Investor Beware: How to Spot a Pump and Dump Scam

This securities con, by its purest definition, happens when a group of executive officers or investors inflates the value of a publicly traded company’s stock, only to sell when the price hits the ceiling. Once the stock is sold and the checks are cashed, the company’s value plummets, leaving innocent investors with nearly nothing. 

Until fairly recently, the pump and dump was almost exclusively something you saw with microcap, nanocap, or penny stock companies. But now that cryptocurrency has entered the mainstream, the digital currency has become a fertile vehicle for pump and dump scams the world over.  

One recent example: A company named Long Island Iced Tea is now under FBI investigation for running an elaborate pump and dump scam. The company originally produced beverages, but rather than going public through an IPO, they conducted a reverse merger and rebranded to a blockchain company named Long Blockchain Corp. 

Two company leaders, already under investigation for securities fraud at another business, bought large amounts of stock before the rebrand. When the crypto bull market hit its height, the public went wild and bought loads of the company’s stock, and the pair cashed out.   

Today, pump and dump scams have gotten more elaborate and complex, and it’s not always easy to tell when nefarious individuals are getting ready to cash out. However, there are definitely things to look for before you invest in what turns out to be a pump and dump, and here are some red flags that can point to a scam in the making.

Low company value
While it’s true that you can have a small company worth $500 million or a big company worth far less, most pump and dump companies fall into the category of microcaps worth less than $300 million or nanocap/penny stock companies worth less than $50 million.

Hollow, flashy partnerships
A classic way to inflate the value of stock is to announce a stream of partnerships with other companies. These partnerships are often exploratory in nature with no real plans to build or produce anything of substance, and are designed to create the PR perception that the pump and dump company is “hot” and going places. 

Inexperienced leadership
Look at the profiles of the CEO, CFO or other business leadership. Have these individuals ever worked at large, reputable companies? If company leadership hasn’t run or worked at any company of substance, consider this a red flag. 

Crypto dump communities
If the company you want to invest in is a crypto or blockchain company, it’s probably easy to find groups on Telegram and other messenger apps where users are planning a pump and dump. Unlike with traditional companies where the owners and leadership benefit from the pump and dump, your garden variety crypto investor can easily cash in by strategically trading on exchanges and artificially inflating the value of the digital currency.  

An elaborate rebrand
One way to bring a sense of excitement over a company is a hot, new rebrand. When company leadership changes the name or branding of their microcap, nanocap or crypto company, it might be a signal that a pump and dump is in the works. 

A reverse IPO or merger
Has the company promised an IPO only to have a private company take over and hatch a reverse IPO instead? Is the company suddenly bypassing IPO laws and selling stock through a shell company? A future pump and dump is a possibility.

No-name auditing firms
Most public companies lean on well-known global firms to audit their business. The reason? These companies have a reputation for following the rules and conducting careful, lawful audits. If the company you want to invest in is using an auditing firm you’ve never heard of, they may be trying to skirt the rules. 

Unfamiliar transfer agents
A transfer agent is a firm used to track the activity and status of shareholders. If the transfer agency in question is small or hardly a household name, it’s entirely possible that the company using this firm is playing fast and loose with data. 

In the business world, the pump and dump scam is an almost ancient practice, with drawings from the 1700s depicting pump and dumps and insider trading schemes. Despite the age of this long-abused activity, it helps to protect yourself by keeping up with how such schemes take shape.