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Spotting Stock Spams and Scams 

by: Sandra Willey

You may have received "spam" or junk e-mail recommending you invest in a stock, perhaps even invest in that stock before it is first publicly offered for sale in an Initial Public Offering (IPO). 

You should know that there are now no federal prohibitions against sending spam. But there are regulations on the content of these messages that involve securities and what the senders must tell you. This Investor Alert explains how to spot and protect yourself from spam problems. 

What Is Spam? 
Spam is unsolicited electronic mail sent to a large number of addresses, usually advertising some product, service, business, Web site, scheme, or strategy. Stock spams are the electronic equivalent of a boiler room sales operation in which someone who doesn’t know you tries to sell you securities, like penny stocks, or puts aggressive—and suspect—messages on an electronic message board to spur your interest in a company.

Is Spam Regulated? 
You should know that although spam is regulated in a number of ways described below, many aspects of it are unregulated. 

Federal Laws
There are no federal laws that outlaw the use of unsolicited e-mail. Legislation is pending that, while still allowing spam, would require the messages to be identified as unsolicited commercial e-mail, require that you be told how to opt out of receiving more of it from the sender, and prohibit false message routing information. 

State Laws
Some states have laws dealing with unsolicited e-mail and many have laws pending, but only Delaware has a law prohibiting its use. Some state laws do require — and many proposed laws would also require — that the spam identify the sender and tell how to opt out of getting more spam from that sender.

SEC (Securities and Exchange Commission) Enforcement
The SEC has created the Office of Internet Enforcement specifically designed to fight Internet fraud, including schemes using spam. The SEC requires online communications touting or recommending stocks to disclose the person or entity that paid for the communication, including the amount and type of the payment. The SEC has brought more than 40 enforcement cases since August 1995 that involve violations of the law using spam. The SEC has investigated a variety of e-mail frauds such as: 

  • "Pump and Dump" scams where messages are sent urging readers to quickly buy a stock, based on a future company or economic development. The message senders may be insiders or paid promoters who gain by selling their shares after unsuspecting investors pump up the stock price. 

  • Pyramid schemes where promoters claim that they could turn a small investment into a large investment within a short period of time, but participants make money solely by recruiting new participants into the program. 

  • "Risk-free" or "guaranteed" investments in exotic-sounding investments. There is no "risk free" investment. Offers of "guaranteed" investments should be viewed very suspiciously. 

  • "Inside information." Someone claims to have inside or non-public information about a company or product that will soon send the stock price soaring. This information is almost always false and designed to get people to invest when they otherwise wouldn’t. In any event, trading on "inside information" can be a violation of the law. 

  • "Off-shore" deceptive investment schemes from another country targeting U.S. investors. Any foreign fraud is difficult for U.S. law enforcement agencies to investigate or rectify. 

  • False promises of pending initial public offerings (IPOs). In one such case, a private company message announced its upcoming SEC-approved IPO. The company raised money fraudulently by offering "free stock" credits if you paid an administrative fee, and said you could redeem your stock credits for common stock when the company completed the IPO. The SEC did not approve the offering and the company never took real steps to issue an IPO. 

  • For more detail on these scams, go to and see the SEC’s Internet Fraud: How to Avoid Internet Investment Scams. 

NASD Regulation
While the National Association of Securities Dealers (NASD) does not prohibit its member brokerage firms or their employees from sending out spam, it does regulate the content of such messages sent to the public. In any communication with the public, NASD rules require that a member identify itself and that investors be given enough information to make a sound investment. NASD rules prohibit statements making promises. 

Remember, though, that the NASD can only regulate the actions of its member brokerage firms and their employees. While all U.S. brokerage firms have to be members of the NASD to do business with the public, most problem spams are likely sent to you by non-regulated businesses or individuals.

Problem Spams NASD Regulation Has Seen

Touting a Stock
The most common types of investment-related spam are those touting a stock. Remember that "tout" means to peddle in an aggressive or persistent way, but it also means to give a tip or solicit a bet on. These touts are sometimes made as part of a Pump and Dump scheme. Many touts look like they are giving unbiased news about an investment, but the spammer may own the stock and want others to buy it so the spammer’s stock will go up in price. Absolute strangers will not offer you a genuine "deal of a lifetime."

