Multiple events 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 conditions, and company management unless there is an exemption. These filings also mandate 10-Q quarterly reports, the annual Form 10-K, and periodic 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 2,000 investors, more than 500 investors that can’t be categorized as accredited investors, and possesses more than US$10 million in assets.
Usually, companies with no more than $10 million in assets and fewer than 2,000 recorded shareholders don’t have to adhere to reporting guidelines under the SEC.9 Interestingly enough, some companies opt for transparency by filing the same types of reports that other, perhaps more reputable, firms are required to do.