Section 4(6) provides a registration exemption for offerings to accredited investors, if the aggregate offering amounts up to the dollar limit of Section 3(b) (currently $5,000,000), if there is no advertising or public solicitation in connection with the transaction by the Issuer or anyone acting on the Issuer’s behalf.

The term accredited investor is defined in section 2(a)(15) and generally includes:

• Banks, insurance companies and pension plans;
• Corporations, partnerships and business entities with over $5 million in assets;
• Directors, executive officers and general partners of the issuer;
• Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
• Entities, all of whose equity owners are accredited.

In addition, the SEC has the power to define as an accredited investor any person, who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor.

Section 4(6) and Regulation D

Section 4(6) is rarely used as a free standing exemption; rather it is thought that Section 4(6) falls under the mandate of Regulation D although none of the three enumerated exemptions under Regulation D (Rules 504, 505 and 506) are strictly limited to accredited investors.

Practitioners seeking to rely on Section 4(6) should be aware that such securities are not considered federally covered under Section 18 of the Securities Act of 1933 and accordingly, in addition to abiding by the federal securities regulations, individual state securities laws must be considered.

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!

Section 4(2) of the Securities Act of 1933 provides that the registration requirements of Section 5 do not apply to “transactions by an issuer not involving any public offering.” The definition of an “issuer” is pretty straightforward as found in Section 2(a)(4) and includes, “the person who issues or proposes to issue” a security and is understood to mean the entity that originally sells the securities. However, not so straightforward is what constitutes a “public offering,” which term is not defined in the Securities Act. In reliance on Section 4(2) the SEC enacted Rule 506 as part of Regulation D.

Rule 506 as a Safe Harbor Provision

Rule 506 is a Safe Harbor. In other words, if all the conditions of Rule 506 are met, you can rest assured that the conditions of Section 4(2) have been satisfied. However, Section 4(2) can be satisfied as a standalone exemption separate from Rule 506. The importance of the distinction between Section 4(2) and Rule 506 cannot be underestimated. Often, when the technical requirements of Rule 506 have not been met, usually inadvertently, the Section 4(2) exemption will still stand and save the day. Moreover, many Issuers satisfy the Section 4(2) exemption “by chance” when other exemptions fail. Section 4(2) does not have filing requirements and at times may be the only exemption available to save an Issuer from civil or even criminal liability.

SEC vs. Ralston Purina Company

The leading case defining a public vs. a private offering is SEC vs. Ralston Purina Co., wherein the U.S. Supreme Court laid down its guidelines. The U.S. Supreme Court focuses on the sophistication of the investor coupled with their access and receipt of disclosure information from the Issuer. Disclosure information should be the “kind of information which registration would disclose.” Importantly, the U.S. Supreme Court refused to establish a quantity standard based on the number of investors. Although, ultimately quantity may be considered, the important factors remain investor qualification and access to disclosure information.

SEC Release No. 4552

The leading SEC pronouncement on Section 4(2) is SEC Release No. 4552 in which it set forth what it considers to the requirements for a private placement. According to the release, all the surrounding circumstances must be considered, “including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering.” Unfortunately, the release does not offer much guidance on each of the factors. Release No. 4552 does however discuss two important concepts in analyzing an offering. The first is “coming to rest” and the second is “integration.”

Coming to Rest

“Coming to rest” is a concept that deals with the issue of when a particular offering is over. The SEC considers an offering to be continuing until the offered securities have “come to rest” in the hands of the persons who are not “merely conduits for a wider distribution.” Integration deals with the issuer of when purportedly singe offerings are integrated to form one larger offering and whether when viewed as a whole, this larger offering, qualifies for an exemption. The list of factors relevant in analyzing integration include, whether:

• The different offerings are part of a single plan of financing;
• The offerings involve the issuance of the same class of security;
• The offerings are made at or about the same time;
• The same type of consideration is to be received; and
• The offerings are made for the same general purpose.

Courts of Appeals have offered guidance on their interpretations of SEC vs. Ralston Purina Co. and Release No. 4552. In particular, in determining whether an offering is private or public (for purposes of the Section 4(2) exemption), courts consider such factors as:

• The number of offerees and their relationship to each other and to the Issuer;
• The number of units offered;
• The size of the offering;
• The manner of the offering;
• Whether the offerees are sophisticated and/or accredited;
• Access and availability of information that would otherwise be found in a registration; and
• Absence of redistribution.

