||For more information
||call the Division at (801) 530-6600
When you receive unsolicited telephone calls or emails, look and listen for red flags.
One warning sign is the “three-call” technique. The first call sets the stage by developing the relationship, discussing general investments,
and establishing the reputation of the firm. The follow-up call whets the investor’s appetite for an investment by hyping the company, its product,
its breakthrough, its technology, or its service. These fraudulent statements misrepresent the investment and mislead investors. On the last call
the broker pressures the investor to buy the stock by imposing false deadlines, rejecting any questions, and harassing the investor.
Another warning sign is the “bait and switch” technique. Unscrupulous brokers lure in new clients by offering them well-known and widely-traded
blue chip stock, but once the account is opened at their firm, the broker pressures the investor to buy a micro-cap stock. Sometimes these brokers
will even buy the stock without the investor’s approval!
Other red flags that the brokerage firm is a boiler room include:
- Repeated, unsolicited calls or emails hyping a deal
- Refusal to say anything negative about the investment
- Baseless price predictions (e.g. “the stock will double in price in a short time period”)
- Pressure based on peers that have already invested
- Insults and condescending behavior (e.g. questioning the intelligence of passing a “sure thing”)
- Extraordinary profits with little or no risk
- Promises of “Guaranteed profits”
- Urgency and False Deadlines (e.g. “immediate action required” “the opportunity will be gone tomorrow”)
- Exclusive deals (e.g. “special” or “private” deal only made to “a few lucky investors” to “get in on the ground floor”)
- Inside information
- Unusual arrangements for collecting funds from investors
Licensing Requirements to Sell Securities Investments
Any person or company that seeks to sell securities in Utah must be properly licensed as broker-dealer or agent under Utah law. Licensing creates
a public record of the company and its agents. Investors should review those records prior to investing.
Investors should verify that both the company and individual agent are licensed. Investors should also review the licensing and registration
records of the company and individual agents. These records allow investors to consider how long the company and agent have been in business,
whether customers have filed complaints against the company or agent, and whether the company or its agents have any other derogatory information
on their records (e.g. regulatory actions, bankruptcies). You can Verify a License and Check Out an Investment online or by calling the Division
at (801) 530-6600.
Many boiler rooms and their agents either fail to provide investors with disclosure documents or there are inadequate disclosures in the
documents provided. The omission or misrepresentation of material information in the offer or sale of a security is considered securities fraud.
Sometimes investors trust the person selling the investment and rely on that relationship rather than reading the written disclosures and
verifying information from independent sources including regulatory filings, licensing and registration.
See the Tools and Resources section for online databases and other resources to investigate the background of the company and broker before
investing with them.
Pump and Dump Schemes
Boiler rooms may be used in “Pump and Dump” schemes. Boiler rooms are used to hype and tout or “pump” a company’s stock raising the stocks value
and price share in the market. Insiders and promoters sell or “dump” their shares at the peak of the pricing and make huge profits on the frenzy.
Once the profits are taken, the shares are no longer hyped and artificial market trading is no longer supported, investors will find the price of
their shares falling or becoming worthless.
These schemes frequently appear through unsolicited e-mail messages.
Some Key Questions Before Investing
Investors should ask questions and take notes of what is being said over the phone in the sales pitch. See: http://www.nasaa.org/content/Files/notepad.pdf
Here are some key questions to ask:
- What type of security is being offered?
Companies raise capital through debt or equity financing. You may be issued an equity
interest (e.g. partnership interest, stock, or interest in a limited liability company) for your investment and may receive dividends or a
share of profits. Your investment may also be a loan, or debt, to the company (e.g. promissory note, bond) that is to be repaid according to
certain terms that may include payments of interest. Debt may also be secured or unsecured.
- Is that security properly registered with the Utah Division of Securities or federal government?
If the company is properly
registered, you should be able to find the SEC’s Edgar database. If the company says it is exempt, they should be able to provide you with a
legal citation of the law that they are relying upon for exemption. Some exemptions require notice filings in the states where the security
is offered. If they cannot provide you reference of filings or exemptions, the security is likely illegitimate and you should not invest.
For more information on micro cap stocks – penny stocks – issued by the smallest of companies with thinly traded markets see the
SEC’s info on Microcap stock.
- Have you been offered some disclosure document?
To help you perform the proper due diligence before investing, you should be provided
a prospectus, private placement memorandum, private offering memorandum, or some other document that fully details information about the security
- Have you been offered audited financials from the company?
Generally, audited financials are reviewed to assess the financial
status of the company, including outstanding liabilities.
- Does the investment meet my investment objectives and risk tolerance?
Do not invest if you do not understand the risks of loss.
Ask yourself what is your motivation for making this investment. Primarily, how much risk do you want to take with your money? No one can
guarantee a return on an investment and boiler rooms pitch products that are both highly speculative and risky. Ultimately the decision to
invest is yours, but if you invest in micro-cap stock or a private offering sold over the phone, you may lose your entire investment.
- Does the hype for the investment’s return or profits seem to be too good to be true?
The risk/reward principal dictates that the
higher the return, the greater risk. Historically, a good rate of return is 7-8 percent per year (above inflation). While such returns are
suspect on face, even if they were accurate, they would reflect serious risks. In short, if it’s too good to be true, it probably is.
