Charlotte start-up’s stock gets rave reviews – but read the fine print

Charlotte entrepreneur Bob Gruder gained national attention in the 2000s for competing against stun gun maker Taser International.

Now he’s looking to challenge GoPro, which sells action cameras used by everyone from surfers to parents.

Gruder’s latest start-up, Life Clips, has minimal revenue and its shares trade for less than $1. But since early May it’s been getting rave reviews on a web site called Tech Stock Insider.

Life Clips “could be one of the most impressive tech stocks the street has seen in a very long time!” a May 11 post says.

A closer look at the site’s fine print, however, explains the positive coverage: Life Clips paid Tech Stock Insider for placement on the site starting May 4.

The Securities and Exchange Commission cautions investors that small publicly traded companies may pay stock promoters to tout their shares in investor newsletters or increasingly on social media. It’s legal for companies to do so, as long as as the publisher of the information discloses the arrangement.

The disclosure on the Tech Stock Insider site, operated by Midam Ventures LLC, describes the firm as “paid advertisers, also known as stock touts or stock promoters who disseminate favorable information...about publicly traded companies.”

Gruder, who took Life Clips public last year, says he hired Midam for investor and market awareness, not to promote the stock. He says Life Clips is working hard to get information out to consumers and build the company’s brand.

“We find it important to make sure that more people know about us because the hardest thing for a start-up company is to make people know who they are and get their word out,” Gruder said in an interview in his south Charlotte office suite.

Life Clips initially paid $225,000 for placement in Tech Stock Insider and in written materials through Aug. 1, according to a disclosure on Midam’s site. That was extended from Aug. 9 through Nov. 9 in return for 500,000 shares of restricted Life Clips stock, the site says.

The disclaimer says the trading volume and price of the stocks Midam profiles will likely “increase significantly” during promotional campaigns and “decrease dramatically” when they end. As a result, investors who buy during a campaign and hold shares until the end “will likely lose most, if not all, of their investment,” the disclaimer says.

Since the promotion began, Life Clips shares have climbed from about 26 cents on May 3 to as high as 76 cents on May 18. Lately, they have been trading below 40 cents, closing Wednesday at 37 cents. The trading volume has grown from about 6,000 shares on May 3 to more than 1 million on some days.

Gruder says “no one at Life Clips is promoting the stock” and that he doesn’t control Midam’s message about the company. “We hired the investor relations firm to bring visibility to Life Clips and not tout the stock,” he said. Disclaimers are required “due to our litigious society,” he added.

In a statement, Gary Henrie, a lawyer for Midam, said Tech Stock Insider’s disclaimer meets SEC requirements. He compared the disclaimer to Food and Drug Administration warnings that caution users about possible medicine side effects even though they are unlikely to experience them.

“It should not be assumed that the provisions of an (investor relations firm’s) disclaimer apply to all clients,” Henrie said.

SEC urges caution on penny stocks

Life Clips is an example of a penny stock – low-priced stocks issued by the smallest of companies.

These securities are found in over-the-counter markets, not better known exchanges such as the New York Stock Exchange and the Nasdaq. They can range from young start-ups to more widely recognized international companies.

The SEC says penny stocks are historically more volatile than the stocks of larger companies, and the regulator says investors need to be careful when they put their money into these securities. One warning sign for investors is if a company’s stock is more heavily promoted than its products or services, the SEC says.

“If you’re going to invest in this area approach with caution and be prepared to lose your full investment,” said Lori Schock, director of the SEC Office of Investor Education and Advocacy. She would not talk specifically about Life Clips.

Life Clips became a public company in October 2015 after a private company Gruder owned acquired a publicly traded movie company, called Blue Sky Media. Gruder said some of his company’s investors encouraged him to go public, and it has helped him raise capital.

Gruder is the company’s biggest shareholder, with 46 percent of the 63 million shares outstanding, according to securities filings.

Life Clips shares trade over the counter, but the company this month said it’s taking steps to move to a better-known exchange.

The company on Aug. 15 filed a registration statement with the SEC to sell shares to raise up to $7.8 million from investors as part of a plan to meet the capital requirements needed to “up-list” to the Nasdaq exchange.

There is no guarantee the company will be able to sell the shares, according to the filing. The switch to the Nasdaq could take place between the end of the year and the summer of 2017, Gruder said in a news release.

Software and stun guns

Over his career, Gruder, 57, has run a series of companies that have experienced highs and lows.

In 1993, the New York City native moved to Charlotte and soon saw an opportunity in helping companies transition their technology from the year 1999 to 2000.

