• 31Oct

  Contracting Away Fiduciary Obligations In Delaware LLCs And Limited Partnerships

  Corporate Law Firm No Comments

  Delaware corporate and alternative entity law has long been the model for other states in drafting statutes and for practitioners in advising clients and preparing limited partnership agreements and limited liability company membership agreements.

  In 2005 the Delaware legislature amended its Limited Liability Company Act and Revised Uniform Limited Partnership Act to provide drafters of LP and LLC agreements with broad flexibility to modify default fiduciary duties. Both Acts now provide that default fiduciary obligations mat be restricted or eliminated, provided that the implied covenant of fair dealing and good faith may not be eliminated. Many states have followed suit.

  Delaware Corporate Law

  Under Delaware law, the purpose of the implied covenant of fair dealing and good faith is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself. Although the covenant of good faith and fair dealing itself cannot be waived, Delaware courts will not infer specific obligations that do not appear in the LLC or LP agreement. Moreover, courts will not override express provisions in the agreements. Accordingly, it is incumbent upon parties to set forth clear and unambiguous provisions to avoid doubt later. For instance, where management is entitled to compete with a company or exercise sole and unfettered discretion on matters, such provisions need to be clear and explicit.

  With respect to discretionary acts, it is very important to spell out the scope of such discretion. If the intent is to allow the General Partner act in its own best interest, it needs to be so stated. Sample sole discretion language which has been upheld is as follows:

        “Notwithstanding any other provision of this Agreement or otherwise applicable provision of law or equity, whenever in this Agreement, the General Partner is permitted or required to make a decision in its sole discretion or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall, to the fullest extent permitted by applicable law, have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership or Limited Partnership.”

  The bottom line is that parties to an LLC or LP Agreement cannot underestimate the necessity to specifically set forth any fiduciary obligations and expectations to each other to avoid the application of statutory default obligations, which can be cumbersome and unintended.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: Delaware corporate law, going public, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney

• 30Oct

  Securities Attorneys Must Self-Regulate to Avoid Potential Insider Trading Pitfalls

  Securities Attorneys No Comments

  Attorneys who accept stock as compensation from public companies need to be aware of a vigilant regarding their insider trading obligations. Before analyzing the dynamics of proper compliance in stock compensation scenarios, it is assumed that the stock received by the attorney was issued pursuant to a registration statement or valid exemption and is being resold also pursuant to a registration statement or valid exemption to registration.

  Insider Trading

  Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Securities attorneys are in a unique position as they are often privy to material, non-public information regarding their public company clients.

  The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or the Securities Exchange Act of 1934, as amended. The law of insider trading is otherwise defined by judicial opinions construing these rules. Rule 10b-5 is the general anti-fraud provision under the Exchange Act. Rule 10b5-1 provides that a person can be guilty of insider trading if at the time of the purchase or sale, they are aware of material non-public information. The Rule also sets forth several affirmative defenses or exceptions to liability. In particular, the rule permits persons to trade in certain specific circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract or instruction that was made in good faith.

  Confidential Information

  Rule 10b5-2 clarifies how the misappropriation theory applies to insider trading. In particular, when a person is aware of confidential information and owes a duty of trust or confidence as to such information, such person is deemed to have misappropriated the information when they make a purchase or sale of securities while aware of such information. For example, when a person has signed a confidentiality agreement or is a party to an attorney/client or other trust relationship.

  Securities attorneys can violate both theories of insider trading. Attorneys need to be aware of their knowledge of insider information both at the time of purchase and the time of the sale of the securities. When an attorney accepts stock as compensation, they have “purchased” such stock. That is, the attorney has made an investment decision to accept stock instead of cash for their services. Clearly when an attorney sells such stock on the open market, they have engaged in a sale.

  Attorneys should exercise great caution in making the decision to accept stock as compensation from public company clients. Attorneys should systems and safeguards already in place to ensure absolute compliance at the time of accepting stock and at the time of sale. Particular care should be paid to the existence of pending transactions, or any other material non-public information that could impact the share price of the stock at a later date.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: going public, insider trading, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, Rule 10b5-2, s8 stock, SEC Law Firm, SEC reporting requirements, securities attorney

• 29Oct

  The Federalism of State Corporate Law

  Corporate Law Firm No Comments

  Historically the regulation of corporate law has been firmly within the power and authority of the states. However, over the past few decades the federal government has become increasingly active in matters of corporate governance. Typically this occurs in waves as a response to periods of scandal in specific business sectors or in the financial markets. Traditionally, when the federal government intervenes in these situations, they enact regulation either directly or indirectly by imposing upon state corporate regulations.

