To come full circle, investing in companies on national stock exchanges provides much greater security and liquidity. The below is from a Canadian source but applies to the NYSE and NASDAQ equally.
Limiting the risk of over-the-counter market fraud (LINK)
What are over-the-counter markets all about?
Over-the-counter markets (also known as “OTC markets” or “Pink Sheets”) are marketplaces for buying and selling securities issued by small companies. Generally, these securities are not frequently traded and they have little liquidity. Transactions are conducted directly between the buyer and the seller. Often, they are valued at less than a dollar, hence the name “penny stocks.”
The stocks are often held by a small number of shareholders.
In many cases, OTC-quoted companies don’t meet the listing criteria of the large exchanges.
Are over-the-counter markets regulated?
OTC markets are subject to little if any oversight by regulatory authorities. They therefore represent a high risk for investors.
Recognized exchanges in Canada [and in the USA such as the NYSE or NASDAQ] impose conditions—in particular, legal and financial—on companies seeking to list and issue securities.
Companies that are unable or do not wish to meet these conditions turn to the OTC markets.
Some investors are taken in by scam artists’ fine words. They’re convinced they’ll make a lot of money quickly due to high returns. Be careful!
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Beware of fraud
OTC markets are ideal for promoting securities (pump and dump scheme).
Scam artists manipulate the market as follows: They buy a large number of securities of a company listed on an OTC market. Demand for these securities is low. The scam artists send out information, often via the Internet, that leads investors to believe that the value of the security will jump very quickly. This information is hard to verify.
You and several other investors purchase the security. Its value goes up temporarily.