Investor Qualifications

The American Bar Association offers excellent guidance in determining the qualification of the investor, which is a key point regardless of whose guidance is followed. In particular, the following factors should be considered:

• Risk-bearing ability (it is assumed an accredited investor can bear the risk of an investment);
• Degree of sophistication (whether the offeree can understand and evaluate the offering);
• The offerees representative (including investment advisors, accountants and attorneys);
• The manner of disclosure (the clearer and more thorough the disclosure, the less concentration on sophistication);
• Nonqualified offerees (and the impact they have on the entire offering); and
• Economic bargaining power.

In conclusion, the best way to analyze whether a particular offering meets the requirements of the Section 4(2) exemption is to examine the offering through the eyes of the state and federal securities regulators and/or plaintiff’s attorneys. If they could reasonably find problems with the offering, either changes those problem areas before embarking on the offering or come up with a new strategy.

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!

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In addition, Rule 144 is used to remove the restrictive legend from securities in advance of a sale. In layman terms, Rule 144, allows shareholders to either remove the restrictive legend or sell their unregistered shares.

Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.

Form 10 Information

In order to use Rule 144, a Company must have ceased to be a shell company, be subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and have filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer a shell company, then those securities may be sold subject to the requirements of Rule 144 after one year has elapsed from the date that the issuer filed “Form 10 information” with the SEC.

The Evergreen Requirement

Rule 144 now affects any company who was ever in its history a shell company by subjecting them to additional restrictions when investors sell unregistered stock under Rule 144. The new language in Rule 144(i) has been dubbed the “evergreen requirement”. The new Rule has the impact of punishing a company that was ever a shell in perpetuity and more importantly, its investors. Brian Breheny, deputy director of the Securities and Exchange Commission’s corporate finance division, referred to the so-called evergreen requirement in Rule 144(i) of the Securities Act, as an “unfortunate result” and said it was “probably not something that the commission intended.”

Going Public and Reverse Mergers

Under the so called “Evergreen Requirement”, a company that ever reported as a shell must be current in its filings with the SEC for 12 months before investors can sell unregistered shares. Here is the hitch. As a result, the restrictive legend can never be removed in advance of a sale. The rule affects all companies going public through a reverse merger or SPAC. Moreover, the Rule effects all companies that have ever been a shell, even if a reverse merger was completed decades ago. It paints a “scarlet letter” on all former shell companies, as this requirement continues literally forever – famous former shells like Blockbuster Entertainment, Texas Instruments and Berkshire Hathaway are now burdened by this restriction decades after their reverse mergers.

So basically, you have to register the shares to get the legend removed. Practitioners have requested that the SEC either amend the Rule or issue additional guidance removing this requirement from Companies that were no longer shells at the time the Rule was enacted. So far no such changes have been made.

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!

The Securities and Exchange Commission’s (SEC) integration guidance in Securities Act Release No. 8828 (August 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Rule 4(2) or the Securities Act Rule 506 safe harbor, with a registered public offering.

Qualified Institutional Investors

Previously it was thought that a private offering could only take place concurrently with a public offering if limited to qualified institutional investors (must have at least $100 million under management) and two or three additional large institutional accredited investors as set forth in the Black Box no action letter (June 26, 1990), or to an Issuer’s key officers and directors. In addition, many practitioners previously utilized the integration rule set forth in Securities Act Rule 502 in determining whether a private and public offering should be integrated. In Release No. 8828, the SEC clarified that Rule 502 provides the test to be used in determining whether two or more otherwise exempt offerings should be integrated. As a public offering is not an exempt offering this rule does not apply when determining the integration of concurrent private and public offerings.

Solicitation of Investors

The SEC guidance focuses on how the investors in the private offering are solicited and in particular, whether by the registration statement or through some other means that would not otherwise foreclose the use of the Section 4(2) exemption (for example, solicitation through general solicitation or advertising would prohibit the use of Section 4(2)). If the potential investors become interested in a private investment through the registration statement, then it is deemed that a general solicitation has occurred and Section 4(2) would not be available. However, if the investors become interested in the private offering through some other means, such as where there is a substantive pre-existing relationship with the Issuer, then Section 4(2) would be available for use.
Moreover, an Issuer that completes a Section 4(2) private offering concurrently with a public offering may amend its registration statement to include the newly sold securities in its re-sale registration statement.

Clarification of Concurrent Offerings

The SEC also clarifies that in the specific situation of a concurrent private and public offering, only the guidance set forth in Release No. 8828 applies, and not the integration rules for exempt offerings set forth in Rule 502 or the integration rules relating to abandoned private and public offerings as set forth in Rule 155. In addition, an analysis under Release No. 8828 is factually specific and must be determined on a case by case basis.

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!

