“MICROCAP TERRORISM” – A Warning to OTC CEO’s [Guest Post]
Guest Post By: Mark R. Basile, Esq.There are many forms of terrorism in this world playing out right before us and we are all somewhat familiar with the political form, but what about the economic form. While there is no one specific definition of terrorism as applied to business, I have seen many companies fall victim to what I call “Microcap Terrorism”. I apply a very broad meaning to Microcap Terrorism when dealing with public markets. Microcap Terrorism comes in many forms as well. It is usually found as the underlying cause preventing you from raising real capital because a group of economic terrorist hijacked the trajectory or narrative of your company and this happens in many different ways with the result being eventual economic devastation.
Microcap “Funding” Terrorists:
A microcap CEO faces many challenges and one of them is raising capital to develop products, pay employees, establish distribution and sales channels, etc…… Unfortunately, the nature of the beast on the OTC Market for raising capital has moved from the once widely used PPM, to toxic funding, whether through heavily discounted convertible notes or the non-existent BS ELOC’s (Equity Lines of Credit). These funding’s are provided by Microcap “Funding” Terrorists. These types of “funding’s” are nothing more than clever ways to separate your shareholders from value and put enormous gains into the pockets of these so-called “funders”. These forms of funding usually create tremendous economic havoc on your share price once those discounted shares start hitting the market. I have seen clients stock go from $3.00 down to under $0.01 in less than 6 months and this is happening everyday to hundreds of OTC companies, right in front of you. Many of these types of transactions are so onerous they violate various state laws, but that’s a whole other discussion. The problem is that microcap companies are stalked by independent investment banker’s claiming they can raise money and introduce the company to the Microcap “Funding” Terrorists. The sales pitch is easy – we can close in 3 days, there are no regulatory issues to worry about, and we give you a one-year maturity date. The problem is that these are disguised transactions to be exempt securities purchase agreements but are really short-term loans and you end up using your company stock to repay the loan at the 6 month anniversary of the closing, of course, at a steep discount. Those funders have absolutely no interest in being an actual “investor” in your company because they are unwilling to take any risk in your company – they just designed these vehicles to acquire your stock at a steep discount so they can get it free from restriction and then flip it for an immediate large profit per share usually tanking your stock price. In a lot of instances, the toxic lenders broker actually shorts the stock before your company even delivers it to the lenders brokerage account, and you wonder why your stock price crumbles quickly. These types of loans fall within my definition of Microcap Terrorism because at the end of the day, these types of transaction cause economic havoc, panic and fear among microcap shareholders and investors.
Microcap “Trading” Terrorists
The Microcap “Funding” Terrorist can count on one thing, that the Microcap “Trading” Terrorists will not only identify quickly (through your 8K and other regulatory filings) that your company took these loans, but they will also emphasize the negative aspects of such loans for their own personal financial gain as well. Doesn’t matter how legit your company may be, they will needlessly attack, belittle, slander and even make up BS about the CEO or management all designed to depress the market so they can make money. They deploy the same “Saul Alinksy Rules for Radicals” tactics used in politics. Many stock message board visitors are there to search for real information about the company and to discuss the possibilities and future, but most of these public company threads have “bashers” that hijack any normal productive discussion of the company. I won’t go into the mechanics on how they do that, there are enough great articles out there on exactly how and why they do it, just be prepared because these terrorists are coming for you and they are relentless no matter how well you or your company does. Some of these stock message boards are breeding grounds for stock manipulators, intentionally creating turmoil through rumor and to show how bad you and your company really are. This is done solely as a tactic to scare your legitimate shareholders out of their stock by frightening them into selling, that there is nothing but doom and gloom for your company. Don’t count on the SEC or FINRA to help either. Almost every CEO and lawyer representing microcap companies I have spoken to about this has tried seeking their help, but to no avail. It is a completely unregulated platform that is designed for you to lose and for them to win. You and your company are now getting slammed by anonymous individuals posting on stock message boards so you unknowingly seek help from a third group of Microcap Terrorists.
