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Understanding Microcap Fraud

Understanding Microcap Fraud

What is Microcap Fraud?

Microcap Fraud is a type of securities fraud that involves investment activity and methodology rooted within stocks and investments that reside within the lower tier of the Market Capitalization classification. Microcap Fraud consists of the utilization of these types of investment options in order to commit fraudulent and criminal activity, which typically results in financial loss on the part of participatory investors. However, prior to more-fully understanding the concept of Microcap Fraud, the explication of applicable terminology surrounding this process is crucial.

What are Microcaps?

The term ‘Microcap Fraud’ is considered to be a colloquialism that refers to a shortened version of the word ‘Capitalization’ within Market Capitalization. The lower classification tiers of Market Capitalization are classified as companies – or investments – whose total market value does not exceed $50 million; as a result, these stocks are typically more inexpensive than stock options that exceed the classification of a Microcap.

In tandem to the typical price range for these Microcap stocks, the moniker ‘Penny Stocks’ has often been associated with Microcap Fraud; this moniker substantiates the decreased pricing with regard to a classification that the mass-purchase of these stocks is more widely-accessible than its larger ‘capped’ counterparts.

The Dangers of Microcaps

Due to the fact that microcaps – or penny stocks – are readily purchasable at decreased prices allows for the prospect of a single buy or entity gaining the opportunity to regulate the behavior of a particular microcap; the mismanagement of microcaps is classified as Microcap Fraud. Microcap Fraud can take place in a variety of methods:


This crime is particularly prevalent within cases in which the Securities and Exchanges Committee (SEC) has allowed for a microcap’s respective deregulation; as a result of this deregulation, the microcap company will be able to maintain agency over the commercial exchange of its stocks:

While this may be a productive and attractive feature for a company, there also exist a wide variety of criminal ramifications that can take place within the realm of Microcap Fraud; this can include the unfair manipulation of the stock resulting in the misrepresentation of its respective earnings.

Pump and Dump

A ‘Pump and Dump’ investment strategy is considered to be one of the most unethical and unlawful investment activities within the realm of Microcap Fraud; due the accessibility of the prospect to buy an individual microcap in large quantities, large-scale buying, selling, and exchange can allow for a single entity to control the behavior of a single stock without regard for other investors:

The ‘Pump’ aspect of this methodology typically involves an individual or entity amassing a large quantity of these microcaps – or penny stocks; individuals committing this nature of Microcap Fraud with ‘Pump’ money into the investment as they purchase a large quantity of shares.

The ‘Dump’ aspect of the process of this type of Microcap Fraud typically occurs as the multitude of microcaps are sold off in bulk; the mass-purchase of the particular Microcap projects the illusion that the stock underwent an increase in value – as the individual ‘Dumps’ that particular Microcap, the value of the stock declines just as quickly as it once rose.