The Office of Investor Education and Advocacy of the United States Securities & Exchange Commission has issued an Investor Bulletin regarding microcap stocks or as penny stocks. The Investor Bulletin provides a general information and a list of “red flags” of fraud and other important factors generally associated with microcap stock fraud.
The SEC Investor Bulletin defines a Microcap Stock as any low price or low market capitalization company with a market capitalization of less than $250 or $300 million. The Investor Bulletin also defines nano-cap stocks, as those with market capitalizations of less than $50 million.
The SEC informs investors that microcap stocks trade in the “over-the-counter” (OTC) market, which includes the OTC Bulletin Board (OTCBB).
OTC Bulletin Board is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are not listed on a national securities exchange.
The SEC warns investors that Microcap Stocks are different from other stocks because
of a lack of public information, no minimum listing requirements and risk
of a lack of public information, no minimum listing requirements and risk
Lack of public information. Reporting companies, which include all large public companies are required to file periodic reports, which includes audited financial information and material business and other information, including ownership and proxy materials, with the SEC and are publicly avalabile on the SEC’s website. However, information, including financial information,about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes.
With Microcap companies there are no minimum listing standards. In contrast, companies that list their stocks on exchanges must meet minimum listing standards which include minimum net assets and a minimum numbers of shareholders. Companies quoted on the OTC Bulletin Board generally do not have to meet any minimum listing standards, but are typically subject to some initial reporting and ongoing periodic requirements.
Perhaps more importantly, according to the SEC, microcap stocks the most risky. Many microcap companies are new start ups and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks involves the low volumes of trades, which may make it difficult for you to sell your shares when you want to do so. Because many microcap stocks trade in low volumes, any size trade can have a large percentage impact on the price of the stock. Microcap stocks may also be susceptible to fraud and manipulation.
More information about microcap fraud is also available on the SEC’s webpage at Investor.gov.
More information about microcap fraud is also available on the SEC’s webpage at Investor.gov.
