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Fraud on OTC or Pink Sheets

What are over-the-counter markets?

Over-the-counter markets (also known as “OTC markets” or “Pink Sheets”) are marketplaces for securities issued by small companies. Generally, these securities are not frequently traded and they have little liquidity. Often, they are valued at less than a dollar, hence the name “penny stocks,” and are held by a small number of shareholders.

Most of the time, OTC-quoted companies do not meet the listing criteria of the large exchanges. Moreover, OTC markets are not highly regulated or not regulated at all by the competent bodies, which increases the risk for investors.

Recognized exchanges in Canada impose conditions—in particular, legal and financial—on companies wishing to list with them and issue securities. Companies that are unable or do not wish to meet these conditions turn to the OTC markets.

High-risk investments

Investors egged on by rumours or hot tips and enticed by promises of high short-term returns should be cautious. OTC-quoted companies sometimes have no history, and finding reliable, objective financial data about them is difficult.

Also, their securities may not be very liquid and could be subject to legal restrictions when resold. As a result, it could be virtually impossible to sell them in a reasonable period of time.

Beware of fraud

The OTC markets are an ideal haven for shell companies. Since they do not have actual assets or business operations, these companies are often used in pump and dump schemes. In this type of market manipulation strategy, scam artists hold a large number of securities of a company listed on an OTC market. Demand from the investing public for these securities is low. Scam artists send out information, often via the Internet, that is hard to verify and leads investors to believe that the value of the security will jump in the short term.

Investors buy the security, which helps to drive up its value temporarily. The scam artists then sell off their holdings in the company and walk away with huge profits. Eventually, the investors realize that the information was false, that their investments are practically worthless and that no one wants them.

Investors should ask themselves what the individuals touting the securities really gain from tipping them off about the investment.

Before investing …

  • Do you understand the features, risks and potential return of the company you are thinking of investing in?
  • Is the information about the company you have access to reliable?
  • Have you read the company’s audited financial statements?
  • Does it have cash assets?
  • Is it carrying substantial debt?
  • Does the company generate income?
  • Is it profitable?
  • How long has it been in business?
  • Has the company been successful in marketing its products or services?
  • Who are the company’s officers and directors? What is their background?
  • What is your risk tolerance? Can you afford to lose your investment?

If you have little or no tolerance for risk, OTC securities are not for you. If you think you will need cash in the short term and will have to resell your securities to get it, this type of investment is not suitable for you.

Whether on the Internet or in person, offering investments is a regulated activity. The person or company asking for your money must be registered with the AMF and authorized to sell you the products being offered. Make sure you check whether the person or company is entered in the register of firms and individuals authorized to practise.