Unsolicited selling of U.S. based Regulation S stock by cold callers can lure foreign investors into the unsafe waters of financial fraud. Here, financial lawyer and consultant Harvey Kesner elaborates on how fraud is committed by “cyber boiler rooms” and what a foreign investor can do to protect themselves.
Regulation S and International Stock Sales
In 1990, the U.S. Securities and Exchange Commission created new rules regarding the sale of stock in publicly-traded companies to investors outside the United States. Known as “Regulation S,” these rules were intended to open the global market for shares of stock in U.S. companies. The critical impact of Regulation S is the relaxation of the registration requirements for stock that is sold outside of the U.S.
Sales to international investors that comply with Regulation S can be made to foreign investors of any wealth level, and there is no requirement that a foreign investor is accredited or given the same information that must be provided to investors located inside the U.S.
Cold Call Sellers and the Fraudulent “Cyber Boiler Room” Technique
Unfortunately, Regulation S has led to fraudulent practices through “cold calling.” Cold calling is a technique used by people and entities falsely claiming to be brokerage or financial management firms; these individuals directly contact potential investors outside the U.S. through phone and internet contact. Cold callers make unsolicited contact with investors and convince them to pay for stock with lucrative promises and sales pitches. The design of the fraud is to obtain payment from an investor and then disappear without delivering the promised stock, or to disappear after a series of small transactions leads to a large transaction that is not completed.
“Boiler room” scams were sometimes common fraudulent selling schemes that originated in the 20th century. Cold calling fraudsters would use high-pressure and dishonest tactics to sell stocks and securities to people targeted through phone calls. Teams of callers would often call from the same “boiler room” office to construct complex fraudulent schemes to trick victims into sending in payment for stock that was either nonexistent or not in the control of the scammers.
Recent years have seen the birth of “cyber-boiler room” schemes. Fraudulent sellers use the newly relaxed requirements on international stock sales to create elaborate and highly detailed hoax companies and stock offerings. Sophisticated scammers have fully developed fake websites, discussion boards, press coverage, and threads of communication, which create a false image of attractive investment opportunities. Investors are spending large sums investing in the imaginary stock, and the advice given to the target is always to buy more and more stock and plan to hold it until some price spike based on supposed insider information comes to pass. Once the target has been bled out, the sellers disappear.
Avoiding Fraudulent Sales Schemes
If you are an international investor and have received unsolicited invitations to invest in a U.S. company or security over the internet or on the phone, skepticism is in order. If an investment opportunity for U.S. based stock seems sketchy, it is undoubtedly worth your time to contact a competent and reliable financial consultant or attorney inside the U.S. to help evaluate the truthfulness of the offer being made and conduct financial and legal due diligence and background checks for known regulatory issues.
About Harvey Kesner
Harvey Kesner has over three decades of work experience in senior attorney, executive officer, and partner positions across major law firms in New York and Washington, D.C. He is currently managing his private law practice based in New York and resides in Ft. Lauderdale, Florida, where he is pursuing various business interests. If you need a consultant for any transaction, anywhere in the world, in any industry, Mr. Kesner has the knowledge and the experience to help you achieve your goals.