SEC and FTC Warn: Look Out for These Coronavirus-Related Investment Scams
Authorities are warning the public about an increase in coronavirus-related investment scams as world concerns grow over the long-term effects of the virus. In particular, the Securities and Exchange Commission, the Florida Department of Agriculture and Consumer Services, and the Federal Trade Commission are warning investors against scams inviting investment in companies working to produce a cure for the virus.
A Novel Coronavirus Opportunity
According to the SEC, the basic idea is nothing new. Scammers are always some of the first to leverage news developments into ways to separate investors from their cash. But the COVID-19 virus, which as of mid-March has sickened over 206,000 people worldwide and resulted in the death of more than 8,200, is a particularly welcome opportunity for scammers.
That’s because the panic and hype surrounding the virus is unmatched in recent memory, especially since it was declared a pandemic. When anxiety and concern run this high, people are more easily misled.
How the Investment Scams Work
These scams are being spread via the Internet, and social media in particular. The scam is presented as an opportunity to invest in a publicly-traded company working on a way to prevent, detect, or cure the COVID-19 virus. The scams go on to elaborate on the possibility that these companies will see a huge uptick in stock value.
In some cases, the scams may be presented as research reports with estimates of how high stock prices can go. According to the SEC, these scams are targeting every type of investment, but the most commonly seen scam involves penny stocks, or microcap stocks.
These are popular targets for the scam precisely because penny stocks involve small companies with market capitalizations under $300 million. Because of their small size, it’s normal for penny stocks to involve companies with limited public information. This makes them the perfect target for scammers since it’s easier to give false information without fear of being discovered.
The Pump and Dump Scheme
The most common form of the scam is known as the “pump and dump.” Scammers buy into a small company that really exists and then release false information claiming the company is developing a cure or method of virus detection. Other investors quickly rush to buy stock, driving the price higher and higher.
At the top of the peak, before the company can correct the erroneous information, the scammers sell and leave everyone else holding the bag with shares that are about to tumble. When the scammers dump, the prices drop drastically, and later investors lose heavily.
What to Watch for
Investors should be careful of any sudden trading activity surrounding a penny stock, especially if it is coronavirus-related. Investors should also keep a healthy suspicion of any market opportunity presented as a sure thing with guaranteed returns.
Investors should also be cautious about random, unsolicited offers of microcap stock with a company said to be doing anything related to the current pandemic. In most cases, the FTC says, investors should expect to hear about medical breakthroughs via other channels than a sales pitch. As with everything surrounding COVID-19, it pays to be cautious.
Additional resources: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_coronavirus