Sign-up for our Free Newsletter, Whitepaper and SEC and FINRA Updates as they occur.

Sep272016

SEC Whistleblower Awards Pass $100 Million As It Continues To Crack Down On Confidentiality Provisions In Employment Agreements

The SEC has proudly announced that including a $22 million award on August 30, 2016, its whistleblower awards have surpassed $100 million. The news comes in the wake of two recent SEC enforcement proceedings against companies based on confidentiality and waiver language in employee severance agreements. Like two prior similar actions, the SEC has taken the position that restrictive language in confidentiality, waiver or settlement agreements with employees violates the anti-whistleblower rules adopted under Dodd-Frank.

Background – The Dodd-Frank Act Whistleblower Statute

The Dodd-Frank Act, enacted in July 2010, added Section 21F, “Whistleblower Incentives and Protection,” to the Securities Exchange Act of 1934 (“Exchange Act”). As stated in the original rule release, the purpose of the rule was “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment related retaliation, and providing various confidentiality guarantees.” Upon enactment of Section 21F, the SEC established the Office of the Whistleblower and created the SEC Whistleblower

Sep202016

SEC Issues Proposed Amendments To Item 601 Of Regulation S-K Related To Exhibits

On August 31, 2016, the SEC issued proposed amendments to Item 601 of Regulation S-K to require hyperlinks to exhibits in filings made with the SEC. The proposed amendments would require any company filing registration statements or reports with the SEC to include a hyperlink to all exhibits listed on the exhibit list. In addition, because ASCII cannot support hyperlinks, the proposed amendment would also require that all exhibits be filed in HTML format.

This newest proposed rule change to Regulation S-K is part of the SEC Division of Corporation Finance’s Disclosure Effectiveness Initiative.  At the end of this blog, I include an up-to-date summary of the proposals and request for comment related to the ongoing Disclosure Effectiveness Initiative.

Background

On April 15, 2016, the SEC issued a 341-page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements in Regulation S-K (“S-K Concept Release”). The S-K Concept Release contained a discussion and

Sep132016

SEC Requests Comment On Changes To Subpart 400 To Regulation S-K

On August 25, 2016, the SEC requested public comment on possible changes to the disclosure requirements in Subpart 400 of Regulation S-K. Subpart 400 encompasses disclosures related to management, certain security holders and corporate governance. The request for comment is part of the ongoing SEC Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72003 of the FAST Act.

Background

The topic of disclosure requirements under Regulations S-K and S-X as pertains to financial statements and disclosures made in reports and registration statements filed under the Exchange Act of 1934 (“Exchange Act”) and Securities Act of 1933 (“Securities Act”) has come to the forefront over the past couple of years. The purpose of the Disclosure Effectiveness Initiative is to assess whether the business and financial disclosure requirements continue to provide the information investors need to make informed investment and voting decisions.

Regulation S-K, as amended over the years, was adopted as part of a uniform disclosure initiative

Sep062016

FinCEN Updates Due Diligence Rules

On May 11, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued new final rules under the Bank Secrecy Act requiring financing institutions, including brokerage firms, to adopt additional anti-money laundering (AML) procedures that include specific due diligence and ongoing monitoring requirements related to customer risk profiles and customer information.  In addition, the new rules require financial institutions to collect and verify information about beneficial owners and control person of legal entity customers.

The Securities Exchange Act of 1934 (“Exchange Act”) specifically requires brokerage firms to comply with the Bank Secrecy Act.  FinCEN provides minimum rules.  Brokerage firms are also required to comply with AML rules established by FINRA, including FINRA Rule 3310.  The purpose of the AML rules is to help detect and report suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation. FINRA also provides a template to assist small firms in establishing and complying with AML procedures. As

Aug302016

DTC Again Proposes Procedures For Issuers Subject To Chills And Locks

On June 3, 2016, the DTC filed a new set of proposed rules to specify procedures available to issuers when the DTC imposes or intends to impose chills or locks. The issue of persistent and increasing chills and global locks which once dominated many discussions related to the small- and micro-cap space has dwindled in the last year or two. The new proposed rule release explains the change in DTC procedures and mindset related to its function in combating the deposit and trading of ineligible securities.

