The Financial Industry Regulatory Authority issued a word of warning Thursday to investors about stocks and scammers looking to ride bitcoin mania, warning specifically about "aggressive cold callers."
"Beware of potential stock scams when considering the purchase of shares of companies that tout high returns associated with cryptocurrencies, such as bitcoin," FINRA wrote in the statement.
Bitcoin's 1,432 percent year-to-date gains have emboldened even novice investors to throw their cash in the game. When dealing with something as uncharted as cryptocurrency, however, even the most experienced investor can get caught in a scam.
"We all need to become Mr. Spock when it comes to investing. We need to be cold and rational and logical," said Gerri Walsh, FINRA senior vice president for investor education. "But when a new sector offers promise and there is a lot of coverage online and in the media related to investing in a new sector, people tend to get emotional."
There are many scenarios in which an investor can get scammed, but the most common is the "pump-and-dump" scheme, Walsh said. "Pump and dump" is a form of securities fraud common among penny stocks, in which shareholders attempt to artificially inflate the price of stock through misleading statements.
At a time when attaching "blockchain" to a company name is a surefire way to blow up stock values, there is plenty of incentive for these schemes.
Walsh said FINRA began fielding a higher volume of calls from investors asking how to invest in bitcoin. When she noticed frothiness in over-the-counter markets for crypotocurrency-related securities, it raised a red flag.
FINRA released the following guidelines to help investors avoid getting duped:
- Be suspicious of anyone who guarantees an investment will perform a certain way or makes pushy sales pitches.
- Do not purchase cryptocurrency stocks from aggressive cold callers, particularly if dealing in penny stocks.
- Use FINRA BrokerCheck® to check the professional background of the individuals involved in selling the investment, as well as the firms who tout these opportunities. Selling securities generally requires a license and registrations under state and federal securities laws and FINRA rules.
- Check the Security Exchange Commission's EDGAR database for SEC filings to learn more about a company, bearing in mind SEC filings alone do not the mark of a good investment make.
- Be wary of stocks with huge spikes in price, which could signal manipulation or fraud.
- Know where the stock trades and pay attention to any cautions associated with the stock. If a stock trades over-the-counter, check a quote platform like OTC Markets.
Walsh also recommended checking the SEC's list of trading suspensions to check whether the company has been deemed a threat to investors.
"We warn investors to look behind the name of the company, look behind the ticker of the stock. Take a look at a company's filings," Walsh said.
"There can be legitimate ways to get involved. Our concern with investors is they might field a call from a less legitimate actor," she added.