  Specifically, the predominant method of federal regulation of corporate governance is through the enactment of mandatory terms that either reverse or preempt state laws on the same point. The most recently prominent example is the passing of the Sarbanes Oxley Act of 2002 (SOX).

  Sarbanes Oxley (SOX)

  SOX regulates corporate governance in five matters: (i) SOX prevents corporations from engaging the same accounting firm to provide both audit and specified non-audit services; (ii) SOX requires that audit committees of listed companies be composed entirely of independent directors and to disclose which such directors are financial experts; (iii) SOX requires that the corporation’s CEO and CFO certify that the periodic reports do not contain material misstatements or omissions and that the financial statements are accurate; (iv) SOX compels forfeiture of CEO and CFO incentive compensation in the event of an earning restatement; and (v) SOX bars corporations from making loans to executive officers.

  Each of these provisions requires the corporation to govern itself accordingly, regardless of whether the board of directors deems the actions to be a useful deployment of resources and regardless of the individual facts and circumstances surrounding that corporate entity. Such provisions limit the ability of directors to negotiate, research and agree to corporate actions that solve and address the unique challenges faced by their individual organization. That is, each of these mandates directly contradicts the essence of state corporate governance.

  Delaware and Model Act

  State corporate law is generally based on the Delaware and Model Act and offers corporations a degree of flexibility from a menu of reasonable alternatives that can be tailored to companies’ business sectors, markets and corporate culture. Moreover, state judiciaries review and rule upon corporate governance matters considering the facts and circumstances of each case and setting factual precedence based on such individual circumstances. The traditional fiduciary duties that govern state corporation laws include the duties of care and loyalty and are tempered by the business judgment rule.

  Duty of Care

  The duty of care requires that directors exercise the same level of care that would be expected from an ordinarily prudent person in the conduct of his or her own affairs. This includes making an informed decision, seeking the advice of experts when necessary and considering both the positive and negative impacts of a decision. The duty of loyalty is essentially a proscription against conflict of interest and self dealing. The business judgment rule basically says that if a director follows both his duty of loyalty and duty of care, than the decision should be deferred to.

  Although the federal government may have the right motives in enacting regulations which effect corporate governance, there is always controversy when they cross “sate lines.” State regulators and judiciaries are usually the best posture to establish and enforce corporate governance regulations. It is a given that director actions that result in a fraud upon shareholders and investors is actionable under federal (and state) securities laws, however, it is still questionable as to whether the federal government is the proper regulatory authority to set forth particular mandates of director responsibility.

  Delaware Corporations Act

  The Delaware Corporations Act together with decisions of the Delaware Court of Chancery provides a reliable source for corporate governance matters. These state laws allow for the quick response to emerging problems in a way that the strict mandates of the federal government cannot.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: corporate governance, corporate law, delaware corporations act, due diligence, going public, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, sarbanes-oxley, SEC Law Firm

• 28Oct

  Five Essential Conditions for Unregistered Spin-Offs

  Corporate Law Firm No Comments

  A spin-off occurs when a parent company distributes shares of a subsidiary to the parent company’s shareholders such that the subsidiary separates from the parent and is no longer a subsidiary. In Staff Legal Bulletin No. 4, the Securities and Exchange Commission (SEC) explains how and under what circumstances a spin-off can be completed without the necessity of filing a registration statement.

  In particular, the subsidiary shares (the shares distributed to the parent company shareholders) do not need to be registered if the following five conditions are met: (i) the parent shareholders do not provide consideration for the spun-off shares; (ii) the spin-off is pro-rata to the parent shareholders; (iii) the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets; (iv) the parent has a valid business purpose for the spin-off; and (v) if the parent spins-off restricted securities, it has held those securities for at least one year. Below is a discussion of each of the five conditions.

