You're right Tom, although the problem you describe, both generally and in particular with Cyclone, is covered by existing regulations. It's just that there are too few resources devoted to enforcement.
I'll let the interested reader look up the chapters and verses, but SEC existing rules, if enforced, would not have stopped investors from losing money in Cyclone but would have at least given them a fighting chance to have avoided it.
When Cyclone applied to upgrade their stock listing in 2011 their application was vetted by the SEC. There was something like four rounds of them questioning Cyclone claims. Most of the unsubstantiated stuff was taken out of that application and it went through.
The enforcement part of SEC prioritizes bigger scams, so they've left Cyclone flying under the radar.
The first issue is that a public company must disclose all material information to investors. Material information is anything that would influence a reasonable investor to choose to buy, sell or hold a stock.
Harry and Frankie are knowingly withholding the fact that they've never made an engine work. That Ohio State University work leaves no engineering doubt that the Cyclone engine configuration with a spider bearing and water lubrication will never be viable unless radical new materials are invented.
This failure to disclose is stock fraud.
Then there are cases where Harry and Frankie say things about the engines that are not made known to the general public, like Harry on the steam car board making claims on engine performance or Frankie in email telling individual investors about things that are going to happen soon. That's insider trading.
There has to to be hundreds of PRs announcing things that never came true. The bottom of each one claims the forward looking statements are protected by the Safe Harbor provision of securities law. Trouble (for Cyclone) is that law specifically exempts penny stocks from this protection. Harry and Frankie know fully well that a first class miracle is necessary before any Cyclone engine will be built or sold commercially. Not being protected by Safe Harbor makes these statements material misrepresentations, and therefore, fraud.
And then there are the outright, bald-faced misrepresentations by Harry about engine performance. Like "you can put your hand on this engine when it is running" while leaning on a mockup. Or that old promo video that said Cyclone engine exhaust is "literally cleaner" than the intake air. Or the 2011 shareholder open house where Harry told the audience that all the technological problems had been overcome.
The SEC should also have issued a stop trading order on CYPW for failing to file financial statements.
Now the SEC is only going to be reactive rather than proactive, but I remember people posting they had called the SEC to complain about Cyclone and gotten told there wasn't enough staff to deal with such a small fish.
Individuals have the ability to sue, but that's not going to happen. Harry and Frankie sold stock primarily to small investors who don't have the resources to launch such a suit. There is no doubt the investor would win, but they'd never collect. Cyclone officially has nothing of value.
There are consumer fraud protections, but Florida let Trump University off the hook. They will never bother with Cyclone.
Imagine if Cyclone had been required to publish what actually happened at Bent Glass? Or Revgine, Great Wall, Topline Automotive, the tank genset performance, the land speed car dyno tests of 2012. Or if Harry had been personally fined for making unsubstantiated claims. Investors would have been able to make informed decisions.
Communicating the firm's current business plan is actually part of the filing requirements under the heading of Management Discussion. The SEC says it is supposed to be a lot more than a recitation of the numbers on the balance sheet, but that's all Cyclone's have been. Except, of course, for the forward looking statements of production expected in six months.
People trying to raise funding for companies with stupid business plans is fine with me, as long as they are up front about with the real facts of the case. Let Cyclone explain they intend to sell into the automotive engine market worth $XX billion per year. But make sure they explain in the annual report how many auto manufacturers they've contacted and what the results were.
There would be a lot of merit to have the principals and promoters of these companies have a personal stake in their proper operation and a high probability of losing that stake if they skirt the rules. I suspect, though, greater policing of the financial industry will be only slightly more likely than a running Cyclone engine.
