Disclosures and Disclaimers

Table of Contents

Use of Service

Use Subject to Agreements: Use of this site and the products and services available through it ("Service") is subject to these disclosures and disclaimers. If you are a customer, use of the Service is also subject to various agreements with Vision, including the Customer Agreement and all applicable Supplements. The current versions of agreements are available for viewing and printing on this Web site. As used in these disclosures and disclaimers "Vision" refers to Vision Financial Markets LLC and its affiliates, and their respective officers, directors, members, partners and employees. If there is an inconsistency between these disclosures and disclaimers and the other agreements that you may have with Vision, the terms of those other agreements will control.

Service Intended for Authorized U.S. Persons (except as expressly authorized by Vision): Use of the Service is limited to authorized customers of Vision and certain other authorized persons, and (except as expressly authorized by Vision) is limited to persons resident in the United States. The information on this site is only for such persons. Unless governing law permits otherwise, if you currently reside outside the United States, you should contact a Vision entity in your home jurisdiction to determine what services, if any, are available to you. The information on this site is not to be construed as an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product or instrument or to participate in any particular trading strategy in any jurisdiction in which such offer, solicitation or trading strategy would be unlawful. You consent to the monitoring of the Service by Vision to assure that all system use is authorized and for other administrative purposes.

Important Information about Online Trading and Other Online Activities

You are responsible for all account activity attributable to your password. You represent and agree that your password is personal to you and you will ensure that the password is known only to you and will not be made available to any other person. You agree to discontinue use of your password and to advise Vision immediately if you know or suspect that someone else may be using your password. You understand that, if your access privileges were granted because of your relationship to the account owner or your employment, and that relationship or employment ends, your access privileges will also end.

Order Execution: Be aware that submitting a trade through the Internet or in any other online or electronic manner is not the same as having that trade immediately or automatically accepted or executed. Although the Service may allow for the electronic entry of orders to buy or sell certain securities, the mere entry of those orders does not necessarily mean that the order will be automatically executed, manually executed or even accepted for that matter. The orders must still be routed to an exchange or market or an appropriate trading desk for execution. Subject to the terms of an order, the method of execution of that order is at the sole discretion of Vision. Vision may reject an order for any reason, including: market conditions; regulatory restrictions or restrictions imposed by Vision with respect to transactions in the particular security; insufficient funds in your account; pending proprietary or customer orders in the same security; system outages; capacity limitations; or because you are trying to sell short a hard-to-borrow security that is not approved by our stock loan department or for which a locate cannot be obtained. Also, please note that in rare circumstances, your order can be rejected at the exchange, in which case it will not be executed even if initially accepted by this Web site.

System Outages, Slowdowns and Capacity Limitations/Delays in Executions and Trade Reports: The Internet and other electronic and wireless services have increased the ease and convenience of placing orders for securities. You should not assume, however, that these delivery mechanisms will always be available. If you trade online, you may have difficulty accessing your account(s) due to a host of reasons, including high Internet traffic, transmission problems, or because of systems capacity limitations. Any computer system or other electronic device, whether it is yours, your Internet service provider's, or the computer systems at Vision, Broadridge Financial Solutions or other third party providers, can experience unanticipated outages, slowdowns or have capacity limitations. In such circumstances, you should contact your Financial Advisor or Vision's Client Services team for assistance.

Limitation of Liability; Indemnity: Vision, its directors, partners, officers, members, affiliates, employees and agents (each a "Related Party") shall have no liability, contingent or otherwise, to you or to third parties, as a result of the correctness, quality, accuracy, security, completeness, reliability, performance, timeliness, pricing or continued availability of the Service or as a result of delays or omissions of the Service, or as a result of the failure of any connection or communication service to provide or maintain your access to the Service, or as a result of any interruption in or disruption of your access or any erroneous communications between us and you, or between you and any third party when you are using the Service. We are not liable for any special, indirect, incidental or consequential damages (including, loss of profit, loss of use, loss of cost or other savings or loss of goodwill or reputation) which you may incur or experience as a result of your using the Service or relying on the Service or any information provided to you in connection therewith, even if we know of the possibility of those damages. We are not responsible for informing you of any difficulties we or other third parties experience concerning use of the Service for our customers or other accounts or to take any action in connection with those difficulties. We also have no duty or obligation to verify, correct, complete or update any information displayed in the Service. You are solely responsible for any losses, damages or costs resulting from your reliance on any data or information that we may provide in connection with your use of the Service. Notwithstanding the foregoing, the foregoing limits of liability and responsibility shall not apply to the extent that actions or omissions on our part constitute gross negligence or intentional misconduct.

