The U.S. Financial Industry Regulatory Authority (FINRA) warned on Thursday, November 17, of potential frauds involving several small initial public offerings (IPOs), many from China.
Reuters cited FINRA reporting that these small IPOs used in manipulative trading fraud are known as pump-and-dump schemes and advised investors to stay away.
It said, “FINRA has observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries.”
FINRA said the majority of these IPOs raise less than $25 million, with modest numbers of shares for businesses valued at less than $100 million.
FINRA added that many of these firms are based in China. They use Hong Kong-based broker-dealers and allocate as much as 90% of their offerings to those dealers. That leads to limited publicly available shares to drive up stock prices artificially.
FINRA also alerts investors that criminals try to lure people into investing in these IPOs via texting or social media, saying, “Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams.”
FINRA warned, “As these ramp-and-dump schemes evolve, there may be varied attempts to inappropriately influence the IPO process. Underwriters, as gatekeepers, must continue to be vigilant in this regard, particularly when dealing with offshore participants in the underwriting and foreign broker-dealers receiving allocations of shares.”
In October, Nasdaq reportedly put the brakes on the IPO preparations of some small Chinese firms. It also investigated short-lived stock surges of those firms after their launching.
According to Reuters, Nasdaq and the New York Stock Exchange announced Thursday that they would further monitor low-cap IPOs.