If you are considering investing in a company based on an unsolicited stock promotion, be cautious. The promotion may be from a paid promoter or company insider who stands to profit at your expense from selling shares after creating a buying frenzy and pumping up the stock price as part of a pump and dump scheme.
What are microcap stocks and why are they more susceptible to stock price manipulation?
Publicly-available information about microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), often is scarce. This makes it easier for fraudsters to spread false information. In addition, it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies.
What are some warning signs of microcap fraud?
- Unsolicited stock recommendation or heavy stock promotion
- Be wary if the company’s stock seems to be more heavily promoted than its products or services.
- No real business operations
- Penny stocks that are aggressively promoted may be stocks of dormant shell companies.
- Unexplained increase in stock price or trading volume
- Some microcap stocks are quoted on “over-the-counter” (OTC) systems (e.g., OTC Bulletin Board and OTC Markets).
- SEC trading suspension
- Click here to find out whether the SEC has recently suspended trading of the company’s stock.
- Frequent changes in company name or type of business
- Frequent changes in company name or business plan may suggest no real business operations.
Where can I get information about a microcap company?
Read recent reports that the company has filed with the SEC. Note that fraudsters often attempt to take advantage of the news as a hook for investment schemes touting “the latest growth industry.” For example, they may promote companies that claim to be developing products or services relating to marijuana, Ebola, or Zika.
What If I received the stock promotion through a legitimate source?
Fraudsters may promote a stock in seemingly independent and unbiased sources including social media, investment research websites, investment newsletters, online advertisements, email, Internet chat rooms, direct mail, newspapers, magazines, and radio.
What if the promoter discloses receiving compensation to promote the stock?
Even if a promoter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may make such disclosures to create the false appearance that the promotion is legitimate. Additionally, the disclosures may not reveal that the underlying source of the compensation is a company insider or affiliate.
Watch this FBI Financial Fraud Public Service Announcement video featuring actor Michael Douglas:
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