Microcap stock fraud

"Night wind hawkers" sold stock on the streets during the South Sea Bubble (The Great Picture of Folly, 1720).

Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year.[1][2][3] Many microcap stocks are penny stocks, which the SEC defines as a security that trades at less than $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.[4]

Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the requirements to be listed on the stock exchanges. Some fraud occurs among stocks traded on the NASDAQ Small Cap Market, now called the NASDAQ Capital Market.[3]

Microcap fraud encompasses several types of investor fraud:

  • Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are "dumped" on the public at inflated prices. Such schemes involve telemarketing and Internet fraud.[1]
  • Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid "under the table" undisclosed payoffs to sell such stocks.[1][3]
  • Dump and dilute schemes, where companies repeatedly issue shares for no reason other than taking investors' money away. Companies using this kind of scheme tend to periodically reverse-split the stock.
  • Other unscrupulous brokerage practices, including "bait-and-switch", unauthorized trading, and "no net sales" policies in which customers are prohibited or discouraged from selling stocks.[5]
  1. ^ a b c "'Micro-cap Fraud', North American Securities Administrators Association". Archived from the original on 2005-10-23. Retrieved 14 November 2018.
  2. ^ "'Pump-and-Dumps' and Market Manipulations". Securities and Exchange Commission. Retrieved 14 November 2018.
  3. ^ a b c Weiss, Gary (December 15, 1997). "Investors Beware: Chop Stocks Are on the Rise". Business Week. Archived from the original on 2 January 2013. Retrieved 14 November 2018.
  4. ^ "Penny Stock Rules". United States Securities and Exchange Commission. 2008-04-04. Retrieved 18 October 2012.
  5. ^ "Microcap Fraud: Underside of the Bull Market" (PDF). Arizona Securities Commission. Archived from the original (PDF) on 2007-08-08. Retrieved 14 November 2018.