In today’s digital era, social networks and online platforms offer a myriad of possibilities for investors, from tips on the most promising stocks to the latest investment opportunities. However, behind the facade of free expression and democratization of financial information often lurk insidious traps, especially for private clients who can easily be misled by biased or fraudulent information sources.

Too often, investors fall into the trap of chasing profits and relying on analyses whose accuracy or relevance they cannot objectively verify, or even worse, by relaying them to other groups and recommending their content.

The Mirage of Expertise
One of the most common pitfalls in this area on social media is the cult of personality surrounding certain self-proclaimed financial influencers, bloggers, or podcasters. On platforms like X (exTwitter), YouTube, or TikTok, these “experts” claim to offer foolproof advice for succeeding in the world of finance.

However, all too often, the lack of regulation and hidden motivations, such as promoting their own investment portfolios or market manipulation for profit, can lead to disastrous consequences for savings.

The “Pump and Dump” Method
A classic example of fraud perpetrated through social media is what’s known as “pump and dump.” In this scam, fraudsters massively buy cheap stocks of a little-known company, then use social media to spread false or exaggerated information about the company, artificially generating excitement around its stocks. Inexperienced investors, lured by promises of quick gains, in turn buy stocks, driving up prices. Once the stock price reaches a sufficiently high level, the fraudsters sell their stocks at a profit, leaving deceived investors with worthless securities whose prices quickly collapse.

Stocks in High-Risk Sectors
In the investment universe, micro and small-cap companies operating in high-risk sectors (such as tech, mining, biotech, etc.) are often prime targets for manipulators. Seeking to exploit the method described above through social media posts, they tout their growth prospects, claiming, for example, in the case of mining companies, discoveries of massive gold deposits in a remote region. These posts are supported by false statements that experts have validated the discoveries, prompting many investors to massively buy stocks of these companies. Once stock prices have reached artificial highs, the instigators sell their own shares, making substantial profits, while gullible investors are left with significantly lower-value securities.

Numerous examples of such abuses can be found on the official websites of the Canadian or U.S. governments reporting these frauds.

The Influence of Reddit
Reddit, with its numerous investment-focused communities such as r/WallStreetBets, has gained popularity in recent years as a platform where investors share tips, analyses, and investment ideas. However, the anonymous nature of Reddit makes it difficult to verify the accuracy of shared information, leading to rapid spread of fake news and erroneous analyses.

A notable example is the incident involving GameStop (GME) in January 2021. Users of r/WallStreetBets launched a coordinated buying campaign of GME stocks, pushing the stock price to astronomical levels. This created a situation where unsophisticated investors bought stocks at very high prices, often influenced by crowd enthusiasm rather than solid fundamental analysis. When the bubble burst, many investors suffered significant financial losses, including some hedge funds whose short positions have been stopped (short squeeze).

SPACs
Popularized in 2020 by investor euphoria, the emergence of Special Purpose Acquisition Companies (SPACs) represents a significant trend in the investment world, offering investors an alternative to traditional initial public offerings (IPOs). SPACs are publicly traded companies created for the sole purpose of subsequently acquiring an existing private company, usually within a two-year timeframe. This structure allows investors to invest in a company even before it has been identified, based on the reputation and expertise of the SPAC’s promoters often relayed by podcasts or blogs.

While these SPACs offer a potential pathway to investments in promising companies, they are not without risks. One of the most common dangers associated with SPACs lies in their speculative nature. Investors may be attracted by the promise of quick and high returns, without fully understanding the underlying risks. Additionally, the process of acquiring a company by a SPAC can sometimes lack transparency, making it difficult for investors to know the specific details of the target company before the transaction is completed.

Another major concern is the potential for conflicts of interest. SPAC promoters often have incentives to close deals quickly to avoid interest losses accrued on funds raised during the SPAC’s IPO. This can lead to pressures to finalize transactions that may not be in the best interest of investors.

As recently as January 2024, following numerous abuse cases, the Securities and Exchange Commission (SEC) adopted new rules and amendments aimed at improving information and strengthening investor protection in the framework of IPOs by SPACs and subsequent merger transactions between SPACs and target companies.

Warning Signs to Know
For investors eager to navigate the tumultuous landscape of social media, it is essential to recognize red flags that could indicate fraud or manipulation:

Unrealistic Return Promises: Beware of messages or posts promising high returns with little or no risk. Every investment carries some level of risk, and promises of easy gains are often too good to be true.