Background

On October 8, 2013, I published a blog and white paper providing background and information on the Depository Trust Company (“DTC”) eligibility, chills and locks and the DTC’s then plans to propose new rules to specify procedures available to issuers when the DTC imposes or intends to impose chills or locks (see my blog HERE). On December 5, 2013, the DTC filed these proposed rules with the SEC and on December 18,

Aug232016

Smaller Reporting Companies vs. Emerging Growth Companies

The topic of reporting requirements and distinctions between various categories of reporting companies has been prevalent over the past couple of years as regulators and industry insiders examine changes to the reporting requirements for all companies, and qualifications for the various categories of scaled disclosure requirements. As I’ve written about these developments, I have noticed inconsistencies in the treatment of smaller reporting companies and emerging growth companies in ways that are likely the result of poor drafting or unintended consequences. This blog summarizes two of these inconsistencies.

As a reminder, a smaller reporting company is currently defined as a company that has a public float of less than $75 million in common equity as of the last business day of its most recently completed second fiscal quarter, or if a public float of zero, has less than $50 million in annual revenues as of its most recently completed fiscal year-end. I note that on June 27, 2016, the SEC issued

Aug162016

SEC Continues Efforts To Prevent Microcap Fraud

As I’ve written about numerous times in the past, a primary agenda of the SEC and FINRA is to prevent small- and micro-cap fraud. On March 23, 2016, the SEC charged Guy Gentile with penny stock fraud. The SEC complaint, as well as numerous industry articles and a blog by Mr. Gentile himself, reveal in-depth efforts by the SEC together with FINRA and the FBI and DOJ to remove recidivist and bad actors from the micro-cap system. While the methods used by the regulators have been the subject of heated debates and articles, the message and result remain that the SEC is committed to its efforts to deter securities law violations.

Although small- and micro-cap fraud has always been an important area of concern and enforcement by the SEC since the financial crisis of 2008, it has increasingly been a focus. Regulators have amplified their efforts through regulations and stronger enforcement, including the SEC Broken Windows policy, increased Dodd-Frank whistleblower

Aug092016

SEC Issues Proposed Regulation S-K And S-X Amendments

On July 13, 2016, the SEC issued a 318-page proposed rule change on Regulation S-K and Regulation S-X to amend disclosures that are redundant, duplicative, overlapping, outdated or superseded (S-K and S-X Amendments). The proposed rule changes follow the 341-page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements issued on April 15, 2016. See my two-part blog on the S-K Concept Release HERE and HERE.

The proposed S-K and S-X Amendments are intended to facilitate the disclosure of information to investors while simplifying compliance efforts by companies. The proposed S-K and S-X Amendments come as a result of the Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72002 of the FAST Act. Prior to the issuance of these S-K and S-X Amendments, on June 27, 2016, as part of the same initiative, the SEC issued proposed amendments to the definition of “Small Reporting Company” (see

Aug022016

SEC Advisory Committee On Small And Emerging Companies Issues Further Recommendations On Accredited Investor Definition

On July 19, 2016, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and drafted its recommendations and response to the SEC report on the definition of accredited investor.  The subject of changes to the definition of accredited investor has been debated in a series of reports, recommendations, proposals and comment letters since early 2015.

On December 18, 2015, the SEC issued a 118-page report on the definition of “accredited investor” (the “report”).  The report follows the March 2015 SEC Advisory Committee recommendations related to the definition.  The SEC is reviewing the definition of “accredited investor” as directed by the Dodd-Frank Act, which requires that the SEC review the definition as relates to “natural persons” every four years to determine if it should be modified or adjusted.  See my blog HERE on the report and additional background on the subject.

