How to Spot a Micro-Cap Scam?

Micro-cap scams are plentiful. You’ve probably seen them before, flooding your inbox with fake newsletters promising a return of 300% or some other fantastic number that sets the hopeful investor’s heart to racing. It can be difficult to resist the temptation of succumbing to micro-cap scams. With the promise of such wild returns, it’s easy to see why so many people fall victim to such fraud. Some scams are easy to spot, others are not. Here are a couple micro-cap scams our experts at Paradigm Capital Management have discussed, you should be wary of and ways you can avoid becoming a victim.

Beware Pump and Dump Schemes

A pump and dump scheme involves hyping up a particular stock by using telemarketers, online bulletin boards, and chat rooms to spread the word that they know something about a particular stock that the market doesn’t. It’s their goal to incite a buying frenzy which in turn “pumps” up the value of the stock. Once the stock has been pumped sufficiently, paid promoters and insiders will “dump” their shares, causing the stock to lose much of its value and costing innocent investors much of their investment. Never listen to the hype. Always do your own research before making an investment. If you receive a “hot tip” from a less than reliable source, always be wary.

Offshore Scams

Under the guidelines of “Regulation S”, companies that sell their stock to overseas investors don’t have to register their shares with the SEC. This guideline has opened the door for a flood of scamming opportunities. In an offshore scam, unregistered Reg S micro-cap shares are discounted and then sold to a scammer who in turn, posing as a foreign investor, inflates the price and sells them to a U.S. investor. As you can imagine, the scammer walks away with a tidy little profit. Furthermore, the influx of unregistered shares in the market causes the stock price of the company to fall, causing more losses for investors. Always do your due diligence before working with an investor of any kind to ensure that you’re paying a fair price for any kind of investment you may engage in.


Tools of the trade

Micro-cap scammers rely upon the lack of public information to spread fake information. There are a number of tools that scammers use to take advantage of unsuspecting investors.

• Cold calls: some less than scrupulous brokers assemble a group of sales people to cold call investors and pressure them into buying risky stocks. Always be wary if you receive a call from a stranger. Never give away personal information such as your social security number.

• Email: spamming inboxes with junk mail has been a past time of scammers since the advent of the internet. It shouldn’t be a surprise that micro-cap scammers use emails as a way to spread false information for scamming purposes. No matter how hot the tip seems, if it came from an email sent from a stranger, you should just ignore it.

• Press releases: micro-cap scammers love to publish fake news releases. They embellish a company’s sales and projections to encourage individuals to invest their money. These press releases tend to look legitimate, so you should conduct your own research before investing in any company.

If you ever find yourself in the middle of a scam make sure to report it. First, make your broker aware of the situation, but if they’re powerless to help you contact the SEC. Small cap investing can be quite profitable as long as you watch for the warning signs of a possible scam.

Paradigm Capital Management is a trusted leader in small cap investing. With a long history of small-cap investing, Paradigm Capital Management employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.Paradigm Capital Management is focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.To read more, visit here: