The legal Prerequisite of a 'pump-and-dump' stock and pump and dump promotional activity on the Pinks.
Calling a stock names, an enthusiast a “pumper” and an activity “pump and dump” can dump a substantial headache on you – play the chat rooms carefully.
Prosecutors and regulators don’t do much it is often said on the chat rooms. Promoters are rampant with stocks they pump and dump on defenseless and naïve traders. Losers outnumber winners by 1080 to 1. Shame on them these prosecutors and regulartors. They should put all those promoters in jail.
But whatever happened to “Caveat emptor” - the golden rule specifying that the duty of care is set in the hands of the buyer. Let the buyer beware - it is after all a constitutional right to lose one’s money. Capitalism requires that right. Of course that is difficult when a buyer, notably in penny stocks is often blinded by greed and incredible notions of massive overnight profits. Just visit the chat rooms you’ll see what I mean. Any meaningful suggestion with support that a stock is a valid “investment” and not a “day trade” is met with insult and calumny : you are a “pumper” out to take advantage over the mass of chat room traders. The misuse of the term “pump and dump” is rampant. But what chat room participants do not realize is that calling someone a pumper, suggesting that someone is engaged in a “pump and dump” activity, is calumnious and accusing a person of a crime a clear actionable tort. That accusation if unsustainable can lead to a valid and expensive lawsuit in surprising jurisdictions because the internet’s reach is global – imagine being compelled to defend yourself on penalty of an enforceable default judgment 8000 miles away.
Six simple tests will establish the presence of the legal prerequisites to your desire to perfect your diatribe, but, and better yet, protect you from scammers who use phony announcements or endorsements to inflate a stock's price before bailing out. If these elements of “pump and dump” are absent you do NOT have a pumper on your screen, nor an activity of “pump and dump”.
Classically the communication will traverse intra-state borders by e-mails. Rather than a factual presentation, the missive will set forth enticing offers to buy at dirt-cheap share prices a stock usually unverifiable other than through an elaborate web page. Following these suggestions we could quit our jobs on one of these should we be fortunate enough to get a hit. All too often of course, those exciting stories are just that: stories made up to support a "pump-and-dump" scheme.
In pump-and-dump schemes, promoters gain control but do not buy large blocks of shares of a small dormant or nearly so public company. The promoters 'pump' the stock by issuing copious press releases announcing the firm's entry into a variety of promising businesses.
These announcements are beefed up with phony investment banking reports circulated via e-mail and on Web sites whose sole business is the business of publicizing stocks for a fee regardless of their fundamental prospects.
The resulting publicity creates demand for shares giving the promoters an opportunity to dump their controlled holdings. Eventually, the promoters sell out and stop pumping, and the shares again become virtually worthless.
It's not just pump-and-dump schemes that present a problem with the smallest of stocks. There are many cheap stocks around that have good stories to tell, but are startups lacking the test of years of activity and who have little or no chance of success.
Fortunately, it's easy to spot a company which is being manipulated by a “pumper” in a classic pump and dump scheme. These are the criteria upon which you can quickly rule out dangerous stocks, whether pump-and-dumpers or in fact just bad ideas. Fail one and you’re out – don’t hesitate.
Criteria #1: Price
Most stocks worth your attention in pennies trade at
.10 cents or higher. Stocks trading below that level are considered without more "junk," and even risk-prone investors wouldn't touch them.
That said, although it's risky territory, there are solid businesses with stocks trading under a dollar per share, and sometimes even below 25 cents. However, the lower you go in terms of share price, the greater your chances of encountering bad ideas. Once you get down to under 5 cents a share, the odds are 100% against you.
There's no point in wasting your time researching these stocks, looking at charts or performing any due diligence. Summarily rule out all stocks trading below 5 cents a share if they lack the standing of a reporting company or if on the Pink sheets the rating of “Current Information”. Similarly rule out all companies that do not have a long term continuous flow of press releases released through thick or thin periods of the stocks behavior and supported by independent trade media published on disinterested sites. You should be able to Google the symbol and find both press releases at regular terms regardless of market performance and many independent press articles.