Microcap “IR” Terrorists
Meet the third group of Microcap Terrorists, the Microcap “IR” Terrorists. The Microcap IR Terrorists hide in plain site because many IR firms are legit and do very good work. The two above terrorist groups sometimes lead the CEO to seek out help from this third group in an effort to try to combat them. While many IR firms offer great services and programs, they are usually up front and honest about what they can do and share with you how they plan to execute. However, The Microcap “IR” Terrorists have infiltrated the broader group of respected IR firms so the CEO must be careful. The Microcap “IR” Terrorists operate as their own terror cells within the IR market. They appear to be legit, many have client testimonials, some apparently have legit publications, professional sounding names usually with the words “Stock” or “Wall Street” in them, etc……. but they are “sleeper cells”, usually led by egocentric and greedy former stockbrokers who blend seamlessly into the community of IR providers. This is where “extreme vetting” comes in. The management team for your company needs to first do FINRA broker checks to see if the principal IR terrorist has been “flagged” or lost their brokerage license through some sort of disciplinary or enforcement action. The CEO’s intent in pursuing IR may be legit because he may feel he has to take steps to be able to have the market “absorb” the stock being converted under the notes of the first group of terrorists or to try to create more positive “awareness” to counter the negative onslaught bashing on social media by the second group of terrorists. BIG MISTAKE. First, most “IR” occurs on social media, where group number 2 thrives and they can spot a pump from across the globe, so there is nowhere to hide and they will hammer you relentlessly for it. The problem is that the CEO is sucked into these situations usually out of some form of desperation. Many of these Microcap “IR” Terrorist firms work for large monthly fees (because they have to buy large opt-in email lists from other companies, so don’t fool yourselves) as well as “restricted” stock. Yea, that’s right, stock. And they KNOW stock, as most of them are former brokers with connection with those who can help themselves “clear” their own stock in your company. Also being former brokers, they know every trading trick and illusion ever tried. Recently, an IR firm’s principal in New York (a former stockbroker – go figure) pleaded guilty to taking kickbacks from a microcap CEO who also plead guilty. It is not the first time this individual got into trouble and it probably won’t be the last unless he actually does jail time. However, there are many other sleeper IR cells that will seek you out. These types of IR Terrorists are the worst. They promise stock performance, charge ridiculous fees and then end up doing more damage to the company than good. When they don’t perform and you try not paying them for non-performance, they sue you. It’s inbred into their moral fiber, something that was actually taught at Stratton-Oakmont – never take no for an answer, they are never wrong on anything, and if things don’t work out, its not their fault, its yours. At the end of the day the buck does stop with the CEO, doesn’t it.
Economic and Corporate Terrorism comes in many shapes, sizes and forms, and while this is my opinion and my opinion only, I am sure many CEO’s have experienced this to some degree and felt the same way. All of this trouble stems from an initial or several bad funding deals and then the domino effect into oblivion as the CEO tries to correct it. Try considering alternative methods of approaching these problems such as microcap counter-terrorism programs, (workouts and restructurings), use extreme vetting (due diligence), and build a wall around your company (good legal and advisory) only letting in those who can really contribute to the success of your company. Everyone makes mistakes and you ARE allowed a do-over.
About Mark R. Basile, Esq.
Mark R. Basile, Esq. is a nationally known corporate restructuring and workout attorney and is a member of The Basile Law Firm, P.C.. The Firm represents numerous OTC and Pink Sheet companies in both litigation and corporate restructurings www.thebasilelawfirm.com. Mr. Basile is also managing director at www.otcworkouts.com
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The practices described above have been going on for years. Sadly, regulators take a negative view of the microcap markets and do nothing to protect against the predatory practices described in the article.
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This has been going on for years. This nefarious type of activity has bred a new type of CEO. These guys buy a shell for the sole purpose of milking unaware shareholders of their toxic business practices, all designed to line their pockets and those of their co-conspirators.
PPM investors looking to invest equity for the long haul are out there but it takes years not days, weeks or even months to find them. CEO’s must be willing to steadfastly stick to their business plan and not cave into these criminals.