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Due Diligence

What Should I Do If I Want To Make A Micro-Cap Stock Investment?

Before making a micro-cap stock investment, a potential investor should research each investment opportunity thoroughly and ask questions.

Make sure that you understand the company’s business and its products or services. Be wary of companies that have no operating history, few assets, or no defined business purpose.

Read carefully the most recent reports the company has filed with its regulators and pay attention to the company’s financial statements, particularly if they are not audited or not certified by an accountant.

You should also find out whether the management of the company has ever run into trouble with the regulators or anybody else.

  • How liquid is this investment? How easy would it be to sell if I needed my money right away?
  • Does this investment match my investment goals?
  • Is this investment suitable for me?
  • How will this investment make money? (Dividends? Interest? Capital Gains?)
  • What must happen for this investment to increase in value?
  • What are the total fees to purchase, maintain and sell this investment?
  • After all the fees are paid, how much does this investment have to increase in value before I break even?
How Do I Find Out More About The People Running A Micro-Cap Stock Company?

To discover information regarding a company’s owners or the people running the company, you should contact your state securities regulator and search for information about them online.

How Do I Know That The Micro-Cap Stock That I Am Considering Investing In Is Not Fraudulent?

The lack of accurate and accessible information about some micro-cap stocks means that they are made vulnerable to fraudulent activities. When there is no information available about micro-cap stock companies, fraudsters are given more leverage to manipulate a micro-cap stock and spread false information.

The greater the volume of financial data and other information on a micro-cap stock, the smaller the propensity for fraud taking place.

How Do I Protect Myself From Internet Fraud?

Internet fraud, as it relates to micro-cap stock investments, generally involves the distribution of e-mails more commonly known as spam or junk mail. This spam would advertise misleading or false information about a micro-cap stock company in the hopes to attract more investors.

Fraudsters also use aliases or “false identities’ on Internet message boards and chat rooms to secure anonymity from which they are able to lure potential micro-cap stock investors with false investment tips deemed as “inside information”.

Being vigilant about internet fraud, understanding the methods used, and most importantly performing thorough research on the micro-cap stock company or companies you choose to invest with are all steps that can be taken to ensure that you do not fall prey to the pervasions of internet fraud.

What Are The Typical Micro-Cap Stock Scams?

Micro-cap stock scams are most predominately carried out in two ways, the “Pump and Dump” and the “Offshore” scams. The “Pump and Dump” scheme usually involves posted internet messages or telemarketers urging investors to speedily buy micro-cap shares or sell before the price falls. The promoters will maintain that they possess “inside information” about a particular investment or business opportunity.

In reality the promoters may actually be company insiders or hired promoters who will benefit themselves after the sale of their own shares once their “promotions” have cultivated an inflated stock price. Investors lose their money once the fraudulent party has sold their shares, the falsely generated hype has died down, and the price inevitably falls.

What Is Regulation S?

SEC Regulation S is a Micro-cap Stock share offer exemption that allows companies to sell stock outside of the United States to foreign or off-shore investors without registering the stock with the SEC.

What Are The Micro-cap Stock Investment Fraud ‘RED FLAGS’ To Look Out For?

The SEC suspends trading in a micro-cap stock if it is under the impression that a company is distributing inaccurate, false or misleading information. If a micro-cap stock’s shares have been suspended, find out more information.

Be careful of micro-cap stock investments where there exists no current financial information on the company but it is both widely recommended and advertised. High pressure sales tactics, where a salesperson speaks very emphatically about a “once in a life time opportunity, not to be missed” and you are being privilege to “confidential, inside information”, are clear red flag signals of fraud. Also be careful of micro-cap stock companies that have large assets but small revenues.

This fraud involves attaching high values on the financial statements to assets completely unrelated to the company itself.

Strange items in the financial statements footnotes, an unusual loan for example, could be another indication that things may be amiss. Strange auditing issues such as a company’s auditor’s refusal to certify their financial statements or a change in accountants may also signal danger in the micro-cap stock investment.

A micro-cap stock investor should be careful of situations where insiders own large amounts of the stock in the company and are given the power to control most of the shares. In this situation, it may be easy to manipulate the micro-cap stock share price to the detriment of a new investor.

A micro-cap stock investor should be careful of investing in a micro-cap stock when there is an unwillingness to provide access to written documentation about the investment, including information a potential investor is entitled to in terms of law or regulations.

Where Can I Turn To For Help If I Become The Subject Of A Micro-Cap Stock Scam?

If you find that you have been targeted in a Micro-cap Stock scam, you should immediately contact your state’s securities regulator and give them all information that you have at your disposal so that they can investigate the matter further.

You should also file a complaint through the Securities Exchange Commission’s (SEC) website at their online complaint centre.

Market Basics

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