South Florida Arbitration & Litigation Lawyer Blog
Penny Stocks:
This post is designed to provide the reader with general educational information concerning various characteristics associated with “penny stocks.” Please keep in mind that this information is being provided for informational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If you have any questions concerning this post or its contents, you should seek the assistance of a qualified professional.
A penny stock is defined by the Securities and Exchange Commission (SEC) as a security that is selling for less than $5 per share and was not listed or authorized for quotation on a NASDAQ market exchange. Penny stocks are issued by start up companies or companies with a short or violative revenue or earning history. Because of the risk associated with this classification of security, many brokerage firms have special precautionary rules about trading in these stocks and the SEC requires that brokerage firms implement suitability rules and require that the firm obtain written consent from investors authorizing such transactions.
When problems arise in the penny stock area, this is the scenario that typically transpires. The account executive solicits the purchase of the penny stock for any number of reasons that sound to good to be true. However, the brokerage firm usually has rules against this. To get around this prohibition, the account executive tells the client that he or she must execute a non-solicitation letter, which confirms to the firm that the penny stock transaction was the idea of the client and not the account executive. When the transaction goes bad, the first thing that happens is that the firm and the account executive throw the non-solicitation letter at the client in an attempt to avoid any liability to the customer for the transaction.