  Essential Conditions

  The first condition is that the parent shareholders do not provide consideration for the spun-off shares. This is because if value is provided, a “sale” has occurred and a “sale” requires registration under Section 5 of the Securities Act of 1933, as amended, unless an exemption is available. In a spin-off, an exemption is rarely available due to the wide variety of shareholders receiving the spun-off shares.

  The second condition is that the spin-off must be pro rata. When the spin-off is pro rata, the parent shareholders have the same proportionate interest in the parent and the subsidiary both before and after the spin-off. If a spin-off is not pro rata, the shareholders’ relative interests change and some shareholders give up value for the spun-off shares, requiring registration pursuant to the first condition.

  The third condition requires that adequate information be provided to the shareholders. If the subsidiary is a non-reporting company it can satisfy this condition by providing the shareholders with an information statement which satisfies the Section 14 proxy rules of the Securities Exchange Act of 1934 prior to or contemporaneously with providing the spun-off shares. In addition, the non-reporting subsidiary must file a Form 10 registration statement, which can be accomplished after the spin-off but prior to trading on the spun-off subsidiary, begins. A reporting subsidiary is deemed to have satisfied its information requirements as long as it is current in its reporting obligations, plus provides any pertinent information directly related to the spin-off itself.

  Adequate Information Requirement

  Where both the parent company and the subsidiary are non-reporting, the adequate information requirement is met if the by the date of the spin-off: (i) the parent provides the shareholders with an information statement which satisfies the Section 14 proxy rules of the Securities Exchange Act of 1934’ (ii) the shares are restricted until such time as a Form 10 is filed; and (iii) the transfer restrictions are enforced such as by means of stop transfer instructions to the transfer agent.

  The fourth condition is that there is a valid business purpose for the spin-off. Although there may be many valid business purposes, the SEC specifically recognizes the following as valid: (i) allowing management of each business to focus solely on that business; (ii) providing employees of each business stock-based incentives linked solely to her or her employer; (iii) enhancing access to financing by allowing investments into each business separately; and (iv) enabling the companies to do business with each other’s competitors.

  Invalid Purposes

  Likewise, although there are numerous purposes that would not be valid, the SEC specifically lists the following as not valid: (i) creating a market in the spun-off securities without providing adequate information and (ii) creating a public market in a shell or development stage company.

  Finally, the last condition is that the parent has held the shares for a minimum of one year. This is so the receiving shareholder may tack with the parent’s holding period and thereby satisfy the holding period requirements of Rule 144.

  The SEC has also taken the position, that as long as all the above conditions have been satisfied, the spin-off will not require registration under Rule 145 merely because the shareholders have voted on the spin-off and/or assets are transferred into the subsidiary as part of the spin-off. Furthermore, except where specifically delineated above (non-reporting parent and subsidiary) as long as all the above conditions are satisfied, the shares issued in the spin-off are not restricted securities.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: due diligence, going public, OTCBB, Over The Counter Bulletin Board, public company spin-offs, registration statement, Reverse Mergers, Rule 144, Rule 145, SEC Law Firm, SEC reporting requirements, securities attorney

• 23Oct

  Disclosure Obligations Of A Reporting Entity In Government Investigations

  Securities Law Firm No Comments

  With the prevalence of investigations by the Securities and Exchange Commission (SEC), and other regulatory bodies, into corporate conduct, public companies often must decide whether, when and how to disclose to investors facts and information regarding such investigations. Although federal securities laws require the disclosure of specific events, some of which may occur as part of an investigation, neither the securities laws, nor court decisions interpreting such laws, provide clear guidance as investigation disclosure obligations. Accordingly, competent securities counsel must analyze all the facts and circumstances and make materiality assessments in advising clients on this difficult topic.

  There is no statute, regulation or rule that explicitly imposes a duty on Companies to disclose an investigation. Moreover, the existence and details about a government investigation is not public information and is confidential. The SEC, and other regulatory bodies, takes care to maintain the confidentiality of such investigations and include documentation regarding the confidential nature of proceedings in all voluntary requests for information and subpoenas.

