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What is the Penny Stock Rule?

SEC Penny Stock Rule

The Penny Stock Rule refers to the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”), under which broker-dealers must follow a series of compliance measures in order to effect transactions in penny stocks.

The term “penny stock” usually refers to a security issued by a very small company trading at less than Five Dollars ($5.00) per share.

Penny stocks are sometimes known as OTC Markets stocks and are typically quoted over-the-counter on OTCMarkets.com  operated by OTC Markets Group, Inc. or on FINRA’s Bulletin Board (“OTCBB”).

Section 15(h) of the Exchange Act

Because of the inherently speculative characteristics of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Exchange Act, which states that broker-dealers  must

  1. approve the customer for the specific penny stock transaction and receive a written agreement to the transaction;
  2. furnish the customer with a disclosure document describing the risks of investing in penny stocks;
  3. disclose to the customer the current market quotation, if any, for the penny stock;
  4. disclose to the customer the amount of compensation the firm and broker will receive for executing the trade; and
  5. after executing the trade, a broker-dealer must send to its investing customer monthly account statements that show the market value of all penny stock held in the customer’s account.

Transactions Exempt from the Penny Stock Rule

Some transactions in penny stocks are exempt from the Penny Stock Rule. Examples of exempt transactions are those with an established customer, who has either done business with the brokerage for greater than one year, or who has made at least three penny stock purchases.  Likewise, transactions with institutional investors may also be exempt.

Some Companies with Low Stock Prices are Not Penny Stocks

Companies quoted on the OTCQX, the highest market tier of OTCMarkets.com, are not considered Penny Stocks even if they have low stock prices because they must meet one of the exemptions to the Penny Stock Rules involving minimum net tangible assets or revenue.

Brokerages Specialize in OTC Markets Penny Stocks

An experienced securities attorney like Matheau J. W. Stout, Esq. can refer shareholders to one of the few brokerage firms which specialize in OTC Markets stocks.

These OTC brokers have streamlined the process of opening accounts for penny stock investors.  Their compliance and legal departments are familiar with penny stocks and the Rule 144 legal opinions needed to deposit OTC stocks.

Interested OTC stock shareholders can review SEC Schedule 15g for further information or contact Matt Stout, microcap securities attorney at (410) 429-7076 or via email at mstout@otclawyers.com.