Could a circle of investors (plotting together) trade among themselves shares of a start-up company to make the company look as a worthy investment?

For example, the company has 10,000 shares and they buy 1,000 for $1,000 each to make the company look like $10,000,000 worth. Alternatively, they exchange 1,000 shares of one company created by them for 1,000 shares of a new company and claim it to be a deal worth $1,000,000.

Is that a common and viable strategy? Are laws protecting future investors against this kind of games?

1 Answer 1


Very simply, that's called a conspiracy to commit fraud with investment instruments. http://www.merriam-webster.com/dictionary/conspiracy

Is that a common and viable strategy?

It happens, though because it is illegal, it's probably (hopefully) not common. And since it's illegal, generally speaking, people view it as not very viable.

Are laws protecting future investors against this kind of games?

Yes. Read:

Securities Fraud https://en.wikipedia.org/wiki/Securities_fraud

Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws

In particular:

Pump and Dump: https://en.wikipedia.org/wiki/Pump_and_dump

Pump and dump" (P&D) is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.

Insider Trading: https://en.wikipedia.org/wiki/Insider_trading

Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to nonpublic information about the company. In various countries, trading based on insider information is illegal.

And: The regulatory and enforcement agency is the U.S. Securities and Exchange Commission

The U.S. Securities and Exchange Commission "holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States." https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

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