Important Information on
This statement is required by the U.S. Securities
and Exchange Commission (SEC) and contains important
information on penny stocks. Your broker-dealer is
required to obtain your signature to show that you
have received this statement before your first trade
in a penny stock. You are urged to read this statement
before signing and before making a purchase or sale
of a penny stock.
Penny stocks can be very
Penny stocks are low-priced shares of small companies
not traded on an exchange or quoted on NASDAQ. Prices
often are not available. Investors in penny stocks
often are unable to sell stock back to the dealer
that sold them the stock. Thus, you may lose your
investment. Be cautious of newly issued penny stock.
Your salesperson is not an impartial advisor but is
paid to sell you the stock. Do not rely only on the
salesperson, but seek outside advice before you buy
any stock. If you have problems with a salesperson,
contact the firm's compliance officer or the regulators
Information you should get
Before you buy penny stock, federal law requires
your salesperson to tell you the "offer"
and the "bid" on the stock, and the "compensation"
the salesperson and the firm receive for the trade.
The firm also must mail a confirmation of these prices
to you after the trade. You will need this price information
to determine what profit, if any, you will have when
you sell your stock. The offer price is the wholesale
price at which the dealer is willing to sell stock
to other dealers. The bid price is the wholesale price
at which the dealer is willing to buy the stock from
other dealers. In its trade with you, the dealer may
add a retail charge to these wholesale prices as compensation
(called a "markup" or "markdown").
The difference between the bid and the offer price
is the dealer's "spread." A spread that
is large compared with the purchase price can make
a resale of a stock very costly. To be profitable
when you sell, the bid price of your stock must rise
above the amount of this spread and the compensation
charged by both your selling and purchasing dealers.
If the dealer has no bid price, you may not be able
to sell the stock after you buy it, and may lose your
Brokers' duties and customer's
rights and remedies
If you are a victim of fraud, you may have rights
and remedies under state and federal law. You can
get the disciplinary history of a salesperson or firm
from the FINRAat 1-800-289-9999, and additional information
from your state securities official, at the North
American Securities Administrators Association's central
number: (202) 737-0900. You also may contact the SEC
with complaints at (202) 272-7440.
The securities being sold to you have not been approved
or disapproved by the Securities and Exchange Commission.
Moreover, the Securities and Exchange Commission has
not passed upon the fairness or the merits of this
transaction nor upon the accuracy or adequacy of the
information contained in any prospectus or any other
information provided by an issuer or a broker or dealer.
Generally, penny stock is a security that:
- Is priced under five dollars;
- Is not traded on a national stock exchange or on
NASDAQ (the NASD's automated quotation system for
actively traded stocks);
- May be listed in the "pink sheets" or
the FINRAOTC Bulletin Board;
- Is issued by a company that has less than $5 million
in net tangible assets and has been in business less
than three years, by a company that has under $2 million
in net tangible assets and has been in business for
at least three years, or by a company that has revenues
of $6 million for 3 years.
Use Caution When Investing
in Penny Stocks:
1. Do not make a hurried investment decision. High-pressure
sales techniques can be a warning sign of fraud. The
salesperson is not an impartial advisor, but is paid
for selling stock to you. The salesperson also does
not have to watch your investment for you. Thus, you
should think over the offer and seek outside advice.
Check to see if the information given by the salesperson
differs from other information you may have. Also,
it is illegal for salespersons to promise that a stock
will increase in value or is risk-free, or to guarantee
against loss. If you think there is a problem, ask
to speak with a compliance official at the firm, and,
if necessary, any of the regulators referred to in
2. Study the company issuing the stock. Be wary of
companies that have no operating history, few assets,
or no defined business purpose. These may be sham
or "shell" corporations. Read the prospectus
for the company carefully before you invest. Some
dealers fraudulently solicit investors' money to buy
stock in sham companies, artificially inflate the
stock prices, then cash in their profits before public
investors can sell their stock.
3. Understand the risky nature of these stocks. You
should be aware that you may lose part or all of your
investment. Because of large dealer spreads, you will
not be able to sell the stock immediately back to
the dealer at the same price it sold the stock to
you. In some cases, the stock may fall quickly in
value. New companies, whose stock is sold in an "initial
public offering," often are riskier investments.