- Have you researched the company? Are there independent sources of information?
Before investing you should research the
investment. Public libraries have many on-line resources for researching the company and the background of the principals. Web browsers like
Yahoo finance and Google aggregate information about stocks. Companies that want to be traded through broker-dealers specializing in microcap
stocks apply to be listed on exchanges. Broker-dealers then report information in the marketplace such as bids, offers, and trades to exchanges
like the NASDAQ and the Pink Sheets. Often in order to become listed or remain listed with an exchange, the company will be required to
maintain current filings of public information including financial statements and reports of shareholders with the SEC’s Edgar system –
(Electronic Data-Gathering, Analysis, and Retrieval system). For information on researching public companies use the SEC’s Edgar database. You can contact the Utah Division of Securities to
see if any administrative actions have been filed on the stock or its promoters. Greater due diligence may require looking for any
court records for criminal or civil matters.
- What if I no longer want to be called or contacted by a firm?
Ask to be placed on the firm’s
do-not-call or do-not-contact list. Legitimate broker-dealers are members of the Financial Industry Regulatory Authority, Inc. FINRA,
and are required under its Conduct Rules to make and maintain a centralized do-not-call list of persons who do not wish to receive telephone
solicitations. Broker-dealers who violate these rules can be sanctioned. Complaints regarding violations may be filed with FINRA, the Federal
Trade Commission, or the Division of Securities.
Tools and Resources
- More Information on Boiler Rooms and Investing Resources
- More Information – Investing Resources
- Do not Call Lists
Ask to be put on the do not call or do not contact list. Securities firms are required to maintain lists and abide by the rules not to contact.
What is a Boiler Room?
The term boiler room describes the high pressure sales tactics employed by a roomful of aggressive and manipulative telephone marketers selling highly
speculative investments (mainly penny stocks). While boiler rooms present themselves as a third-party brokerage firm, sometimes they have undisclosed
relationships or financial interests with the companies being promoted. Sometimes the investment doesn’t even exist!
How does a Traditional Boiler Room operate?
Boiler room operators set up offices with banks of telephones manned by salespeople that have little or no experience in finance, but plenty of experience
in high-pressure sales.
Trust the Experts
The first step for a phone-based boiler room is to establish their legitimacy and prominence. Inexperienced brokers will use fancy titles (e.g. investment
executive, senior account executive), tout their firm as a major player on Wall Street, and talk fast with a lot of jargon. The point is to convince the
investor they are talking to a seasoned veteran who has great insight or inside information on the company being promoted. Boiler room brokers focus on
establishing this trust so that investors won’t question the broker, the company, or the investment. Investors should be extremely cautious about any broker
that reaches out by cold calls. As will be discussed below, boiler room brokers will often lie, misrepresent the investment, and do whatever it takes to close
Bait the Hook
The second step for boiler rooms is to use a cleverly crafted script to walk the investor through the investment scheme, making the “house stock” appear
to be an incredible opportunity. The boiler room broker boasts the genius of the company, the miraculous product, the amazing technology, the game-changing
idea, or the revolutionary service. Then the broker explains that the stock is going to go public or release some great news that will skyrocket the stock
price. The broker is selling this opportunity to invest ahead of the game. Sometimes the whole thing is a lie—the company, product, technology, service do
not even exist. But most often the boiler room operators already own the worthless stock and design these sales to drive up the stock price so they can sell
it off at a profit, leaving the investor stuck with a worthless investment. This is called a “pump and dump” scheme.
Close the Sale
The final step is where the boiler room broker makes his/her livelihood: closing the sale. Top producing brokers will do whatever it takes to close the
sale; they will lie about the deal, misrepresent the investment, manipulate any situation, and pressure relentlessly. If investors change their minds and
want to sell, the broker bullies investors to keep the stock; some firms will even implement a “no sale” policy so that the boiler room operators can dump
their stock before investors. For their part in these unscrupulous tactics, the boiler room broker receives hefty commissions (often undisclosed to investors)
and other perks at the expense of the investor.
Do Boiler Rooms still operate today?
Yes. The rise of the Internet and online trading has led to web-based boiler rooms that use new technology to employ the same high-pressure sales tactics.
Quality websites, online press releases, and paid search results help build the legitimacy of web-based boiler rooms and the companies being promoted. Social
networking, email, and instant messaging extend the high-pressure sales tactics into the cyber world.
Boiler rooms today use both old-school methods and new-age technology to hype their product and hard-sell investors. From phone calls to facebook
unscrupulous brokers will find any way to pitch investors and close the sale.
Ultimately, investing in micro-cap stock is highly speculative and entails a lot of risk. Investors can lose their entire investment. To ensure that your
broker is above board, use the Division’s online resources and call the Division to research the brokerage firm and its agents before committing or sending
them your money.
Repeat Victims are Targets
Boiler room operators and the agents may take their list of contacts from one boiler room to the next. These “sucker lists” may also be sold to third
parties. Con artists even focus their pitches on helping investors recover losses from their worthless stock that was leftover from the previous boiler room
that scammed them.
Unfortunately, investors who have lost money are often eager to “double down” and invest more in the hopes of recovering losses. Boiler room brokers prey
on these desperate investors by running “recovery room operations” or “reload scams.”
For more information on these scams see Worthless Stock: How to Avoid Doubling Your Losses.