You will indemnify, protect, and hold harmless each of the Related Parties from and against any and all losses, liabilities, judgments, suits, actions, proceedings, claims, damages, costs (including attorney's fees) (collectively, "Losses") resulting from or arising out of use of the Service by you or your customers, including without limitation, any breaches of the security of the Service, or claims that a trade was not suitable for or not authorized by you or a customer.

In this Limitation of Liability; Indemnity section, the terms "Vision", "we", "our" and "us" include any third party service providers selected by you or us in connection with the Service.

Orders that you enter using the Service will be routed through third parties. We and our Related Parties are not responsible for any losses, damages or costs that may result from errors made by any third party system in reading, processing or executing such orders, or if any third party system otherwise fails to properly execute such orders.

You agree that our liability and the collective liability of our Related Parties and the third party service providers selected by you or us, if any, arising out of any kind of legal claim (whether in contract, tort, or otherwise) or in any way connected to your use of the Service will not exceed the amount of the profit we received on the specific transaction giving rise to such legal claim unless caused directly by our intentional misconduct or gross negligence.

Volatility and Fast Markets: Conditions of severe volatility might also give rise to systems problems, resulting in the inability to view current quotes or place buy or sell orders. There may also be delays in trade execution and/or trade reports due to the sheer volume of trades being processed in a fast market. Fast markets are typically characterized by wide price fluctuations and heavy trading. They often come as a result of an imbalance of orders in one direction or another (for example, many "buy" orders and few "sell" orders) and can be caused by events such as a company news announcement, strong analyst recommendation, or a popular initial public offering ("IPO") as it begins to trade in the secondary market.

Market Orders: Market orders are required to be executed fully and promptly without regard to price, even if such an order has been delayed. Any of the above delays may cause a market order to be executed at a price significantly away from the price quoted or displayed at the time the order is entered. For example, in a fast market environment, even "real-time" quotes may be far behind what is currently happening in the market. In addition, the number of shares available at the current quote may change rapidly, affecting the likelihood of the quoted price being available to you. These factors may be particularly compounded when placing a market order for securities issued as part of an IPO where the securities have recently begun trading in the secondary market. If these securities are trading at a much higher price than their offering price ("hot issues") under fast market conditions, a market order may be executed substantially away from the market price that was in existence at the time you placed the order.

Limit Orders: Limit orders, unlike market orders, will be executed, if at all, at or better than the price specified in the order. Therefore, you should use limit orders rather than market orders under these conditions and at any other time when you want to limit the execution price of a trade. Limit orders can significantly reduce your risk of receiving an execution at a price other than your expected execution price (which is often based on the price of the security at the time you first submit your order). With a limit order, you specify the lowest sale price (for a sell order) or the highest purchase price (for a buy order) beyond which the order may not be executed. Please be cautioned, however, that while a limit order may provide this price protection, there is a risk that your limit order may never be executed, even if the security trades at the limit price. As a result, Vision can make no assurance that such limit orders will be executed at all.

Cancel and Replacement Orders: Because of the potential delays described above, in the event that you do not receive a trade report that indicates that your order has been executed, we understand that you may be concerned that your order has not been executed. In such an event, you may be tempted to try to cancel your initial market order, and enter a new order. However, as described above, market orders must be executed as promptly as possible. Therefore, it may not be feasible to cancel a market order, even if a trade report confirming the execution has not yet been issued or received by you. Entry of a cancellation request does not assure cancellation of an order. Entering an instruction to cancel the order and entering a separate replacement order may result in your being responsible for the execution of duplicate orders if the cancellation order cannot be processed in a timely fashion. To avoid creating duplicate orders, you should consider these delays and the chance that your order has already been executed but not yet reported, before canceling and/or changing the order. Canceling and replacing the order does not expedite a trade report when a security is trading in a fast or otherwise volatile market. In fact, these actions have the opposite effect by adding more stress to the trading systems and creating more information to process. While we will endeavor to cancel an order if we receive a cancellation request prior to execution of the order or prior to the entry of the order into an automatic execution facility from which the order cannot be readily withdrawn, no assurance can be made that we will be able to do so.

