| Rules issued by the Securities and Exchange Commission under the Securities Exchange Act of 1934 define and regulate "penny stocks." Penny stocks are defined in Rule 3a51-1 as unregistered stocks priced at less than five dollars issued by a company with net tangible assets of less than $2 million after being in operation for three years or less than $5 million after being in operation less than three years.
Penny stocks are viewed by some observers as being more speculative than registered securities. Penny stocks are sold through the OTC Bulletin Board or the "Pink Sheets" rather than on one of the national exchanges such as the New York or American Stock Exchanges.
Securities and Exchange Commission Rules 15g-1 through 15g-9 regulate transactions in penny stocks. A penny stock may not be sold by a broker-dealer unless the broker-dealer first determines that the transaction is appropriate for the customer and then provides a risk disclosure document to the customer. Thus, Rule 15g-2 provides:
It shall be unlawful for a broker or dealer to effect a transaction in any penny stock for or with the account of a customer unless, prior to effecting such transaction, the broker or dealer has furnished to the customer a document containing the information set forth in Schedule 15G, Rule 15g-100, and has obtained from the customer a manually signed and dated written acknowledgement of receipt of the document.
Schedule 15G describes the format, style, and content of the information to be provided to the penny stock customer. The cover page must be titled "Important Information on Penny Stocks." Additional required information alerts the investor to the risk of investing in penny stocks and to information that must be provided by the seller. Broker duties and rights and remedies available to the investor are described, and further information on the nature and risk of penny stocks is provided. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |