How the micro-cap sector is built on hot air

Small companies are paying thousands of dollars a month to be spruiked to investors via paid content as a new breed of promoters cash in on traditional retail brokers exiting the space, a trend that has prompted increased regulatory action by the Australian Securities Exchange.

StocksDigital, a Melbourne-based firm, is offering a package that promises an “immediate effect on market”, or what’s known in the industry as a “sugar hit”.

“As you have experienced, once these articles go live, clients see immediate effect on market,” an email sent to a potential clients explained. 

StocksDigital is one of about a dozen operators including Stockhead, Bulls N Bears and enduring online forum Hot Copper that are competing to promote micro and small cap stocks to retail investors. They are an increasingly important channel to help raise capital. 

The ASX, which regulates company disclosure and polices keeping the market properly informed, is increasingly focused on the sector.

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“We have had cause to take action on fronts that are more unusual than traditional over the last six to 12 months, such as sponsored content and use of social media, even though they have long been areas we’ve monitored,”  ASX spokesman Matthew Gibbs said, noting advertorials in newspapers including The Australian Financial Review  were a popular platform earlier in the year. 

“ASX is very alert to promoters using various social and other media platforms to ‘promote’ or ‘pump up’ stocks to which they’re connected. And we’re also alive to the issue of ‘independent’ research funded by companies themselves.”

A spokesman for The Australian Securities and Investment Commission, which is focused on real-time market surveillance for investigating alleged market manipulation, said they were alert to the rising trend. 

Within the industry there is also concern, as well as recognition, that there are few other effective ways to get the word out about micro-cap stocks, some of which have been outstanding performers.

In June of this year, Stocks Digital, one of the earliest and largest online stock promotion websites, wrote to now prime minister Scott Morrison to outline their concerns.

“Businesses such as ours who are disadvantaged in the marketplace by the same unauthorised and unlicensed persons. These persons continue to offer and promise ‘Riches’ to investors with seeming impunity,” wrote StocksDigital in the letter. 

The letter called out five competitors it felt the regulator should be paying more attention to, although in a copy of the letter seen by AFR Weekend the names were redacted. 

StocksDigital asked Morrison “to direct the attention of ASIC and its investigators at these organisations and ensure Australian investors … are protected from those who publicly and defiantly fail to comply with the law and manipulate the market with snake oil promotions”.

As one of the earlier movers in this market, it’s a bold step for StocksDigital – which has many of its own critics in an increasingly snipey, but booming area where news is blurred with promotion. 

New breed of stock promoters

Just months ago, StocksDigital was weighing up the merits of its own sharemarket listing, telling potential investors it was generating profits of about $2 million a year. 

As micro-cap companies rush to market, the cottage industry that had been restricted to those with a moderate social media following has institutionalised and professionalised.

But for many, it’s still a relatively opaque world that is forging a different set of rules.

Businesses have been built to cash in on the paid promotion of small companies, many of which are seeking ways to market directly to retail investors who can be critical in getting an IPO over the line, due to the “spread” rule which requires 300 or more investors to invest a minimum of $2000.

“Their simple premise is ‘the days of going to brokers is gone so why don’t you come to us. We know where the investors are and we can help you find them’,” says a corporate adviser.

“But they are not [all] licensed, not regulated under the Corporations Act and are just promoting stocks willy-nilly.”

StocksDigital said regulators were “having a bit of trouble keeping up” with the new breed of stock promoters. 

“The new wave of unlicensed stock promotion via social media, blogs and news websites is the wild west and difficult to police,” it said, adding StocksDigital operates under an Australian Financial Services Licence with accompanying regulation.  

“Helping investors make informed decisions is about cross-checking facts, intelligent interpretation, and full disclosure … These days anyone can spin up a $30 website and try to charge thousands of dollars to promote a stock with little accountability to either investors or the companies.”

Blurred lines

It can be hard to tell what is paid for and what isn’t. Mainstream media publications, including The Australian Financial Review, regularly run paid-for advertorials which are used by companies to promote their businesses.

Sometimes, they too can overstep.

In presentations to market participants, the ASX has highlighted issues with disclosure of customer contracts, including announcing contracts without any details, disclosing revenue projections that do not have a proper basis. More relevant to social media promoters or newsletter writers is the use of commissioned research reports to publish “objectional material”, including forward estimates that haven’t been released to the market.

