The SEC, FINRA and North American Securities Administrators Association (NASAA) have issued warnings about an increase in scams that use the pandemic as part of their fraud with microcap stocks.
What Are Microcap Stocks?
Different than the blue-chip stocks that most people think of, microcap stocks are also called “penny stocks” that are traded on the over-the-counter (OTC) market or on an OTC bulletin board (OTCBB).
Companies that have microcap stock are small, with market capitalization from a minimum of $50M to $300M. (Those companies with less than $50M are called “nano-caps.”) However, the company’s market capitalization isn’t related to the share price. Large-cap stocks, with capitalization of $10B or more, can sell for $5 or $10 per share, while microcap shares can sell in the hundreds.
Microcap Stocks And Securities Fraud
Unlike traditional securities, there are several differences to be aware of no matter what the company:
- There is a lack of publicly available company information. Large public companies are required to file regular reports with the SEC that are easily accessible on the SEC’s website. Information is also readily available in investment industry publications and websites. Smaller microcap companies don’t have to file these reports, and as a result, finding more about the company can be difficult.
- No minimum listing requirements for trading. A company trading on the NYSE or NASDAQ must meet minimum requirements in order to trade. This can include minimum investments and/or a minimum number of shareholders. But OTC and OTCBB companies don’t have those types of requirements, and therefore don’t have any publicly available information.
- They are riskier than traditional securities. Even a legitimate company can be a high-risk investment. Some companies may be without revenue and/or assets. Companies that are not well-known or well-established may have a service or product that’s yet to be released, in testing, or still in development. A sudden change can cause investors to lose their capital. Understanding this going in will help you in deciding which non-traditional microcap might be a good investment for your overall objective.
Companies with less than $10M in revenue aren’t required to file reports with the SEC. However, some smaller companies may decide to file those reports, even if they aren’t required.
The COVID Factor on Securities
The constant news on the pandemic, coupled with business shutdowns and other unexpected activity, has everyone on edge and looking for the light at the end of the tunnel. Social isolation and distancing magnifies the need for that light. Many people become vulnerable to any bit of good news they find. Unfortunately, not all of it is real.
Scammers of all kinds enjoy using current events to perpetuate their fraudulent activity, and the securities market is no exception. These schemas come in all shapes and sizes, and steal money from all kinds of people with a myriad of promises. Those who have been negatively impacted by the pandemic may find the promise of a “ground floor opportunity” too appealing to ignore.
Since the beginning of the pandemic, The SEC and FINRA have seen an increase of these kinds of offerings related to microcap stocks tied into the pandemic, including misleading claims. These can include:
- Home testing kits for COVID-19
- Alleged “cures” for the virus
- Other products related to the prevention or defense against the virus
Some of these companies may have just recently engaged in a business related to another current trend, such as cryptocurrency or CBD products.
Many small-cap stocks are actually seeing a sudden increase in business, such as those making testing kits and other necessities. But like any stock you’re considering, it’s vital to read beyond headlines, emails, and social media posts that tell you about “the next big thing” in investing.
Investment Fraud Schemes during Covid
Fraudsters use a number of methods to get their message out, including:
- Claims in media that are questionable or unsubstantiated regarding microcap offerings, partnerships, and financing agreements that are related to COVID-19 (or other news trend)
- Emails that are unsolicited that discuss microcap stocks
- Cold-calling from a script in call centers (aka “boiler rooms”)
- Social media ads and posts in constant rotation
- Banner ads that take you to a professional looking website with convincing information
Other ways to create publicity:
- Issue a company press releases with information about a company on their website, in SEC disclosures, company financial information, or other sources that can’t be confirmed
- Putting out a large amount of information in chat rooms and message boards devoted to investing
One well-known classic scheme is called “pump and dump,” and can take many forms. Someone creates buzz around a company in order to inflate the stock price. The generated interest causes more buyers of the stock and the price to increase. When the price rises to a considerable rate, the owners dump their own shares at the high price, causing other investors to lose money when the price inevitably falls.
Read more about protecting yourself against these kinds of fraudulent activities on FINRA’s website.
Avoid Investing In Fraudulent Microcap Stocks
The potential for fraud can be anywhere when investing in securities. Because of their very nature, microcap stocks may not have a sufficient amount of information for you to make an informed decision.
This is not to say that microcaps aren’t a good investment—they can be, if you look beyond online information. Many microcap companies are legitimate businesses that no one has ever heard of. But as an investor, you’ll need to commit to due diligence, and investigate any company you’re considering and their stocks to make an informed decision.
How do you do that when there may not be much information? The SEC offers this detailed guide to microcaps for the interested investor, including finding info on a microcap company you are considering.
There Is Always A Risk
Even solid investments touted by reputable investment advisors carry some form of risk. Your broker or investment advisor should explain this to you or provide information to that effect.
Any investment that promises little or no risk, returns that are high and/or guaranteed, as well as other claims that just don’t make sense is likely something to avoid.
Information received from email or text message that’s unsolicited or cold calls from a “financial analyst” that sounds too good to be true should always be treated with suspicion, no matter what the subject matter.
Always be wary of unsolicited advice from unlicensed advisors, as well as purchasing any unregistered securities.
Never invest money you can’t afford to lose, and read the fine print.
You can always use FINRA’s BrokerCheck website to check on a company or individual, as well as the SEC’s EDGAR database to find out if the company files SEC reports.
Victims of securities or investment fraud may be able to recover their losses through securities arbitration for misconduct by a financial advisor or stockbroker or by pursuing a class action against the company or principals who orchestrated the misconduct.
Securities and Investment Fraud Attorneys
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today and let us know how we can help.