The iSignthis Ltd (ASX: ISX) controversy is no nearer to resolution after the self-styled ‘paydentity’ business told investors the sudden suspension imposed by both securities regulators ASIC and the ASX was nothing to worry about.
In fact iSignthis claimed the suspension was good news as it gave it the opportunity to “clear up rumour and innuendo” around the business’s ownership structure and compliance with continuous disclosure obligations.
In its announcement the company referred to “significant media focus” over the ownership of iSignthis shares held in separate legal entities named iSignthis BVI and Red 5 Solutions Ltd.
According to the announcement, on 16 March 2015 iSignthis issued escrowed performance rights convertible into shares after two years (i.e. in March 2017) to the CEO, two family members, and a number of other named individuals.
It then denied that any directors or ‘related parties” have sold shares in iSignthis since its resisting in March 2015.
This is important because continuous disclosure obligations impose strict conditions forcing companies to disclose when directors or related parties (i.e husbands, wives, etc) sell shares in a business, as this is considered material information for public investors.
iSignthis also claimed that performance rights (convertible to shares) were issued to a number of individuals in Red 5 Solutions, but not of them were directors or related parties other than the CEO’s brother Andrew Karantzis.
The fact it claims none of Red 5’s iSignthis shareholders were legally definable as ‘related parties’ under its interpretation of the Corporations Act is important as this means it does not have to disclose whether anyone who held iSignthis shares in Red 5 had sold shares.
It did concede that the company secretary for Red 5 is the iSignthis CEO’s sister-in-law and different stakeholders are free draw their own conclusions from this situation.
Between March 2017 and September 2019 iSignthis shares went from 16 cents to as high as a $1.76 on the back of a series of announcements revealing huge growth in its gross processing turnover volume (GPTV) that it earns fixed fee revenue on.
Even at its last closing price of $1.07 it boasts a market cap of $1.17 billion as the share count and investor excitement balloons.
In its announcement it also reminded investors ‘two previous audits’ have been conducted on its revenue figures with ‘no material concerns arising’.
So while the company claims it’s done nothing wrong, the suspension imposed by regulators is highly unusual in an otherwise lightly regulated local market.
For now though there’s absolutely no suggestion iSignthis is involved in any malpractice itself.
Beware of other share market practices
On a different lesson for retail investors some of the oldest tricks in the share market book are still the commonest scams to avoid.
These include Ponzi or Pyramid-type schemes where newer investors’ money is used to pay off older investors to create the impression of a legitimate business offering excellent returns, while management pull out funds for their own enrichment.
There are many variants on Ponzi schemes, but on share markets they tend to involve companies raising a lot of capital and debt to pay off older investors and management. They will also tend to involve complex or opaque underlying investments and ownership structures that can help pull the wool over auditors’ eyes.
Recent examples include agricultural businesses Quintis Ltd (ASX: QIN) and Blue Sky Limited (ASX: BLA). Both collapsed after being exposed as scams and in hindsight showed some of the classic symptoms of Ponzi-itis.
These include opaque underlying assets in terms of valuation, unrealistic returns, conflicted management remuneration structures, undisclosed or complex related party transactions, excess capital raisings, and use of debt.
Pyramid schemes have operated for thousands of years in one form or another and regularly suck unknowing investors in.
A second classic mistake is to buy shares in companies that have great stories spun by numerous positive announcements, but no revenue or profit to show for it.
These companies tend to take advantage of less-sophisticated investors in story spaces such as pot stocks, blockbuster medical breakthroughs, huge mining deposits, or unprecedented industrial technology breakthroughs.
The share market trick of playing on investor ‘greed’ or fear of missing out (FOMO) goes back 300 years to the South Sea Co. Bubble of 1720, where every public investor lost all their money after being sucked in by the false promises of insiders running the business.
There are plenty of businesses operating on the local market that fall into the story stock category sucking in unknowing investors every day.
As a a word of warning if you want to make money speculating on these kind of story stocks you must be on the inside track with brokers and capital markets advisers to obtain shares at the IPO stage or earlier. You can then take advantage as the businesses’s stories are pumped onto local markets.
Otherwise you might end up a patsy after all the early shareholders have dumped stock.
The sometimes scary world of micro-caps is why serious investors tend to favour the blue-chip end of the market…..
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.