Alydaar Software became one of the fastest-growing technology companies in North Carolina, but it ultimately struggled to generate new revenues as the year 2000 passed by. Gruder left the company, renamed Information Architects, in 2002.

Two years later, Gruder was running Stinger Systems, the stun gun manufacturer. Rival Taser responded by filing patent infringement lawsuits against Stinger.

“I had underestimated what a bully Taser was going to be,” Gruder told the Observer. “We had spent millions in lawsuits.”

Taser spokesperson Steve Tuttle responded by saying, “Imitation is the sincerest form of flattery.”

In addition to Taser’s suits, the SEC in 2008 filed a civil complaint alleging Stinger and Gruder made “a series of material misrepresentations and omissions regarding Stinger’s ‘flagship’ stun gun product.”

Months later, Stinger consented to a judgment barring the company from future violations of securities laws, without admitting or denying the allegations. Gruder, however, did not settle the claims filed against him personally, and in 2010 a judge ruled the government failed to prove its case. He didn’t have to present a defense.

“For me to have won convincingly by not even having to defend, I think it speaks for itself,” Gruder said. He says he lost $1.5 million of his own money while at Stinger and never sold any of his stock in the company.

Opportunity in video

During his Stinger tenure, Gruder, who is married and has two grown children, moved to Tampa, Fla. But he returned to Charlotte a few years ago.

His latest venture, Life Clips, grew out of an earlier attempt to sell body cameras to police departments.

“I knew ... from my Stinger days that video was getting hot,” he said. “It seemed like an opportunity to get into.”

During the interview in June at his Cotswold office, tucked behind a bank branch on South Sharon Amity Road, Gruder showed the Observer Life Clips’ initial version of its camera.

The camera resembles a small square GoPro camera, and he says it has similar features. But it’s available for $169, compared with GoPro cameras ranging from $199 to $499.

Gruder also highlighted Life Clips’ acquisition of Batterfly Energy Ltd., an Israeli-based battery maker that makes disposable batteries for phones and cameras under the Mobeego brand name. Life Clips, which used cash and stock for the purchase, has announced a number of deals to sell the batteries at retailers worldwide.

In June, Gruder said Life Clips had four employees, including himself. He works with third-party engineers and manufacturers to build the cameras, he said, but he did not provide names.

“We are meeting our business objectives and will be hiring more (employees) in the near future,” he said in an email this month.

In the email, Gruder said the company began selling its products in July but that he can’t discuss sales because they haven’t yet been publicly disclosed. Feedback on the camera and battery products “has been very positive,” he said.

He says he has put his own money into the company and hasn’t made a profit from the venture. In 2015, he received a salary of $80,000, according to a securities filing.

In taking on GoPro, Life Clips is competing with a dominant industry leader, said Christopher Chute, an analyst with the International Data Corp. “If you want to beat GoPro it’s going to be difficult,” said Chute.

But Gruder said he relishes the challenge of being a start-up.

“Being an entrepreneur is about making something happen from nothing,” he said. “That is why I do it, and why I love it.”

Coverage remains positive

Life Clips, however, still faces major financial challenges.

In the quarter ended March 31, Life Clips had a loss of $194,215 on sales of $534, according to the filing for its stock offering. The company also said it had a shareholder deficit of $5.58 million, meaning its liabilities exceed its assets by that much.

The company’s auditors have issued an opinion raising “substantial doubt about its ability to continue as a going concern based on its current financial position,” the filing adds.

Life Clips “is not an investment that someone should consider unless they have a risk tolerance that would allow them to lose their entire investment,” said Tom Hazen, a professor at the UNC School of Law who specializes in corporate, securities and commodities law, referencing the disclosures in the filing.

“Some start-up emerging growth companies like this one do succeed,” he added, “but in most cases like this, an investor would be betting on a longshot.”

Despite Life Clips’ challenges, Tech Stock Insider’s coverage of Life Clips remains upbeat. The disclaimer on the site says it is paid to publish only favorable information.

An Aug. 3 post asked if Life Clips shares might reach new highs. After hitting lows of 30 cents, recent movement in the stock “could be a strong testament to the bullish sentiment in the market right now,” the article said.

Asked whether investors should be skeptical of Life Clips’ agreement with Midam, Gruder said investors should always do their own research when considering whether to buy a stock.

“I would tell anyone to do their due diligence,” he said, “and not purchase anything until they are comfortable.”

This story was originally published August 25, 2016 at 12:27 PM with the headline "Charlotte start-up’s stock gets rave reviews – but read the fine print."