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

by Laura Anthony, Esq.

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

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!