  Certainly, federal securities laws require specific duties to disclose specific enumerated events and non-enumerated material information. Issuers have duties to make specific disclosures in quarterly forms 10-Q, annual forms 10-K and periodic reporting forms 8-K. Moreover, in the event that a limited or selective disclosure has been made, either intentionally or unintentionally, regulation FD would require general disclosure of such material information. Below I will list the items in these disclosure obligations which would most likely require the disclosure of an investigation. Each of the items would only require disclosure if the disclosable event is a “substantial certainty.” That is, the facts must be substantially certain to be material. In reality the fact of an investigation does not meet this criteria, however, the facts uncovered in the investigation, and the likelihood of a pending enforcement or other action, do.

  The specific items which may require a disclosure include the following. First, Regulation S-K, Item 103 requires the disclosure of “Legal Proceedings.” In particular, Item 103 provides in pertinent part, “[D]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is subject…..[I]nclude similar information as to any such proceedings known to be contemplated by governmental authorities.” Generally disclosure of an investigation under Item 103 must be had when the SEC Enforcement staff issues a Wells notice.

  Item 303 of Regulation S-K requires Issuers to disclose Management Discussion and Analysis, including the Issuers financial condition, changes in financial condition and known facts and circumstances which could change or affect such financial condition. If an investigation uncovers facts that could reasonably affect the Issuer’s financial condition, an Item 303 disclosure would be necessary. Item 503(c) requires a discussion of risk factors and changes in risk factors. Again if an investigation uncovers facts that would affect the Issuer’s risk factors, a disclosure is required. Item 401(f) requires disclosure of the involvement of directors or executive officers in legal proceedings. Many times an investigation will result in targeting a particular officer or director. Generally, such disclosure would not be necessary until a Wells notice has been issued.

  Form 8-K requires disclosure of several events that may relate to an investigation or facts uncovered in an investigation, including, (i) the resignation or removal of a director or certain officers; (ii) the non-reliance on previously issued financial statements; (iii) the resignation or dismissal of the Company’s auditor; and (iv) entry into a material definitive agreement with a governmental agency to conclude an investigation.

  If an Issuer determines that a disclosure need be made, the securities laws require that such disclosure be full and complete and fail to include all material information. Issuers should consider that the disclosure should include enough information to minimize the need to supplement it in the near future. However, the disclosure should not contain so much information as to potentially confuse a reader or convolute the issue.

  In conclusion, counsel should consider all the facts and circumstances of an investigation, and continue to make materiality assessments on a continuous basis during the course of an investigation to ensure that Issuers meet their disclosure obligations without unnecessarily jumping the gun and facing potential negative market consequences.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: form 10-k, form 10-q, form 8-k, going public, OTCBB, Over The Counter Bulletin Board, regulation s-k, Reverse Mergers, SEC investigation disclosure, SEC investigations, SEC Law Firm, SEC reporting requirements, securities attorney

• 22Oct

  The Demise of the Death Spiral – SEC Interpretation of Rule 415

  Securities Attorneys No Comments

  Without fanfare, publications, or other notice, in mid 2006, PIPE investors and the Issuers that utilized them noticed a big difference in the way that the Securities and Exchange Commission’s (SEC) division of corporate finance reviewed and commented upon, resale registration statements. Although the SEC staff contended that its position on Rule 415 had not changed, there was, incontrovertibly, a dramatic impact felt by Issuers and PIPE investors.

  For years, Issuers had relied upon Rule 415 in order to register the resale of shares issued in PIPE transactions (a “secondary offering”). Rule 415 governs the registration requirements for the sale of securities to be offered on a delayed or continuous basis, such as in the case of the take down or conversion of convertible debt and warrants. In the years prior to 2006, Issuers would register shares they sold in a PIPE transaction, which could represent in excess of 50% of their outstanding public float.

  Convertible Debt and Subsequent Resale

  In a typical convertible debt and/or warrant PIPE transaction, the exercise price to convert the debt or warrant was based on a discount to current market price. Accordingly, the PIPE investor would convert a small percentage of the debt or warrant into common shares and immediately sell those shares on the open market, thus forcing down the price of the stock. The PIPE investor would then convert another small percentage of the debt or warrant at a discount to the new lower market price and again immediately re-sell the shares, further depressing the market price. This process could continue infinitum until all of the debt or warrants had been converted leaving the Company’s stock price considerably lower than where it started. Thus the term “death spiral”.

