Can file fraudsters with the SEC

Talkin go money

Your inbox is littered with them: newsletters alerting you to micro-cap stocks that "got 92% up in one day!" or promise "1000% + profit on this one!" Some micro-cap scams are obvious, but others are not. Do you know how to identify a scam?

The siren call of the wild return of micro-cap stocks can be hard to resist. With approximately 15,000 publicly traded securities in the United States, most investors know that there are many overlooked and misunderstood smaller companies worth owning. But investing in microcapsules can be a minefield if you don't know how to spot real opportunities from fraud.

What are micro caps and where do they trade ?
The term "micro-cap" refers to companies with small or "micro" market caps. These are companies whose market capitalization is typically between $ 50 million and $ 300 million. Micro-cap companies mainly trade on the OTCBB (Over-the-Counter Bulletin Board) or the pink-colored boards.

The OTCBB is an electronic listing system that displays real-time quotes, sell prices, and volume information for many OTC securities that are not listed on the Nasdaq or other major stock exchanges. Although the NASD oversees the OTCBB, the OTCBB is not part of the Nasdaq. Scammers often claim that an OTCBB company is a Nasdaq company, but this is misleading; it suggests that a company is bigger and more fluid than it is likely to be. The pink leaves are named after the color of the paper on which they were historically printed. Many of the stocks listed on the pink sheets are penny stocks. The pink leaves are not a stock exchange and are not regulated.

What is different with Micro Caps?
We all know that good information is an investor's best defense when buying shares in a company, but accurate information about micro-cap stocks is difficult to come by. Many micro-cap companies do not file reports with the Securities and Exchange Commission (SEC), so it is difficult for investors to get all the facts. The lack of reliable information makes it easy for investors to be seduced by scammers.

Another important difference between micro caps and larger holdings is the lack of minimum listing standards. Companies that trade their shares on major exchanges such as the NYSE and the Nasdaq must hold minimum net worth and minimum number of shareholders in order to maintain their listings. However, companies at the OTCBB or the Pink Sheets do not have to meet any minimum standards.

Micro cap risks It should come as no surprise that micro-cap investing is much riskier than investing in large caps. Liquidity is usually limited, which means you may not be able to sell a micro-cap stock quickly enough to minimize losses if things go wrong. Returns are often negative and there may be significant deficits built up. These companies are like shooting stars: they can fizzle out as fast as they can light up the sky.

When researching a micro-cap inventory, check the EDGAR database first, as even the smallest companies can file degrees with the SEC. Companies with assets less than $ 10 million actually do not have to file, but often do if they want to offer their securities to the public. Other micro-caps may offer publicly traded securities but are exempt from filing with the SEC. These exceptions include "Reg A" offers where the company raises less than $ 5 million in 12 months or "Reg D" offers - those that raise less than $ 1 million in 12 months.

The fake facts and tools of the trade Microcapsule scammers rely on the lack of public, reliable information to spread false facts. What are your favorite trading tools?

  • e-mail : Spam e-mails and "spam" over the Internet are popular tools that scammers use to spread false information about micro-cap stocks. Never buy stocks based on an email from someone you don't know.
  • Internet bulletin boards : Many scammers hide or change their identity in investor chat rooms or message boards and use these forums to promote certain micro-cap companies. They often claim to have unique inside information about a company or its products. Never buy a stock unless you have done your own research and verified the facts.
  • Paid Promoters : Some micro-cap companies pay promoters to recommend their stocks. These loaner arms claim to provide independent, unbiased investment newsletters, research reports, and radio or television shows. Investors should review the credentials of anyone who declares their advice to be objective and independent. Look for legitimate financial certificates that require holders to adhere to a code of ethics (for example, CFA, CFP, CIC, and the like).
  • "Boiler Rooms" and Cold Calls : Some dishonest brokers organize high pressure sellers into groups (also called "boiler rooms") to attract potential investors and get them to buy questionable micro-cap stocks. Be careful when calling strangers and never give your caller your bank details or social security number.
  • Questionable press releases : Press releases may look real, but are you sure the company's sales, forecasts, and products are valid? Check the facts on your own.

Micro-cap fraudsters use their trading tools to lure you into their network in the following ways:

  • "Pump and Dump" schemes : Internet mailboxes, chat rooms, and telemarketing a pump-and-dump system where they discuss a stock with claims they know about something the rest of the market doesn't. Once they hyped the stock enough to "pump" its price, insiders and paid promoters will then "throw away" their stocks, causing the price to drop and innocent investors to lose money. In a recent twist on the "pump and dump" scheme, some investors may spot a voice message - presumably inadvertently left on their answering machine - and leave a hot stock price. Never trade on this type of information.
  • Offshore systems : Under Regulation S, companies selling shares outside of the United States to offshore investors are not required to register shares with the SEC. In an offshore scam, unregistered micro-cap stocks in Reg S are sold at discount levels to scammers who, in turn, as foreign investors, resell their stocks to US investors at inflated prices and pocket huge profits. The deluge of unregistered stocks in the market inevitably causes the company's share price to decline, causing huge losses for unsuspecting investors.

What to do if you are caught in a network of scammers
Report it! Start with your broker. If your broker can't solve the problem, you should check with your state's securities commission or the SEC. Complaints can be submitted online to the supervisory authorities. Don't let scammers turn you into a statistic. You will be able to buy small ones and big ones to win if you do your homework and keep an eye out for red flags.