There’s something going on with NASDAQ IPOs that isn’t sitting right with the SEC. Chairman Paul Atkins has launched a task force to “combat cross-border fraud harming U.S. investors, saying it was investigating “pump-and-dump” schemes in the stocks of companies from foreign jurisdictions,” according to Bill Alpert and Nate Wolf in Barron’s. They explain that a number of IPOs on NASDAQ have imploded, writing:
Some 50 offerings came public below the $15 million threshold in the first five months of Nasdaq’s new IPO regime. About 80% were from the China region. Most weren’t good stocks. A third of the 50 stocks suffered some of the year’s worst one-day drops. Dorsey’s newsletter reported that a few of these drops were preceded by social media promotions. In July, an FBI bulletin said it had seen at least a 300% increase in victim complaints about “ramp-and-dump” frauds, where bad actors ramp up stock prices through deceptive trading before dumping the stock.
The scale of investors’ losses from listed small-cap fraud is hard to know, but individual schemes can rake in hundreds of millions of dollars. In May, federal prosecutors in Chicago announced the seizure of $214 million in proceeds from participants in an alleged pump-and-dump scheme involving China Liberal Education Holdings CLEUF +53.96%. Seven Malaysian and Taiwanese nationals, all still at large, promoted the stock and coordinated trades before its collapse in January, the indictment charged. The Beijing business listed on the Nasdaq Capital Market in 2020.
In September, Nasdaq proposed more revisions that will require all its IPOs to raise at least $15 million. The proposal would require an offering of at least $25 million by companies from China, to ensure that enough free-trading shares get into the hands of public investors in the U.S. China-based companies represent less than 10% of Nasdaq’s listings, the exchange notes, but they have led to 70% of its referrals for investigation by the SEC and Finra.
Action Line: Be very careful. Just because a stock is trading on an exchange doesn’t mean it’s bulletproof. Even IPOs that meet the minimum standards can go up in flames. When you want to talk about your retirement plan, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
