How to Research Your Microcap Company
From fraudbureau.com http://www.fraudbureau.com/investor/education/article5.html
Upon reading our articles hosted on our site, you will no doubt be left with the strong if not forceful opinion that you should stay away from the stocks that trade on the Over-The-Counter Bulletin Board or in the Pink Sheets. Sometimes you will not know what type of company you are dealing with.
To make informed decisions about a microcap stock that you are looking at, we have provided the following suggestions in gathering information on such companies. Many of our suggestions can be pursued using the tools located on our site:
1. What Type of Company is it?
Determine whether you are dealing with a NASDAQ microcap stock or a stock that trades in the Pink Sheets or the Over-The-Counter Bulletin Board. The promotional material will tell you. Sometimes a promoter will try to pass off a OTC stock as being a NASDAQ stock. Where you are being told that it is a NASDAQ stock, retrieve the stock quote by using its ticker symbol. The results will tell you where it is traded. If the ticker symbol is preceded by "OTC BB:" it is an OTC Bulletin Board company. If it is preceded by "Nasdaq:" then it is a Nasdaq company. If it is a NASDAQ stock then you will be ahead of the game since there will be information about this stock filed with the SEC.
2. SEC Filings
Prospectus Retrieve the company's SEC Edgar filings which will uncover a great deal of information. First read the prospectus (S1 Registration Statement). The prospectus is a wealth of information explaining what the company does, its strategies, the make-up of its management and the risks to which the stock will be subject. To assist you in determining what you should be looking for when reading the Prospectus, read our article entitled “How to read the Prospectus”.
Annual Reports If the company has traded for more than a year, you can also take a look at its annual reports known as the 10-K. The annual report provides a comprehensive overview of the company for the past year. The filing is due 90 days after the close of the company's fiscal year, and contains such information as company history, organization, nature of business, equity, holdings, earnings per share, subsidiaries, and other pertinent financial information.
Quarterly Reports In addition to the annual report also look at the company’s quarterly report which provides a continuing view of a company's financial position during the year (Form 10-Q). The filing is due 45 days after each of the first three fiscal quarters. No filing is due for the fourth quarter.
Individual Filings You can also retrieve all SEC filings made by a director, officer and other insiders of a company.. Look up the company’s proxy statement for salaries, stock option packages and other compensation. Read about the executive compensations. Are the executives being overpaid?
Read the 8-K report, which companies must file after a “materially important” event occurs.
Suspension You can also do some historic research to determine whether the company has ever had its stock suspended from trading. The SEC lists companies whose stocks have been suspended. Stocks are suspended for a number of reasons including in cases where the SEC believes that information about the company is inaccurate or unreliable. If the stock has been suspended, you should probably stay away from the company.
Research Centre On our site, you can retrieve SEC filings by visiting our Research Centre. To retrieve SEC filings made by directors, officers or insiders, click on People Search.
There are two ways to search for such information on our site. First, you can conduct your search using our SEC Filings tools. In the alternative, you can conduct a search under our heading of "SEC Enforcement Actions" located in our Stock Scam Centre.
3. Microcap Exemptions
Most microcap companies are not required to file with the SEC. A company must file reports with the SEC only if:
(i) it has 500 or more investors and $10 million or more in assets; or
(ii) it lists its securities on the following stock markets:
* American Stock Exchange
* Boston Stock Exchange
* Cincinnati Stock Exchange
* Chicago Stock Exchange
* Nasdaq Stock Market
* New York Stock Exchange
* Pacific Exchange
* Philadelphia Stock Exchange
Furthermore, companies can also avoid registering their securities with the SEC under certain exemptions:
* "Reg A" Offerings Companies raising less than $5 million in a 12 month period may be exempt from registering their securities under a rule known as Regulation A. Instead of filing a registration statement through EDGAR, these companies need only file a printed copy of an "offering circular" with the SEC containing financial statements and other information. Get a copy of this offering circular and read it.
* "Reg D" Offerings Some smaller companies offer and sell securities without registering the transaction under an exemption known as Regulation D. Reg D exempts from registration companies that seek to raise less than $1 million dollars in a twelve-month period. It also exempts companies seeking to raise up to $5 million, as long as the companies sell only to 35 or fewer individuals or any number of "accredited investors" who must meet high net worth or income standards. In addition, Reg D exempts some larger private offerings of securities. While companies claiming an exemption under Reg D don't have to register or file reports with the SEC, they must still file what's known as a "Form D" within a few days after they first sell their securities. Form D is a brief notice that includes the names and addresses of owners and stock promoters, but little other information about the company. You may be able to find out more about Reg D companies by contacting your state securities regulator. For more information visit the SEC site.
Most Microcaps will have to start to make SEC filings in the very near future. For more information read our article entitled "Differences between NASDAQ and the OTC market".
4. Rule 15c2-11
If the company does not file reports with the SEC, ask your broker for what's called the "Rule 15c2-11 file" on the company. That file will contain important information about the company.
5. Securities Regulator
You can also contact your state securities regulator to find out whether they have information about a company and the people behind it. To find the phone number and address of your state regulator go to the site of the North American Securities Administrators Association. Your regulator will tell you whether the company has been legally cleared to sell securities in your state.
6. Broker Disciplinary Proceedings
Where the stock is a microcap trading on the OTC or Pink Sheets, you should also check out the brokerage firm and the stockbroker. Call your state securities agencies for a report on their track record of disciplinary infractions, if any. You can also conduct a search using our Broker Disciplinary Actions tool which is located on our Broker Centre.
The NASD Regulation also provides a Public Disclosure Program (PDP) for investors to learn about the professional background, business practices, and conduct of NASD member firms or their brokers. You can obtain information about the industry professional's current employment and background.
7. Ask your Broker
Your Broker will know who the unscrupulous brokers are in the penny stock industry. Avoid those brokers who "specializes" in penny stocks.
8. Stock Charts
To determine what has been happening with the stock look at a graph of the stock price. Has it hit new highs or lows? Is recent volume much higher than normal volume levels? Does it trade every day? On our site you can obtain a chart by simply retrieving a stock quote.
9. Press Releases
Read all press releases of the company. This will tell you what the company is doing. When reading a press release, read it with a suspecting eye. Determine the facts and not what is imminent. The press release will be drafted in a favourable light but you should read through all the hype and only look and rely upon the facts.
10. Contact Company Directly
Contact the company to obtain an information package and speak with its investor relations contact. Again don’t believe everything you hear but try to determine the facts. The information package should have all the annual and quarterly reports and other information about the company. Don’t be afraid to ask any questions you might have with the company representative. Make sure when reading any financial statements that they are audited statements.
11. Company News
Conduct a search to determine all the news affecting the company. Visit our Research Centre to conduct the appropriate search. Reading the news will give you all material information affecting the company and the history of its developments.
12. Caution: Investment Newsletters
Beware of biased recommendations in newsletters. Many publishers of newsletters are paid to promote stocks. Read the disclaimer at the end of the newsletter to see if the writers of the newsletters are being paid to tout the stock by the company. To determine whether the newsletter is unbiased, see if it provides both the negatives and positives of the company.