  The SEC recognized this pattern and the negative effect it had on the marketplace. Beginning in mid 2006, the SEC staff began tightening the availability of Rule 415 for secondary offerings, particularly where the number of shares being registered exceeded 30% of the Issuers public float. The SEC was able to do this without rule amendments or such by simply taking the position that the registration of in excess of 30% of the public float should be closely reviewed and possibly considered a primary offering and not a secondary offering at all. A primary offering is one where the securities are being sold by the Issuer (or in this case on behalf of the Issuer) as opposed to a third party, such as a PIPE investor.

  Primary versus Secondary Offerings

  The consequences of deeming an offering a primary offering as opposed to a secondary offering are two-fold. First, Rule 415, the rule that allows securities to be registered for sale on a delayed or continuous basis, is generally unavailable for primary offerings by small business issuers. Second, a primary offering requires that each of the investors named as a selling security holder be identified as an underwriter. Underwriter status exposes the named underwriter to full liability for any misstatements or omissions in that registration statement (subject to a due diligence defense). Most PIPE investors want to be just that, investors, not guarantors of the statements, or misstatements, of an Issuer.

  Toxic Offerings

  The SEC staff made it clear that its interpretation of Rule 415 was meant to curtail death spirals and other “toxic offerings” which tended to flood the market with penny stocks whose value continued to decline. The SEC’s efforts worked. Since mid 2006 the number of Rule 415 registered PIPE offerings declined dramatically. Prominent PIPE investors such as Cornell Capital and the Laurus Fund significantly decreased their investments in small business issuers.

  Small business issuers found it considerably harder to attract PIPE and other speculative investors. In fact, it is the pressure from these small business issuers that has since prompted other changes in federal securities laws, such as the decreased holding period under Rule 144, and the use of registration exemptions to lure investors, such as Section 3(a)(9) and (10) of the Securities Act.

  Reverse Merger Exceptions

  It should be noted as well, that in the past year, the SEC staff is again routinely allowing the registration of securities in excess of 30% of the public float in cases where the registrant was a shell company and has just completed a reverse merger or other transaction that causes it to cease being a shell company. Presumably this has been to assist small business issuers attract investors following the depressive effects of the prohibition of the use of Rule 144 for companies that are or become shell companies.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

  Tags: going public, OTCBB, Over The Counter Bulletin Board, PIPE offerings, Reverse Mergers, Rule 144, rule 415, SEC Law Firm, SEC reporting requirements, Section 3(a)(10), Section 3(a)(9), securities attorney

• 21Oct

  The Securities & Exchange Commission (SEC) Provides Guidance Regarding Section 3(a)(10) of the Securities Act of 1933

  Securities Law Firm No Comments

  Section 3(a)(10) of the Securities Act of 1933, as amended (“Securities Act”) is an exemption from the Securities Act registration requirements for the offers and sales of securities by Issuers. The exemption provides that “[E]xcept as hereinafter expressly provided, the provisions of this title [the Securities Act] shall not apply to any of the following classes of securities….(10) Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.”

  The Securities and Exchange Commission (SEC) has given guidance on the operation of Section 3(a)(10) in its Division of Corporation Finance: Revised Staff Legal Bulleting No. 3. In particular, in order to rely on the exemption, the following conditions must be met:

  • The securities must be issued in exchange for securities, claims, or property interests, not cash;
  • A court or authorized governmental entity must approve the fairness of the terms and conditions of the exchange;
  • The reviewing court or authorized governmental entity must (i) find that the terms and conditions of the exchange are fair to those that the securities will be issued to; and (ii) be properly advised that the Issuer will be relying on the court’s findings to issuer securities;
  • The reviewing court or authorized governmental entity must hold a hearing before approving the fairness of the terms and conditions of the transaction;
  • A governmental entity must be expressly authorized by law to hold the hearing;
  • The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange;
  • Adequate notice must be given to all those persons; and
  • There cannot be any improper impediments to the appearance by those persons at the hearing.

  In addition to complying with the above conditions, Issuers should be aware that many state securities law statutes that authorize a Section 3(a)(10) court process, require that there be a majority shareholder vote approving the transaction, prior to the hearing.

