Dangers of OTC, Pink Sheet and Microcap Stocks


Dangers of OTC, Pink Sheet and Microcap Stocks

It can be tempting to invest in micro-cap stocks that trade on the over-the-counter (OTC) markets due to the potential for a large return on your investment. If you can find that gem of a company that’s undervalued and ahead of the pack for developing something novel, you can turn pennies into millions, but you can also lose your shirt. That’s why smart investors never invest more than they can afford to lose in OTC securities and go into these investments with a thorough understanding of the risks. Sadly, some financial institutions churn fees by luring inappropriate investors into buying OTC stocks without appropriate warnings. If you’ve lost money on OTC securities that were recommended by your broker, you should speak to an experienced investment broker fraud attorney about making a claim. MDF Law represents investors that have been taken advantage of by unscrupulous brokers and financial institutions. We handle your case on a contingency fee, so you don’t have to pay us unless we collect money for you. Call 800-767-8040 for a free attorney consultation.

What Are Micro-Cap Stocks?

There are four basic categories of stocks, based on the amount of market capitalization for the company. The market capitalization amount is based on the total worth of the company’s shares. These are the four types:

  • Large-cap stocks are the most common investments. They are the big name companies like Starbucks, Microsoft, Target, and Amazon that are unlikely to go out of business or sustain huge losses. The market cap for these stocks is usually between $10 billion – $200 billion.
  • Mid-cap stocks have market caps between $2 billion – $10 billion dollars, making them financially stable with great potential for growth.
  • Small-cap stocks have $300,000 – $2 billion dollars in market capitalization and are usually young companies that are only known within a sector.
  • Micro-cap stocks only have between $50 million and $300 million in market capitalization.

Large-cap, mid-cap, and small-cap stocks trade on the regular exchanges, but micro-cap stocks are only traded over-the-counter (OTC.) If you’ve lost money because your broker encouraged you to invest in the OTC stocks without warning you of the risks, you may be entitled to compensation. It’s important to contact an experienced broker fraud attorney as soon as possible if you believe you’ve been taken advantage of, so that evidence can be preserved and deadlines can be met.

How Do Micro-Cap OTC Stocks Differ From Other Investments?

In addition to lower market capitalization, there are additional ways that micro-cap OTC investments differ from other types of stocks. These are the most important differences that investors should be aware of:

  • Limited Public Information: The lack of information available to the public is the most important difference between micro-cap and other stock categories. Larger public companies are required to file regular reports with the Securities and Exchange Commission (SEC,) that are easily obtainable on the SEC website. Lack of public information makes it more difficult to determine whether OTC stock price is fair and also makes these investments vulnerable to fraud.
  • Lack of Minimum Listing Standards: Some OTC marketplaces, such as OTCQB do have reporting requirements, but OTC Link and OTCBB companies do not have to meet standards such as minimum net assets or minimum number of shareholders.
  • Risk Level: Micro-cap stocks are the riskiest stock investments because they are new companies without track records. Many of these companies have no assets, operations headquarters, or revenue, and offer products and services that are still in the development stage. They are also substantially less liquid than regular stocks, so you might not be able to sell them quickly, making it harder to cut losses if the prices of the stock plummets.

Are OTC Securities A Wise Investment?

A 2016 Securities and Exchange Commission (SEC) analysis of investments in OTC stocks found that the typical return on investment is severely negative and that older, retired, low income, and less educated investors are more likely to lose money on these investments. A regulation mindset is exacerbating the problem by allowing companies to disclose less information, creating a void that is filled by “fraudsters” that release false and misleading information intended to entice investors into buying a particular micro-cap stock. The study also found that the rags to riches scenario rarely plays out as micro-cap stocks are unlikely to graduate to the major exchanges. Despite these increasing risks, the market for OTC counter stocks is growing due to campaigns such as:

  • Email Spam
  • Chat Rooms
  • Paid Promoters
  • Boiler Rooms and Cold Calling
  • Fraudulent Press Releases and
  • Pump and Dump Campaigns

Some mid-cap companies trading on OTC markets are worthy investments, but it’s important to only invest in companies where it’s possible to get adequate and trustworthy information from the following sources:

  • State Securities Regulator;
  • The SEC;
  • Other Government Regulators such as such as The Federal Reserve, The Office of the Comptroller of Currency, or the Federal Deposit Insurance Corporation
  • Reference Books and Commercial Databases such as Dun and Bradstreet, Bloomberg, Hoover’s Profiles, Lexis-Nexis, and Standard and Poor’s
  • The Secretary of State where the company is incorporated.

There are very specific disclosures and eligibility requirements for brokers that recommend OTC stocks to their clients and failing to adhere to these requirements can give rise to a claim.

Should I Hire A Broker Fraud Attorney?

If you’ve lost money on investments that were recommended by your broker, you may have been a victim of broker fraud. The SEC has many requirements for eligibility and disclosure that brokers are required to follow, and when they fail to do so, they can be sued for their investor’s losses. The best way to find out if you have a claim is to contact an experienced broker fraud attorney that can review the facts of your case to determine whether you have a strong case. At MDF Law our entire practice is dedicated to representing investors that have been taken advantage of by unscrupulous brokers and financial institutions. We handle cases on a contingency fee, so you don’t have to pay us unless we collect money for you. Call 800-767-8040 for a free consultation.

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