Investing in microcap stocks, also known as penny stocks, presents significant risks for investors. There are several reasons why. Unfortunately, this does not stop online promoters from aggressively targeting investors with “can’t miss” opportunities, nor does it stop unscrupulous brokers and advisors from recommending these high-risk investments to their clients.
The U.S. Securities and Exchange Commission (SEC) defines a “microcap” company as a company that has less than $100 million in market capitalization. While there is no precise definition of a “penny stock,” these stocks typically trade below (and often well below) $5 per share. If you have suffered stock losses and believe that you may be a victim of microcap or penny stock fraud, you should speak with a lawyer about your recovery options promptly.
What are the Risks Associated with Microcap Stocks?
There are several risks associated with investing in microcap stocks. Unfortunately, many investors do not learn of these risks until it is too late. Some examples of risks that can lead to losses for microcap stock investors include:
- Microcap stocks trade on over-the-counter (OTC) markets. Microcap stocks do not trade on the NYSE or NASDAQ. Instead, they trade on OTC markets that are subject to much less oversight and regulation. This not only means that it can be more difficult for investors to find the information they need to make sound investment decisions, but it also means that the microcap market is at significantly higher risk for manipulation and other forms of investment fraud.
- Microcap stocks have limited liquidity. Microcap stocks trade relatively infrequently, and many microcap stocks are issued by private companies with no active market for their shares. As a result, investors cannot simply sell their shares whenever they want. If a microcap stock’s price starts to crash, investors may have no choice but to wait and see how much the value of their portfolio drops.
- It can be difficult to obtain accurate price quotes for penny stocks. Since penny stocks have a limited market, it can be difficult to get accurate price quotes on both sides of investing transactions. In other words, investors risk overpaying when they buy, and they risk offering a steep discount when they sell.
- Penny stock prices can fluctuate wildly. Given all of the factors we just discussed, penny stock prices can fluctuate wildly. There is often little rhyme or reason to the movement of share prices in the microcap market, and this means that investors – and inexperienced investors in particular – have limited options for making informed decisions.
- Pump and dump schemes are a very real concern. In the microcap market, pump and dump schemes are a very real concern. These schemes involve promoters “pumping up” the price of penny stocks by spreading false and misleading information online. Once these promoters pump the price to a satisfactory level, they “dump” their shares on investors who end up paying far too much for stocks that they will have a difficult time selling for even a fraction of what they paid.
Can Investors Recover Fraudulent Microcap Losses?
Yes, investors who lose money investing in microcap stocks will be able to recover their losses in some cases. Recovering losses from penny stock investments requires evidence of fraud, and the assistance of a dedicated and experienced microcap fraud lawyer.
Examples of Penny Stocks Fraud
Fraud always looks different, which is why sometimes it is complex to identify before you become a victim. Below are some instances of what microcap stock losses and penny stock fraud might look like:
A Microcap Company Spreads False or Misleading Information
In some cases, microcap companies will spread false or misleading information about their finances or business prospects. They may engage in other fraudulent practices as well. When this happens, investors may be able to pursue claims against these companies directly.
An Independent Entity Executes a Pump and Dump Scheme or Other Fraud Scam
Fraudsters frequently use microcap stocks to perpetrate pump and dump schemes and other securities fraud scams. Investors who fall victim to these scams will be able to recover their losses in court in some cases.
A Broker or Advisor Recommends a High-Risk Microcap Investment
Brokers and advisors may receive commissions, kickbacks or other fees for recommending microcap stocks or helping to promote pump and dump schemes. They may also simply fail to do their due diligence before recommending high-risk penny stocks to their clients. In either scenario, brokers and advisors can – and should – be held liable for their clients’ fraudulent losses.
Find Out if You Can Recover Your Investment with a Microcap Stock Losses Fraud Lawyer
Are you concerned that you may be a victim of penny stock fraud? If so, we can help you understand your situation and make informed decisions going forward. To speak with a microcap stock lawyer in confidence as soon as possible, call 212-742-1414 or request a free consultation online now.