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How Crypto Startup HUMBL Became the Best Penny Stock of 2021
In early February, a virtually unknown company, Tesoro Enterprises (OTCMKTS: TSNPD), suddenly found itself as the largest actively trading company in the OTC market. At a valuation of $ 7 billion, the company was briefly worth more than JetBlue Airways (NASDAQ: JBLU) and GoPro (NASDAQ: GPRO) combined. But there was one problem: neither the company nor its merged entity HUMBL still had a full-fledged operating business. Source: Shutterstock Instead, the joint entity was just an early stage – a dream and a series of test products proposed by the charismatic CEO and his team. Its multi-unicorn status was merely a product of its OTC share price – a number controlled by penny investors, not by the company itself. As the firm rides a second crypto-wave, one thing will become clear: the party is starting first. The rise of Tesoro illustrates a broader shift: retail investors have found their way into the world of past investments. The recent boom in SPACs, initial currency offerings and OTC stocks means that ordinary people can now buy in companies that were once only available to angel investors and venture capitalists. InvestorPlace – Stock Market News, Trading and Trading Advice The trend will not stop. soon; large investors’ pay days will ensure. As Wall Street and technology executives continue to stick to the accreditation of investor laws, retail investors will find more opportunities to make big profits or go home. After all, removing the exercise wheels cuts both ways. This means that runaway stocks such as Tesoro / HUMBL will occur more frequently. And only those who understand their anatomy can consistently benefit from this wild new world of early investments. TSNP Stock and HUMBL: A Marriage Made in Crypto-Land In November, HUMBL, a global payment company, merged with Tesoro Enterprises into a $ 10 million deal. Tesoro Enterprises itself was a relatively inactive company that sold on pink sheets without a prescription. Its final official financial filing by the SEC took place in 2007, where the “retailer of value-added ceramic floor and wall covering products” reported on its bankruptcy. After submitting another small offer in 2010, the company fell silent for more than a decade. HUMBL, meanwhile, was a hot start in the payments and blockchain space. The young company, founded by CEO Brian Foote, was named the “Best North America Startup” at the 2019 Blockchain Summit. Why would an onset of payments merge with a tile distributor? Without any apparent synergies, the management of HUMBL probably did the transaction so that they could access OTC capital markets – the wild west of finance. OTC markets: unimaginable prosperity and a setback of bankruptcy The establishment in Wall Street tends to look down on the OTC market. With minimal reporting requirements and off-exchange, scam companies can often be legitimate. This is also where many unlisted companies go after their shares become worthless. However, the OTC market is a lot like visiting Grandma’s house and getting ice cream for breakfast: it offers a do-it-yourself attitude that will make mom (i.e. the SEC) furious. Companies do not have to submit audited financial statements, which makes it a cheap place to do business. And OTC markets also allow companies to trade in legal gray areas. The Grayscale Bitcoin Trust (OTCMKTS: GBTC), for example, trades OTC, making it the largest non-business entity on the stock exchange. HUMBL Adopts OTC Markets During normal times, a startup like HUMBL would have completely ignored the OTC markets – instead of raising money from angel investors and venture capital. It’s a worn out road for promising young businesses to gain access to deep pockets and technological expertise. But because venture capital is increasingly focused on larger transactions at a later stage, HUMBL decided to follow a riskier path. The plan worked. Following the merger in November 2020, the TSNP share rose from one cent to more than 16 cents, a handsome return of 1,500%. Much of this came from a clever investor campaign – the song and dance that most startups perform for their VC overlords. HUMBL did the same for penny stock investors, and its earlier announcements created the intended result on its share price. But by the end of January, things started to get out of hand. In eight days, the company announced launches for international payments, e-commerce and blockchain products. Its shares immediately rose to $ 1.91, a gain of almost 20,000% from barely two months earlier. By the time the company announced the launch of its ‘BLOCK ETX Products’, its $ 7 billion market value surpassed the two pure blockchain companies listed on the Nasdaq Exchange: Marathon Digital Group (NASDAQ: MARA) and Riot Blockchain (NASDAQ): RIOT). There was one problem: HUMBL was still a startup. His products were a collection of test cases, or ‘minimal viable products’ (MVPs). VCs may have seen it all through and valued HUMBL in the tens (or hundreds) of millions of dollars. But they certainly would not have paid $ 7 billion for the firm. (To achieve the valuation, the firm would have to look like Uber at the end of 2013, the year in which the driving industry would reportedly earn $ 210 million on more than $ 1 billion worth of rides). However, OTC investors do not seem to care. Unexpected rise in HUMBL To understand how HUMBL became a $ 7 billion company, we need to go back to December 2020, when the company