The SEC’s Office of Investor Education and Advocacy is issuing a series of three Investor Bulletins to provide investors with important information to consider before investing in microcap stocks often known as penny stocks. The Bulletins provide a general overview of microcap stocks and their marketplaces, a list of sources to research microcap stocks, and a list of “red flags” of fraud and other important factors to consider before making an investment in microcap stocks.
Investors may have difficulty finding accurate, complete and current information about microcap companies. Many microcap companies do not file reports with the SEC, so it’s hard for investors to get the facts about the company’s management, products, services, and finances. Before you consider investing in a microcap company, make sure you carefully research the company.
How Do I Get Information About Microcap Companies?
If you are working with a broker or an investment adviser, you can ask your investment professional if the company files reports with the SEC and to provide you written information about the company and its business, finances, and management. Be sure to carefully read any prospectus and the company’s latest financial reports. Check to see if the financial reports have been audited. Also, remember you should never use unsolicited e-mails, message board postings and company news releases as the sole basis for your investment decisions. Unfortunately, some of the information you receive may be false or misleading, or may be distributed by persons with an undisclosed interest in causing investors to buy stock for more than it is worth. You can also get information on your own from these sources:
- From the company. Ask the company if it is registered with the SEC and files reports with the SEC. If the company is small and not subject to SEC reporting requirements, you could also call your state securities regulator to try to get information about the company, its management, and the brokers or promoters who’ve encouraged you to invest in the company. Consider whether the management has the background or expertise needed to execute its business plan. Consider whether the company has the resources or any competitive advantage indicating that it will succeed. Carefully review the company’s website. You may also consider searching for company information on the OTC Markets website at www.otcmarkets.com.
- From the SEC. Many companies must file reports with the SEC. Using the SEC’s EDGAR database at https://www.sec.gov/edgar/searchedgar/webusers.htm, you can find out whether a company files with the SEC and get any reports that the company has filed. For companies that file reports with the SEC but do not file them on EDGAR, use the SEC’s online form at https://www.sec.gov/cgi-bin/request_public_docs or email the SEC's Public Information Office at firstname.lastname@example.org.
- From your state securities regulator. If you have difficulty finding information on a microcap company through the company itself, your broker-dealer, or the SEC, you should contact your state securities regulator to find out whether they have information about the company and the people behind it. Look in the government section of your phone book or visit the website of the North American Securities Administrators Association at http://www.nasaa.org/investor-education/how-to-report-a-scam-or-file-a-c... to get the name and phone number. Even though the company may not have registered its securities with the SEC, it may have registered them with your state. Your regulator will tell you whether the company has been legally cleared to sell securities in your state.
- From other government regulators. Many companies, such as certain banks, do not have to file reports with the SEC. But banks must file updated financial information with their banking regulators. Visit the Federal Reserve System’s National Information Center site at www.ffiec.gov/nicpubweb/nicweb/nichome.aspx, the Office of the Comptroller of the Currency at www.occ.treas.gov, or the Federal Deposit Insurance Corporation at www.fdic.gov.
- From reference books, websites and commercial databases. Visit your local public library or the nearest law or business school library. You'll find many reference materials containing information about companies. You can also access commercial databases that may have more information about the company’s history, management, products or services, revenues, and credit ratings. The SEC cannot recommend or endorse any particular research firm, its personnel, or its products. But there are a number of commercial resources you may consult, including: Bloomberg, Dun & Bradstreet, Hoover’s Profiles, Lexis-Nexis, and Standard & Poor’s Corporate Profiles. Ask your librarian about additional resources.
- The Secretary of State where the company is incorporated. Contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing. You may also be able to obtain copies of the company's incorporation papers and any annual reports it files with the state. Please visit the National Association of Secretaries of State website at www.nass.org for contact information regarding a particular Secretary of State.
JUST BECAUSE A COMPANY APPEARS TO HAVE READILY AVAILABLE COMPANY INFORMATION OR FILES REPORTS WITH A REGULATOR, DOES NOT MEAN IT'S SAFE TO INVEST IN THAT COMPANY. YOU SHOULD ALWAYS CAREFULLY CONSIDER ANY INVESTMENT DECISION.
Investor Bulletin: Microcap Stock Basics (Part 1 of 3: General Information)
Investor Bulletin: Microcap Stock Basics (Part 3 of 3: Risk)
Investor Publication: “Microcap Stock: A Guide for Investors”
For more information about microcap fraud please visit the Microcap Fraud webpage on Investor.gov.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.