Held and Not Held Orders: When you submit an order to buy or an order to sell, we must designate that order as either "held" or "not held" in accordance with applicable regulatory requirements. Generally, smaller market orders are designated as "held" orders, meaning that they must be fully and promptly executed without regard to price. However, larger orders (generally greater than 10,000 shares and $100,000) may be eligible for personal handling by a professional at Vision or another broker/dealer. If you ask Vision or another broker/dealer to personally handle this order, Vision (or a third party utilized by Vision) or another broker/dealer may choose to wait until market conditions improve before executing all or a portion of it. Because changes in stock prices may be unpredictable, there can be no guarantee that a professional will execute your order at a better price than you might have otherwise obtained. These orders are classified as "not held," meaning that you are "not holding" Vision or another broker/dealer to provide an immediate execution.

Orders to Sell Securities: All sales are assumed to be "long sales" unless the sale is designated as a "short sale." Long sales are sales of securities held by you in the account that is making the sale. Short sales are sales of a security that you do not own, or otherwise any sale consummated by the delivery of a security borrowed by the seller, usually from a broker. Short sales are only authorized in accounts that have margin approval, and only where Vision can make arrangements to borrow the stock. In certain circumstances, Vision will be obligated to close-out short sales in securities even though an initial determination had been made that the securities could be located for borrowing (e.g., the lender recalls securities that were loaned and replacement securities cannot be obtained). In those cases, you will be responsible for the cost of returning the stock to the stock lender.

Your Responsibility as an Electronic Account Holder: You are responsible for all activity in your account. You must notify Vision immediately if you are concerned about your account for any reason, including the unauthorized use of passwords, failure to receive written confirmation of an order after it was entered and you received a status message indicating that the order was "Executed," receipt of an erroneous status message regarding an order, failure to receive a reference number for an order that has been submitted, a discrepancy in the balance or security positions in an account, or a change to your e-mail address. In addition, you acknowledge that your use of the Service may be monitored by Vision and the resulting information used by Vision in any manner consistent with the Vision's Privacy Policy.

No Representations Made as to Other Sites or Links; No Representations as to Positions Held Away: The Service may provide links to certain Internet sites (the "Sites") sponsored and maintained by third parties. Vision is providing such links solely as a convenience to you. Accordingly, Vision makes no representations concerning the content of the Sites. The fact that Vision has provided a link to a Site does not constitute an endorsement, authorization, sponsorship, or affiliation by Vision with respect to that Site, its owners, or its providers. Vision has not tested any information, software, or products found on any of the Sites and therefore does not make any representations with respect thereto, including any representations regarding the content or sponsors of the Site, or the suitability or appropriateness of the products or transactions described therein. The Service may also permit you to monitor positions that you hold at another financial institution (referred to as "positions held away" or "positions custodied away"). The ability to monitor positions held away is provided solely as a convenience and is based on information provided by or through you. Vision makes no representation whatsoever to you concerning the accuracy of this information, and, in particular, the accuracy of the valuations reflected for these positions and your ability to liquidate them or to obtain the stated values on liquidation. To the extent that any advice or results of any analytic tools are dependent upon information about positions held away, you agree that the advice or results will depend on the accuracy, timeliness and completeness of the information provided to Vision, for which you remain solely responsible. Positions held away are not in the custody or control of Vision, nor are they covered by SIPC or other insurance provided through Vision.

Additional Resources Related to Online Trading: The following information is provided by regulatory authorities. In general, they address trading securities through use of electronic services and the Internet.

*FINRA Investor Resources (http://www.Finra.org/InvestorInformation.index.htm) - The investor resources page of the Financial Industry Regulatory Authority, Inc. (FINRA) web site that provides information about FINRA services, investor awareness and educational information regarding investing.

*SEC Learning About Investing Site ((http://www.sec.gov/investor/learn.shtml ) - The investor education page of the U.S. Securities and Exchange Commission (SEC) Web site that provides information about Internet and online trading.

*NASAA Investor Education (http://www.nasaa.org/nasaa/invedu/investor_ed_overview.asp) - The investor education page of the North American Securities Administrators Association, Inc. (NASAA) Web site that provides information from state securities regulators designed to help investors recognize and avoid securities fraud.

