Every one of these “great ideas” was sure to return 1000% on your investment, if not more. You would be missing out on a fortune if you didn’t get in RIGHT NOW!
These “boiler rooms” perfected the “pump and dump”, where unsuspecting investors were bilked out of millions. Penny stocks moved from $.05 to a $1.00 in no time flat as investors piled in, driven to the slaughter by high pressure sales tactics. That was assuming there was an actual stock involved. If there was, it was nearly impossible to sell; the “brokers” simply didn’t take sell orders.
Often times no real company existed, except in the minds and words of the pitchmen.
The regulators began cracking down in the mid-nineties, closing many of these fraudulent money printing shops down. But the boiler room graduates simply moved to Wall Street and the internet bubble was born. Sarbanes-Oxley was supposed to contain that for equities... and it sort of did. Wall Street then invented new mortgage products that were sure winners, until that bubble burst just a few years ago.
Unfortunately, all the scamsters and scumbags alike are licking their chops as lawmakers look to enact what I call “The Boiler Room Act of 2012”, giving new life to fraud and potentially bringing back unregulated stock schemes.
Of course our worthy legislators, who always have the best interests of the investing public in mind, aren’t calling it the “Boiler Room Act”. It is called the “JOBS Act” which sounds great, but isn’t.
You need to be aware of this potential disaster because, if it passes, you can expect a new generation of scamsters and scumbags to be calling or e-mailing you with opportunities of a lifetime sure to put you in the poor house faster than you can say, “crowd financing”.
Opening the Flood Gates
In theory, the bill is supposed to open up access to funding for “emerging growth companies” (EGC), which are any businesses that have up to $1 billion in revenue. Clearly there are a lot of unlisted companies with revenues in that range.
The JOBS Act (H.R. 3606) allows these companies to raise funds from the public through the internet or nearly any other form of solicitation.
These companies can raise up to $1 million per year without providing any information other than their address and 2 years of unaudited financial statements. Companies that provide audited statements can raise up to $2 million per year. The caveat in the latter case is that although the statements need to be audited, the auditor does not have to approve them, which would be required for a listed company or one that was intending to go public through the normal channels.
I realize this already smells a little fishy, but it gets even smellier.
Have I Got a Deal for You!
There are two big openings for the ethically challenged.
First is that fact that you do not need to be a registered representative to pitch these deals. Normally a securities dealer needs to be registered with NASD as well as the state in which they do business. Not so for emerging growth companies.
In order to tap “crowd financing”, a means of raising money through social media, i.e. Facebook, etc., companies can advertise and solicit funds without being registered security dealers, provided they receive no compensation for their activities. I am pretty sure my 12 year old could find a way around that one.
But maybe you are not comfortable sending money through the internet to fund a company that you have little reliable information on. Not a problem. You can go through a normal broker. Perhaps they have some research on the company in question that could help you evaluate the company’s prospects.
That is the second opening.
Brokers can issue research reports in advance of an offering, as well as provide additional written and oral communications that will not be construed as an offer for sale of said security. Brokers are given free rein to issue these communications in many forms, “whether or not it provides information reasonably sufficient upon which to base an investment decision.”
Normally, IPOs are only available to institutions or accredited investors (people who make more than $250K per year or have more than $1 million in assets), but anyone can get involved in this bonanza, provided the broker “reasonably believes [the buyer] is a qualified investor.”
That sounds a lot like the qualifications for no-doc or “liar loans” issued in the mid-2000s.
No worries though: An individual cannot invest more than $10,000 or 10% of their income into a given issue. This is actually probably the best part of the bill for the investor: Brokers and those soliciting crowd funding are limited on how much they can steal from any one individual.
I wish I was making this stuff up, but I am only touching on the “highlights”.
Catching a Winner Despite the Odds
I am sure that many legitimate companies will look to this type of funding to raise capital -- it won't only be the fraudsters. So let's assume you find one of these and the company is delivering, but you would like to take your profits.
If you got into this deal of a lifetime but are not an accredited investor or institution, you have to hold your stock for a year!
If you have plenty of money or are an institution, you can trade anytime you like (although how this would happen, since there is no regulated exchange for these securities to trade on, remains an unanswered question).
Watching Big Brother
The provisions of this abomination of a bill are all amendments to the Securities Acts of 1933 and 1934. Those acts were in response to exactly these types of frauds that were perpetrated in the 1920s, contributed to the Crash of 1929, and the subsequent Great Depression.
Now the dolts on the Hill see fit to pitch the last bit of investor protection out the window to give Wall Street another opportunity to fleece Americans. If you are as stunned and outraged as I am by this latest version of robbing the poor to pay the rich, I encourage you to make your voices heard.
The bill has passed the House and a similar bill has passed the Senate, but they will need to be reconciled to become law, and that will likely take a few months, so let your Congressmen and Senators know what you think. If you are not sure who your legislators are you can find them through these links by just typing in your zip code: http://www.house.gov/ and http://www.senate.gov/.
Don’t allow this government to take any more from the people it is supposed to represent!
Price Shock Trader