SEC proposing tougher rules for penny stocks


If you can afford to go to Las Vegas, put a pile of money on one number and spin the roulette wheel, then you may be able to afford to invest in penny stocks.

But if you invest the grocery money, you may go hungry.

Penny stocks are cheap securities, usually selling for under $5 a share, that are not traded on any national market.

"With these kinds of stock, if you invest any money in them you better be prepared to lose it, because that's the nature of speculative investments," said Alan Ford, an official with the Kansas securities commissioner's office.

That's assuming that every penny stock is legitimate. In many cases, government regulators and consumer advocates say, penny stocks are little more than thinly disguised scams. In a report submitted to Congress last year, the North American Securities Administrators Association said that "Americans lose at least $2 billion each year as a result of schemes involving penny stocks -- the shadowy netherworld of U.S. securities markets."

The Securities and Exchange Commission requires only that firms selling such stocks make "full disclosure" of the risks, but it has proposed tougher regulations on penny stock sales that officials say should cut fraud and abuse. The rule-making process is to be completed this year.

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