The OTC Markets Group, which is home to most cannabis stocks, is taking the lead on identifying stock promotions for its investors. Stock promotion isn’t illegal. What is illegal is not being transparent about it.
Microcaps or penny stocks are especially susceptible to these types of manipulations because information on these companies can often be limited. In 2014, the SEC charged four people with manipulating stock prices for GrowLife Inc and Hemp Inc.
The OTC Markets has employed various tactics to help investors like what it calls the “blunt club” or the skull & crossbones icon that warns the market of bad behavior. However, the OTC doesn’t have the power to engage in disciplinary measures which falls to the SEC. The SEC though doesn’t move very quickly and even if it is investigating a company or person, that information is rarely made public. The OTC believes it can at least react more quickly and warn investors of questionable activity.
In its latest action, the OTC has set up a “Promotion flag” to warn market participants that the trading could be under suspicion. “For market forces to work, it’s got to be about providing more information so investors can make the right decisions,” said Cromwell Coulson Chief Executive Officer of the OTC Markets Group. “The companies have a responsibility to immediately address information regarding trading rumors. We’ve removed issuers because they weren’t truthful about sponsoring promotions.”
Investors can check this page for a list of companies that have recently paid for stock promotions. For example, Hemp Americana (HMPQ) appears on this list and also has a skull and crossbones icon. On the company Overview page under the Caveat Emptor designation, there is now a megaphone icon underneath that says stock promotion.
The process relies on mostly human observation, with either the OTC team spotting the behavior or an investor bringing it to their attention. “The job of the market is to sniff out what’s true and false,” said Coulson, “In the long term, it usually comes out. In the short term? Not so much.” Coulson said the OTC was pushing for changes to the rule called 17-B around anonymously paid promotions.
The SEC also warns about press releases announcing events that never happen or contracts that never get finalized. Other behavior in stock promoting companies that issue a lot of shares without a corresponding increase in assets. The SEC said in a statement, investors should exercise extreme caution if there appears to be more promotion of the company’s stock versus its actual products. It also said that guaranteed high investment returns, “limited time” stock promotions and unsolicited stock recommendations.
Investors are also warned not to feel more comfortable if the promoter suggests you buy the stock through your own brokerage account. Your purchase may be their “sell.” The SEC wrote, “Even if you do not give the promoter any money directly, your stock purchases may enable the organizers of the promotion to offload their otherwise valueless shares.”
In addition to the promotion flag, the OTC has added a shell-risk flag. This icon identifies whether a company is a shell as defined by the SEC. “The term shell company means a registrant, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB that has: (1) No or nominal operations; and (2) Either: (i) No or nominal assets; (ii) Assets consisting solely of cash and cash equivalents; or (iii) Assets consisting of any amount of cash and cash equivalents and nominal other assets.”
“Over-valuation is the biggest risk,” said Coulson. “It happens even with electric car companies. With small companies, we need to build markets to fit .”