Risks Associated with Using Margin

Vision is furnishing this information to you to provide facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading securities in a margin account, you should understand these risks and carefully review Vision's Margin Supplement. Consult your financial advisor or Vision's Client Services team regarding any questions or concerns you may have with your margin account or margin generally.

When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from Vision If you choose to borrow funds from Vision, you will open a margin account with us. The securities purchased are the firm’s collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, Vision can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the member, in order to maintain the required equity in the account.

It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:

  • You can lose more funds than you deposit in your account(s). If the securities you purchased on margin decline in value, you will be required to provide additional securities or cash to Vision to avoid the forced sale of the securities or other assets in your account(s).
  • Vision can force the sale of securities or other assets in your account(s). If the equity in your account falls below the maintenance margin requirements under the law, or Vision's higher "house" requirements, we can sell the securities or other assets in any of your accounts held at Vision to cover the margin deficiency. You also will be responsible for making up any short fall in the account after such a sale.
  • Vision can sell your securities or other assets without contacting you. Some investors mistakenly believe that Vision must contact them for a margin call to be valid, and that Vision cannot liquidate securities or other assets in their accounts to meet the call unless Vision has contacted them first. This is not the case. Vision will attempt to notify customers of margin calls, but we are not required to do so. However, even if Vision has contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities or other assets without notice to you.
  • You are not entitled to choose which securities or other assets in your account(s) are liquated or sold to meet a margin call. Because the securities are collateral for Vision's margin loan to you, Vision has the right to decide which securities to sell in order to protect our interests.
  • Vision can increase its "house" maintenance margin requirements at any time and is not required to provide you advance written notice. These changes in Vision's policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
  • You are not entitled to an extension on time on a margin call. While Vision may grant you an extension of time to meet margin requirements, we are not required to do so and you do not have a right to an extension.
  • Short selling is a margin account transaction and entails the same risks as described above. Vision can use your account(s) to buy securities to cover a short position without contacting you. If you don't have sufficient assets, you are responsible for the shortfall and collection costs.
  • Vision can loan out (to itself or others) the securities that collateralized your margin borrowing. If we do, you may not be entitled to receive, with respect to securities that are lent, certain benefits that normally accrue to a securities owner, such as the ability to exercise voting rights, or to receive interest, dividends or other distributions. Although you may receive substitute payments in lieu of distributions, these payments may not receive the same tax treatments as actual interest, dividends or other distributions, and you may therefore incur additional tax liability for substitute payments. Vision may allocate substitute payments by lottery or in any other manner permitted by law, rule or regulation. Please note that any substitute payments Vision makes are voluntary, and may be discontinued at any time.
  • Checkwriting, cards and bill payment services may increase your risk of a margin call. If Vision provides any of these services to you, any debits that are posted to your account(s) when no income or account assets are available will increase your margin balance.

Risks Associated with Trading Options

Vision is furnishing this information to you to provide facts about trading options, and to alert you to the risks involved. Before trading options, you should understand these risks and carefully review Vision's Options Supplement. The information below is not intended to enumerate all of the risks entailed in trading options. It is expected that you will read the booklet entitled "Characteristics and Risks of Standardized Options" (see www.theocc.com). In particular, please direct your attention to Chapter X, "Principal Risks of Options Positions."

Risk of Buying Options: An option buyer (holder) runs the risk of losing the entire amount paid for the option in a relatively short period of time. The risk reflects the nature of an option as a wasting asset which becomes worthless when it expires. An option holder who neither sells his option in the secondary market nor exercises it prior to its expiration will lose his entire investment in the option. The more an option is out-of-the-money and the shorter the time remaining to expiration the greater the risk that an option holder will lose all or part of his investment in the option.

Risk of Covered Call Writing: The writer of a covered call forgoes the opportunity to benefit from an increase in the value of the underlying instrument above the option price, but continues to bear the risk of a decline in the value of the underlying instrument.

Special Risks for Uncovered Option Writers: There are special risks associated with uncovered option writing which expose the investor to potentially significant loss. Therefore, this type of strategy may not be suitable for all customers approved for options transactions. These risks include:

(a) The potential loss of uncovered call writing is unlimited. The writer of an uncovered call is in an extremely risky position, and may incur large losses if the value of the underlying instrument increases above the exercise price.

