INFORMATION
MATTERS
Information
is the investor's best tool when it comes to investing wisely.
However, accurate information about the smallest of companies
can be extremely difficult to find. Many small companies do not
register their securities or file financial reports with the
SEC, which makes it difficult for investors to get the facts
about the company's management, products, services, and
finances.
The fact that a company files
reports with the SEC does not make the company a
"good" investment or immune to fraud. Conversely, the
fact that a company does not file with the SEC does not mean the
company lacks legitimacy. Many of the companies that don't file
reports with the SEC are honest businesses with real products or
services. T
WHICH
COMPANIES FILE WITH THE SEC?
The
federal securities laws require all but
the smallest public companies to file reports with the
SEC - including companies with 500 or more investors and $10
million or more in assets, companies that list their securities
on a major national exchange,
and companies whose securities are quoted on the OTC Bulletin
Board.
Reports
that a company files with the SEC contain a treasure trove of
important information about the company's management,
business, and financial condition and can tell you whether the
company is making money or losing money and why. Any investor
can access (for free) these and other documents by searching the
SEC's EDGAR
database of company filings.
WHAT
INFORMATION DO I NEED?
If you
are investing on your own, research each opportunity thoroughly
and ask questions - about both the
company itself and the person or entity promoting it. These
simple steps can help you make an informed investment decision:
Research the
Company
If you can't find the company on EDGAR, contact your state
securities regulator. Read carefully the most
recent reports the company has filed with its regulators. Make
sure you understand the company's business and its products or
services. If the company does not file reports with the
SEC, be sure to ask your broker for what's called the
"Rule 15c2-11 file" on the company.
Know
the Owners
Contact your state
regulator to check out the people running the
company. Be sure to find out whether they have a history of
investor complaints or fraud charges. It pays to know whether
the company's management has made money for investors in the
past - or not.
Check
Out Your Broker
Make sure the broker and his or her firm are registered
and licensed to do business in your state. Ask your state
regulator whether the broker and the firm have
complaints against them.
HOW DO I GET
INFO ON COMPANIES?
If you're working with a
broker or an investment adviser, he or she can provide you with
information about the company and its disclosure
documents. You can also get information on your own from
these sources:
From
the company
Ask the company if it is registered with the SEC and files
reports with us. If the company is small and unknown to most
people, you should also call your state securities regulator
to get information about the company, its management, and the
brokers who've encouraged you to invest in the company.
From
the SEC
A great many companies must file their reports with the SEC.
Using the EDGAR
database, you can find out whether a company files
with us and get any reports in which you're interested. For
companies that do not file on EDGAR, check with the SEC's
Public Reference Room to see whether the company has filed an
offering circular.
From
your state securities regulator
We strongly urge you to contact your state
securities regulator to find out whether they have
information about a company and the people behind it. Even
though the company does not have to register with the SEC, it
may have to register them with your state. Your regulator will
tell you whether the company has been legally cleared to sell
securities in your state.
From
other government regulators
Many companies, such as banks, do not have to file reports
with the SEC. But banks must file updated financial
information with their banking regulators. Visit the Federal
Reserve at www.federalreserve.gov,
the Office of the Comptroller of the Currency at www.occ.treas.gov,
or the Federal Deposit Insurance Corporation at www.fdic.gov.
From
reference books and commercial databases
Visit our investment
bookstore. You'll find many reference materials
containing information about companies. You can also access
commercial databases for more information about the company's
history, management, products or services, revenues, and
credit ratings. Commercial resources include: Bloomberg,
Dun & Bradstreet, Hoover's Profiles, Lexis-Nexis, and
Standard & Poor's Corporate Profiles. Ask your librarian
about additional resources.
From
the Secretary of State where the company is incorporated
Contact the secretary of state where the company is
incorporated to find out whether the company is a corporation
in good standing. You may also be able to obtain copies of the
company's incorporation papers and any annual reports it files
with the state.
WHAT ARE THE
RED FLAGS?
SEC
Trading Suspensions
The SEC has the power to suspend trading in any stock
for up to 10 days when it believes that information about the
company is inaccurate or unreliable. Think twice before
investing in a company that's been the subject of an SEC
trading suspension.
Company
Recommended But No Current Information
Be careful if you receive an unsolicited fax or e-mail
about a company -- or see it on an Internet bulletin board --
but can find no current financial information about the
company from independent sources. Many fraudsters use e-mail,
faxes and Internet postings to tout thinly traded stocks, in
the hopes that the resulting buying frenzy will push the share
price up so that they can sell their shares. Once they dump
their stock and quit promoting the company, the share price
quickly falls.
High
Pressure Sales Tactics
Beware of salespeople who pressure you to buy before
you have a chance to think about and investigate the
"opportunity." Dishonest people may try to tell you
about a "once-in-a-lifetime" opportunity or one
that's based on "inside" or "confidential"
information. Don't fall for a promise of spectacular profits
or "guaranteed" returns. These are the hallmarks of
fraud. If the deal sounds too good to be true, then it
probably is.
Assets
Are Large But Revenues Are Small
Companies will sometimes assign high values on their
financial statements to assets that have nothing to do with
their business. Find out whether there's a valid explanation
for low revenues, especially when the company claims to have
large assets.
Odd
Items in the Footnotes to the Financial
Statements
Many fraud schemes involve unusual transactions among
individuals connected to the company. These can be unusual
loans or the exchange of questionable assets for company stock
that may be discussed in the footnotes.
Unusual
Auditing Issues
Be wary when a company's auditors have refused to
certify the company's financial statements or if they've
stated that the company may not have enough money to continue
operating. Also question any change of accountants.
Insiders
Own Large Amounts of the Stock
In many fraud cases - especially "pump and dump"
schemes - the company's officers and promoters own significant
amounts of the stock. When one person or group controls most
of the stock, they can more easily manipulate the stock's
price at your expense. You can ask your broker or the company
whether one person or group controls most of the company's
stock, but if the company is the subject of a scam, you may
not get an honest answer.
Additional
Warning Signs
Don't deal with anyone who refuses to provide you with written
information about the investments they're promoting. Never
tell a cold caller your social security number or numbers for
your banking and securities accounts. And be extra wary if
someone you don't know and trust recommends foreign or
"off-shore" investments. For more tips on avoiding
danger, be sure to read Cold
Calling and The
Fleecing of Foreign Investors.
WHAT ABOUT
BANKRUPTCY?
Watch
out for ticker symbols ending with a fifth letter "Q."
The addition of a "Q" to a company's stock ticker
symbol indicates that the company has filed for or is involved
in bankruptcy proceedings. Investors often snatch up the
low-priced shares of companies that have filed for Chapter 11
protection, speculating that the price will rise once the
company emerges from bankruptcy.
Be
cautious when buying common stock of companies in Chapter 11
bankruptcy.
Doing so is extremely risky and will likely
lead to financial loss. Although a company may emerge from
bankruptcy as a viable entity, in most instances, the company's
plan of reorganization will cancel the existing equity shares.
It is generally the creditors and the bondholders who become the
new owners of the company's new shares - not the
stockholders.
WHERE CAN I
TURN FOR HELP?
If you've been asked to invest
in a company but you can't find any record that the company has
registered its securities with the SEC or your state, or that
it's exempt from registration, you may have come face to face
with a scam. Call or write your state's securities regulator
immediately with all the details. You can also file a complaint
using the SEC's online Complaint
Center.