  Importantly SEC Staff Bulletin 3 provides that the re-sale of securities issued in a Section 3(a)(10) transaction may be had without regard to Rule 144 if the seller is not an affiliate of the Issuer either before or after the Section 3(a)(10) transaction. If the seller is or will be an affiliate either before or after the Section 3(a)(10) transaction, re-sales may be made in accordance with Rule 144, except for the holding period and notice filing requirements. That is, affiliates would still be subject to the drip rules, manner of sale and current public information requirements.

  As a practical matter, many over the counter traded securities (Over the Counter Bulletin Board or OTCBB and Pink Sheets) have been utilizing the exemption found in Section 3(a)(10) to convert debt into common stock. The conversion of debt into common stock can assist an Issuer in two ways. First, and obviously, it eliminates the debt from the balance sheet and increases liquidity and solvency. Second, and less obvious, is that the Section 3(a)(10) exemption can be used to convince lenders to make investments into a company, without the investor relying solely on the Company cash flows for repayment.

  Moreover, in these trying economic times, it seems there is the potential for a substantial increase in the use of this exemption by OTCBB and Pink Sheet Companies as a tool to clean up their balance sheets and induce additional capital investments. In fact, the hearing process can be quick and relatively inexpensive. The court must only opine on the fairness of the transaction to those that the securities will be issued, the creditor whose debt will be exchanged for stock.

  The court does not render their decision based upon the potential impact on the shareholders of record, the Company or the potential marketplace shareholders. In most cases the creditor is highly motivated to convert its debt into common stock and realize the opportunity for immediate cash through resale or the opportunity for long-term gain through holding the stock.

  As with the use of all registration exemptions, Issuers are cautioned that they are still subject to the anti-fraud, civil liability and other provisions of the federal securities laws. Moreover, Section 3(a)(10) is not available to exempt any transaction that is in part of a plan or scheme to evade the registration provisions of the Act. In any of these cases, registration under the Act is required unless another exemption is available.

  Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

  Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

  Tags: convertible debt, due diligence, going public, OTCBB, Over The Counter Bulletin Board, public shells, Reverse Mergers, SEC Law Firm, Section 3(a)(10), securities attorney

• 20Oct

  Elements Constituting “Solicitation” Such that a 14A Proxy Solicitation is Required Instead of a 14C Information Statement Under the Section 14 Proxy Rules of the Securities Exchange Act of 1934

  Securities Attorneys No Comments

  If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.

  Companies with securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are subject to the Exchange Act proxy rules found in Section 14 and the rules promulgated thereunder. The proxy rules govern the disclosure in materials used to solicit shareholders’ votes in annual or special meetings held for the election of directors and the approval of other corporate action.

  The information contained in proxy materials must be filed with the SEC in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote. The disclosure information filed with the SEC and ultimately provided to the shareholders is enumerated in SEC Schedule 14A.

  In instances when a shareholder vote is not being solicited, such as when a Company has obtained shareholder approval through written consent in lieu of a meeting, a Company may satisfy its Section 14 requirements by filing an information statement with the SEC and mailing this statement to its shareholders. In this scenario, the disclosure information filed with the SEC and mailed to shareholders is enumerated in SEC Schedule 14C.

  As with the proxy solicitation materials filed in Schedule 14A, Schedule 14C information is reviewed by the SEC to ensure all important facts are disclosed. However, Schedule 14C does not solicit or request shareholder approval or any other action for that matter, but rather informs shareholders of an approval already obtained and corporate actions which are imminent.

  The information requirements in Schedule 14C are less arduous in the respect that they do not include lengthy material regarding what a shareholder must do to vote or approve a matter. Moreover, the Schedule 14C process is much less time consuming, as the shareholder approval has already been obtained. Accordingly, when possible, Companies prefer to utilize the Schedule 14C Information Statement as opposed to the Schedule 14A proxy solicitation.

