To comply with regulations regarding the sale of unregistered securities and to minimize the manual processing associated with trading shares that are not publicly quoted, we impose certain restrictions on U.S. Microcap Stocks. A list of those restrictions, along with other FAQs relating to this topic are provided below.
We will only accept transfers of blocks of U.S. Microcap stocks from Eligible Clients. Eligible Clients include accounts that: (1) maintain equity (pre or post-transfer) of at least $5 million or, clients of financial advisors with aggregate assets under management of at least $20 million; and (2) have less than half of their equity in U.S. Microcap Stocks.
We will only accept transfers1 of blocks of U.S. Microcap Stocks where the Eligible Client can confirm the shares were purchased on the open market or registered with the SEC;
We will not accept transfers1 of or opening orders for U.S. Microcap Stocks designated by OTC as Caveat Emptor or Grey Market from any client. Clients with existing positions in these stocks may close the positions;
We will not accept transfers of U.S. Microcap Stocks to cover a short position established with us;
Execution-only clients (i.e., execute trades through us, but clear those trades elsewhere) may not trade U.S. Microcap Stocks within their account here. (We may make exceptions for U.S.-registered brokers);
What is a U.S. Microcap Stock?
The term “Microcap Stock” refers to shares (1) traded over the counter or (2) that are listed on Nasdaq and NYSE American that have a market capitalization of between $50 million to $300 million and are trading at or below $5. For purposes of this policy, the term Microcap Stock will include the shares of U.S. public companies which have a market capitalization at or below $50 million, which are sometimes referred to as nanocap stocks or trade on a market generally associated with Microcap Stocks.
To avoid situations where minor, short-term fluctuations in a stock price cause repeated reclassification, any stock classified as U.S. Microcap will remain in that classification until both its market capitalization and share price exceed $300 million and $5, respectively, for a 30 consecutive calendar day period.
As Microcap Stocks are often low-priced, they are commonly referred to as penny stocks. We may make exceptions, including for stocks traded at low prices that recently had a greater market cap. In addition, we will not consider ADRs on non-US companies to be Micro-Cap stocks.
Where do Microcap Stocks trade?
Microcap Stocks typically trade in the OTC market, rather than on a national securities exchange. They are often electronically quoted by market makers on OTC systems such as the OTC Bulletin Board (OTCBB) and the markets administered by the OTC Markets Group (e.g., OTCQX, OTCQB & Pink). Also included in this category are stocks which may not be publicly quoted and which are designated as Caveat Emptor, Other OTC or Grey Market.
In addition, U.S. regulators also consider stocks listed on Nasdaq or NYSE American trading at or below $5 with a market capitalization at or less than $300 million to be Microcap Stocks.
What happens if our company receives a transfer from an Eligible Client where one or more of the positions transferred is a Microcap Stock?
If we receive a transfer containing a block of a Microcap stock, we reserve the right to restrict the sale of any Microcap position(s) included in the transfer unless the Eligible Client provides appropriate documentation establishing that the shares were either purchased on the open market (i.e., on a public exchange through another broker) or were registered with the SEC pursuant to an S-1 or similar registration statement.
Eligible Clients can prove that shares were purchased on the open market by providing a brokerage statement or trade confirm from a reputable broker reflecting the purchase of the shares on a public exchange. Eligible Clients can establish that the shares are registered by providing the SEC (Edgar system) File number under which their shares were registered by the company (and any documents necessary to confirm the shares are the ones listed in the registration statement).
Note: All clients are free to transfer out any shares we have restricted at any time.
What restrictions will we apply to Prime accounts?
Clients whose activities include Prime services are considered Eligible Clients solely for the purposes of those trades which we have agreed to accept from its executing brokers. However, while Prime accounts may clear U.S. Microcap Stocks here, those shares will be restricted until such time we confirm that the shares are eligible for re-sale under the procedures discussed above.
To remove the restriction for shares purchased on the open market, please have the executing broker provide a signed letter on company letterhead or an official Account Statement stating that the shares were purchased in the open market. The letter or statement must also include the below required criteria. Alternatively, if the shares were acquired through an offering the letter or statement must provide documents or links to the relevant registration statement and state that the shares were part of it.
Required Broker Letter Criteria:
Time of Execution
Must be signed
Must be on Firm's official letterhead
To summarize: Sell Long trades will be accepted if the long position is no longer restricted. Sell Short trades will be accepted. Buy Long trades will be accepted and the position will be restricted until Compliance is provided with sufficient information to remove the restriction. Buy Cover trades and intraday round trip trades will not be accepted.
What happens if a stock you purchase gets reclassified as Grey Market or Caveat Emptor?
If you purchase a stock in your account here that at a later date becomes classified as a Caveat Emptor or Grey Market stock, you will be allowed to maintain, close or transfer the position but will not be able to increase your position.
What are some of the reasons why Microcap Stock trading may be restricted in my account?
There are two primary reasons why you might be restricted from trading in a Microcap Stock:
Potential Affiliation to Issuer: U.S. Securities and Exchange Commission (“SEC”) Rule 144 places certain limitations on trading of stocks (including Microcap Stocks) by an “affiliate” of the issuer. If we observe trading activity or holdings in a Microcap Stock that are close to the trading volume thresholds under Rule 144 (“Rule 144 Thresholds”), we may restrict the client from trading the Microcap Stock until a compliance review is completed.
Transfer of Microcap Stock: If the client has recently transferred a Microcap Stock into their account here, we may restrict the client from trading in that security until a compliance review is completed.
If one of the above reasons apply, trading will be restricted in the security and a notification will be sent to the client’s message center in Account Management. This notification will describe the reason for the restriction and the steps the client must take before we will consider lifting the restriction.
Why does this company consider me to be a potential affiliate of a Microcap Stock issuer?
An “affiliate” is a person, such as an executive officer, a director or large shareholder, in a relationship of control with the issuer.
Rule 144 applies to all securities, including Microcap Stocks. However, given the heightened risks associated with trading Microcap Stocks, if a client’s trading and/or holdings in a Microcap Stock are close to the Rule 144 Thresholds, we will restrict the clients trading in the Microcap Stock. This restriction will remain in effect pending a compliance review into the client's potential affiliate status.
For the Potential Affiliate review, why do I need to ask for a new review every two weeks?
A client’s affiliate status may change soon after we complete the above-referenced Potential Affiliate review. As such, we believe it is appropriate to refresh a Potential Affiliate review every two weeks if a client's trading activity and/or holdings in the Microcap Stock remain close to the Rule 144 Thresholds.
Where can I find a list of stocks that our company have designated as U.S. Microcaps?
A list of stocks designated as U.S. Microcaps by us is available via the following link: www.ibkr.com/download/us_microcaps.csv
Note that this list is updated daily.
Where can I find additional information on Microcap Stocks?
Additional information on Microcap Stocks, including risks associated with such stocks may be found on the SEC website: https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html
1This includes transfers by any method (e.g., ACATS, DWAC, FOP), conversion of Canadian listings to their U.S. equivalent via “Southbound” transfer, transfers to cover existing short positions, our Prime clients executing with other brokers and clearing to us, etc.