Microcap Fraud

The over-the-counter (OTC) market for securities, often referred to the microcap market, is designed for and comprised of companies with small amounts of assets and low stock prices. More than 10,000 companies have shares that trade on the OTC market’s two inter-dealer quotation systems:  the OTC Bulletin Board (OTCBB) and OTC Markets Group, Inc. (f/k/a Pink Sheets). While companies that trade their stocks on major exchanges undergo a formal application process and must meet minimum listing standards, companies quoted on the OTCBB or the OTC Markets do not have to apply for listing or meet any minimum financial standards.

In the News

OTC Litigation DERA Graph

Click here for the PDF.

Notes:

  • These data are based on analysis by the Division of Economic and Risk Analysis (DERA) of over 4,000 litigation releases over 2003 to 2012 (available at http://www.sec.gov/litigation/litreleases.shtml).
  • The x-axis depicts the first year of the alleged violation period.
  • Groups are based on the primary classification of the alleged violation.
  • This chart includes alleged violations committed by parties unrelated to the OTC-traded issuer.

Watch out for these “Red Flags” when investing in Microcap Stock:

  • SEC Trading Suspensions
  • Spam
  • Assets are Large but Revenues are Small
  • Odd Items in the Footnotes of Financial Statements
  • Unusual Auditing Issues
  • Insiders Own Large Amounts of Stock

What if I Want to Invest in Microcap Stocks?

  • To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions. These simple steps can make the difference between profits and losses:

    1. Find out whether the company has registered its securities with the SEC or your state's securities regulators.
    2. Make sure you understand the company's business and its products or services.
    3. Read carefully the most recent reports the company has filed with the SEC and pay attention to the company's financial statements, particularly if they are not audited or not certified by an accountant. If the company does not file reports with the SEC, be sure to ask your broker for what's called the "Rule 15c2-11 file" on the company.
    4. Check out the people running the company with your state securities regulator, and find out if they've ever made money for investors before. Also ask whether the people running the company have had run-ins with the regulators or other investors.
    5. Make sure the broker and his or her firm are registered with the SEC and licensed to do business in your state. And ask your state securities regulator whether the broker and the firm have ever been disciplined or have complaints against them.