November 17, 2022

FINRA Urges Caution Around Small-Cap IPOs in Wake of Pump-and-Dump Schemes

FINRA warned investors to exercise caution when investing in small capitalization initial public offerings ("IPOs") due to an increase in pump-and-dump schemes.

In a Regulatory Notice, FINRA noted that some pump-and-dump schemes have targeted investors using social media platforms. FINRA highlighted several identifying characteristics that were found across many of the schemes that have affected small-cap IPOs. These IPO factors include instances where there were:

  • less than (i) 20,000,000 shares issued, (ii) $25,000,000 raised, and (iii) $100,000,000 in valuations;

  • foreign issuers and broker-dealers including, but not limited to, those based in China and Hong Kong;

  • a significant number of shares concentrated in the hands of a limited number of investors;

  • nominee and omnibus accounts opened at U.S. institutions on behalf of foreign entities;

  • extreme levels of price volatility, which were not based on news or other material events; and

  • allegations of individuals using social media to establish connections with investors for the purposes of encouraging them to place orders at set prices and times.

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