The trading hub for many small companies has begun tagging securities it suspects are the target of fraudulent stock promotions.
OTC Markets Group Inc. has released a new classification it is using to identify securities that have been subject to misleading stock promotion, marking the market operator's latest step to help regulate its own trading venues, which house about 10,000 securities.
"Anonymous, paid stock promotion should have no place in the public markets," OTC Markets President and CEO Cromwell Coulson said in a statement.
Stock promotion has long been an issue with smaller securities, the price of which individuals and companies can manipulate by publishing false content to persuade other investors to buy in. Now, with social media and technology, "fraudsters and bad actors" are able to impact more investors, "making it that much harder to police," OTC Markets Executive Vice President of Corporate Services Jason Paltrowitz said in an emailed statement.
OTC's new classification comes about four months after the company detailed a new best practices policy for stock promotion. Released in November 2017, the new policy detailed certain measures companies should be taking to assure investors that their stock is not being manipulated through false promotions.
At the time, OTC Markets also rolled out its first designation, a skull and crossbones icon dubbed the "Caveat Emptor," or "buyer beware." The classification is placed next to stock symbols to inform investors that the company has been exposed to any of a number of wrongful actions such as promotion, criminal activity or undisclosed corporate actions.
"We're not the pink sheets anymore," Paltrowitz said in a prior interview. "It's important to use technology and transparency to bring that [promotion] out. Sunlight is the best disinfectant."
The markets operator, which facilitates the trading of smaller securities not listed on venues such as those run by the New York Stock Exchange and Nasdaq Inc., plans to alert investors to companies exposed to stock promotion by placing a megaphone icon on the company's affiliated OTC Markets page, similar to the skull and crossbones icon used for the Caveat Emptor classification.
Fraudulent stock promotion will be identified by OTC Markets' compliance team, which will use a number of sources and insights from other market participants to determine what companies have been illegally promoted.
The crackdown on stock promotion follows a similar move from Wall Street's top regulator. In April 2017, the SEC charged 27 companies and writers with fraud for allegedly promoting stocks through investing websites such as SeekingAlpha.
OTC Markets also said it is rolling out a shell risk flag, which indicates that a company may be a shell company. Both of the new classifications went into effect March 28.