Penny Stock Bars 101
by
Brenda Hamilton on Aug. 29, 2014
Business Securities Business Corporate Business
Summary: The Securities & Exchange Commission has the authorization to bar an individual from certain conduct (“SEC Bar”) under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Remedies Act”). SEC Bars are injunctions that must be granted by a court.
Upon court order, SEC Bars prohibit a variety of conduct. Bars may enjoin individuals from serving as officers or directors of a public company, from involvement with penny stock issuers, and from practicing before the SEC as an attorney or accountant.
Many penny stock market participants are unclear about the wide range of activities prohibited by a penny stock bar. The bar prohibits owning a penny stock even for one’s own account as well as any activity related to an offering of a penny stock, including drafting disclosures. The impact of a Penny Stock Bar is that he individual is barred from acting as a promoter, finder, consultant or agent or otherwise engaging in activities with a broker, dealer, or issuer for the purpose of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
Section 15(b)(6)(A)(iii) of the Exchange Act authorizes the SEC to prohibit persons from participating in an offering of penny stock also known as the “Penny Stock Bar”. Section 15(b)(6)(C) defines “person participating in an offering of penny stock” to include, among other things, any person “who engages in activities with a[n] issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.”
The wide reach of an SEC Penny Stock Bar is demonstrated in the case of the Securities and Exchange Commission v. Joseph P. Cillo, Civil Action No. 8:11-cv-02320 (M.D. Fla. October 14, 2011). On June 13, 1995, the Commission entered an order that “barred [Cillo] from participating in an offering of any penny stock.” In the Matter of Joseph P. Cillo, Admin. Proc. File No. 3-8670 (June 13, 1995).
The Court found that Cillo had violated his earlier Penny Stock Bar because he engaged in activities for purposes of issuing, trading, and inducing others to purchase the relevant issuer’s penny stock.
These prohibited activities included that Cillo:
• issued and/or offered shares of stock to third-parties,
• drafted and approved multiple press releases, and
• prepared, signed, and submitted periodic disclosure statements to the OTC Markets Group.
The Court agreed with the Sec and found that each of these acts constituted an activity engaged in for the purpose of issuing, trading and inducing others to purchase the issuer’s stock. The SEC successfully argued that Cillo’s conduct was precisely the conduct that was prohibited by the penny stock bar against Cillo that had been in place since 1995.