It’s an industry that has helped propel a hashtag: #DYOR – do your own research – to a whole new level.

StocksDigital, which lists Big Un, Creso Pharma, Lithium Australia, Orinoco, MMJ Phyotech and Milestone Sports as clients on its website, charges $19,500 for a typical three-month “engagement”, according to one quote, and the client would be expect to reach 11,000 “targeted and engaged investors”.

Sometimes this can be paid for in company scrip, sometimes cash. StocksDigital breaks down the three-month fee into $5000 for the initial engagement and $3500 for each month after that. And they say the “large, in-depth article” guarantees 5000 readers with a minimum view time of 4.37 seconds. Additional investor articles are $7500 for one or $20,000 for four.

There’s also booster packages – for an additional fee.

Another service which blurs the lines between promotion and news is Bulls N Bears, a joint venture involving Business News. It says its point of difference is that it “guarantees coverage in The West Australian“, including a daily breaking news email bulletin loaded on to The West Australian’s website, posted to the The West Australian‘s Twitter account and The West Australian Facebook account. The cost? $1575 a month. The same monthly fee also covers managing the company’s Twitter account. 

“Our stories go out under the banner of existing mainstream news media outlets which adds considerable news credibility to them” is part of the pitch, according to an email.  

When contacted by the AFR Weekend, Bulls N Bears said: “Our clients do not pay us for the news content of the articles but rather they pay us to ensure their ASX news is actually covered – how we cover it [is] how we see it.”  It said the company would not take stock or options for its services.

“For whatever reason the mainstream media has gravitated towards large-cap stories over the last decade … there is still a very strong market interest in the activities of small-cap companies that are doing interesting things.

“Bulls N Bears exists to ensure that the news relating to the next big tech play or the next massive biotech breakthrough or the next big lithium find is covered along the way before it becomes obvious to the wider news audience.

“We can smell a beat-up a mile away too and, whilst it doesn’t happen all that often, we won’t hesitate to walk away from those companies who are just relentlessly trying to whip the donkey that won’t move because it has no ability.”

Also in the mix is Stockhead, which has told potential clients it is targeting coverage of two positive articles for every 1.5 negative articles across the site, which the company denied. 

“There is not – and has never been – a ratio or any policy regarding ‘positive’ to ‘negative’ stories on Stockhead. Editorial decision-making is based solely on newsworthiness,” Stockhead said. The company does not accept scrip as payment.

The cost of working with the platform is variable; the offering starts at $4000 a month.

Stockhead is owned by AG Media Investments, which has some common shareholders with investor relations firm Media & Capital Partners. Like more mainstream publications, the pitch to clients is that the sponsored content is labelled “special report” and interspersed with news stories. The claim is 75 per cent of the website’s content is independent. (The website says 100 per cent of the journalism is independent, presumably excluding sponsored content).

​And, despite these newer upstarts, stock forum HotCopper is a stayer in the spruiker infrastructure. The influential platform listed on the ASX in 2016.   

The company says in its marketing pitch that it is the largest financial news site with more page views than Google Finance, the ASX, news.com.au and The Australian Financial Review per Nielsen ratings.  It says the $12,000 spend for its Corporate Spotlight package – effectively a banner advert on the company’s forum home page – will increase its audience by 3.5 times.

Hot Copper charges $12,500 a time for an email blast to its large base of registered users. A few years ago that was closer to $20,000. The company says that reduction is due to increased competition, as well as a move away from the so-called “sugar hit” or one-off promotion to more sustained campaigns that roll out over a year. The site gets about 10,000 posts a day, with about 150 reported for moderating and 40 per cent of that number cleared.  

HotCopper said that, while the company doesn’t take shares or options for services, it sometimes will take a “matching stake” in an equity raise. In other words, it will invest the cash it has been paid for services in the company. The company said the shares were voluntarily escrowed for six months, and the portfolio managed by Perth broker Euroz. The board therefore doesn’t make portfolio decisions, removing potential conflicts of interest. 

But last year regulators demanded that the company disclose that these were paid advertisements from the company and that HotCopper did “not endorse, approve or have responsibility” for the offers and statements.

“We see our biggest competitor as Twitter,” HotCopper said. ​

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