Why tiny companies are suddenly going public for $4 a share

A Hong Kong noodle shop wants to sell you stock for $4 a share. So does an American tech startup you’ve never heard of, plus dozens of other little-known companies from around the globe.

More than 90 penny stocks have held IPOs so far this year, a bump from the 77 that did so in 2024. Penny stock IPOs are surging to levels not seen since the 1980s as a mix of commission-free trading apps, crypto-primed retail investors, and distracted regulators creates ideal conditions for small companies to tap U.S. markets.

While these ultra-cheap shares feel accessible compared to expensive Magnificent Seven offerings, the track record is brutal: Penny stock IPOs typically lose 60% of their value over three years, underperforming the broader market by roughly 90 percentage points, according to Jay Ritter, a University of Florida finance professor who has tracked IPOs for decades.

“On average, the investors lose their shirts,” Ritter said.

Penny stocks flourished in the 1980s until Nasdaq tightened listing requirements, and then they basically disappeared, according to Ritter. The SEC’s 1990 penny stock regulations proved effective at shutting down notorious firms.

The numbers started creeping up in 2021, fueled by pandemic-era conditions that made speculative investing irresistible. Cheap money from near-zero interest rates, stimulus checks landing in bank accounts, and millions of bored Americans discovering commission-free trading apps like Robinhood created perfect conditions for a penny stock revival. What once required a sales pitch from a licensed broker now happens with a few taps on a screen.

A penny stock doesn’t necessarily mean fraud. The SEC defines penny stocks simply as stocks trading below $5 per share. However, the low barrier to entry has attracted both legitimate small businesses and questionable operators seeking to tap into U.S. capital markets.

Often, the problem isn’t outright fraud but structural issues, according to Ritter. An offer price of $4 per share might appear cheap, but when companies flood the market with shares, the total market value can exceed what the business can realistically support. The stock price then inevitably drops as the market corrects the valuation.

The scale mismatch is evident in this year’s penny stock pipeline. Many of this year’s penny stock IPOs come from small Chinese and Hong Kong companies that Ritter described as small restaurants and obscure manufacturers.

“These are like Hong Kong noodle shops, not Alibaba,” he said.

So how are these tiny businesses accessing U.S. capital markets with such ease? The SEC’s years-long focus on cryptocurrency enforcement has created an opening for penny stock promoters, according to Benjamin Schiffrin, Director of Securities Policy at Better Markets, a nonprofit advocacy group. While regulators pursued high-profile crypto cases, penny stocks flew under the radar.

Under the Trump administration, federal regulators are pulling back from crypto investigations without redirecting enforcement firepower elsewhere. The SEC has already moved to gut SPAC disclosure rules implemented in 2024, which were designed to protect retail investors from risky blank-check companies that, like penny stocks, prey on unsophisticated investors with promises of easy money. Weakening those protections, Schiffrin said, signals to penny stock issuers that the regulatory coast is clear.

“You can see investors in the penny stock space thinking the SEC is going to take a similar view with penny stocks, instead of trying to figure out how to regulate them better,” Schiffrin said.

The regulatory shift is emboldening companies to test boundaries. Schiffrin views penny stocks as essentially the stock market version of meme coins — both exploit the same investor psychology of fear of missing out. But penny stocks carry an advantage for promoters: They’re actual securities subject to federal oversight, giving investors a false sense of protection while still promising the same explosive gains that attract meme coin speculators.

The problem, according to Schiffrin, is that traditional SEC warnings about penny stock risks have largely disappeared, leaving retail investors vulnerable to the same pump-and-dump schemes that plagued the market decades ago.

The penny stock revival reflects a timeless pattern in investor psychology, according to James Park, a law professor at UCLA. When markets are hitting new highs, retail investors inevitably feel like they missed the train on the big winners and start hunting for the next opportunity at prices they can actually afford. With Bitcoin surpassing $100,000 and companies like Nvidia and Microsoft reaching $4 trillion market caps in 2025, that feeling is particularly acute right now.

“This is a pretty remarkable time in terms of the willingness of investors to take on risk,” Park said. “Companies are going to want to take advantage of that.”

The appeal is mathematical, Park said. Penny stocks offer the psychological satisfaction of owning thousands of shares for the price of a single tech stock that, if it pops, could generate spectacular percentage returns that would be impossible with established companies.

Of course, that same math works in reverse. Many penny stocks are essentially worthless, meaning investors can lose their entire investment. The thin trading volumes make manipulation easier than with established companies.

For those willing to take that risk, the math can seem compelling. The appeal is owning thousands of shares for pocket change, with the tantalizing possibility that a few pennies could become dollars.

“That’s the hope,” Park said. “But you have to get very lucky to find something like that, and you can also lose all your money.”