Investor Relations 101The Securities Laws & Stock Promotion

What Is Investor Relations?

Investor relations or stock promotion involves the dissemination of information about a public company to increase its stock price and/or trading volume.

The person who publishes this information is sometimes referred to as a “Stock Promoter”, “Investor Relations Provider” or “Stock Tout”. 

How Do Investor Relations Firms Promote A Stock?

Stock Promoters use many techniques including newsletters, email advertisements, internet postings, direct mail newsletters, stock websites and message boards, press releases and phone rooms to generate interest in the securities they are hired to promote. 

How Does Section 17(b) Impact Investor Relations?

Section 17 (b) of the Securities Act of 1933, as amended (the “Securities Act”) is an anti-fraud statute that requires publishers of investor relations and promotional information about public companies to provide disclosure of their compensation including:

Type of compensation (securities or cash) received; Amount of securities received or cash paid; If the compensation is in securities, whether the securities

are restricted or unrestricted; If a corporate entity is the publisher of the information, its

control persons must be identified; The identity of Person paying (Direct or Indirect)

compensation to the stock promoter; and If the Publisher is compensated by a third party shareholder

or corporate entity, the shareholder or control persons of the entity must be identified by his or her individual name.

How Section 5 Impacts Investor Relations

Section 5 of the Securities Act makes it unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy any security, unless a registration statement has been filed as to such security.

Stock Promoters are sometimes paid for their services in securities of the public companies they promote. Section 5 requires that the shares be registered with the SEC or exempt from registration.

How Do Stock Promoters Receive Free Trading Shares?

Stock Promoters receive free trading shares a variety of ways. To receive free trading shares lawfully the shares must be registered with the SEC. Stock promoters receive illegally free trading shares a few ways, including: (i) improper issuances under Rule 504, (ii) transfers of unrestricted shares from third party stockholders, and (iii) debt or note conversions into unregistered shares.

Can A Third Party Stockholder Pay The Issuer’s Investor Relations Firm?

If an issuer participates in investor relations activity or arranges for a third party shareholder to pay for investor relations services with its shares, the shares are restricted securities even if they were not so in the hands of the stockholder.

The transfer and/or issuance of the shares to the issuer’s Stock Promoter under these circumstances becomes an offering on behalf of the issuer. As such, unless the shares are registered with the SEC, they are restricted securities. In the case of Stock Promoters paid in shares, their shares must be registered with the SEC or the Promoters must comply with Rule 144.

Note that Section 5 imposes strict liability for sellers of unregistered securities even if a legal opinion from a securities attorney is obtained.

What Is Stock Scalping?

Stock scalping refers to the illegal and deceptive practice of recommending that others purchase a security while secretly selling the same security. 

Stock promoters who intend to sell during a promotional campaign should specifically state in a disclaimer that he or she intends to sell during the campaign. Prior sales should also be disclosed.

Promoters should remember that the securities laws require stock promotional materials to disclose certain information to investors. In addition, the disclosures provided must be truthful and complete so that investors are on even footing in the market place.  

When Is Broker-Dealer Registration Required?

Section 15 of the Exchange Act requires a person acting as a “broker” or a “dealer” in securities transactions to register with the SEC. Both brokers and dealers are persons who are “engaged in the business” of buying and selling securities. Brokers arrange securities transactions for others, whereas, dealers purchase and sell securities for their own accounts. For purposes of the Exchange Act, persons are “engaged in the business” of buying and selling securities if they demonstrate a “regularity of participation” in securities transactions.

Participation in a single, isolated transaction is insufficient to require registration. Nevertheless, the SEC and the courts interpret the phrase “engaged in the business” broadly. Where investor relations firms locate investors for the issuer, they are potentially unregistered brokers.

Continued - When Is Broker-Dealer Registration Required?

In determining whether a person has acted as an unregistered dealer, the primary question is whether they receive securities as compensation as a regular part of their business.

If the Stock Promoter receives stock compensation from its clients routinely in exchange for services, they are a dealer and subject to the broker-dealer registration provisions.

In determining whether a person has acted as an unregistered broker, other factors are considered, including whether the person:

solicited investors for the issuer, advised investors as to the merits of an investment, received commissions or transaction-based remuneration, is selling, or previously sold, the securities of the same or

other issuers, and made investment recommendations.

If the Stock Promoter has any contact other than making an introduction to investors or broker-dealers, he or she risks being deemed an unregistered broker.

The failure to be properly registered as a broker-dealer may subject that person to potential liability, including criminal penalties, fines, suspension, and disbarment.

The potential harm to the issuer includes investor rescission rights, meaning that they could demand repayment of their entire investment. The issuer could also find itself subject to sanctions and penalties from securities regulators as an aider and abettor of the activities of the unregistered broker-dealer and face fines and prohibitions on future securities offerings.

For further information about the rules & regulations that apply to investor relations activity, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at info@securitieslawyer101.com or visit www.securitieslawyer101.com. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities LawyersBrenda Hamilton, Securities Attorney101 Plaza Real South, Suite 202 NorthBoca Raton, Florida 33432Telephone: (561) 416-8956Facsimile: (561) 416-2855www.SecuritiesLawyer101.com