CL King

Uncovering Hidden Investment Opportunities Since 1972

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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 CL King & Associates 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.


Learn more about Micro-cap Funds; consult us at C.L. King & Associates.
C.L. King & Associates is a full-service investment bank and self-clearing broker-dealer founded in 1972. We provide investment banking, equity research, sales and trading, and investor services to corporations and institutions.
We co-manage bond offerings, IPOs, follow-ons, secondaries, convertibles, and preferred. In addition, we transact directly in the capital markets on behalf of corporations through our Corporate Services business focused on share repurchase and continuous share offerings ("ATMs"). 
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