one of these companies because most are broke.
6. Are the company's records up to date with the Secretary of State in the State in which it is incorporated? You might be surprised how many penny stock companies have had their registrations yanked for not filing tax returns, paying their fees or updating their list of officers. These companies fail the smell test, and the SEC and FINRA fail at their job.
7. How many employees does the company have?  If it is a one man show, then that person's job is probably printing certificates. Fail.
8. Is the company's share structure steady? If shareholders are subjected to a steady stream of reverse splits, then head for the hills because this is a dump-a-palooza and this test is failed. What is even scarier is a reverse split followed by a forward split, which happens more often than you might think.
9. Is the company providing more information than the promoters? If the company hasn't issued a press release about their progress in a long time, there's probably a reason. If the promoters are hyping old news, then this test is a big fat fail.
10. Is the company continually changing its name, ticker symbol, or line of business? If it is constantly shifting gears, especially to accommodate the new hot trend, then you can bet that it's a scheme and a failure.