Touts and Other Spams on OTC Bulletin Board and Pink Sheet Stocks
Most touted stocks are infrequently traded, not well known, and can move up or down in price quickly. They are usually quoted on the OTC Bulletin Board (OTCBB) or in the Pink Sheets. The OTCBB and the Pink Sheets are quotation mediums for broker/dealers that contain quotations for thousands of over-the-counter stocks not listed on any of the major stock markets. Neither the OTCBB nor the Pink Sheets require the companies to meet set minimum assets or revenues. Neither the OTCBB nor the Pink Sheets is an issuer listing service or a stock market, and they should not be confused with The Nasdaq Stock Market or with a national securities exchange. To learn more about the differences, go to the OTCBB Web Site, To learn more about the Pink Sheets, go to 

All companies that are quoted on the OTCBB—but not the Pink Sheets—must file financial and other information with the SEC or another regulatory authority. You can check out an OTCBB company’s SEC information at

Pre-IPO Spam
Many problem spams and other Internet advertising involve IPO and pre-IPO investing. Pre-IPO investing is buying private placements of shares of stock in the hopes of selling the shares for a profit when the company goes public. Many of the statements in pre-IPO spams are promissory—no one knows if the company will actually do the IPO. 

Some of the red flags in pre-IPO spams are predictions of large price gains, promising the ability to "get in on the ground floor," and offering examples or projections of very profitable IPOs. 

There are many risks of buying privately placed shares, especially when none of the company’s stock is publicly traded. You cannot be certain when or even if the company will ever take steps that could result in a public market for the securities. This means that you cannot be sure that if you purchase pre-IPO you will be able to sell your shares even if the company goes public, since privately purchased shares come with restrictions. It is difficult to determine a fair market value for the investment. Pre-IPO companies are often new and untested companies without revenue, a real product line, or experienced management. So even when they are legitimate, they are highly risky.

Spotting Problem Spam 
Problem spams frequently include: 

Price targets or predictions of exponential growth in a short period of time. 

  • Rumors of coming major news such as "inside" or "confidential information," an "upcoming favorable research report," a "prospective merger or acquisition," or the announcement of a "dynamic new product." Sometimes spammers say what the "news" is going to be. 
  • Standard corporate developments, like contracting with a supplier, presented as if they are major events. 
  • Mention of large, unnamed corporate partners. 
  • Popular terms, such as Internet or biotech, to increase the impact of the message. 
  • Urgency, such as "You must act now!!" 
  • "Guarantees" that you will not lose money on a particular securities transaction. 
  • Unusually high yields or returns—significantly higher than available alternatives—on a dividend or interest-paying instrument. 

If You Get Spammed 
A high-pressure sales pitch can mean trouble on the phone or on the Internet. Do not believe anyone who tells you, "Invest quickly or you will miss out on a once-in-a lifetime opportunity." If it sounds too good to be true, it is.

Regulators strive to protect investors as a whole and do not start cases for the sole purpose of getting money back to you following a fraud. You can hire a lawyer to try to get your money back, but you need to know that recovery is rare. By far the best protection is to stay away from bad deals in the first place. You, the investor, are in the best position to protect yourself. 

Investigate before you invest. Find out who sent the message to you. Ask whether the claims can be documented. Verify whether the claims are true before you send a nickel of your money. 

If you are suspicious about an offer or if you think the claims might be exaggerated or misleading, contact the SEC Investor Complaint Center at You can check out if the firm or individual spamming you is registered with the NASD at or by calling the NASD Hotline at 800-289-9999. If you think that the problem spammers may be registered with the NASD, you can file a complaint at 

If you are an international investor and a non-U.S., non-NASD member firm solicits your interest in OTC Bulletin Board or Pink Sheet stocks, you can check the International Organization of Securities Commissioners (IOSCO) membership lists at to get the address of your country’s securities commission where you can file a complaint. 



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