We see a few r/investing members getting caught in these type of scams every month, I hope this AMA serves as an important lesson and gives you insight into how this game works.
Back in the late 90's I was your typical university student, I was already involved in the stock market, mostly airline stocks for some reason (word of advice, airline stocks are the walking dead of the stock market world, they all going bankrupt at some point! lol). I can't remember if it was on the Yahoo boards, but some person was asking if anybody could design a website. I was proficient with notepad and html, so I replied back to the guy that I could make him a site for a few hundred bucks. Being a student, this would go a long way in topping up my gas tank and paying for a few drinks at the bar that weekend.
He accepted my offer and I whipped up a very simply one page site on some free hosting service, I think it was geocities (remember that?).
The site was about mining stocks, which were all the rage in the mid 90's because of a company called Bre-X. That in itself is another amazing story that we should discuss at some time.
I got paid for the site and then got a small monthly fee to keep it updated with what ever material he would send me, usually press releases on the four to five companies on the site. I never gave it much thought, I had no interest or knowledge about mining companies.
The next request I got from him was to start a newsletter so that people that visited the site could enter their email and we could send out email alerts rather than wait for them to come see news on the site. This was a new and great idea at time! He was not very computer savvy so he would send me the newsletter and ask me to send it out.
The guy was a terrible writer, lots of spelling mistakes, bad punctuation and horrible grammar. I felt bad sending out his newsletters without fixing them up first, so I started editing his material.
Before I knew it, I was writing newsletter on mining stocks, thus began my journey into the world of penny stock promotions!
While my activities were limited to updating a website and writing or re-distributing material for clients, I did get to see how some major IR firms (investor relations firms for penny stocks are basically the promoters, I use these terms interchangeably) operate. And yes, it's worse than you thought!
By the late 90's and early 2000 I was mostly out of the penny stock business, the tech bubble had begun and I had moved onto large caps at that point.
Have you wondered why or how these small caps pop and drop?
Have you ever received some mailer with information on a stock that looked too good to be true?
I am here to answer your questions about the shady and moldy underbelly of the small cap markets! AMA!
Here is a comment from another poster
Some do, some don't.
You're a previously established broker/promotor/"venture capital" guy. You call your lawyer buddy up and say "I want some POS shell incorporated in Delaware. Then I want you to get me an OTC:BB listing for said shell." The lawyer does all the work, gets a bit of cash and a ton of share+options for his work. The shell starts trading at $0.01 and no volume.
You call one of your other POS friends and ask if they know anyone with some kind of tech company/mining operation for sale. He says "yeah, my buddy is bleeding money on his XYZ website-- he'd sell for practically nothing."
You put on your Rolex Submariner, a $200 polo shirt, cheap dress pants, no socks and your Rockports and go for a meeting. The owner talks up his site a little, but he knows it's going to always lose money. You offer him stock, options and some cash out of whatever financing you do.
You go to your shitty IR friends that run superstoxxxx.com and offer them a couple hundred thousand shares in exchange for an email blast, some video interviews and basically worthless coverage. You go to your other IR friend who runs a boiler room for shitty OTC stocks and offer him the same deal (I worked for one of these companies). Everyone agrees to do it.
Your shell company now has a subsidiary, congratulations. Now you need to finance it. Your shitty IR guys are offered a decent commission on your first private placement, offering 1 share and 1 warrant for $0.10. You somehow manage to raise $500,000 by telling your sucker investors that a big press release is coming out in a few weeks. You cut the original owner a cheque, yourself a cheque, the lawyer a cheque, your mom a cheque, your cousin a cheque-- everyone gets a cheque.
Just before the press release, the boiler room gets to work. They tell potential marks "I can't really tell you this, but a big press release is coming out in a few days." Volume starts to build and you're at $0.03 (you, the lawyer and whoever else you gave shares to are selling, FYI). The original owner may or may not have started dumping as he/she probably has a few million shares to get through. You and your other buddies are crossing shares, propping up the bids-- anything to keep the volume up before the 'big presser'.
Finally the press release comes and it's mediocre at best. It's emailed to 10,000,000 people, but basically no one buys in. The websites generate mild sentiment...
The IR guy/girl's phone however is ringing off the hook from people who invest in the PP and got hosed. People show up at the office looking for blood. You tell them some bullshit story about "9/11, the tech bubble, Hurricane Katrina..." whatever it can be blamed on at the time.
The bullboards light up with "didn't you check the EDGAR filings and see that soandso was the lawyer and soandso was the CEO?!" You have some shills on the board and they help mitigate the blowback, mostly reporting the legit guys as spammers.
Now, the original owner is still drawing a salary and has made a bit of cash off the stock, so he's sticking around, but the employees are bouncing their cheques and crying murder. The owner comes to you and says you need more money. 6 months has past since your last PP, so you line up to do another one.
The stock pops again, the owner sells a bunch more as do you, your lawyer etc.
Eventually you run out of suckers and it's time to wind down the company (not the shell). You sell whatever original intellectual property back to the owner and you find another company to buy.
The original owner still thinks the idea can work, so he effectively invests all of his profits back into the company and watches as it fails over the next 6-12 months.