First, you can't short penny stocks in the US. No broker will allow it. Second, if you want to check offshore shorting, you would find the margin requirements to be outrageous. I know as I have checked. Please feel free to check on it yourself. Offshore shorting does go on. It's mainly done by large hedgefunds that loan money, usually toxic financing in exchange for shares, to small companies in need of cash. They then short large quantities of shares as they dump their own holdings into the float. Illegal here, but real profitable in loosely regulated Carribean islands. Either way the small investor gets screwed. Whether it's the company diluting shares or the financier playing the shorting game from offshore, it all adds up to dilution. Hope this helps.
....al