Long overdue changes to Rules 211 and 144 are going into effect, forcing bad actors out into the light
How can toxic debt kill a company? The answer is in this simple question: how much would you say a new website, some press releases (let’s be generous and say 24 per year) and social media management cost? Go ahead and guess.
If you hire a legitimate agency, the going rate is about $8-12k per month. The social media alone is about half that cost.
Now, what if I told you that some companies are charging a million dollars a year? As in $120,000 per month.
Does that make any sense? Why would you hire someone for $120,000 per month instead of paying $8,000 per month?
I’ll tell you. It’s because if you pay $120,000 per month you can pay with stock. It’s often cloaked as a convertible note, but it’s toxic debt, plain and simple.
Apart from the massive markup, there are two other “features.” One, the stock is “adjustable” so that it can always be sold AT A DISCOUNT to what the current share price is. Sounds bad, right? It’s not just bad, it’s the worst.
Which leads us to our second feature:
Breaking up with toxic debt is impossible
If you’ve ever broken up with an agency, you know this is not a pleasant experience. There are loose ends everywhere: logins, landing pages, social media accounts, the list goes on. Breakups can be difficult, even if amicable.
Well guess what? If you have an agency that has taken a million dollars worth of your stock, they do not make it easy to break up.
In fact, if you break up with a toxic agency, they will often tank your stock. And you still have to live with them.
But how about this scenario which is more common: the toxic agency that owns a million dollars of your stock tanks your stock even if you don’t break up.
Now why would they do that?
They do that because every time the price goes up, they sell shares. This high volume selling counteracts the upward momentum, especially with low volume stocks.
So the share price rarely goes up for long. Or if it does, it’s a one or two day event. Depending on how much it goes up, this might be called a “pump.”
So, not only do you have to pay ten times the going rate, you are stuck with an agency that always sells into momentum. Bad!
I have first-hand experience seeing some of these toxic agencies in action. Even if the company can’t understand that its price is being held down by a toxic agency (usually affiliated with a funder or lender, such as a private equity, VC or investor), a visit to one of a few “alternative” social media sites usually answers a lot of questions pretty quickly.
How to check if your agency is toxic
Toxic agencies usually hang out on “alternative” social media sites. Twitter is too public, so they are most often found on InvestorsHub, StockTwits or worse – CEO.CA — where they bash stocks, manufacture price targets and circulate rumours every day.
They do what they were hired to prevent. But the logic is, if they are the ones manufacturing rumours, then they can be the ones that also take credit for quashing them. This is known in the industry as something I won’t repeat here, but it is two words and the first word is “circle.”
These toxic agencies do not want any new agency to be successful. No way. Any agency that takes convertible debt or “market-adjustable securities” is toxic and I am happy to paint them all with the same brush. I have not seen one example of an agency that prefers this type of compensation that goes on to do a good job. Not one.
These agencies should be shut down and no one will miss them. And, at some point in the near future, they will be.
Rule 144: the toxic debt takedown
The laws (it’s actually an Act) that govern stock trading were introduced in 1934. Obviously a lot has changed since then.
But what hasn’t changed much are the laws.
As former SEC head Hugh Owens said in a 1964 speech, the life savings of a single State went down the drain because of inadequate securities law. The same thing is happening now. Except we’re not talking about the State of Oklahoma. We’re talking about a nation. A nation invested in Bitcoin and penny stocks.
The meteoric rise of the retail investor has strengthened an ecosystem of fraudsters.
These include a dozen or so toxic agencies that have preyed on companies by taking toxic debt as compensation ($120,000 per month) and executives at those companies (aka issuers) that willfully or not, prey on investors by relying on those same toxic agencies to “pump” their stock.
New amendments to securities laws that were never meant to last 87 years are finally going into effect with the intent of killing off or at least exposing much of the illicit activity. There have been a lot of large, high profile prosecutions from the SEC lately and you can expect to see many more.
Once something known as “Rule 144” goes into effect, the whistleblowers will show up by the droves (they already are) to report on the outrageous activities being carried out by some of these firms. Insider trading doesn’t even scratch the surface.
We are talking about acute malpractice, only because the authorities have not had the rules, motivation or resources to curtail many of the bad actors.
But with the rise of retail investors, many of whom are now actively trading bitcoin and other digital currencies, the regulators (SEC, FINRA, OTC Markets) are now actively trying to protect investors. And the markets.
It’s been a long time coming.
Predators alive today
“Bad actor” marketing agencies are operating right now. I see them every day. They are easy to spot because they are associated with “pumpers” on Twitter. These are accounts that tweet up to 50 times a day, tagging stocks with “cashtags” and making outrageous claims designed to entice new investors.
In one soon-to-be infamous case unfolding now, a hydrogen water company that made promises for six months that it would get current with its financial filings was just denied that opportunity. As a result, they are suing two influencers that “pumped” the company’s stock on Twitter.
What is interesting about this is that the company appeared to be working very happily with these two influencers until it became clear that the company would be unable to meet new disclosure requirements.
The dark underbelly of stock promotion is now out in the open on social media as changes to laws are forcing fraudulent companies to either play by the rules or get out.
New rules go into effect on September 28 for Rule 211 (aka Rule 15c-211) and changes are also expected to Rule 144. If you’re a public company operating on the OTC or TSX and are married to a toxic agency, know that you won’t have to be held hostage for much longer.
An amendment to Rule 144 will require an affiliate of the issuer (such as a marketing agency) to hold the stock for up to a year and to report the sale of such stock. Sales have to be reported within a day.
The changes being instituted are viewed universally as being good for the markets, as companies that have been deceiving investors will no longer exist, or at least will have a much more difficult time. With any luck, the toxic agencies will disappear along with them.
Want to lose your toxic agency? Reach out.