At the July 19 meeting, the Advisory Committee finalized a draft of a letter

Jul262016

Testing The Waters; Regulation A+ And S-1 Public Offerings – Part 2

The JOBS Act enacted in 2012 made the most dramatic changes to the landscape for the marketing and selling of both private and public offerings since the enactment of the Securities Act of 1933.  These significant changes include: (i) the creation of Rule 506(c), which came into effect on September 23, 2013, and allows for general solicitation and advertising in private offerings where the purchasers are limited to accredited investors; (ii) the overhaul of Regulation A, creating two tiers of offerings which came into effect on June 19, 2015, and allows for both pre-filing and post-filing marketing of an offering, called “testing the waters”; (iii) the addition of Section 5(d) of the Securities Act, which came into effect in April 2012, permitting emerging growth companies to test the waters by engaging in pre- and post-filing communications with qualified institutional buyers or institutions that are accredited investors; and (iv) Title III crowdfunding, which came into effect May 19, 2016, and allows

Jul192016

Testing The Waters; Regulation A+ And S-1 Public Offerings – Part 1

The JOBS Act enacted in 2012 made the most dramatic changes to the landscape for the marketing and selling of both private and public offerings since the enactment of the Securities Act of 1933.  These significant changes include: (i) the creation of Rule 506(c), which came into effect on September 23, 2013 and allows for general solicitation and advertising in private offerings where the purchasers are limited to accredited investors; (ii) the overhaul of Regulation A creating two tiers of offerings, which came into effect on June 19, 2015 and allows for both pre-filing and post-filing marketing of an offering, called “testing the waters”; (iii) the addition of Section 5(d) of the Securities Act, which came into effect in April 2012, permitting emerging growth companies to test the waters by engaging in pre- and post-filing communications with qualified institutional buyers or institutions that are accredited investors; and (iv) Title III crowdfunding, which came into effect May 19, 2016 and allows

Jul122016

SEC Proposes Amendments To Definition Of “Small Reporting Company”

On June 27, 2016, the SEC published proposed amendments to the definition of “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K.  The amendments would expand the number of companies that qualify as a smaller reporting company and thus qualify for the scaled disclosure requirements in Regulation S-K and Regulation S-X.  The rule change follows the SEC concept release and request for public comment on sweeping changes to the business and financial disclosure requirements in Regulation S-K.  Throughout the SEC Concept Release, it referenced the scaled and different disclosure requirements for the different categories of company and affirmed that it was evaluating and considering changes to the eligibility criteria for each.

If the rule change is passed, the number of companies qualifying as a smaller reporting company will increase from 32% to 42% of all reporting companies.

The proposed rule change follows the SEC Advisory Committee on

Jul052016

Confidentially Marketed Public Offerings (CMPO)

Not surprisingly, I read the trades including all the basics, the Wall Street Journal, Bloomberg, The Street, The PIPEs Report, etc.  A few years ago I started seeing the term “confidentially marketed public offerings” or “CMPO” on a regular basis.  The weekly PIPEs Report breaks down offerings using a variety of metrics and in the past few years, the weekly number of completed CMPOs has grown in significance.  CMPOs count for billions of dollars in capital raised each year.

CMPO Defined

A CMPO is a type of shelf offering registered on a Form S-3 that involves speedy takedowns when market opportunities present themselves (for example, on heavy volume).  A CMPO is very flexible as each takedown is on negotiated terms with the particular investor or investor group.  In particular, an effective S-3 shelf registration statement allows for takedowns at a discount to market price and other flexibility in the parameters of the offering such

Jun282016

OTC Markets Petitions The SEC To Expand Regulation A To Include SEC Reporting Companies

On June 6, OTC Markets filed a petition for rulemaking with the SEC requesting that the SEC amend Regulation A to expand the eligibility criteria to include all small issuers, including those that are subject to the Securities Exchange Act of 1934 (“Exchange Act”) reporting requirements and to allow “at-the-market offerings.”