(b) As with writing uncovered calls, the risk of writing uncovered put options is substantial. The writer of an uncovered put option bears a risk of loss if the value of the underlying instrument declines below the exercise price. Such loss could be substantial if there is a significant decline in the value of the underlying instrument.

(c) Uncovered option writing is thus suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer's options position, Vision may request significant additional margin payments from you. If you do not make such margin payments, Vision may liquidate stock or options positions in your account, with little or no prior notice in accordance with your margin agreement.

(d) For combination writing, where the investor writes both a put and a call on the same underlying instrument, the potential risk is unlimited.

(e) If a secondary market in options were to become unavailable, investors could not engage in closing transactions, and an option writer would remain obligated until expiration or assignment.

(f) The writer of an "American-style" option is subject to being assigned an exercise (i.e., having the option exercised) at any time after he has written the option until the option expires. By contrast, the writer of a "European-style" option is subject to exercise assignment only during the exercise period.

Important Information on Penny Stocks

This statement is required by the U.S. Securities and Exchange Commission (SEC) and contains important information on penny stocks. You are urged to read it before making a purchase or sale.

Penny stocks can be very risky.

Penny stocks are low-priced shares of small companies not traded on an exchange or quoted on NASDAQ. Prices often are not available. Investors in penny stocks often are unable to sell stock back to the dealer that sold them the stock. Thus, you may lose your investment. Be cautious of newly issued penny stock.

Your salesperson is not an impartial advisor but is paid to sell you the stock. Do not rely only on the salesperson, but seek outside advice before you buy any stock. If you have problems with a salesperson, contact the firm's compliance officer or the regulators listed below.

Information you should get.

Before you buy penny stock, [effective January 1, 1993] federal law requires your salesperson to tell you the "offer" and the "bid" on the stock, and the "compensation" the salesperson and the firm receive for the trade. The firm also must mail a confirmation of these prices to you after the trade.

You will need this price information to determine what profit, if any, you will have when you sell your stock. The offer price is the wholesale price at which the dealer is willing to sell stock to other dealers. The bid price is the wholesale price at which the dealer is willing to buy the stock from other dealers. In its trade with you, the dealer may add a retail charge to these wholesale prices as compensation (called a "markup" or "mark-down").

The difference between the bid and the offer price is the dealer's "spread." A spread that is large compared with the purchase price can make a resale of a stock very costly. To be profitable when you sell, the bid price of your stock must rise above the amount of this spread and the compensation charged by both your selling and purchasing dealers. If the dealer has no bid price, you may not be able to sell the stock after you buy it, and may lose your whole investment.

Brokers' duties and customer's rights and remedies.

If you are a victim of fraud, you may have rights and remedies under state and federal law. You can get the disciplinary history of a salesperson or firm from the Financial Industry Regulatory Authority (FINRA) at 1-800-289-9999, and additional information from your state securities official, at the North American Securities Administrators Association's central number: (202) 737-0900. You also may contact the SEC with complaints at (202) 272-7440.

FURTHER INFORMATION

THE SECURITIES BEING SOLD TO YOU HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. MOREOVER, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR THE MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN ANY PROSPECTUS OR ANY OTHER INFORMATION PROVIDED BY AN ISSUER OR A BROKER OR DEALER.

Generally, penny stock is a security that:

  • Is priced under five dollars;
  • Is net traded on a national stock exchange or on NASDAQ (the FINRA's automated quotation system for actively traded stocks);
  • May be listed in the "pink sheets" or the FINRA OTC Bulletin Board;
  • Is issued by a company that has less than $5 million in net tangible assets and has been in business less than three years, by a company that has under $2 million in net tangible assets and has been in business for at least three years, or by a company that has revenues of $6 million for 3 years.

