Penny stocks. at one point or another, come up in conversation for every average stock investor. Some choose to acquire shares of these risky stocks due to their upside potential whereas others won’t even consider them as a viable investment. Although investors may shy away from them, many don’t understand that there is actually more to these misunderstood securities than one might think. (For more, see: The Lowdown On Penny Stocks .)

What Makes a Penny Stock a Penny Stock?

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When Is A Penny Stock Not A Penny Stock Anymore?

There are multiple events that can trigger the transition of a penny stock to a regular stock. The company can issue new securities in an offering that is registered with the SEC, or it can register an existing class of securities with the regulatory body. Both types of transactions automatically require the firm to adhere to periodic reporting, including disclosures to investors about its business activities, financial condition and company management unless there is an exemption. These filings also mandate 10-Q quarterly reports and annual Form 10-K and Form 8-K reports, which detail unexpected and significant events.

In some instances, there are additional conditions that will require a company to file reports with the SEC. Reports must be filed if a company has either at least 2000 investors or more than 500 investors that can’t be categorized as accredited investors. and possesses more than $10 million in assets. If a business lists its securities on any national security exchange. like the NYSE or the NASDAQ. it must file as well. Lastly, SEC registration is mandatory if a company’s securities are quoted on the OTCBB or under the OTCQB marketplace of the OTC Link.

Usually, companies with no more $10 million in assets and fewer than 2000 recorded shareholders don’t have to adhere to reporting guidelines under the SEC. Interestingly enough, there are some companies that opt for transparency by filing the same types of reports that other, perhaps more reputable, firms are required to do.

The Bottom Line

At first glance, one may be tempted to view a penny stock as just a low-priced security; however, there is more complexity to these investments. Penny stocks don’t have the stringent reporting requirements or readily available public financial information that blue chip and other stocks have. Moving away from a penny stock designation isn’t just a matter of going up in value: there are plenty of stocks listed on national security exchanges that don’t trade above $5.

The number of investors, company assets and exemptions can dictate each stock’s appropriate classification, which is why investors should question companies’ decision to not file reports with the SEC. It is imperative to keep the aforementioned factors in mind when assessing a company’s overall value and and gauging whether or not it’s an appropriate investment.