Thus your first prerequisite to the qualification of a “pump and dump” stock is that no objective reporting mechanism exists to qualify the representations made.
Criteria #2: Sales
A pump-and-dump stock worthy of that name has recorded little or no sales. Instead, they've issued voluminous press releases announcing deals and extraordinary finds around the world. Somehow, those great deals never make it, and the deals never result in significant sales.
Most Pink Sheet “Current Information” rated publicly traded companies are real businesses with record annual sales of a million dollars and more. They have filed financials for at least three years, and this they have done every quarter (Pink Sheet stocks worth looking at all do this as a requirement of the “Current Information” rating). You can see a firm's quarterly revenues for the past three years - it doesn’t matter that the company has yet to turn a profit if through its public filings it is speaking to you, showing improvement, investing time and money building a business and it remains there and viable several years after its start.
Thus your second prerequisite to the qualification of a “pump and dump” stock is that the company has never filed financial reports in the public arena, let alone with the Securities and Exchange Commission. Since no data is available, the quarterly revenue figures, as well as other financial data, are not available. These are not real companies. Summarily rule out all such stocks without a second thought.
Criteria #3: Market Capitalization.
Market capitalization is the total value of a company (shares outstanding multiplied by the recent share price). Obviously the general consensus is to consider larger companies to be safer investments than smaller ones. But on the Pinks this is a secondary issue. However a “pump and dump” will almost always - before the campaign issues, have a market capitalization below $2 million, and most investors should rule out stocks with market caps below $10 million.
Thus your third prerequisite to the qualification of a “pump and dump” stock is that the company has a market capitalization of less than $ 5 million, and those stocks should be summarily ruled out.
Criteria #4: Insider or control person ownership under 15% each
Insiders or control persons for these purposes are individuals or entities owning more than 10% of the company’s authorized and outstanding shares. Other than officers and directors, hedge funds, pension plans and other large investors can figure as such. No matter how small and obscure the company the presence of these control persons and their likely association is dangerous and a key component of a possible pump and dump activity if one is to occur.
Insider or control persons owning more than 15% are more likely to have the resource to feed a promoter’s requirement for a large quantity of stock to pump and dump. Anything over 10% or so is probably a bad idea. However, a control of 15% or more underlines a prerequisite essential to a ”pump and dump” scheme and present the foregoing, forms the fouth prerequisite justifying that the stock be summarily ruled out.
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Criteria Rule #5: Debt/equity ratio inferior to 3
Since even they must suffer the burden of expenses, notwithstanding the absence of income, pump-and-dump companies and in consequence their stocks will carry a high debt. The debt-to-equity ratio, (total debt versus shareholders equity), is the most common standard for debt measurement. Debt free companies will reveal a zero debt/equity ratio. The higher the ratio the higher the debt. A ratio above 1.0 is highly leveraged and reveals high-debt.
Thus your fifth prerequisite to the qualification of a “pump and dump” stock is that the company has a debt/equity ratio of 3 or thereabout. Companies with a ratio at that level or nearing it present a strong premise for “pump and dump” and their stock should be summarily ruled out and this even if they managed to squeeze by the other test.
Rule #6 Price/book ratio above 30
Since they have no or little sales, and no earnings or positive cash flow, the price-to-book ratio (share price divided by book value) is the valuation gauge for pump-and-dump stocks. Price/book ratios range from below 1 for to 20 or so for high-growth stocks.
Since they have no significant assets, pump-and-dump and other dangerous stocks will have extraordinarily high price/book ratios. So the sixth prerequisite to the qualification of a “pump and dump” stock is that the company have a prce/book ratio of nearing 30 or more and those should be avoided and summarily ruled out.
“Pump and Dump” stocks are noteworthy because they have no real businesses except that of pumping and dumping. That’s their primary commercial activity, providing a medium to hype imaginative activities, products and sales.
Now I don’t guaranty that applying these rules will provide a selection process for winners, but applying them will set legal prerequisites without which no “pump and dump” scheme can be effectively prosecuted, but more usefully a summary method to stop wasting your time and losing your money on stocks that have no basis to justify your attention a fortiori your money. No matter what you have heard on the chat room.
Conclusion FLKI is no "pump and dump"...