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. Micro Cap

    A publicly traded company in the United States that has a market ...
  4. Jitney

    A situation in which one broker who has direct access to a ...
  5. Wide Open

    The gap between a stock's bid price and the ask price at the ...
  6. Blank-Check Company

    A company in a developmental stage that either doesn't have an ...
RELATED FAQS
  1. Should I invest in penny stocks or large cap stocks for my retirement portfolio?

    Large-cap stocks are a superior investment option for retirement portfolios compared to penny stocks. Most penny stocks are ... Read Full Answer >>
  2. Is it more beneficial to invest in a blue chip stock or a penny stock?

    Penny and blue-chip are terms used to describe a stock's valuations and statures. Penny stocks are generally the stocks of ... Read Full Answer >>
  3. Why is it a bad idea for beginning investors to speculate in penny stocks?

    A penny stock is the stock of a company that trades below $5 and generally trades on the over-the-counter bulletin board ... Read Full Answer >>
  4. What is the difference between a penny stock and a small cap stock?

    A penny stock and a small-cap stock represent the shares of a company with low market capitalizations. However, there is ... Read Full Answer >>
  5. Why would an investor consider purchasing electronic stocks for their portfolio?

    An investor would consider purchasing electronics stocks because that sector provides many opportunities for both quick profits ... Read Full Answer >>
  6. Where do I go to make an OTC (over-the-counter) transaction?

    Over-the-counter (OTC) markets are where market makers hold inventories of nonlisted stocks for investors to trade. Unlike ... Read Full Answer >>
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. Investing

    The Risks & Rewards of Penny Stocks

    Penny stocks can make you a lot of money in a short period of time, but this is a very dangerous game that almost always will leads to losses.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center