Within the next month, Georgia Gov. Joe Frank Harris is to sign one of the toughest laws in the nation designed to weed out corruption and fraud in penny stock dealings within the state.
Harris expects to sign by April 18 the law approved by the 1990 session of the Georgia Legislature, said the governor's spokeswoman, Barbara Morgan.
Other states, such as neighboring Alabama and Mississippi, are closely watching the Georgia law to see what effect it will have on regulating the penny stock industry. Last year, Mississippi officials announced a similar crackdown on abuses in the sale of penny stocks.
The legislation revises the Georgia Securities Act of 1973 and provides better protection for investors, who spend $250 million annually for penny stocks.
Secretary of State Max Cleland, Georgia's commissioner of securities who drafted the legislation, said an estimated 4,000 penny stock transactions worth $5 million take place each week in Georgia.
Cleland said companies that sell penny stocks are able to manipulate the value of shares, enabling brokers to mislead consumers about the worth of the securities.
The Georgia legislation limits the amount of compensation penny stock brokers can receive to 10% of each transaction.
Also, each penny stock transaction must include a risk disclosure document, as well as written agreements that describe the sale and include information about stock sales price and broker compensation.
The bill establishes a price quotation system approved by Cleland and allows civil recovery of triple damages to wronged investors. The state also can levy a maximum fine of $500,000 for illegal transactions, up from the current $25,000.
Georgia's new law also provides for a three-day cooling off period in which investors who buy such stocks can change their minds and mandates four months of training for penny brokers.
The law will make "it very difficult to sell" penny stocks in Georgia, said Bryan N. Smiley, an attorney for the Atlanta law firm Page & Bacek, which specializes in securities fraud cases.
"You have to jump through some serious hoops from paper work perspectives to sell these things now," Smiley said. He strongly urged consumers to contact Cleland's office to check whether brokers who call them have been charged with any crimes. Cleland's office is tied to a nationwide electronic network that stores such information on brokers.