  The SEC requires the use of a Schedule 14A proxy solicitation whenever the Company is making a solicitation of shareholder approval, however small that solicitation. A “solicitation” is defined by Rule 14a-1(l) as;

  1. any request for a proxy whether or not accompanied by or included in a form of proxy
  2. any request to execute or not to execute, or to revoke a proxy
  3. the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

  Simply stated, whenever a Company requests a shareholder to consent to action, it is soliciting that shareholder’s approval and accordingly must abide by the Schedule 14A proxy solicitation requirements. According to the exact language of these SEC rules, a Schedule 14A proxy solicitation is required since the Company is requesting a shareholder to vote. In reality, a Company is nothing more than the officers and directors that run it and often these officers and directors are shareholders as well.

  Although the SEC has not issued definitive guidance on the subject, by practice they have taken the position that where required shareholder consent can be had without requesting any shareholders other than the officers and directors of a company to issue such consent, a 14C Information Statement may be used rather than the 14A proxy solicitation.

  That is, a 14C Information Statement is only appropriate where the majority shareholder(s) are comprised of only the officers and directors. This is so even in cases where the majority of shareholders is comprised of a small group of family and friends of officers and directors, or a small group of consultants or other insiders.

  Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

  Tags: Exchange Act Section 14, going public, OTCBB, Over The Counter Bulletin Board, public shells, Reverse Mergers, schedule 14A, schedule 14C, SEC Law Firm, SEC reporting requirements

• 19Oct

  New FINRA Requirements for Corporate Actions Require More Thorough Documentation on Behalf of Issuers

  Corporate Law Firm No Comments

  If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.

  As of December 1, 2008, the Financial Industry Regulation Authority (FINRA) began a new policy for effectuating corporate actions for OTCBB quoted and traded securities (securities quoted and traded on the Over the Counter Bulletin Board and the PinkSheets). Corporate actions include anything that would require notification to FINRA and the issuance of a new trading symbol, such as a name change, reverse or forward stock split.

  Prior to the initiation of the new procedures, Issuers making corporate changes were only required to submit a short cover letter explaining the action and providing the new CUSIP number. In addition, they were required to submit a copy of the documents evidencing the corporate action, including board and shareholder consents and amended articles of incorporation. In addition, transfer agents were and are still required to submit transfer agent verification forms at least ten days prior to the effective date of the corporate action.

  New Procedure and Exhibits

  The new procedures require Issuers to submit detailed cover letters, numerous corporate records and completed standardized forms. In addition, Issuers must now document and evidence proper corporate procedures and maintain historical books and records in their entirety. Although FINRA is still refining its own internal review process, which will help expedite properly submitted documentation, the new procedures will ultimately benefit legitimate corporate management and deter those who attempt to take action without proper authority.

  The new OTC Equity Issuer Notification Form requires detailed information regarding the Company, specifically, its name and address, all contact information, details regarding its securities as well as complete transfer agent information. In addition, all officers must be listed and copies of properly executed board resolutions and meeting minutes appointing each officer must be provided.

  Name Changes and Stock Splits

  The new OTC Equity Name Change/Stock Split Request Form requires detailed information regarding the proposed corporate action and sets forth the supporting documentation which must be provided. In particular, an Issuer must provide a cover letter that provides a complete and detailed corporate history of the company including an explanation for every corporate change that ever occurred. These corporate changes include, but are not limited to; every amendment filed with the state of incorporation, changes in control, and name changes and stock splits, from its date of inception to the present date.

  In order to fulfill this requirement, Issuer’s must possess all documents that have been filed with its state of incorporation and any successor states if there has been a change in domicile. Moreover, an Issuer must
  be prepared to provide backup documents to evidence that historical changes (such as board and shareholder consents and meeting minutes) were executed properly.

  Reverse Mergers and Required Documentation

  In a transaction involving two entities such as a reverse merger or acquisition, Issuers must provide relevant documentation regarding the proposed change, including board and shareholder consents and amendments filed with the state. Issuers must also provide an opinion letter from an attorney licensed in the relevant state opining that the entity in question is the same corporate entity as the public entity and that the transaction is otherwise legal.

  Simply stated, following a merger or change of domicile from Florida to Delaware, an issuer would be required to provide opinions from attorneys licensed in both Florida and Delaware opining that the merged entity is the same public company and that the transaction was legal in both states.

  In many cases the documents provided by the Issuer must be executed and notarized.

