Penny Stock Rules

The term “penny stock” generally refers to low-priced (below $5),
speculative securities of very small companies. While penny stocks
generally trade over-the-counter, such as on the OTC Bulletin Board
or in the Pink Sheets, they may also trade on securities exchanges,
including foreign securities exchanges. In addition, penny stocks include
the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm
to first approve the customer for the transaction and receive from the
customer a written agreement to the transaction. The firm must furnish
the customer a document describing the risks of investing in penny stocks.
The firm must tell the customer the current market quotation, if any, for
the penny stock and the compensation the firm and its broker will receive
for the trade. Finally, the firm must send monthly account statements
showing the market value of each penny stock held in the customer’s account.

Penny stocks may trade infrequently, which means that it may be difficult to
sell penny stock shares once you own them. Because it may be difficult to find
quotations for certain penny stocks, they may be impossible to accurately price.
Investors in penny stocks should be prepared for the possibility that they may
lose their whole investment.

For more information, read the penny stock rules section of the SEC Broker-Dealer
Registration Guide. You may also want to review the penny stock rules (Securities
Exchange Act Rules 15g-1 through 15g-9).

Before you consider investing in the stock of any small company, be sure to read
SEC brochure, Microcap Stock: A Guide for Investors.

Information derived from: http://www.sec.gov/answers/penny.htm