INVESTOR BULLETIN: MICROCAP STOCK BASICS (PART 3 OF 3: RISK)
DOES ANY OF THIS SOUND FAMILIAR?
Lack of public information. Often, the biggest difference between a microcap stock and other stocks is the amount of reliable publicly-available information about the company. Most large public companies file reports with the SEC that any investor can get for free from the SEC's website. Professional stock analysts regularly research and write about larger public companies, and it is easy to find their stock prices on the Internet or in newspapers and other publications. In contrast, the same information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices will be based on full and accurate information about the company.
Fraud. Reliable publicly-available information about microcap stocks is often limited. Also, the stocks of microcap companies are historically less liquid and more thinly traded (lower volume) than the stocks of larger companies. These factors make it easier for fraudsters to manipulate the stock price or trading volume of microcap stocks.
No History of Operational Success. Use caution before investing in a company’s stock if the company has no history of operational success; yet still projects large future revenues, especially if the projections appear based solely on information about the company’s industry rather than on the company itself.
Insiders Own Large Amounts of the Stock. In many microcap fraud cases - especially “pump and dump” schemes - the company’s officers and promoters own significant amounts of the stock. When one person or group controls most of the stock, they can more easily attempt to manipulate the stock’s price. You can ask your broker or the company whether one person or group controls most of the company’s stock; however, accurate information may not be available. You also should consider whether a company issues financial instruments that are convertible into equity/stock positions, as this could mask control over large portions of a company’s stock.
No real business operations. Frequent or unexplained changes in company name or type of business, little or no assets, minimal revenues, or implausible press releases may suggest no real business operations.
Be aware that dormant shell companies that continue to trade may be aggressively promoted and are susceptible to market manipulation.
Look closely at a company that became public through a reverse merger.
Look closely at a company that has recently undergone a reverse stock split (reducing the number of shares and increasing the share price proportionately), particularly when the reverse stock split also accompanies a reverse merger in a short time frame.
Review independent information about the company’s management and its directors. Consider whether these individuals have background or expertise in the business of the company.
Make sure you understand the company’s business and its products or services. Carefully review all materials you are given and verify every statement you are told about the investment. Pay attention to the company’s financial statements, particularly if they are not audited by a certified public accountant (CPA). If there are no financial statements or other company reports, ask your broker to provide any information they can about the company. If your broker has solicited you to purchase this stock and cannot provide you basic information regarding the company (for example, the company’s financials), carefully consider whether this is an appropriate investment for you.
To report possible securities fraud to the SEC, submit a tip or complaint.