MICRO CAP STOCK

The term "micro cap stock" applies to companies with low or "micro" capitalizations, meaning the total value of the company's stock. Micro cap companies typically have limited assets. For example, in cases where the SEC suspended trading in micro cap stocks, the average company had only $6 million in net tangible assets — and nearly half had less than $1.25 million. Micro cap stocks tend to be low priced and trade in low volumes.

No Minimum Listing Standards Companies that trade their stocks on major exchanges and in the NASDAQ Stock Market must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies on the OTCBB or the Pink Sheets do not have to meet any minimum standards.
Risk:
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While all investments involve risk, micro cap stocks are among the most risky. Many micro cap companies tend to be new and have no proven track record. Some of these companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to micro cap stocks involves the low volumes of trades. Because micro cap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.


The Off-Shore Scam:
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Under a rule known as "Regulation S," companies do not have to register stock they sell outside the United States to foreign or "off-shore" investors. In the typical off-shore scam, an unscrupulous microcap company sells unregistered Reg S stock at a deep discount to fraudsters posing as foreign investors. These fraudsters then sell the stock to U.S. investors at inflated prices, pocketing huge profits that they share with the microcap company insiders. The flood of unregistered stock into the U.S. eventually causes the price to plummet, leaving unsuspecting U.S. investors with enormous losses.