Try to find out if the shares the salesperson wants
to sell you are part of such an offering. Your salesperson
must give you a "prospectus" in an initial
public offering, but the financial condition shown
in the prospectus of new companies can change very
4. Know the brokerage firm and the salespeople with
whom you are dealing. Because of the nature of the
market for penny stock, you may have to rely solely
on the original brokerage firm that sold you the stock
for prices and to buy the stock back from you. Ask
the National Association of Securities Dealers, Inc.
(NASD) or your state securities regulator, which is
a member of the North American Securities Administrators
Association, Inc. (NASAA), about the licensing and
disciplinary record of the brokerage firm and the
salesperson contacting you. The telephone numbers
of the FINRAand NASAA are listed on the first page
of this document.
5. Be cautious if your salesperson leaves the firm.
If the salesperson who sold you the stock leaves his
or her firm, the firm may reassign your account to
a new salesperson. If you have problems, ask to speak
to the firm's branch office manager or a compliance
officer. Although the departing salesperson may ask
you to transfer your stock to his or her new firm,
you do not have to do so. Get information on the new
firm. Be wary of requests to sell your securities
when the salesperson transfers to a new firm. Also,
you have the right to get your stock certificate from
your selling firm. You do not have to leave the certificate
with that firm or any other firm.
Disclosures to you. Under penalty of federal law,
your brokerage firm must tell you the following information
at two different times-before you agree to buy or
sell a penny stock, and after the trade, by written
* The bid and offer price quotes for penny stock,
and the number of shares to which the quoted prices
apply. The bid and offer quotes are the wholesale
prices at which dealers trade among themselves. These
prices give you an idea of the market value of the
stock. The dealer must tell you these price quotes
if they appear on an automated quotation system approved
by the SEC. If not, the dealer must use its own quotes
or trade prices. You should calculate the spread,
the difference between the bid and offer quotes, to
help decide if buying the stock is a good investment.
A lack of quotes may mean that the market among dealers
is not active. It thus may be difficult to resell
the stock. You also should be aware that the actual
price charged to you for the stock may differ from
the price quoted to you for 100 shares. You should
therefore determine, before you agree to a purchase,
what the actual sales price (before the markup) will
be for the exact number of shares you want to buy.
* The brokerage firm's compensation for the trade.
A markup is the amount a dealer adds to the wholesale
offer price of the stock and a markdown is the amount
it subtracts from the wholesale bid price of the stock
as compensation. A markup/markdown usually serves
the same role as a broker's commission on a trade.
Most of the firms in the penny stock market will be
dealers, not brokers.
* The compensation received by the brokerage firm's
salesperson for the trade. The brokerage firm must
disclose to you, as a total sum, the cash compensation
of your salesperson for the trade that is known at
the time of the trade. The firm must describe in the
written confirmation the nature of any other compensation
of your salesperson that is unknown at the time of
In addition to the items listed above, your brokerage
firm must send to you:
* Monthly account statements. In general, your brokerage
firm must send you a monthly statement that gives
an estimate of the value of each penny stock in your
account, if there is enough information to make an
estimate. If the firm has not bought or sold any penny
stocks for your account for six months, it can provide
these statements every three months.
* A Written Statement of Your Financial Situation
and Investment Goals. In general, unless you have
had an account with your brokerage firm for more than
one year, or you have previously bought three different
penny stocks from that firm, your brokerage firm must
send you a written statement for you to sign that
accurately describes your financial situation, your
investment experience, and your investment goals,
and that contains a statement of why your firm decided
that penny stocks are a suitable investment for you.
The firm also must get your written consent to buy
the penny stock.
Legal remedies. If penny stocks are sold to you in
violation of your rights listed above, or other federal
or state securities laws, you may be able to cancel
your purchase and get your money back. If the stocks
are sold in a fraudulent manner, you may be able to
sue the persons and firms that caused the fraud for
damages. If you have signed an arbitration agreement,
however, you may have to pursue your claim through
arbitration. You may wish to contact an attorney.
The SEC is not authorized to represent individuals
in private litigation.
