“Microcap stocks” are low-priced stocks issued by small companies with low or “micro” capitalizations of the total value of the company’s stock. In general, these small companies have a market capitalization of less than $250 or $300 million, and limited assets and operations. Typically, although some may elect to, not all file financial reports with the SEC. Their stocks trade in the “over-the-counter” (OTC) market, rather than on a national securities exchange such as the New York Stock Exchange or NASDAQ.

Regularly, these companies issue stocks usingRegulation D or Regulation A exemptions. Regulation Dregistration exemption applies to companies seeking to raise less than $1 million in a twelve-month period and companies seeking to raise up to $5 million, selling only to 35 or fewer individuals or any number of “accredited investors” who must meet high net worth or income standards. The Regulation A exemptionis available tocompanies raising less than $5 million in a 12-month period.

Microcap stocks are extremely risky because the companies involved are new and have no proven track record, have no assets, operations, or revenues, or their products and services are still in development. Additionally, their stocks trade in low volumes and any size of trade can have a large impact on the price of the stock.

Fraud Alert

Many microcap companies are legitimate businesses with real products or services. However, they are often susceptible to deceitful spreading of false information. Some of the ways this fraudulent information is spread include:

Email Spam: Junk e-mail or “spam” distribution over the internet to spread false information about a microcap company to thousands of potential investors.

• Internet Fraud: Using aliases on internet bulletin boards and chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposed “inside” information about impending developments at microcap companies.
• Paid Promoters: Paid promoters advertising microcap companies that mislead investors into believing they are receiving independent advice.
• “Boiler Rooms” and Cold Calling:  Dishonest brokers that set up “boiler rooms” and cold call investors urging them to buy “house stocks” or stocks that the firm buys or sells as a market maker or has in its inventory.
• Questionable Press Releases: Using press releases disseminated through legitimate financial news portals on the internet containing exaggerations or lies about the microcap company’s sales, acquisitions, revenue projections, or new products or services.