Penny Stock Reform Act

AAA

DEFINITION of 'Penny Stock Reform Act'

A securities act enacted in 1990 that sought to clamp down on fraud in non-exchange-listed stocks priced below $5 that generally trade in the over-the-counter market. The Penny Stock Reform Act – which was part of the “Securities Enforcement Remedies and Penny Stock Reform Act of 1990” – was signed into law by Georage H.W. Bush  on Oct. 15, 1990, to deal with the growing incidence of penny stock fraud in the 1980s. The act attempted to impose more stringent regulations on broker/dealers who recommended penny stocks to clients, and also promoted establishing a structured electronic marketplace for quoting such securities.

INVESTOPEDIA EXPLAINS 'Penny Stock Reform Act'

The Penny Stock Reform Act used a two-pronged approach of more regulation and better disclosure to achieve the objective of reducing penny stock fraud. First, it granted the Securities and Exchange Commission (SEC) administrative power over penny stock issuers, brokers and dealers. Second, the act required penny stock brokers and dealers to disclose to potential customers general information about the penny stock market, and specific information about the penny stocks such customers proposed to purchase.

Penny stocks are usually issued by very small companies with minimal levels of net tangible assets and annual revenues. Penny stock transactions and abusive activities associated with them – such as “pump and dump” schemes and account “churning” – grew substantially in the U.S. from the mid-1980s onward. Advances in technology and telecommunications contributed to the dramatic rise in interstate “boiler room” operations where promoters used high-pressure sales tactics to convince unsuspecting investors to invest in dubious penny stocks.

In its report on the 1990 act, the House Committee on Energy and Commerce identified two main factors that had spurred the growth of penny stock fraud:

1) A lack of public information on these stocks, which facilitated price manipulation; and

2) The presence of a large number of promoters and others associated with penny stock issuers and broker-dealers who were repeat offenders under securities laws, convicted felons or had ties to organized crime.

VIDEO

Loading the player...
RELATED TERMS
  1. OTC Pink

    The lowest tier of the three marketplaces for trading over-the-counter ...
  2. Pip-Squeak Pop

    A slang term used to describe a moderate price increase in a ...
  3. Bucket Shop

    1. A fraudulent brokerage firm that uses aggressive telephone ...
  4. Penny Stock

    A stock that trades at a relatively low price and market capitalization, ...
  5. Over-The-Counter Bulletin Board ...

    A regulated electronic trading service offered by the National ...
  6. Nano Cap

    Small public companies with a market capitalization below $5 ...
Related Articles
  1. Investing Basics

    How To Play The OTC Pink Stocks

    The OTC Pink offers a variety of investment candidates including many good companies waiting to be discovered. Recently, the OTC Pink has worked hard to improve the service by tiering companies ...
  2. Investing Basics

    Spotting Sharks Among Penny Stocks

    To protect yourself from an attack, don't swim in this ocean.
  3. Investing

    Spot Hotshot Penny Stocks

    Don't flip a coin to find your next investment.
  4. Personal Finance

    How To Identify A Micro-Cap Scam

    Discover how to distinguish a real investment opportunity from a fraudulent one.
  5. Trading Strategies

    Small Caps Boast Big Advantages

    Find out why little companies have the greatest potential for growth.
  6. Investing Basics

    Small Cap Research Can Have A Big Impact

    Don't rely on Wall Street analysts for information on these stocks.
  7. Investing Basics

    How To Evaluate A Micro-Cap Company

    Learn how to think big by investing in smaller stocks.
  8. Active Trading

    Catching A Lift On The Penny Express

    The popularity of the penny stock market has grown, but are these stocks a safe bet?
  9. Investing Basics

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
  10. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center