Penny Stocks are stocks that have a very low value and are traded outside of the formal stock exchanges. They are mostly traded over the counter on the Over The Counter Bulletin Board (OTCBB) and the Pink Sheets. Also, they are characterized by very thin volume. Due to the low value of these stocks and the thin volume of trade everyday, they are subject to a lot of manipulations. As a result, many frauds and scams occur in penny stocks trading. The Securities and Exchange Commission (SEC) has formulated certain rules and regulations for penny stocks trading. This is primarily to help investors to safeguard their investment from possible frauds and scams. The Securities Exchange Act of 1934 relates to penny stocks. Section 3(a)(51) of this act is associated with penny stocks. Penny stocks are defined as securities other than those falling into the categories mentioned below: The shareholders' equity should be a minimum of $5,000,000. These companies should have a net income of $750,000 (excluding extraordinary or non-recurring income) during the last year or during two of the last three years. The company must have been operating for at least one year and the average revenue must be at least 6,000,000 during the last three years. The market value, last bid price multiplied by the number of listed shares, should be a minimum of $50 million. The common or preferred stock of the company must have a minimum bid price of $4. There must be at least 300 different holders of the company's common stock. There should be a minimum amount of $10 million in the case of a convertible debt security. Convertible debt security is a security that can be converted to other securities issued by the same company. The stocks must have been issued by an investment company under the Investment Company Act of 1940. These companies must have call or put options issued by the Options Clearing Corporation. There must be at least 100,000 rights and warrants issued and these securities must be registered with the stock exchanges or an automated electronic system sponsored by a registered national securities association. Stock falling under the above mentioned categories are not penny stocks. Investors must know that any person trying to sell the stocks falling in any of the above mentioned category as a penny stock is a scammer or fraudster. Every broker-dealer firm engaged in penny stocks trading must get a written agreement from the customer before they go ahead with the transaction. This written agreement should lay out the risks involved in penny stocks investing. In addition, the current price and the broker's compensation should be mentioned. The firm must also send monthly statements to the customer showing the current value of the invested penny stocks. Every investor must be aware of the rules and regulations laid down by the SEC in relation to these stocks. This will go a long way in helping the investors to make money and to steer away from frauds and scams associated with penny stocks investing.
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