U.S. Microcap Stock Restrictions

Introduction

To comply with regulations regarding the sale of low-priced 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, are provided below.

Microcap Restrictions

  • IBKR clients identified as an affiliate for a U.S. Microcap are blocked from trading the security unless IBKR specifically grants the client an exception from this restriction, which would require approval, in writing, from an executive of IBKR.

  • If a client is not an affiliate and IBKR observes trading activity or holdings in a Microcap Stock 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. See "What are some of the reasons why Microcap Stock trading may be restricted in my account?” below for more details.

  • 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. Additionally, we will not accept the transferring out of a short position unless it is done via a Full ACAT Transfer.

  • Execution-only clients (i.e., execute trades through us, but clear those trades elsewhere) may not trade U.S. Microcap Stocks within their account with us. (We may make exceptions for U.S.-registered brokers).

Microcap FAQs

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 includes 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, such as stocks traded at low prices that recently had a greater market cap. Additionally, 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 and are often electronically quoted by market makers on OTC systems, such as 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, as well as those designated as Caveat Emptor, Other OTC, or Grey Market.

Additionally, 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 confirmation 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.

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 trades, which we have agreed to accept from its executing brokers. However, while Prime accounts may clear U.S. Microcap Stocks at our company, those shares will be restricted until we confirm 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:

  1. Account Number

  2. Account Title

  3. Trade Date

  4. Settlement Date

  5. Symbol

  6. Side

  7. Price

  8. Quantity

  9. Time of Execution

  10. Exchange

  11. Must be signed

  12. Must be on Firm's official letterhead

Alternatively, if the shares were acquired through an offering, the letter or statement must provide documents or links to the relevant registration statement and indicate that the shares were part of it.

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 at our company that later 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 three 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 ( "Control Securities"), including Microcap Stocks, by an “affiliate” of the issuer. We will automatically prevent clients designated as affiliates in our system from selling US Control Securities if:

    • the Control Security is not current in its regulatory filing.

    • the Control Security is a U.S. Microcap.

    • the affiliate's sales during a 3-month period would exceed the greater of either

      • 1% of outstanding shares of the same class, OR

      • A four-week average weekly trading volume for the prior four weeks (only applicable to securities traded on a stock exchange.)

  • Potential Trade Volume Indicating Affiliation: If we observe trading activity or holdings in a Microcap Stock that are close to the trading volume thresholds under Rule 144 (see Rule 144 “Volume Threshold"), we may restrict the client from trading the Microcap Stock until a compliance review is completed.

    • Rule 144 "Volume Threshold" - The number of shares you may sell during any three-month period in the security (Control Security) cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or, if the class is listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.

  • Transfer of Microcap Stock: If the client has recently transferred a Microcap Stock into their account at our company, we may restrict the client from trading in that security until a compliance review is completed.

If the restriction is transfer-related, trading will be restricted in the security and a notification will be sent to the client’s message center under Client Portal. This notification will describe the reason for the restriction and the steps the client must take before we will consider lifting the restriction.

If the restriction is related to the client being an affiliate or potential affiliate, a restriction message will be displayed in the client’s trading platform when they attempt to make a restricted trade. To lift the restriction, clients should click Transmit to request a review of their affiliate status.

Please Note: When clicking Transmit, clients are triggering a review of their affiliate status, not submitting an order. Clients will be notified of the results of the review via the secure message center under Client Portal.

What is an affiliate, and why does this company consider me to be a potential affiliate of a Microcap Stock issuer?

An “affiliate” is a person in a relationship of control with the issuer. Control is defined as the possession, direct or indirect, of power to direct the management and policies of a company, whether through ownership of voting securities, by contract, or otherwise. For instance, any person that is an officer, director, or at least a 10% shareholder of a company is considered a control person.

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 conduct a due diligence review of the security, and may restrict the clients trading in the Microcap Stock, pending a compliance review of 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

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.

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.