Use caution when investing in penny stocks:

  1. Do not make a hurried investment decision. High-pressure sales techniques can be a warning sign of fraud. The salesperson is not an impartial advisor, but is paid for selling stock to you. The salesperson also does not have to watch your investment for you. Thus, you should think over the offer and seek outside advice. Check to see if the information given by the salesperson differs from other information you may have. Also, it is illegal for salespersons to promise that a stock will increase in value or is risk-free, or to guarantee against loss. If you think there is a problem, ask to speak with a compliance official at the firm, and, if necessary, any of the regulators referred to in this statement.
  2. Study the company issuing the stock. Be wary of companies that have no operating history, few assets, or no defined business purpose. These may be sham or "shell" corporations. Read the prospectus for the company carefully before you invest. Some dealers fraudulently solicit investors' money to buy stock in sham companies, artificially inflate the stock prices, then cash in their profits before public investors can sell their stock.
  3. Understand the risky nature of these stocks. You should be aware that you may lose part or all of your investment. Because of large dealer spreads, you will not be able to sell the stock immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. New companies, whose stock is sold in an "initial public offering," often are riskier investments. Try to find out if the shares the salesperson wants to sell you are part of such an offering. Your salesperson must give you a "prospectus" in an initial public offering, but the financial condition shown in the prospectus of new companies can change very quickly.
  4. Know the brokerage firm and the salespeople with whom you are dealing. Because of the nature of the market for penny stock, you may have to rely solely on the original brokerage firm that sold you the stock for prices and to buy the stock back from you. Ask FINRA or your state securities regulator, which is a member of the North American Securities Administrators Association, Inc. (NASAA), about the licensing and disciplinary record of the brokerage firm and the salesperson contacting you. The telephone numbers of the FINRA and the NASAA are listed in this "Penny Stock" section.
  5. Be cautious if your salesperson leaves the firm. If the salesperson who sold you the stock leaves his or her firm, the firm may reassign your account to a new salesperson. If you have problems, ask to speak to the firm's branch office manager or a compliance officer. Although the departing salesperson may ask you to transfer your stock to his or her new firm, you do not have to do so. Get information on the new firm. Be wary of requests to sell your securities when the salesperson transfers to a new firm. Also, you have the right to get your stock certificate from your selling firm. You do not have to leave the certificate with that firm or any other firm.

    YOUR RIGHTS

    Disclosures to you. Under penalty of federal law, [effective January 1, 1993] your brokerage firm must tell you the following information at two different times - before you agree to buy or sell a penny stock, and after the trade, by written confirmation:

    The bid and offer price quotes for penny stock, and the number of shares to which the quoted prices apply. The bid and offer quotes are the wholesale prices at which dealers trade among themselves. These prices give you an idea of the market value of the stock. The dealer must tell you these price quotes if they appear on an automated quotation system approved by the SEC. If not, the dealer must use its own quotes or trade prices. You should calculate the spread, the difference between the bid and offer quotes, to help decide if buying the stock is a good investment.

    A lack of quotes may mean that the market among dealers is not active. It thus may be difficult to resell the stock. You also should be aware that the actual price charged to you for the stock may differ from the price quoted to you for 100 shares. You should therefore determine, before you agree to a purchase, what the actual sales price (before the markup) will be for the exact number of shares you want to buy.

    The brokerage firm's compensation for the trade. A markup is the amount a dealer adds to the wholesale offer price of the stock and a markdown is the amount it subtracts from the wholesale bid price of the stock as compensation. A markup/markdown usually serves the same role as a broker's commission on a trade. Most of the firms in the penny stock market will be dealers, not brokers.

    The compensation received by the brokerage firm's salesperson for the trade. The brokerage firm must disclose to you, as a total sum, the cash compensation of your salesperson for the trade that is known at the time of the trade. The firm must describe in the written confirmation the nature of any other compensation of your salesperson that is unknown at the time of the trade.

    In addition to the items listed above, your brokerage firm must send to you:

    Monthly account statements. In general, [effective January 1, 1993] your brokerage firm must send you a monthly statement that gives an estimate of the value of each penny stock in your account, if there is enough information to make an estimate. If the firm has not bought or sold any penny stocks for your account for six months, it can provide these statements every three months.

    A Written Statement of Your Financial Situation and Investment Goals. In general, unless you have had an account with your brokerage firm for more than one year, or you have previously bought three different penny stocks from that firm, your brokerage firm must send you a written statement for you to sign that accurately describes your financial situation, your investment experience, and your investment goals, and that contains a statement of why your firm decided that penny stocks are a suitable investment for you. The firm also must get your written consent to buy the penny stock.