Background

On March 25, 2015, the SEC released final rules amending Regulation A. The new Regulation A creates two tiers of offerings.  Tier I of Regulation A, which does not preempt state law, allows offerings of up to $20 million in a twelve-month period.  Due to difficult blue sky compliance, Tier 1 is rarely used.  Tier 2, which does preempt state law, allows a raise of up to $50 million.  Issuers may elect to proceed under either Tier I or Tier 2 for offerings up to $20 million.  The new rules went into effect on June 19, 2015 and have been gaining traction ever since.  Since that time, the

Jun212016

A Comparison Of Nevada, Delaware And Florida Corporate Statutes

When forming a new entity, I am often asked the best state of domicile.  Following a July 1, 2014 increase in Delaware franchise taxes, I am also often asked the best state to re-domicile or move to following an exit from Delaware.   Delaware remains the gold standard; however, there has been a definite shift and Delaware is now not the “only standard.”

Part of the reason for the shift away from Delaware has been the increase in fees.  Delaware calculates annual fees based on one of two methods: (i) the authorized share method; and (ii) the assume par value capital (asset value) method.  For either method the annual fee is capped at $180,000.00.   Even for small- and micro-cap business issuers, the annual fee often reaches the tens of thousands.  For example, a company with 300,000,000 common shares authorized with a $.001 par value per share and 30,000,000 shares issued and outstanding and $20,000,000 in gross assets would pay $180,000.00 per

Jun142016

NYSE MKT Listing Requirements

This blog is the second in a two-part series explaining the listing requirements for the two small-cap national exchanges, NASDAQ and the NYSE MKT.  The first one, discussing NASDAQ, can be read HERE.

General Information and Background on NYSE MKT

The NYSE MKT is the small- and micro-cap exchange level of the NYSE suite of marketplaces.  The NYSE MKT was formerly the separate American Stock Exchange (AMEX).  In 2008, the NYSE Euronext purchased the AMEX and in 2009 renamed the exchange the NYSE Amex Equities.  In 2012 the exchange was renamed to the current NYSE MKT LLC.  The NASDAQ and NYSE MKT are ultimately business operations vying for attention and competing to attract the best publicly traded companies and investor following.  The NYSE MKT homepage touts the benefits of choosing this exchange over others, including “access to dedicated funding, advocacy, content and networking and the industry’s first small-cap services package.”

Although there are substantial similarities among the different exchanges,

Jun072016

SEC Issues New C&DI On Use Of Non-GAAP Measures; Regulation G – Part 2

On May 17, 2016, the SEC published 12 new Compliance & Disclosure Interpretations (C&DI) related to the use of non-GAAP financial measures by public companies.  The SEC permits companies to present non-GAAP financial measures in their public disclosures subject to compliance with Regulation G and item 10(e) of Regulation S-K.  Regulation G and Item 10(e) require reconciliation to comparable GAAP numbers, the reasons for presenting the non-GAAP numbers, and govern the presentation format itself including requiring equal or greater prominence to the GAAP financial information.

This is the second part in a two-part blog series on the use of non-GAAP financial information.  In the first blog I summarized the new C&DI, and in this blog I am reviewing Regulation G and Item 10(e) of Regulation S-K.  The first blog in the series can be read HERE.

Background

In the last couple of months SEC Chair Mary Jo White, SEC Deputy Chief Accountant Wesley Bricker, Chief Accountant James Schnurr and

May312016

OTC Markets Amends IPO Listing Standards for OTCQX

OTC Markets has unveiled changes to the quotations rule and standards for the OTCQX, which proposed changes are scheduled to become effective on June 13, 2016.  The proposed amendments are intended to address and accommodate companies completing an IPO onto the OTCQX and which accordingly have no prior trading history.  Such entities either would have a recently cleared Form 211 with FINRA or are completing the 211 application process through a market maker, at the time of their OTCQX application.  The initial qualification changes apply to OTCQX Rules for U.S. Companies, U.S. Banks and International Companies.

The OTCQX previously amended its listing standards effective January 1, 2016 to increase the quantitative criteria for listing and to add additional qualitative requirements further aligning the OTCQX with a national stock exchange.  To read my blog on the January 1, 2016 amendments see HERE.

The new amendments will (i) allow companies that meet the $5 bid price test to use unaudited, interim