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Jan 17, 2023

Small-cap IPOs to get FINRA attention after wild price swings

Regulator releases report on major risks for 2023

The US regulator for broker-dealers has said it will pay close attention to small-cap IPOs after noting significant price swings shortly after listings take place.

In a wide-ranging report on supervision activities, FINRA says small-cap IPOs are an ‘emerging risk area’ and called on brokers to watch out for signs of manipulated trading.

‘FINRA, NASDAQ and the NYSE have recently observed that IPOs for certain small-cap, exchange-listed issuers may be the subject of market manipulation schemes, similar to so-called ‘ramp and dump’ schemes,’ notes the report.

NYSE building
NYSE building on Wall Street

The regulator ‘has observed significant unexplained price increases on the day of or shortly after the IPO of certain small-cap issuers,’ it continues. ‘These price increases appear to be associated with trading by apparent nominee accounts that invest in the small-cap IPO and subsequently engage in apparent manipulative orders and trading activity.’

Some victims appear to have fallen for social media scams, including a tactic known as ‘pig butchering,’ says FINRA. In this particular fraud, criminals give the illusion that invested money is generating a good return, encouraging the victim to pour in more and more. Once the individual runs out of funds, the scammers disappear with everything.

The IPOs in question normally raise less than $25 mn and the issuers or their subsidiaries are often located ‘in China or other foreign countries,’ said FINRA in a previous statement on the suspicious activity.

Further risks

Other areas of focus in the new report, which may ultimately impact IR teams, include mobile investment apps, cyber-security and fractional shares.

FINRA says it has witnessed ‘potential issues with some mobile apps’ where they do not properly distinguish between products offered by the broker-dealer and third parties.

These apps ‘raise novel questions and potential concerns, such as whether they encourage retail investors to engage in trading activities and strategies that may not be consistent with their investment goals or risk tolerance,’ says the regulator.

In addition, the report names cyber-security as one of the ‘most significant risks’ faced by member firms and customers, noting that FINRA has launched a new division – the Cyber and Analytics Unit – to oversee the cyber landscape and has increased outreach over potential threats.  

Fractional shares, where stocks are broken into slices to make them more accessible, are another market area under the spotlight. FINRA says it has noted some firms are not fully reporting fractional trade orders or implementing systems that track whether fractional trades are properly recorded.