Two men have been arrested as part of the Financial Services Authority's (FSA) first criminal investigation into illegal share selling.
The FSA warns about boiler rooms on its website
The two suspects were arrested on Wednesday after police helped the FSA raid several addresses in England.
The FSA suspects the men of involvement with Universal Management Services (UMS), a front for fraudulent share traders known as "boiler rooms".
The regulator suspects victims of the fraud may have been conned out of £5m.
Boiler rooms are usually based overseas but sometimes operate with the help of "front" organisations in the UK that channel the money abroad.
The FSA has no jurisdiction overseas but tries to close down any boiler room activities here.
The fraudsters involved are not authorised by the FSA and typically sell shares to unsuspecting members of the public by cold-calling them.
They then persuade their victims to buy shares that are worthless or have little value.
The FSA said it suspected that UMS had been helping illegal boiler rooms after it received complaints from the public about the high-pressure tactics of the salesmen, who had told their victims to make out cheques to UMS.
The FSA said UMS, which is unrelated to at least four UK registered companies with similar names, appeared to have been taking payments for at least six known boiler rooms.
Assets worth about £5.5m have been frozen so far as part of the investigation.
"This the first time we have taken this action and it shows that we will not hesitate to use our powers to protect consumers, including launching criminal investigations where appropriate," said Jonathan Phelan, head of retail enforcement at the FSA.