    Legal remedies. If penny stocks are sold to you in violation of your rights listed above, or other federal or state securities laws, you may be able to cancel your purchase and get your money back. If the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration. You may wish to contact an attorney. The SEC is not authorized to represent individuals in private litigation.

    However, to protect yourself and other investors, you should report any violations of your brokerage firm's duties listed above and other securities laws to the SEC, FINRA, or your state securities administrator at the telephone numbers on the first page of this document. These bodies have the power to stop fraudulent and abusive activity of salespersons and firms engaged in the securities business. Or you can write to the SEC at 450 Fifth St., N.W., Washington, D.C. 20549; FINRA at 1735 K Street, N.W., Washington, D.C. 20006; or NASAA at 555 New Jersey Avenue, N.W., Suite 750, Washington, D.C. 20001. NASAA will give you the telephone number of your state's securities agency. If there is any disciplinary record of a person or firm, FINRA, NASAA, or your state securities regulator will send you this information if you ask for it.

    MARKET INFORMATION

    The market for penny stocks. Penny stocks usually are not listed on an exchange or quoted on the NASDAQ system. Instead, they are traded between dealers on the telephone in the "over-the-counter" market. FINRA's OTC Bulletin Board also will contain information on some penny stocks. At times, however, price information for these stocks is not publicly available.

    Market domination. In some cases, only one or two dealers, acting as "market makers," may be buying and selling a given stock. You should first ask if a firm is acting as a broker (your agent) or as a dealer. A dealer buys stock itself to fill your order or already owns the stock. A market maker is a dealer who holds itself out as ready to buy and sell stock on a regular basis. If the firm is a market maker, ask how many other market makers are dealing in the stock to see if the firm (or group of firms) dominates the market. When there are only one or two market makers, there is a risk that the dealer or group of dealers may control the market in that stock and set prices that are not based on competitive forces. In recent years, some market makers have created fraudulent markets in certain penny stocks, so that stock prices rose suddenly, but collapsed just as quickly, at a loss to investors.

    Mark-ups and mark-downs. The actual price that the customer pays usually includes the mark-up or mark-down. Markups and markdowns are direct profits for the firm and its salespeople, so you should be aware of such amounts to assess the overall value of the trade.

    The "spread." The difference between the bid and offer price is the spread. Like a mark-up or mark-down, the spread is another source of profit for the brokerage firm and compensates the firm for the risk of owning the stock. A large spread can make a trade very expensive to an investor. For some penny stocks, the spread between the bid and offer may be a large part of the purchase price of the stock. Where the bid price is much lower than the offer price, the market value of the stock must rise substantially before the stock can be sold at a profit. Moreover, an investor may experience substantial losses if the stock must be sold immediately.

    Example: If the bid is $0.04 per share and the offer is $0.10 per share, the spread (difference) is $0.06, which appears to be a small amount. But you would lose $0.06 on every share that you bought for $0.10 if you had to sell that stock immediately to the same firm. If you had invested $5,000 at the $0.10 offer price, the market maker's repurchase price, at $0.04 bid, would be only $2,000; thus you would lose $3,000, or more than half of your investment, if you decided to sell the stock. In addition, you would have to pay compensation (a "mark-up," "mark-down," or commission) to buy and sell the stock.

    In addition to the amount of the spread, the price of your stock must rise enough to make up for the compensation that the dealer charged you when it first sold you the stock. Then, when you want to resell the stock, a dealer again will charge compensation, in the form of a markdown. The dealer subtracts the markdown from the price of the stock when it buys the stock from you. Thus, to make a profit, the bid price of your stock must rise above the amount of the original spread, the markup, and the markdown.

    Primary offerings. Most penny stocks are sold to the public on an ongoing basis. However, dealers sometimes sell these stocks in initial public offerings. You should pay special attention to stocks of companies that have never been offered to the public before, because the market for these stocks is untested. Because the offering is on a first-time basis, there is generally no market information about the stock to help determine its value. The federal securities laws generally require broker-dealers to give investors a "prospectus," which contains information about the objectives, management, and financial condition of the issuer. In the absence of market information, investors should read the company's prospectus with special care to find out if the stocks are a good investment. However, the prospectus is only a description of the current condition of the company. The outlook of the start-up companies described in a prospectus often is very uncertain.

    For more information about penny stocks, contact the Office of Filings, Information, and Consumer Services of the U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, (202) 272-7440.

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