Microcap Fraud

(What are Microcap Stocks?)

If you receive an unsolicited stock promotion, be cautious.  Whoever is promoting the stock may stand to profit at your expense from pumping up the stock price and then selling shares.  Fraudsters often use emerging technologies or industries - including crypto assets - to entice investors as part of a fraudulent or manipulative scheme.  For example, they may publicly announce a development that is intended to affect a company’s stock price.  Or they may promote a company that claims to be developing products or services relating to the latest news events or trends.

What are microcap stocks and why are they more susceptible to stock price manipulation?

Publicly-available information about microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), often is scarce.  This makes it easier for fraudsters to spread false information.  In addition, it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies and often do not trade on a national securities exchange. 

What are some warning signs of microcap fraud?  

• Unsolicited stock recommendation or heavy stock promotion
  • Be wary if the company’s stock seems to be more heavily promoted than its products or services.
• No real business operations
  • Penny stocks that are aggressively promoted may be stocks of dormant shell companies. 
• Unexplained increase in stock price or trading volume
• SEC trading suspension
  • Click here to find out whether the SEC has recently suspended trading of the company’s stock.
• Frequent changes in company name or type of business
  • Frequent changes in company name or business plan may suggest no real business operations.
• Microcap stocks often are quoted on “over-the-counter” (OTC) systems (e.g., by alternative trading systems (ATSs)), such as Delaware Board of Trade ATS (DBOT ATS), Global OTC ATS (part of NYSE Group, Inc.), and OTC Link ATS (operated by OTC Markets), among other venues.

Where can I get information about a microcap company?

Read recent reports that the company has filed with the SEC.  You may also consider searching for company information on the websites of DBOT ATS (https://dbottrading.com), Global OTC ATS (https://www.globalotc.com), and OTC Link ATS (http://www.otcmarkets.com.  However, the SEC does not endorse or otherwise approve of the information posted there.  Learn more. 

What If I received the stock promotion through a legitimate source?

Fraudsters may promote a stock in seemingly independent and unbiased sources including social media, investment research websites, investment newsletters, online advertisements, email, Internet chat rooms, direct mail, newspapers, magazines, and radio.

What if the promoter discloses receiving compensation to promote the stock?

Even if a promoter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may make such disclosures to create the false appearance that the promotion is legitimate.  Additionally, the disclosures may not reveal that the underlying source of the compensation is a company insider or affiliate. 

Watch this FBI Financial Fraud Public Service Announcement video featuring actor Michael Douglas:

Additional Information

Report possible securities fraud to the SEC.
Updated Investor Alert: Fraudulent Stock Promotions
FINRA Investor Insight: “Nothing Micro About Microcap Fraud: Investing in Low Priced Stocks”
Investor Bulletin: Microcap Stock Basics (Part 1 of 3: General Information)
Investor Bulletin: Microcap Stock Basics (Part 2 of 3: Research)
Investor Bulletin: Microcap Stock Basics (Part 3 of 3: Risk)
Microcap Fraud Spotlight
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