Boiler rooms use high-pressure selling techniques to persuade UK investors to purchase shares in companies that are usually based overseas. Boiler rooms are not authorised by the FSA and act illegally by selling and promoting the sale of shares in the UK. In the majority of cases, the shares being sold are worthless and the boiler room vanishes, leaving the investor out of pocket. But the FSA is aware of a new trend where some boiler rooms are selling shares in companies based in the UK.
The scam
In a typical scenario, a boiler room would approach a small UK company and propose to raise capital by selling £100,000 worth of shares in that UK company on their behalf. Of this £100,000, the boiler room would take 60% as their fee, leaving the small company with £40,000 capital. In reality, the boiler room will cold call UK investors to sell the shares at anything from 10 to 100% over and above the agreed price, take their fee and vanish.
In some circumstances, the investor can demand a refund from the UK company, which may then be required to pay back the full price of the shares sold, even though it only received a percentage of the takings.
David Mayhew, acting Director of Enforcement at the FSA, said: "This is a new money-making scam by boiler rooms. It is particularly worrying, not only because investors are being enticed to pay over the odds for the shares but the UK company whose shares are being sold by a boiler room could potentially face financial losses and damage to its reputation.
"If the boiler room is taking a large percentage of the funds raised, many small companies would struggle to refund investors with the full price that was paid for the share. Both investors and the small company will be left considerably out of pocket.
"Regardless of where the company is based, investors must be sure they know who they are dealing with before they part with their money. A UK company may feel like a safer prospect to investors, but if they are buying shares through a boiler room, which will not be authorised by the FSA, they will not get the benefit of the UK compensation and complaints schemes.
"We recommend that UK companies approached with a capital-raising idea consider seeking their own independent legal advice and check who they are dealing with before they allow them to sell shares or find potential investors on their behalf."
Case studies
- In one case known to the FSA, a small UK company was approached by a boiler room, coincidentally just when they needed to raise capital. The firm offered to find potential investors for the company in return for commission, which later turned out to be 90% of the share price. Until the FSA contacted them, the company was not aware that it was a boiler room selling their shares.
- In a second case, a small UK company was told by a boiler room that they had a large investor base who had specifically asked to be notified of investment opportunities in growing companies. It soon became obvious that there was no investor base and a boiler room was cold calling prospective UK investors, so the UK company terminated their dealings with them.
Small UK companies should be aware that dealing with unauthorised overseas firms could lead them into serious financial difficulties and cause them reputational damage.
Investors and companies can check that a firm is authorised by visiting the firm check service on the FSA's consumer website.
The DTI
The DTI fully supports the FSA's warning to UK companies and investors and points out that in most circumstances it is a criminal offence for a private company to offer its shares for sale to the public. ( A private company is one whose name ends with the word Limited not Plc. ) Any company that offers its shares to the public for the first time -except for listed companies, whose shares can be bought and sold freely on a stock market - must publish a prospectus setting out the terms of the offer. There are exemptions from this requirement. The DTI suggests that a company thinking about offering its shares to the public, and any prospective investor thinking about purchasing such shares, should seek advice if in any doubt about the legal requirements.