began a three-phase investor relationship pressure. Act I, December 2020: e-commerce. In that month, HUMBL launched HUMBL Holiday Deal Days, a destination for “highly compiled holiday deals, coupon codes and affiliate discount links in vertical stores such as electronics, health, beauty, home, fashion, fitness and kids.” Investors would have initially applauded the news. Just like grandma’s ice cream breakfast, only a killjoy can dismiss ‘highly composed holidays’. But experienced VCs checking the website humblpay.com would have noticed the true MVP nature of the product. Instead of fulfilling the promise of ‘highly composed’, the site places links to retailers such as World Market and Target as placeholders for future products. Act II, January 2021: Global Payments. HUMBL launches HUMBL Studios, a service for “global merchant registration and integration of internet payments”. Again, the ‘launch’ is an excellent start for an MVP, leaving room for a future payment system. A quick search on Builtwith, a website that checks technology platforms, and a quick call with the firm, confirm that HUMBL is running Stripe as a payment processor. Act III, February 2021: Cryptocurrency. HUMBL makes its most important announcement yet: “HUMBL Financial launches BLOCK ETX products in more than 100 countries.” The press release raised the shares of TSNP / HUMBL to its market value of $ 7 billion. And rightly so – financial firms have long tried to launch Blockchain ETFs for ordinary investors. The first company to reach it globally could become the next billion-dollar trading fund. However, keen readers would have noticed that the BLOCK ETX product is still in a beta testing phase. The outcome was ‘not intended to be investment services or advice, but is completely unsupervised’. In other words, BLOCK ETX is a representation of an ETF, not an ETF itself. (For non-crypto investors: this is the difference between buying a $ 100,000 sports car and buying a $ 50 manual on how to build one). The reality behind OTC companies This may remind cynics of the Fyre Festival fiasco, a luxury music festival in 2017 that ended with thousands stranded on an island in the Bahamas. While concert-goers promised ‘a luxurious getaway on a private island of Exuma, live music from top artists and partying with celebrities’, people mostly ended up in tents and styrofoam dinners. Many will fondly remember the viral photo of a cheese sandwich meant for the crew. But VC investors and HUMBL supporters will rightly disagree. HUMBL’s press releases look a lot like a startup book – filled with business dreams, visions and test cases about where the products can finally fit. But while investors in VC have not oversold themselves, the same cannot be said of penny stock investors. sent TSNP stock to the moon. Even more questions In a post-regulatory world, some may find this early stage investing quite exciting. TSNP shares would have made any quick-thinking cent investors extraordinarily rich. And virtually all VC-funded businesses go through a ‘fake-it-til-you-make-it’ cycle to raise capital and build world-class products. It’s not clear if that’s what’s going on here. After all, HUMBL’s BLOCK ETX product has incredible applications in the real world. There’s also a hero element: Brian Foote. HUMBL’s CEO has probably become a billionaire thanks to his initial investment in the business – an achievement that takes the most successful founding members of the start-up years, not two months. (This is of course if he bought at least 20% of the company on his penny days). But OTC investment also has costs: those who bought at the top of the TSNP ride would have seen their wealth torpedo as the TSNP share falls below $ 1. And Mr. Foote is not obligated to build the products that his firm promised to bring. With virtually no reporting requirements, he could easily sell his shares and walk away from the company without anyone ever knowing. Acquiring unrelated businesses may also worry investors who would rather see HUMBL expand its core crypto products. What can we learn? Audited financial statements are not perfect – many companies outperform reality and sometimes even falsify their numbers. But it is the most objective source of truth that investors have. Since the Sarbanes-Oxley Act was passed in 2002, corporate executives have now been jailed for misleading financial statements. However, investors in the early stages do not have that luxury. Instead, they face companies like HUMBL: a black box that could be the next PayPal or (very often) the next zero. Studies show that the average OTC investment drops by 60% every year. So which one is it? Investors in HUMBL have lost a total of $ 4 billion since the stock peaked in early February, before recovering just as quickly. But only when the company is listed on a major stock exchange again and publishes audited statements will investors finally find out what’s under the hood. Until then, we can all hang on to the dream that only penny stocks, VC-funded companies and slot machines can offer – that magic card that could one day become a beautiful winner. At the date of publication, Tom Yeung held no (direct or indirect) positions in the securities mentioned in this article. Tom Yeung, CFA, is a registered investment advisor who wants to promote the simplicity of the investment world. More from InvestorPlace Why everyone invests in 5G, all wrong. It does not matter if you have $ 500 savings or $ 5 million. Do it now. 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