The SEC Office of Investor Education and Advocacy provided a list of risks and "red flags" for investors to consider before investing in microcap stocks. The Investor Bulletin warned investors to be wary of:
- a lack of publicly-available information;
- no minimum listing standards;
- a lack of liquidity;
- high volatility; and
- fraud manipulation.
In addition, the Investor Bulletin urged investors to look out for the following "red flags":
- SEC trading suspensions;
- stock promotions (including email, text messages and social media sites recommending a stock);
- unexplained increases or decreases in stock price or trading volume;
- no history of operational success;
- insiders owning large amounts of the stock; and
- no real business operations.
Finally, the SEC warned investors to:
- look closely at reverse mergers;
- look closely at reverse stock splits;
- review independent information about the company's management;
- cautiously examine any unsolicited recommendation;
- never deal with brokers who refuse to provide you with written information; and
- not provide personal information to an unestablished account.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.