However, to protect yourself and other investors,
you should report any violations of your brokerage
firm's duties listed above and other securities laws
to the SEC, the FINRA or your state securities administrator
at the telephone numbers on the first page of this
document. These bodies have the power to stop fraudulent
and abusive activity of salespersons and firms engaged
in the securities business. Or you can write to the
SEC at 450 Fifth St., NW., Washington, DC 20549; the
FINRAat 1735 K Street, NW., Washington, DC 20006;
or NASAA at 555 New Jersey Avenue, NW., Suite 750,
Washington, DC 20001. NASAA will give you the telephone
number of your state's securities agency. If there
is any disciplinary record of a person or a firm,
the FINRA NASAA, or your state securities regulator
will send you this information if you ask for it.
The market for penny stocks. Penny stocks usually
are not listed on an exchange or quoted on the NASDAQ
system. Instead, they are traded between dealers on
the telephone in the "over-the-counter"
market. The NASD's OTC Bulletin Board also will contain
information on some penny stocks. At times, however,
price information for these stocks is not publicly
Market domination. In some cases, only one or two
dealers, acting as "market makers," may
be buying and selling a given stock. You should first
ask if a firm is acting as a broker (your agent) or
as a dealer. A dealer buys stock itself to fill your
order or already owns the stock. A market maker is
a dealer who holds itself out as ready to buy and
sell stock on a regular basis. If the firm is a market
maker, ask how many other market makers are dealing
in the stock to see if the firm (or group of firms)
dominates the market. When there are only one or two
market makers, there is a risk that the dealer or
group of dealers may control the market in that stock
and set prices that are not based on competitive forces.
In recent years, some market makers have created fraudulent
markets in certain penny stocks, so that stock prices
rose suddenly, but collapsed just as quickly, at a
loss to investors.
Mark-ups and mark-downs. The actual price that the
customer pays usually includes the mark-up or mark-down.
Markups and markdowns are direct profits for the firm
and its salespeople, so you should be aware of such
amounts to assess the overall value of the trade.
The "spread." The difference between the
bid and offer price is the spread. Like a mark-up
or mark-down, the spread is another source of profit
for the brokerage firm and compensates the firm for
the risk of owning the stock. A large spread can make
a trade very expensive to an investor. For some penny
stocks, the spread between the bid and offer may be
a large part of the purchase price of the stock. Where
the bid price is much lower than the offer price,
the market value of the stock must rise substantially
before the stock can be sold at a profit. Moreover,
an investor may experience substantial losses if the
stock must be sold immediately.
Example: If the bid is $0.04 per share and the offer
is $0.10 per share, the spread (difference) is $0.06,
which appears to be a small amount. But you would
lose $0.06 on every share that you bought for $0.10
if you had to sell that stock immediately to the same
firm. If you had invested $5,000 at the $0.10 offer
price, the market maker's repurchase price, at $0.04
bid, would be only $2,000; thus you would lose $3,000,
or more than half of your investment, if you decided
to sell the stock. In addition, you would have to
pay compensation (a "mark-up," "mark-down,"
or commission) to buy and sell the stock. \1/4\ In
addition to the amount of the spread, the price of
your stock must rise enough to make up for the compensation
that the dealer charged you when it first sold you
the stock. Then, when you want to resell the stock,
a dealer again will charge compensation, in the form
of a markdown. The dealer subtracts the markdown from
the price of the stock when it buys the stock from
you. Thus, to make a profit, the bid price of your
stock must rise above the amount of the original spread,
the markup, and the markdown.
Primary offerings. Most penny stocks are sold to
the public on an ongoing basis. However, dealers sometimes
sell these stocks in initial public offerings. You
should pay special attention to stocks of companies
that have never been offered to the public before,
because the market for these stocks is untested. Because
the offering is on a first-time basis, there is generally
no market information about the stock to help determine
its value. The federal securities laws generally require
broker-dealers to give investors a "prospectus,"
which contains information about the objectives, management,
and financial condition of the issuer. In the absence
of market information, investors should read the company's
prospectus with special care to find out if the stocks
are a good investment. However, the prospectus is
only a description of the current condition of the
company. The outlook of the start-up companies described
in a prospectus often is very uncertain.
For more information about penny stocks, contact
the Office of Filings, Information, and Consumer Services
of the U.S. Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549, (202) 272-7440.