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What is penny stock rule?


The term penny stock refers to securities that usually trade at over the counter market at less than $5 per share. Such stocks are mostly issued by smaller companies whose shares trade on OTC Markets or less frequently on OTC Bulletin Boar. Penny stock are also considered highly speculative, with small market capitalization, lacking liquidity and disclosures urging Congress to prohibit broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 also known as Penny Stock Rule.

To comply with the requirements of Section 15(h) of Securities and Exchange Act broker-dealer must:
  1. approve the customer for the specific penny stock transaction and receive a written agreement to the transaction
  2. furnish the customer 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 customer the amount of compensation the firm and its broker will receive for the trade 
  5. after executing the sale a broker-dealer must send to its customer monthly account statement showing the market value of each penny stock held in the customer's account.
This security is exempt from the definition of a Penny Stock under SEC under Rule 240.3a51-1 because it meets one of the following tests: 

  1.  a price over $5 per share
  2.  the issuer has average revenue of at least $6 million for the last 3 years
  3. the issuer has net tangible assets in excess of $2 million if the issuer has been  in contentious operations for at least 3 years or $5 million if less than 3 years.

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Location: West Palm Beach, FL, USA

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