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[Joemoney]

Penny Stock Salesmen

by Joemoney

Remember when salesmen would come to your door and try to sell you things? They would beg you to take a look at their products. Many of them sell simple products, like magazines and cookies. However, in today's Internet age, a new breed of salesmen are popping up. Not at your doorstep, but in your e-mail inbox and on message boards. They use the same persuasive techniques, but offer a different product. These new salesmen are trying to sell you stock. More specifically, penny stocks. Also known as profilers. Don't get profilers confused with stock pumpers. These profilers are not paying themselves by front running, but they are being paid by the companies they profile.

What are restricted shares?
Profilers are usually paid in SEC Rule #144 Restricted Shares of stock. Restricted Shares of stock are as quoted by the SEC (http://www.sec.gov/), "The term "restricted securities" is defined in Rule 144(a)(3) [17 CFR 230.144(a)(3)] and includes: securities acquired from the issuer or an affiliate in a transaction or chain of transactions not involving a public offering; securities acquired from the issuer and subject to resale limitations under Regulation D [17 CFR 230.501-508] or Rule 701 [17 CFR 230.701]; securities subject to the Regulation D resale limitations and acquired in a transaction or chain of transactions not involving a public offering; securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A [17 CFR 230.144A]; and securities acquired from the issuer that are subject to the resale limitations of Regulation CE (230.1001). Separate releases being issued today propose to amend the term to also include securities issued pursuant to an exemption under Securities Act Section 4(6) [15 U.S.C. 77(d)(6)] as well as equity securities of domestic issuers, and of foreign issuers where the primary market for such securities is in the United States, sold under Regulation S [17 CFR 230.901-230.904 and Preliminary Notes]."

Restricted shares of stock can be sold one year after they are transferred to the profiler. However, many companies use "third parties" in order to transfer cash, free trading shares, and other forms of compensation to profilers. This practice is legal, but tricky.

Why do companies have their stock profiled?
More and more companies are giving compensation to profilers in order to promote their stock. This is the main reason companies have their stock profiled, to create interest in their stock by investors. Small OTCBB companies must find someway to generate interest in their stock. Since most people have never heard of most of the OTCBB listed companies, they cannot rely on their name to generate investors.

How much do companies pay stock profilers?
Big time stock profilers can get paid as much as $250,000 in restricted or free trading shares and $100,000 cash. It makes you wonder why websites would ruin their reputation by profiling stocks that they don't believe in. It's safe to say that almost all stock websites exists only to make the owner wealthy and not to benefit investors. Most websites, especially stock profile websites, only expect to live a short time because the owner only wants to make a quick buck. Actually, most stock profilers get paid around $5-10k in restricted shares. Most companies don't compensate small time profilers with cash.

Does profiling stocks actually drive the price up?
Most of the time the stocks are profiled don't even rise. They do create investor awareness, and may make the company's Raging Bull board a little more active. In general, the stock does not rise at all because of the poor reputations the stock profilers already have. Stock profilers are often not the smartest people you'll know. Because of their lack of market intelligence, they profile stocks to make money off their sites instead of advertising.

How do investors tell if a stock on a website is a paid profile?
It is required by law that a stock website have a disclaimer. Within this disclaimer, a profiler must state that they are being paid to profile a certain stock. In many cases, the profiler will be extra cautious and actually list how much compensation they received for profiling a certain stock. A profiler will not tell their readers to buy or sell a stock, but they will just give information about the profiled stock. Profilers will create "due diligence" like pages and list only the good things about the company they are profiling.

Conclusion
Profiled stocks are in most cases stocks that should be avoided. Most companies profile their stock because of dilution and lack of investor interest. If a company is outstanding and has a bright future, there should be no need for a them to have their stock profiled. The best thing investors can do is to do their own research and try to avoid companies that pay to have their stock profiled. Just ask yourself next time you see a website profiling a stock "If this company is so good, then why must they try to sell it to me? Shouldn't it already in a buying frenzy?"

To discover more commentary by Joemoney (AKA "The Reporter"): http://www.marketreporter.com/