  Another common request is for a letter from the transfer agent confirming that they have had sole and continuous custody and control over the company’s shareholder records.

  FINRA Notifications

  All of the above documents and information must be provided by each and every issuer engaging in corporate action which requires FINRA notification. In addition, upon review, and at the option of FINRA, additional information may be requested. A common additional request is for the issuer to provide copies of all resignations from prior board members.

  Lastly, if there has been a change of transfer agent, transfer agent notifications must be provided by both the current and former transfer agent in order to once again establish an uninterrupted chain of control over the Company’s shareholder records. This requirement also ensures that the Company shareholder records have not been altered in any way.

  The Need for Corporate Counsel

  Some Issuers perceive the new FINRA requirements to be cumbersome and needlessly expensive to comply with. These same Issuers are also dismayed by the additional time it now takes to have a submittal reviewed by FINRA. However, as a whole, these new rules are appropriate and necessary. They merely require public entities to maintain proper and complete books and records and to follow state corporate law regarding board and shareholder changes and consents; practices the Issuer should be adhering to already.

  Obviously, the aforementioned FINRA requirements make the ongoing involvement and advice of securities legal counsel all the more necessary.

  Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

  Tags: due diligence, going public, OTC Equity Issuer Notification Form, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney

• 17Oct

  Necessity of Background Searches on Officers and Directors as Part of Due Diligence Prior to a Reverse Merger or IPO

  Reverse Mergers No Comments

  If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.

  Many private companies go public either through a reverse merger with a public shell or initial public offering (IPO) process. A reverse merger allows a private company to go public by purchasing a controlling percentage of shares of a public shell company and merging the private company into the shell. An initial public offering is where the private company files a registration statement with the Securities and Exchange Commission and once the registration statement is effective proceeds to sell stock either directly (a DPO) or more commonly through an underwriter.

  It is very important that management of public shells and underwriters conduct a background check on the private company’s officers and directors prior to embarking on any transaction that will result in a private company becoming public. While a reverse merger saves on the costs associated with going public, private companies must be weary of the intentions of the officers and directors associated with the takeover.

  Within four days of completing a reverse merger of with a shell public company, the company must file a form 8-K which contains all the information that is required in a Form 10 registration statement. Such information includes Regulation S-K Items 401 and 404. This same information must be included in a registration statement filed to conduct an IPO.

  Regulation S-K Item 401 requires public companies to provide detailed information regarding its directors, executive officers, significant employees, promoters and control persons, including, but not limited to, the following:

  • Name, age and positions with the company
  • Family relationships among directors, executive officers, significant employees, promoters and control persons
  • Detailed background, business experience and employment for the last five years
  • Directorships in other public companies;
  • Involvement in any of the following legal proceedings in the past five years:
    1. Any personal or corporate bankruptcy proceedings;
    2. A conviction in a criminal proceeding or being named the subject of a pending criminal proceeding;
    3. Being subject to an order, judgment or decree permanently or temporarily enjoining or permanently or temporarily barring the person from acting as a broker, associated person; investment adviser, underwriter, dealer, affiliated person, director or employee in any way related to the securities or banking business; engagement in any securities related activities or violating any state or federal securities laws;
    4. Being found by a court to have violated any state or federal securities or commodities laws;

  Regulation S-K Item 404 requires public companies to provide detailed information regarding transaction by and among related persons including transactions by and among the company and any of its directors, executive officers, significant employees, promoters and control persons. Moreover, Item 404 requires detailed information regarding how such transactions were reviewed, approved and ratified.

  Clearly it is important for all parties to know well in advance the disclosures that will be required regarding its directors, executive officers, significant employees, promoters and control persons. Moreover, it is important for both public shell companies and underwriters to conduct independent background checks as individuals may not always be forthcoming regarding disclosures such as prior securities law issues and criminal convictions.

  It is generally the responsibility of corporate legal counsel to conduct, or assist in completing, these background searches. The foundation of the due diligence process, and the success of the potential reverse merger or IPO itself, depends upon the meticulousness and accuracy of these various background checks.

  Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

  Tags: background searches, due diligence, form 8-k, going public, IPO, OTCBB, Over The Counter Bulletin Board, public shells, regulation s-k, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney

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