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If you have ever received an unsolicited stock recommendation or been heavily pressured into buying a certain stock, you may have been a victim of microcap fraud. Stocks sold by small companies or an entity masquerading as one are known as microcap stocks, and it is often difficult to find third-party information about them as there is little publicly available information. This makes it easy for fraudsters to take part in manipulative schemes such as pumping up prices.
If you suspect you have been a victim of microcap fraud or have been unfairly accused of it, do not hesitate to seek legal help immediately. Our attorneys at Weltz Law have years of experience in securities litigation and can help you navigate legal procedures with ease.
What are Microcap Stocks?
Microcap stocks are those sold on the over-the-counter (OTC) market as opposed to major exchanges. This is because they are often released by smaller companies and therefore cost less to buy, giving rise to the common term “penny stocks”. Furthermore, companies do not need to go through a verification process before listing their stocks on the microcap market as is the case with large regulated markets. This makes it hard for investors to find unbiased, third-party information about the company and can make them susceptible to microcap fraud. On the other hand, the microcap market is a ripe picking for fraudsters as its very nature makes it more conducive to conducting scams.
How do Microcap Frauds Work?
Also known as a “pump and dump scam”, fraudsters aggressively market a microcap stock, resulting in a surge in demand and causing its price to rise. Once that happens, they immediately sell their shares and the stock price plummets, leaving the victims with stocks that are worth significantly less than before.
Identifying Microcap Frauds
Fortunately, there are some warning signs you can look out for to identify microcap frauds.
- Aggressive unsolicited promotion of a business’s stocks over its products and/or services.
- No actual business operations – such companies are also known as “dormant shell companies”.
- Frequent changing of the business’s name and type of business.
- Sudden, unexplained rise in stock price and/or trading volume.
Be careful even if you found out about the stock through a “legitimate” source or if the promoter assures you they have already received compensation. Fraudsters may market their stock on a range of websites including social media, investment newsletters and emails. Furthermore, promoters may have been falsely enticed to promote a stock through compensation.
