“If a company has a good chance at profitability, they could use a number of private channels for financing without needing to issue penny shares,” Rogovy says.
“1) I can’t think of even one successful business that began as a penny stock. Legitimate companies tend to use legitimate channels for financing. If a company has a good chance at profitability, they could use a number of private channels for financing without needing to issue penny shares. Venture capital and private equity firms specialize in high risk / high reward investments. Even these specialists choose companies that go bankrupt. Anything they leave behind extremely likely to end up worthless.
Penny stocks are notoriously used in scams. These scams can be very difficult to prove. While individual actions taken by scammers may be legal, the series of actions fits a pattern with an intent to deceive. Bethany McLean, who was one of the journalists to uncover the Enron scandal, calls it “Legal Fraud.” Penny stock scams are usually relatively small, which may be why regulators fail to completely eliminate it. Perhaps this is why the SEC adamantly warns investors about penny stocks. Because they know fraud is common, but the costs of prosecuting it are higher than the proceeds of the scam. They have issued a warning here: https://www.sec.gov/investor/schedule15g.htm
2) Instead of penny stocks, consider distressed equities. Sometimes successful companies fall on hard times and their share prices approach the penny level. To avoid the sigma of penny stocks (and to maintain their listing on an exchange), they reverse split which increases the notional price of their shares.
For example, look at the stock MTG. MGIC Investment Corp sells mortgage insurance, and they were nearly decimated after the 2008 subprime crisis. By 2012, their stock price was under $1. Since then, they’ve turned around their business and the stock reached $10 within 3 years. A 10x return in such a short time is an outstanding result, and is what penny stocks often promise but almost never deliver.”