Investor Relations 101

The Securities Laws & Stock Promotion

What Is Investor Relations?

Investor
relations
or
stock
promotion
involves
thedissemination of information about a public company
to increase its stock price and/or tradingvolume.
The person who publishes this informationis sometimes
referred to as a Stock Promoter, Investor Relations
Provider or Stock Tout.

How Do Investor Relations Firms Promote A

Stock?
Stock Promoters
use
many
techniques
including
newsletters, email advertisements, internet postings,
direct mail newsletters, stock websites and message
boards, press releases and phone rooms to generate
interest in the securities they are hired to promote.

How Does Section 17(b) Impact Investor Relations?

Section 17 (b) of the Securities Act of 1933, as amended (the
Securities Act) is an anti-fraud statute that requires
publishers of investor relations and promotional information
about public companies to provide disclosure of their
compensation including:
Type of compensation (securities or cash) received;
Amount of securities received or cash paid;
If the compensation is in securities, whether the securities
are restricted or unrestricted;
If a corporate entity is the publisher of the information, its
control persons must be identified;
The identity of Person paying (Direct or Indirect)
compensation to the stock promoter; and
If the Publisher is compensated by a third party shareholder
or corporate entity, the shareholder or control persons of
the entity must be identified by his or her individual name.

How Section 5 Impacts Investor Relations

Section 5 of the Securities Act makes it unlawful for any
person, directly or indirectly, to make use of any means or
instruments of transportation or communication in interstate
commerce or of the mails to offer to sell or offer to buy any
security, unless a registration statement has been filed as to
such security.
Stock Promoters are sometimes paid for their services in
securities of the public companies they promote. Section 5
requires that the shares be registered with the SEC or exempt
from registration.

How Do Stock Promoters Receive Free Trading

Shares?
Stock Promoters receive free trading shares a variety of ways.
To receive free trading shares lawfully the shares must be
registered with the SEC. Stock promoters receive illegally free
trading shares a few ways, including: (i) improper issuances
under Rule 504, (ii) transfers of unrestricted shares from third

Can A Third Party Stockholder Pay The Issuers

Investor Relations Firm?
If an issuer participates in investor relations activity or arranges
for a third party shareholder to pay for investor relations
services with its shares, the shares are restricted securities even
if they were not so in the hands of the stockholder.
The transfer and/or issuance of the shares to the issuers Stock
Promoter under these circumstances becomes an offering on
behalf of the issuer. As such, unless the shares are registered
with the SEC, they are restricted securities. In the case of Stock
Promoters paid in shares, their shares must be registered with
the SEC or the Promoters must comply with Rule 144.
Note that Section 5 imposes strict liability for sellers of
unregistered securities even if a legal opinion from a securities
attorney is obtained.

What Is Stock
Scalping?
Stock scalping refers to the illegal and deceptive practice of
recommending that others purchase a security while secretly
selling the same security.
Stock promoters who intend to sell during a promotional
campaign should specifically state in a disclaimer that he or
she intends to sell during the campaign. Prior sales should also
be disclosed.
Promoters should remember that the securities laws require
stock promotional materials to disclose certain information to
investors. In addition, the disclosures provided must be
truthful and complete so that investors are on even footing in
the market place.

When Is Broker-Dealer Registration

Required?
Section 15 of the Exchange Act requires a person acting as
a broker or a dealer in securities transactions to
register with the SEC. Both brokers and dealers are persons
who are engaged in the business of buying and selling
securities. Brokers arrange securities transactions for
others, whereas, dealers purchase and sell securities for
their own accounts. For purposes of the Exchange Act,
persons are engaged in the business of buying and
selling securities if they demonstrate a regularity of
participation in securities transactions.
Participation in a single, isolated transaction is insufficient
to require registration. Nevertheless, the SEC and the
courts interpret the phrase engaged in the business
broadly. Where investor relations firms locate investors for
the issuer, they are potentially unregistered brokers.

Continued - When Is Broker-Dealer Registration

Required?
In determining whether a person has acted as an unregistered
dealer, the primary question is whether they receive securities
as compensation as a regular part of their business.
If the Stock Promoter receives stock compensation from its
clients routinely in exchange for services, they are a dealer and
subject to the broker-dealer registration provisions.
In determining whether a person has acted as an unregistered
broker, other factors are considered, including whether the
person:
solicited investors for the issuer,
advised investors as to the merits of an investment,
received commissions or transaction-based remuneration,
is selling, or previously sold, the securities of the same or
other issuers, and
made investment recommendations.

If the Stock Promoter has any contact other than making

an introduction to investors or broker-dealers, he or she
risks being deemed an unregistered broker.
The failure to be properly registered as a broker-dealer
may subject that person to potential liability, including
criminal penalties, fines, suspension, and disbarment.
The potential harm to the issuer includes investor
rescission rights, meaning that they could demand
repayment of their entire investment. The issuer could also
find itself subject to sanctions and penalties from
securities regulators as an aider and abettor of the
activities of the unregistered broker-dealer and face fines
and prohibitions on future securities offerings.

For further information about the rules & regulations that

apply to investor relations activity, please contact
Brenda Hamilton, Securities Attorney at 101 Plaza Real S,
Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at
info@securitieslawyer101.com or visit
www.securitieslawyer101.com. Please note that the prior
results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com

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