In a typical “equity line” financing arrangement, an investor and an Issuer enter into a written agreement whereby the Issuer has the right to “put” its securities to the investor. That is, the Issuer has the right to tell the investor when to buy securities from the Issuer over a set period of time and the investor has no right to decline to purchase the securities (or a limited right to decline). Generally the dollar value of the equity line is set in the written agreement, but the number of securities varies based on a formula tied to the market price of the securities at the time of each “put”.

Similar to PIPE Transactions

Most equity line financing arrangements are similar to a PIPE (private investment into public entity) transaction such that the Issuer relies on the private placement exemption from registration to sell the securities under the equity line and then files a registration statement for the re-sale of such securities by the investor. However, where in a PIPE transaction the investor bears the risk, in an equity line transaction, the investor often bears little risk due to the delayed nature of the puts coupled with the price of the securities being a formula tied to market price. Accordingly, the SEC views equity line financing registrations as indirect primary offerings.

Although the SEC views the equity line as an indirect primary offering, it allows the filing of re-sale type registrations if the following conditions are met:

• The Issuer must have completed the private transaction prior to filing the registration statement (i.e. both parties must be fully contractually bound with all material points agreed upon)
• The “resale” registration statement must be on the form that the Issuer is eligible to use for a primary offering; and
• In the prospectus the investors must be identified as both underwriter(s) and selling shareholder(s).

Investors Must Be Bound to Purchase All Securities

In order for the first condition to be met, the Investor must be irrevocably bound to purchase all the securities. That is, only the Issuer can have the right to exercise the put and, except for conditions outside the investor’s control, the investor must be irrevocably bound to purchase the securities once the Issuer exercises the put. In addition, the obligations of the Investor must be non-assignable to meet the “irrevocably bound” condition.

Investors May Not Possess Ability to Make Investment Related Decisions

Moreover, if the Investor has the ability to make investment related decisions under the terms of the contract, they will not be deemed to be irrevocably bound allowing for the filing of a re-sale registration statement. Examples of investment decisions that would viewed by the SEC as creating a continuing transaction (and not a completed transaction allowing for the filing of a registration statement), include:

• Agreements that give the Investor the right to acquire additional securities (including through warrants) at the same time or after the Issuer exercises a put;
• Agreement that permit the Investor to decide when or at what price to purchase the securities underlying the put;
• Agreements with termination provisions that have the effect of causing the Investor to no longer be irrevocably bound to purchase the securities; and
• Agreements that allow the Investor to exercise a “due diligence out”.

However, the Agreements may allow for customary “bring downs” as conditions to closing such as customary representations and warranties and customary clauses regarding no material adverse changes affecting the Issuer that would be within the Investors control.

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!

Many clients seek to register convertible securities, such as convertible debentures, warrants, options or convertible preferred stock. The question most often asked is how many share need to be registered, and in particular, does the Company need to register the shares underlying the convertible security.

First, it is essential to review a few basic facts on what a convertible security is and how it works.

Convertible Security Defined

A “convertible security” is a security that can be converted into a different security – typically shares of the company’s common stock. In most cases, the holder of the convertible determines whether and when a conversion occurs. In other cases, the company may retain the right to determine when the conversion occurs.

Companies that may be unable to tap conventional sources of funding sometimes offer convertible securities as a way to raise money more quickly. In a conventional convertible security financing, the conversion formula is generally fixed – meaning that the convertible security converts into common stock based on a fixed price. The convertible security financing arrangements might also include caps or other provisions to limit dilution (the reduction in earnings per share and proportional ownership that occurs when, for example, holders of convertible securities convert those securities into common stock).

Death Spirals

By contrast, in less conventional convertible security financings, the conversion ratio may be based on fluctuating market prices to determine the number of shares of common stock to be issued on conversion. A market price based conversion formula protects the holders of the convertibles against price declines, while subjecting both the company and the holders of its common stock to certain risks. Because a market price based conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both the company and its shareholders, convertible security financings with market price based conversion ratios have colloquially been called “floorless”, “toxic,” “death spiral,” and “ratchet” convertibles.

Registration of Convertible Securities

Where convertible securities are being registered, the underlying securities must be registered where such securities are convertible within one year, or where the securities are convertible at the option of the Company. Where the securities are convertible or exercisable within one year, an offering of both the overlying security and underlying security is deemed to be taking place. If such securities are not convertible or exercisable within one year, the Company may choose not to register the underlying securities at the time of registering the convertible securities. However, the underlying securities must be registered no later than the date they become exercisable or convertible.

