Micro-cap stocks are shares in companies that are not well-established, have a small number of shares in public hands (“thinly traded” shares) and often trade at less than $5.00 per share. The SEC is concerned about implementing new rules and regulations on micro-cap companies due to the potential increase in fraud. A majority of brokers and dealers have refused to manage, settle, hold or issue securities for micro-cap companies because of the cost of the due diligence required and concern about fraud.
According to the U.S. Securities and Exchange Commission, Microcap companies typically have limited assets and low-priced stock that trades in low volumes. An initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division’s Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.
The existence of empty shell companies can be a financial boon to stock manipulators who will pay as much as $750,000 to assume control of the company in order to pump and dump the stock for illegal proceeds to the detriment of investors. But with this trading suspension’s obligation to provide updated financial information, these shell companies have been rendered essentially worthless and useless to scam artists.
Pump-and-dump schemes are among the most common types of fraud involving microcap companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.
On May 14th of this year, The SEC suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The trading suspension marks the largest number of companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.
“Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors.”
“This mass trading suspension is an effective and novel way for the SEC to neutralize potential threats to investors,” said Chris Ehrman, Co-National Coordinator of the SEC’s Microcap Fraud Working Group. “With the ability to leverage staff expertise throughout the agency’s offices and divisions, the Working Group is uniquely positioned to take on risk-based matters like these and focus resources where they are needed most.”