View Full Version : Equity Crowdfunding Vs. Penny Stock Scams

08-15-2013, 08:44 PM
If you have had any experience investing into penny stock, you likely know that a majority of them are scams in disguise. Penny stocks traded on the pink sheet markets as well as many on the OTC BB are extremely risky. The funny thing is that the SEC doesn't seem to do too much about the scams out there until it's way too late for investors, all the while it is taking them over 16 months to even create rules for the new provisions of the JOBS Act.

How the Typical Penny Stock Scam Operates
A typical scam in the penny stock markets work like this. The scammer buys a NASDAQ shell company for anywhere between $80,000 and $300,000. With that shell they get a vast majority of the outstanding shares of the NASDAQ traded stock, ticker symbol and all. The new CEO then will put out all sorts of press releases alluding to the various possible deals they have in the works, which will make this company a multi-million dollar earner in the near future. Once the stock starts running up on this news, they will raise the Authorized share number, then dump a tremendous amount of newly issued shares into the market at extremely overvalued prices. They then use the funds brought into the company to pay themselves, as well as their close associates ridiculous salaries. All this is usually legal in a sense, since no SEC filings were issued with false material events, and all the language in the press releases were "possibilities," rather then actual events.

Could Equity Crowdfunding Turn into Another Scammer Free-for-all?
Sadly, the answer here is "Yes". Having said this, with the proper framework and rules, the SEC can get this market right from the start. There will surely be scammers trying to bring investor's funds into their company on ideas which they embellish, just so that they can line their own pockets as well as the pockets of their close associates. This however, in my opinion, will not be the norm.

Why Equity Crowdfunding is Much Less Dangerous than Penny Stocks:
The one biggest advantage Equity crowdfunding will have in protecting non accredited investors is that there will be a limit on how much money they can invest as an individual. Currently in the Penny stock markets someone earning $50,000 per year could invest their life savings into a scam stock. With Equity Crowdfunding the SEC will limit it to only a few thousand dollars annually. It's kind of a double standard since they could really cut back on the stock scams out their if they limited investments their as well. The possible losses will be dramatically lower in the Equity crowdfunding markets than in the penny stock markets.