Timing of Registration

Where securities are convertible at the option of the issuer, the underlying securities must be registered at the time the convertible securities are registered since the entire investment decision that the investor will be making, is made at the time of purchasing the convertible security. That is, the security holder, by purchasing a convertible security that is convertible at the option of the Company, is in effect also deciding to accept the underlying security.

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.

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!

The Securities Act of 1933 recognizes two broad types of exemptions to the registration requirements of Section 5, exempt securities and exempt transactions.

The Exempt securities are set forth in Sections 3(a)(1) – (8), (13) and (14) of the Securities Act. Exempt securities are continuously exempt from the registration requirements regardless of the nature of the transaction in which they may be offered, issued, sold or resold. Examples of exempt securities which may be publicly offered, issued, sold and resold by their issuers or any other person without registration include:

• Securities issued or guaranteed by the federal government;
• Any security issued or guaranteed by a bank;
• Commercial paper with a maturity of nine months or less;
• Securities issued by non-profit religious, educational or charitable organizations; and
• Insurance contracts

Exempt Transactions

The exempt transactions are set forth in Sections 3(a)(9), 3(b) and Section 4 of the Securities Act. Exempt transactions allow a security to be offered or sold in a particular transaction or circumstance or by a particular person or entity, although a subsequent offer or sale of the security could require registration under Section 5. Examples of exempted transactions include:

• Transactions by any person other than an issuer, underwriter or dealer (Section 4(1) – which permits most secondary trading of securities are form the basis for Rule 144)
• Transaction by an issuer not involving any public offering (Section 4(2) – often called the private placement exemption and is only available for use by the issuer and not for re-sale transactions)
• Brokers transactions (Section 4(3)); and
• An exchange of securities by an issuer with its existing security holders exclusively where no commission or other remunerations is paid or given (Section 3(a)(9) – conversion of convertible debt or equity securities and cashless exercises of warrants are typically accomplished using this exemption)

Examples of other common exemptions include:

• Offer or sales of a debtor through a bankruptcy court;
• Small offerings of less than $5 million under either Regulations A or D
• Offers and sales under written employee benefit plans (Rule 701); and
• Offshore offers and sales and Regulation S.

Of these exemptions the most commonly used are Regulations S, D and A. Regulation S is not technically an exemption but a jurisdictional provision regarding the reach of the Securities Act of 1933. In particular, Rule 901 provides “[F]or the purposes of Section 5 of the Act, the terms “offer to sell”, “sell”, “sale”, and “offer to buy” shall be deemed to include offers and sales that occur with the United States and shall be deemed not to include offers and sales that occur outside the United States.”

Regulation S

Regulation S covers (i) sales of securities to non-U.S. persons and to foreign securities markets by U.S. issuers, (ii) sales of securities to non-U.S. persons and in foreign securities markets by foreign issuers whose securities are not listed in the U.S. securities markets and which are non reporting companies under the Exchange Act, (iii) sales of securities to non-U.S. persons and in foreign securities markets by foreign issuers which are reporting companies under the Exchange Act, and (iv) resales of these securities.

Regulation D

Regulation D consists of eight (8) rules. Rule 501 through 503 contain definitions, conditions and other provisions that apply to Regulation D generally. Rules 504, 505 and 506 are the three current, specific exemptions from registration. Rule 504 provides an exemption for companies that are not subject to the reporting requirements of the Exchange Act of 1934 for the offer and sale of up to $1 million of securities in a 12 month period. Rule 505 exempts offers by companies of up to $5 million of securities in a 12 month period as long as offers are made without general solicitation or advertising, and there are no more than 35 unaccredited purchasers.

Rule 506

Rule 506 is a safe harbor under the private placement exemption (Section 4(2)). There is no limit on the amount of securities that can be offered or sold, so long as (i) offers are made without general solicitation or advertising, and (ii) the sales are made only to accredited investors or no more than 35 unaccredited investors and all investors must be sophisticated.

Accredited investors are generally defined to include:

• Banks, insurance companies and pension plans;
• Corporations, partnerships and business entities with over $5 million in assets;
• Directors, executive officers and general partners of the issuer;
• Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
• Entities, all of whose equity owners are accredited.

Regulation A

Regulation A permits a public offering of up to $5 million by issuers, including up to $1.5 million by selling stockholders, within any 12 month period. Regulation A is only available to issuers who are not subject to the reporting requirements of the Securities Exchange Act. Affiliate resales are not permitted unless the issuer has had net income from continuing operations in one of its last two fiscal years.

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!

The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, as amended, by a blank check company. Rule 419 requires that the blank check company filing such registration statement deposit the securities being offered and proceeds of the offering into an escrow or trust account pending the execution of an agreement for an acquisition or merger.

