Official Government Website

Micro-Cap Fraud

Micro-cap fraud is similar to the penny stock fraud that was prevalent in the 1980's. Micro-cap stocks are shares in companies that are not well-established, have a small amount of shares in public hands (also known as "thinly traded" shares) and often trade at less than $5.00 per share. Investors are particularly at risk to micro-cap fraud given that in recent years many have come to expect investment returns exceeding 25%. Micro-cap stocks often trade on the OTC Bulletin Board, the Pink Sheets, or the Pink Sheets Electronic Quotation Service, and are often too small to be traded on the stock exchanges or NASDAQ. Because they are not subject to the listing standards and reporting requirements of an exchange or NASDAQ, public information is often limited.

The North American Securities Administrators Association estimates that investors lose over $6 billion a year to investment fraud, including micro-cap fraud schemes. Efforts against micro-cap fraud, by state, industry and federal regulators, have had an impact but the problem remains serious and investors need to be on guard. The following are some examples of the ways in which stock promoters or unscrupulous securities brokers illegally profit in the micro-cap area:

How to Protect Yourself Against Micro-Cap Fraud

Finally, find out if the securities are registered with the state or provincial securities agency or the federal Securities and Exchange Commission. Even if they are, investors should not rely on governmental registration of the offering as an indication of government approval of the soundness of the company or the advisability of the investment. All that is required to register a security in many jurisdictions is full disclosure of relevant facts. It is up to the individual to judge from the disclosures contained in the prospectus or other up-to-date offering materials and other reliable sources whether or not to invest in the stock. Don’t take the word of a salesperson! Check out the investment yourself.

The oldest international organization devoted to investor protection, the North American Securities Administrators Association (NASAA) was organized in 1919. It is a voluntary association with a membership consisting of the 66 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico. In the U.S., NASAA is the national voice of the 50 state securities agencies responsible for the promotion of efficient capital formation and investor protection.

If you have questions concerning a micro-cap security or salesperson or promoter selling a micro-cap security, call or write the securities agency in your state, province or territory immediately. For a phone number or address contact NASAA at 1-202-737-0900. Contact information is also available on NASAA’s Web site at www.nasaa.org.