A boiler room is a telephone operation where salespeople cold-call a list of potential investors, in an attempt to get them to invest in stock, services, or goods. These salespeople may convince people to invest by making false claims, exaggerating the value of an item, misleading the potential investors about the risks, discouraging potential investors from conducting research, pressuring potential investors to purchase right away, and other deceitful tactics. They often target potential investors who don’t have much knowledge on the item being sold to them.
Congress has passed a few statutes to stop this deceptive behavior. Securities and Exchange Commission Rule 10b-5 prohibits broker-dealers from giving out false or misleading information, leaving out material information, and other deceitful activities. The Penny Stock Reform Act requires penny stockbrokers to adhere to a set of disclosure requirements when speaking with potential investors. But some boiler rooms will choose to operate outside of the country they target, in order to avoid the target country’s legal system.
[Last updated in June of 2021 by the Wex Definitions Team]