In addition, the registrant is required to file a post effective amendment to the registration statement containing the same information as found in a Form 10 registration statement, upon the execution of an agreement for such acquisition or merger. The rule provides procedures for the release of the offering funds in conjunction with the post effective acquisition or merger. The obligations to file post effective amendments are in addition to the obligations to file Forms 8-K to report both the entry into a material non-ordinary course agreement and the completion of the transaction. Rule 419 applies to both primary and re-sale or secondary offerings.

Investors Must Be Notified in Timely Fashion

Within five (5) days of filing a post effective amendment setting forth the proposed terms of an acquisition, the Company must notify each investor whose shares are in escrow. Each investor then has no fewer than 20 and no greater than 45 business days to notify the Company in writing if they elect to remain an investor. A failure to reply indicates that the person has elected to not remain an investor. As all investors are allotted this second opportunity to determine to remain an investor, acquisition agreements should be conditioned upon enough funds remaining in escrow to close the transaction.

Intended Purposes

For purposes of Rule 419 as defined within the Rule, the term “blank check company” means a company that:

1. Is a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person; and
2. Is issuing “penny stock,” as defined in Rule 3a51-1 under the Securities Exchange Act of 1934.

Definition of a Shell Company

The definition of “shell company” as set forth in Rule 405 of the Securities Act (and Rule 12b-2 of the Securities Exchange Act of 1934) means a Company that has:

1. No or nominal operations; and
2. Either:
   1. No or nominal assets;
   2. Assets consisting solely of cash and cash equivalents; or
   3. Assets consisting of any amount of cash and cash equivalents and nominal other assets.

Although the definitions do not appear to be the same, as per the definitions a “shell company” may have nominal operations and may have a specific business plan, the SEC has firmly held the position that Rule 419 applies equally to shell and development stage companies. Although the SEC position may be subject to challenge by a willing challenger and federal court judge, to date, none of have taken up the fight.

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!

While the issuance of small numbers of shares as prizes or awards to employees may be made without Securities Act Registration, if such awards are tied to the achievement of specific goals (eg. sales goals) by individual employees, an offer or sale requiring registration may be involved. When tied to the achievement of specific goals, the share awards may constitute compensation for services performed or to be performed by the employees that would amount to a disposition of the shares for value and a “sale” of the shares to employees requiring either registration or an exemption from registration under the Securities Act of 1933.

Although many exemptions may be available for the issuance of securities to employees, Rule 701 provides an excellent exemption for non-reporting entities. In particular, Rule 701 is only available to issuers that are not subject to the reporting requirements of the Securities Exchange Act 1934. The beauty of Rule 701 is that ninety days after the Issuer becomes subject to the reporting requirements of the Exchange Act, securities issued under this Rule may be resold by persons who are not affiliates under Rule 144 without compliance with the current public information, holding period, amount or Form 144 requirements. That is, generally speaking, ninety days after an Issuer becomes reporting, Rule 701 issued securities may be freely sold. Regardless of whether an Issuer becomes reporting, resales may be made under any available exemption, or pursuant to registration.

Compliance with Rule 701

To comply with Rule 701, an Issuer must have a written compensatory benefit plan for the participation of its employees, director, general partners, trustees, officers, or consultants and advisors. Rule 701 is only available for consultants and advisors if: (i) they are natural persons; (ii) they provide bona fide services to the issuer; and (iii) the services are not in connection with the offer or sale of securities in a capital raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities. A copy of the plan must be delivered to all individuals receiving stock under the plan.

The amount of securities sold in reliance on Rule 701 may not exceed, in any 12 month period, the greater of: (i) $1,000,000; (ii) 15% of the total assets of the issuer; or (iii) 15% of the outstanding amount of the class of securities being offered and sold in reliance on the exemption. Rule 701 issuances do not integrate with the offer and sales of any other securities under the Act whether registered or exempt.

Antifraud Provisions Still Apply

As with all other Securities Act registration exemptions, the issuer is still subject to the antifraud, civil liability and other provisions of the federal securities laws. Issuers and persons acting on their behalf have an obligation to provide all investors, including employees, with disclosure adequate to satisfy the antifraud provisions of the federal securities laws. In addition, Rule 701 is not available for plans or schemes to circumvent the purpose of the Rule, which is for compensatory purposes, and not to raise capital. Moreover, Rule 701 is not available to exempt any transaction that is in technical compliance with this section but is part of a plan or scheme to evade the registration provisions of the Securities Act. Finally, in addition to complying with Rule 701, the Issuer also must comply with any applicable state law relating to the issuance.

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!