06 May What are Stock Promotions / Stock Promoters ?
What are stock promotions / stock promoters?
Stock promotions are, in the broadest sense of the term, a means of drawing attention to little-known, usually low-priced securities that would otherwise attract few investors. For traders, they can create profitable plays; for investors, they're almost always deadly.
Originally, companies promoted their own stock with a view to raising badly-needed capital. Promotions were—and are—standard operating procedure for Canadian microcaps, especially junior miners. A mining business takes a long time to establish, and costs for exploration, drilling, analysis and the like are high. Without raising funds on a continual basis, these companies stood little chance of survival, and so they devised ways to interest the investing public in what they had to offer. The promoters of Howe Street in Vancouver became legendary, or notorious, depending on one's point of view. Still, for the most part the idea was to capitalize the promoted companies, not to enrich insiders while quickly destroying the vehicle. To this day, CEOs of small Canadian companies are often called “promoters,” with no seriously pejorative connotation intended.
Eventually the light dawned: promotions need not be a road to a viable investment; they could simply be used as a means of making fast and easy money for the people involved.
A blast from the past
At first, penny stock touts relied on boiler rooms whose employees spent their days cold-calling potential buyers, and on hard mailers sent to the homes of thousands, or tens of thousands, of unsuspecting marks. Profits, though satisfactory, were limited. Boiler room workers, however badly-paid, were an expense. Printing and bulk mailing costs were exorbitant.
The internet changed all that; with its advent stock promotion became a billion dollar industry. Several things made that possible. The first was the enormous change in the brokerage business when discount brokers began to offer online trading. Transactions that would a few years earlier have cost hundreds of dollars were now as cheap as $7.99. The second was the availability of quotes for penny stocks. OTCBB issues—fully-reporting but not exchange-listed—weren't covered by any financial publications. Brokers could get quotes on their Quotrons, but interested clients would have to call and ask about their favorite cheapies. Information about Pinks was unavailable to everyone except those to whom the Pink Sheets, a flyer printed on pink paper, were distributed. There was no electronic trading of either, by market makers or the public. Suddenly, a great deal of information about penny stocks was a mouse click away for anyone with an internet connection.
These changes, whose importance the regulators were slow to grasp, changed the world of finance for a great many retail investors. A whole new class of players sprang up: students, young professionals, soldiers serving far from home, soccer moms, and even a few high schoolers. They were for the most part less affluent than traditional investors, but made up for that with their numbers and their frequent trades. Even many of those traditional investors took the opportunity to dabble in less pricey stocks just for the fun of it.
Suddenly everyone wanted to be a daytrader, an ambition previously impracticable for most because of those killer commissions. These developments paved the way for a corresponding new class of promoters.
The new generation
Perhaps not surprisingly, many of these new promoters were computer-savvy and were recruited from the internet. They instantly understood that email blasts were far cheaper and far more effective than boiler-room cold calls. As the price of domains dropped dramatically over the last decade, along with the price of web hosts and email service providers, even lower costs made it possible to reach hundreds of thousands of people simply by pressing the “send” button. Improved graphics and higher speeds allowed the transmission of more appealing images and videos. It was time to make a buck.
The new promoters didn't need to know much about our capital markets, or even about the stocks they touted. A few dramatic (if inappropriate) sector comparisons, some charts, and a juicy “price target” were quite enough. As financial message boards, and then Facebook and Twitter captured the public imagination, word about the latest hot pick could and did spread like wildfire.
With success come challenges, of course. What had been a rather specialized field became clogged with newcomers. Some, coyly describing themselves as purveyors of “awareness,” infested message boards, bombarding them with thousands of repetitive posts a day. Generally speaking, they were (and are) poorly paid and extremely ineffective. Even ranker amateurs weren't paid at all; they simply frontloaded and hoped others would foolishly buy into their lame pumps.
The elite—or those who considered themselves to be elite—needed to find a way to establish a brand, and to convince their audience that that brand was better than their rivals'. Until a few years ago, some used their real names, but the growing number of SEC enforcement actions persuaded them that anonymity was a better choice. They made up for that by trying to establish a kind of corporate identity, emphasizing past successes and doing their best to erase failures from their users' memories. In some cases—AwesomePennyStocks' VLNX disaster comes to mind—that technique has failed. People who lose serious amounts in a single day have long memories.
How promotions work
In the current climate, promotions have only one purpose: to enable insiders, former insiders, or other very large shareholders to sell their positions. A promoter's job is not to convince people to buy and hold a good stock; it is to generate volume sufficient to permit those large shareholders—who are also their clients and backers—to unload. This fundamental truth should be at the forefront of the mind of anyone venturing into the penny game.
The elite promo teams don't work alone. Their “picks” are naturally not a choice that, as they often claim, they've “researched” to bring to you. The promoters are always part of the campaign from very early on. Sometimes they assist in the formation of a shell, or in the reverse merger that turns the shell into a promotable company. Along the way, they collaborate with seed shareholders of the shell, convertible debt holders of the new company, and with attorneys and transfer agents. They may receive shares in the new company that will be immediately freed up by the complicit attorney; that happened with two of the original APS members in the case of Recycle Tech. The SEC alleges that they sold those shares into their own pump, an illegal practice known as scalping. The Recycle Tech scam was set up for the express purpose of running a lucrative pump and dump. The company was worthless. Only very nimble players made significant money on it, but the touts collected about $450,000 each for six weeks' work. And that promotion didn't even attract much attention.
APS continues to follow the Recycle Tech playbook, though since then their declared payment has taken the form of cash, eliminating the possibility of easily proved scalping. The sums disclaimed have been relatively small, which raises the question of undisclosed methods of payment, given the fact that offshore entities are nearly always involved.
Usually a promotion begins in conjunction with a flurry of press releases from the company. In most cases, the company has been created through a reverse merger. Ideally, neither the original shell nor the new public issuer has traded significantly. With APS plays, a few months before the pump is scheduled, a hefty forward split nearly always takes place, considerably increasing the amount of stock held by the people who intend to sell, in advance of the establishment of any market price for the stock.
The promoter's job is to create as much volume as possible, starting on the first day of the promotion. Since these promos are usually anticipated by penny players, the volume will arrive. Generally, though not invariably, it's highest for the first few days, perhaps a week, of the campaign. The insiders who helped finance the pump will begin selling almost immediately. If the promotion works as planned, stock price will double or perhaps even triple. It will not reach the lofty targets set by the touts.
Here today, gone tomorrow
Promotions begin to great fanfare: press releases announcing exciting acquisitions, new and lucrative contracts, and technological breakthroughs. Typically, two or three email alerts are sent daily, urging prospective investors to buy, buy, buy. The stock may drop, even precipitously, but that will be described as a “healthy consolidation.” Sometimes there'll be a second run, though they're almost never as strong as the first. A third drop is a strong signal that the fun will soon be over.
Promos can last for only a few days, or continue for a month or a little more. The longer they can be sustained on relatively high volume, the more insiders can dump. No matter how much stock they could potentially sell, they'll never manage it all, but for the heavy hitters, a profit of $10-20 million, perhaps more, is entirely feasible. Not bad at all, considering how little money they initially “invested."
They win. Anyone hanging on too long will lose. Until the very end, promoters will assure their fans that they'll be pumping the stock in question “into next month.” That doesn't happen. Ever. One day the emails stop. And the stock crashes and burns.