Penny stocks are low-priced, highly speculative common stock investments issued by very small companies. Through broker-dealers that specialize in penny stock transactions, companies can issue the stock directly to investors via private placement offerings. Penny stock issuers often seek to increase liquidity and access to new investors by registering to have their shares trade over the counter, or OTC, as Bulletin Board stocks. The Over the Counter Bulletin Board, or OTCBB, is an electronic interdealer quotation system operated by the Financial Industry Regulatory Authority, which displays quote, price and volume information for OTC securities not listed on other, national exchanges.
Issuing Penny Stock
Any company can issue stock via private transactions, but the advent of trading on a public exchange such as the OTCBB represents an initial public offering, in which the company hires a broker-dealer to offer its securities to the public for the first time. Afterward, the shares trade freely on the exchange, although penny stock trading volume is often very low. To trade on the OTCBB, the company must register its shares with the Securities and Exchange Commission and seek sponsorship by a broker-dealer registered with the OTCBB. The company must also provide current financial statements to the SEC. In connection with the issuance, the sponsoring broker-dealer makes certain disclosures on behalf of the penny stock issuer.
The broker-dealer is required to receive from any prospective investors a signed receipt acknowledging receipt of the required disclosures. The document must contain information warnings for investors regarding the speculative nature of penny stock investments and a statement cautioning the investor that he may lose the entire value of his investment. The amount of fees collected in connection with the issuance must also be disclosed. Prospective investors must also qualify by meeting specific financial requirements, which the broker-dealer is responsible for certifying.
- Securities and Exchange Commission: Penny Stock Rules
- Securities and Exchange Commission: Microcap Stock -- A Guide For Investors
- Securities and Exchange Commission: Amendment to the Penny Stock Rules
- U.S. Securities and Exchange Commission. "Penny Stock Rules." Accessed Aug. 4, 2020.
- U.S. Securities and Exchange Commission. "Microcap Stock: A Guide for Investors." Accessed Aug. 4, 2020.
- Federal Bureau of Investigation. "Penny Stock Fraud Nets Millions." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-9 Sales practice requirements for certain low-priced securities." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-2 Penny stock disclosure document relating to the penny stock market." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-3 Broker or dealer disclosure of quotations and other information relating to the penny stock market." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-4 Disclosure of compensation to brokers or dealers." Accessed Aug. 4, 2020.
- Electronic Code of Federal Regulations. "Sec. 240.15g-6 Account statements for penny stock customers." Accessed Aug. 4, 2020.