SEC Confirms Applicability of ESIGN to Penny Stock Transactions

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While many conversations about electronic signature and electronic contract execution take place in the real estate industry, other industries also have questions about ESIGN and how DocuSign can help them go paperless. DocuSign can be used for almost anything, including SEC-regulated transactions such as accredited investor statements and agreements to purchase stocks, including penny stocks.

About those who trade in Penny Stocks, our Chief Legal Officer, Ken Moyle, says:

In Exchange Act Rel. No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 2001), the SEC sought to argue why its record retention rules were exempt from ESIGN. In so doing, they based their argument on the carve-out in ESIGN for transactions or records that are executed or stored principally for a “government purpose.” The SEC was careful not to reach out into other regulated documents and practice, limiting their comments to storage requirements that would still necessitate paper originals of certain manually signed documents, such as the transaction records described in Rules 15g-2 and 15g-9. The application of ESIGN to the execution of these documents themselves was not disputed.

In fact, the SEC later confirmed the applicability of ESIGN to penny stock transaction in its discussion of new proposed rules for a waiting period for purchase of penny stocks:
Section 101(a) of the Electronic Signatures Act “enables customers to provide to broker-dealers in penny stocks electronic signatures in place of the signatures in tangible form required under Rules 15g-2(a) and 15g-9(b)(4), and permits customers to provide the agreement regarding particular penny stock transactions required under Rule 15g-9(a)(2)(ii) through electronic media.” 69 FR 2540 (Jan. 16, 2004)

In other words, the SEC argued that its record retention rules were exempt from ESIGN. The SEC argument was based on the carve-out in ESIGN for transactions or records executed or stored mainly for a “government purpose” and was limited to storage requirements. These storage requirements would still require paper originals of certain manually signed documents, like transaction records described in certain rules. The SEC did NOT dispute the application of ESIGN to the execution of these documents.

The SEC confirmed that ESIGN applies to penny stock transactions, when it discussed new proposed rules for a waiting period for the purchase of penny stocks. Customers can provide their broker-dealers with electronic signatures and the agreement about particular penny stock transactions can be made with electronic media, for example, pdf documents.

So bottom line? You can use electronic signature and online contract execution in multiple industries, including wealth management and insurance. ESIGN applies to penny stock transactions.