Where the promotion arrives, and it is not one channel. The SEC lists the routes by which false or misleading information about a stock may be spread: "social media, investment research websites, investment newsletters, online advertisements, email, Internet chat rooms, direct mail, newspapers, magazines, and radio." The list is worth reading because it shows the promotion does not have to look like an advertisement. A research-looking website, a subscriber newsletter, a chat-room consensus and a magazine article are all on it, and each carries more apparent independence than a paid advert would.
Paid promotion has its own statute, and it is the single most checkable thing about a promotion. Section 17(b) of the Securities Act, 15 U.S.C. 77q(b), makes it unlawful for any person to "publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof." Note what the provision demands: not merely an admission that the writer was paid, but the fact of payment and its amount, including payment that is only prospective and payment received indirectly. A promotional piece with no compensation disclosure, or one whose disclosure says a fee was received without saying how much, has failed the statute's own terms.
Why a small, thinly traded company suits the mechanism. The SEC's stated reason is informational: "Microcap companies are particularly vulnerable to pump and dump schemes because there is often limited publicly-available information about microcap companies." Where there is little to check against, a promotional claim cannot easily be contradicted. A second feature follows from size rather than from disclosure: in a stock where few shares change hands on an ordinary day, a modest amount of new buying moves the price a long way, so the promotion does not have to reach many people to produce a chart that looks like discovery. The SEC's vocabulary here is worth having: the term "microcap stock", it says, is "sometimes referred to as 'penny stock'", applies to companies with low market capitalizations, and companies below roughly $250 to $300 million are often called microcaps, while those under $50 million are sometimes called nanocaps.
The tell that is available before the price moves. Almost everything else about a promotion is contestable, but the promoter's own position is not. Ask who holds the shares, how they got them, at what price, and whether they are free to sell. A promoter who acquired stock cheaply and is free to sell into the demand they are about to create has an interest opposite to every reader's, and that fact does not depend on whether their claims about the business are true. The compensation disclosure required by 15 U.S.C. 77q(b) is where that information is supposed to appear.
What this is not. It is not a Ponzi scheme: there is a real security, a real market and real trades, and nobody is being paid fabricated returns out of later entrants' money. Why the conduct is unlawful as a matter of law — the material misstatement, the state of mind required, and the connection to a purchase or sale — belongs to the wider subject of securities fraud, and where to report a loss belongs to the wider subject of fraud.
