The biggest difference between a microcap stock and other stocks is the amount of reliable, publicly available information about the company. Larger public companies are required to file reports with the SEC and any investor can review them for free from the SEC’s website. Professional stock analysts regularly research and write about larger public companies, and it’s easy to find their stock prices in the newspaper. In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes.
Smaller companies “those with less than $10 million in assets” generally do NOT have to file reports with the SEC. But some smaller companies, including microcap companies, may choose voluntarily to register their securities with the SEC.
Many of the microcap companies that don’t file reports with the SEC are legitimate businesses with real products or services. But the lack of reliable, readily available information and investment advice about some microcap companies can open the door to fraud. It’s easier for fraudsters to manipulate a stock when there’s little or no information available about the company.
Types of Fraud
Microcap fraud depends on spreading false information. Here’s how some fraudsters carry out their scams:
- E-mail Spam
- Fraudsters distribute junk e-mail or “spam” over the Internet to spread false information quickly and cheaply about a microcap company to thousands of potential investors. Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing.
- Qwoter provides a free stock spam report in every stock quote search or you can view the latest stock spam reports.
- Internet Fraud
- Fraudsters often use aliases on Internet bulletin boards and chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly “inside” information about impending developments at the companies.
- Paid Promoters
- Some microcap companies pay stock promoters to recommend or “tout” the microcap stock in supposedly independent and unbiased investment newsletters, research reports, or radio and television shows. Paid promoters are generally behind the unsolicited “junk” faxes you may receive, touting a microcap company. The federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so and mislead investors into believing they are receiving independent advice.
- “Boiler Rooms” and Cold Calling
- Dishonest brokers set up “boiler rooms” where a small army of high-pressure salespeople use banks of telephones to make cold calls to as many potential investors as possible. These strangers hound investors to buy “house stocks” that the firm buys or sells as a market maker or has in its inventory.
- Questionable Press Releases
- Fraudsters often issue press releases that contain exaggerations or lies about the microcap company’s sales, acquisitions, revenue projections, or new products or services. These fraudulent press releases are then disseminated through legitimate financial news portals on the Internet.
Microcap Fraud Schemes
Microcap fraud schemes can take a variety of forms. Here’s a description of the most common schemes:
- The Classic “Pump and Dump” Scheme
- It’s common to see messages posted on the Internet that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks.
- In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by the buying frenzy they create. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls, and investors lose their money.
- The Latest Variation of the “Pump and Dump” Scheme
- Some people are finding that they have received a “misdialed” call from a stranger, leaving a “hot” investment tip for a friend. The message is designed to sound as if the speaker didn’t realize that he or she was leaving the hot tip on the wrong answering machine.
- If you get a message like this, it’s not a wrong number at all. Instead, it is from someone who is being paid to leave these messages on a whole lot of answering machines.
- The Off-Shore Scam
- Under a rule known as “Regulation S,” companies do NOT have to register stock they sell outside the United States to foreign or “off-shore” investors. In the typical off-shore scam, an unscrupulous microcap company sells unregistered Reg S stock at a deep discount to fraudsters posing as foreign investors. These fraudsters then sell the stock to U.S. investors at inflated prices, pocketing huge profits that they share with the microcap company insiders. The flood of unregistered stock into the U.S. eventually causes the price to plummet, leaving unsuspecting U.S. investors with enormous losses.
Have you been defrauded by a microcap scam? Leave a comment below!
For more information regarding public company stock spam, read through our spam advice for companies.