Toxic Financing in Penny Stocks..
In scamming, you call the sucker that you steal from THE MARK. In penny stocks, everyone on the investing forums are THE MARK. I’m relaying this info to you today so that you know how penny stock investors get scammed.
I’m surprised no one has ever done a complete description of the scam. Anyway, here’s how it works:
1. There is a crappy pink at .0001 or similar with no PRs and no buyers. We’ll call it Crapolla Inc (Ticker:CRAP) 1 billion shares at .0001 per share is a market cap of $1,000,000. The CEO has %55 of the common stock, or about $550,000 of investment in the company. %45 of the stock is outstanding, held by uneducated investors that got stuck with it on its way down.
2. This CEO realizes the company is going nowhere (he owes at least $100,000 in debt that the public investors don’t even know about) while he’s still in charge and decides to sell it. He goes to any number of reverse-IPO brokers or shell-marketers, they are more than happy to arrange to find him a buyer.
Examples:
Absolute IPO.com
Go Public.com
Innovation Public Shells
Keating Investments
Mergers-R-Us.com
Merger Station
OTCBBShell.Com
OTC Traders
Reverse Merger.com
Reverse Mergers.Net
Venture Associates
3. Private company owner of Poop, Inc needs a shell because he wants to try his hand at going public, or just hears about how easy it is to scam the average 49-54 year olds out of their life savings and decides to go to the website of the above companies. They have about $255,000 in cash. $5,000 later, the above companies have fitted him up with CRAP, Inc.
4. The public company (CRAP CEO) and the private company (owner of Poop) strike a deal, $50,000 goes to CRAP CEO and he keeps 5% of the new companies shares. Poop, Inc’s owner loses $50,000, but still has about $200,000 in cash and now owns %50 of the shares.
5. The combined company, CHIT, Inc (Ticker: CHIT), under new management, announces a reverse stock-split at 1,000 to 1.
(The new outstanding share count will be 1,000,000 shares. 50,000 will still be owned by the former CEO of Crap, Inc and 500,000 will be owned by the new CEO of CHIT. Remember that the public does not know this.)
6. The stock price will also reverse to a penny a share, but immediately tank as the public scrambles to sell their shares. After all, they all thought the most they could lose was X amount, now that it has reversed, it’s only going to go down further. Eventually, the new market cap will be .0001 again, this time at a market cap of $100,000.
IMPORTANT ITEMS:
CEO of CHIT - %50 - 500,000 shares - $50,000
Former CEO of CRAP - %5 - 50,000 shares - $5,000
Stockholders - %45 - 450,000 shares - $45,000
Debt - $100,000
Market cap - $100,000
Cash on hand - $200,000
So the CEO realizes something interesting now, he now has the company at a point where it’s market cap is vastly undervalued! The public investors keep selling, too.
7. The CEO of CHIT still has about $200,000 in cash, and that market cap is highly undervalued. Because of that, the CEO will buy up shares at these bargain prices. about $5,000 of investment at these levels (bought very slowly) should do well. He might be lucky enough to be able to buy 10% of the public ownership (100,000 shares) at .0001 for $10,000. That would bring his percent ownership to about %60, remember that the original CEO still owns %5. Cash on hand is now $190,000.
8. Here’s where it gets fun. The CEO goes out and searches for a financier, usually some hedge fund that sells stock that doesn’t exist yet, to short the company, and then the CEO just raises the authorized shares and gives the legit stock to the hedge fund which covers its shorts. It works because the CEO doesn’t have to consult with his shareholders before raising the authorized share count. But he doesn’t do this yet. He just lines up a financier.
9. The forums are ablaze! Someone just noticed that good old CHIT, Inc (Ticker: CHIT) is struggling to stay at .0001! Alert the INTARWEBs! Before long, everyone is watching. Usually these people are paid pumpers, but sometimes it is employees of the company itself. We’ll say the CEO spent $5,000 to hire someone to do good PR and search engine optimization (SEO) for the stock ticker. $185,000 is left.
10. The CEO decides to start investing in the company by purchasing assets, starting a new service (or website), and releasing PRs via Marketwire! Some of the PRs talk about how $20,000 was spent to lower CHIT’s debt, they are looking at moving to a new exchange (all pink sheet stocks say this), they’ve secured new financing (another loan), the float is only 400,000 because he just retired 50,000 shares and still owns %55 of the company. Whatever they can say to get an investor. With his $185,000 original money, we’ll say that in 1 week he’s down to $100,000 in cash on hand.
11. But lucky for him, people are noticing and throwing tons of cash into CHIT. Hell, the PPS went from .0001 to .0085 in a week. It’s still at this point when the CEO raises the authorized shares from 1 million to 50 million and since he can’t lose majority control, his 550,000 shares are now 27.5 million. The average stock owner still owns their crappy little investment, but they are out speaking the wonders of the world for the CHIT CEO, and talking about how much they made. Eventually the stock hits .0350 PPS, and everyone is wondering when it will stop. The former CEO of CRAP sells his 5% and bails.
12. Before long, the signal goes to the toxic financier that he’s ready, and the financier starts shorting the stock after the former CEO sells his 5% stake. They sometimes short slow, but they always short big. One day, the PPS drops to .0150 with over 5 million shares in volume! A call to the Department of Treasury confirms that yup, the authorized share count is now 50 million!
13. Smart investors would get out now, but how easily forum investors are duped. Before long, thousands hold a position in the stock, and the toxic financier and CEO have scammed out 20 million shares at an average of .0175 per share. That’s a sum of $350,000 that usually ends up getting split relatively evenly between the two.
14. With the newfound money, the CEO may be able to successfully buy some more shares to stablize the PPS, but most just let it fall, raising the authorized shares even higher when they get a chance, shorting through toxic financing, and then getting out by selling the company (at a higher price) to the next person that wants to try. In this example, the CEO of CHIT knows exactly what to do…
(Next Round: Go to Step #2 above)
There are ways to make money on penny stocks, but it involves finding 50 different penny stocks all at .0001 and investing about $100 in each of them. If you do that, you’re likely to find one at the right time. It’s important to get stocks that have only decreased in value. It is the difficulty of finding a stock that is at Step #7 or Step #14 that makes this type of investing so risky.
About the closest to risk-free penny stock investing is doing something called a “group play”, but it’s a straight up scam on forum posters. Essentially how it works is by finding a stock at Step #7 or Step #14 really low and, with a group of people, buying somewhere between $10-15 thousand of shares of a company. Then, each member is responsible for posting on a forum and replying to other member’s posts, about how they are now in that particular stock.
These members then wait for the PPS to double or triple, and signal each other to sell. They’ll keep pumping on the forums as well. Eventually they’ll be out of the stock entirely, and it’ll slowly (or quickly) drop back down to the range it was at before.
You’ll notice I didn’t use any specific stock names in this article. That’s not for legal reasons, it’s just because 99.99% of Pink Sheet and 98.99% of OB stocks follow this pattern.
