Wealthy investors see opportunity in China, but need to steer clear of marketing scams
Americans wealthiest investors - those with a net worth of $25 million or more - see great potential in China, but regulators warn that a heightened interest in Chinese companies is fueling investment scams.
A high percentage of mega-millionaires - 66 percent - own international investments purchased through private hedge funds. These millionaires, typically sophisticated investors, see the most potential in China. India and Brazil come in a distant second and third.
Robust economic growth and strong performances by the Shanghai and Shenzhen Composite Indices make Chinese companies highly attractive to investors, but some of the firms promoted as low-priced China stocks have no actual connection to China’s stock markets, said the Financial Industry Regulatory Authority, a self-governing group.
“As with other market sectors, there are legitimate and not-so-legitimate ways to invest in China,” said FINRA in a recent investor alert warning investors about phone, fax, email and even cell phone text message scams touting hot China stocks.
“The fact that a company has 'China' in its name can be misleading,” said FINRA. “The company might not be incorporated or based in China, and it may be very difficult to assess how much, if any, business the company actually derives from China.”
Some stock promoters change a company’s name and trading symbol in an apparent strategy to link a stock with a current event or issue. One fax headline read, “Grabbing massive profits in China has never been easier than right now!” According to FINRA, the fax went on to promote a company whose shares were “ripe to pop” for “a low price that’s unheard of, and quite temporary.”
The stock being promoted had gone by five different names and trading symbols in five years, with none of the previous names even remotely suggesting an affiliation with China, FINRA said.
“Fraudsters use these efforts to pump up the stock’s price, then sell of their shares, usually leaving investors with a stock valued at much less than when they purchased it,” FINRA said.
Most unsolicited spam recommendations involve stocks that can’t meet the listing requirement of registered national securities exchanges, such as the NASDAQ Stock Market or the New York Stock Exchange. Instead, the stocks may be quoted on an Over-the-Counter platform. As of April 11, 2011, more than 300 companies with ‘China’ in their name were quoted on the OTC market, compared to the 50 trading on the NASDAQ, 27 on the NYSE and the 12 on the NYSE Amex Equities.
OTC platforms do not require companies to file annual or quarterly reports with the U.S Securities and Exchange Commission, a federal regulatory body. OTC securities can trade infrequently and can be highly illiquid and difficult to sell.