Category: FINRA

FINRA: In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments…

Mar102015

SEC Supports FINRA’s Rule 6490 Authority Over Corporate Actions

ABA Journal’s 10th Annual Blawg 100

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In two recent administrative decisions, the SEC has upheld FINRA’s broad authority under Rule 6490 to approve and effectuate corporate actions by public companies trading on the OTC Markets.  One of FINRA’s mandates is to protect investors and maintain fair and orderly markets and like broker-dealers, it acts as a gatekeeper in the small-cap industry.  FINRA exercises its powers though the direct regulation of its member broker-dealer firms, but also through its Office of Fraud Detection and Market Intelligence, which monitors the trading activity and press releases of issues in the marketplace and conducts related investigations.  FINRA works with the SEC as a front line in the detection, investigation and assistance with the prosecution of issuers. 

Recently, through its power under Rule 6490, as more fully explained below, FINRA has, with the support of the SEC, expanded its impact on the small-cap marketplace by conducting in-depth reviews of issuers in conjunction with the

Oct282014

FINRA Seeks to Eliminate the OTCBB and Impose Regulations on the OTC Markets

ABA Journal’s 10th Annual Blawg 100

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On October 7, 2014, the SEC published a release instituting proceedings to determine whether to approve FINRA’s request to delete the rules related to, and the operations of, the OTC Bulletin Board quotation service.  On June 27, 2014, FINRA quietly filed a proposed rule change with the SEC seeking to adopt rules relating to the quotation requirements for OTC equity services and to delete the rules relating to the OTCBB and thus cease its operations.  Although the rule filing was published in the Federal Register, it garnered no attention in the small cap marketplace.  Only one comment letter, from OTC Market Group, Inc. (“OTC Markets”) (i.e., the entity that owns and operates the inter-dealer quotation system known by its OTC Pink, OTCQB and OTCQX quotation tiers) was submitted in response to the filing.

The OTCBB has become increasingly irrelevant in the OTC marketplace for years.  In October 2010, I wrote a blog titled

Sep302014

The ECOS Matter; When Is A Reverse Split Effective?

ABA Journal’s 10th Annual Blawg 100

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In what was presumably an unintended consequence, the application of an SEC- approved FINRA regulation has resulted in a conflict between state and federal corporate law for a small publicly traded company.

On September 16, 2014, Ecolocap Solutions, Inc. (“ECOS”) filed a Form 8-K in which it disclosed that FINRA had refused to process its 1-for-2,000 reverse split.  At the time of the FINRA refusal, ECOS had already received board and shareholder approval and had filed the necessary amended articles with the State of Nevada, legally effectuating the reverse split in accordance with state law.  Moreover, ECOS is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and had filed a preliminary and then definitive 14C information statement with the SEC, reporting the shareholder approval of the split.

The ECOS 8-K attached a copy of the FINRA denial letter, which can be viewed HERE

Jun032014

FINRA Amends Rules 5110 and 5121 Related to Corporate Financing and Conflicts Of Interest

 On April 28, 2014 and on May 7, 2014, the SEC approved the Financial Industry Regulatory Authority’s (FINRA) amendments to Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) and 5121 (Public Offerings of Securities with Conflicts of Interest) in order to simplify and refine the scope of the rules.  FINRA is the self-regulatory body that regulates and governs securities firms.  All securities firms are required to be licensed broker-dealers and are required to be members of FINRA.

FINRA rules and regulations are subject to review and approval by the SEC.  Section 15A of the Securities Exchange Act of 1934, as amended, requires that FINRA rules be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in

May272014

What is A CUSIP and Legal Entity Identifier (LEI) Number?

CUSIP stands for Committee on Uniform Securities Identification Procedures.  A CUSIP number identifies securities, specifically U.S. and Canadian registered stocks, and U.S. government and municipal bonds.  The CUSIP system—owned by the American Bankers Association and operated by Standard & Poor’s—facilitates the clearing and settlement process of securities by giving each such security a unique identifying number.

The CUSIP number consists of a combination of nine characters, both letters and numbers, which act as individual coding for the security—uniquely identifying the company or issuer and the type of security. The first six characters identify the issuer and are alphabetical; the seventh and eighth characters, which can be alphabetical or numerical, identify the type of issue; and the last digit is used as a check digit.  A CUSIP number changes with each change in the security, including splits and name changes.

Whereas CUSIP identifies securities, a Legal Entity Identifier (LEI) identifies issuers.  An LEI is a new global standard identifier for

Mar112014

Crowdfunding Using Intrastate Offerings and Rule 147 – Is Florida Next?

As required by Title III of the JOBS Act, on October 23, 2013, the SEC published proposed crowdfunding rules.  The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire 584-page text of the rule release is available on the SEC website. The proposed rules invite public comment on many points and have indeed resulted in such comments.  As of today, it is unclear when final rules will be released and passed into law and what changes those final rules will have from the proposed rules.  Moreover, upon passage of the final rules, there will be a period of ramping up time in which crowdfunding portals complete the process of registering with the SEC, becoming members of FINRA and completing the necessary steps to ensure that their portal operates in compliance with those final rules.  Federal crowdfunding it coming, but it is a slow process.

In the meantime, many states have recently either enacted or introduced state-specific crowdfunding

Feb042014

SEC Files Proceedings Against 19 S-1 Companies and Suspends Trading on 255 Shell Companies

A.  S-1 Proceedings

On February 3, 2014, the SEC initiated administrative proceedings against 19 companies that had filed S-1 registration statements.  The 19 registration statements were all filed with an approximate 2-month period around January 2013.  Each of the companies claimed to be an exploration-stage entity in the mining business without known reserves, and each claimed they had not yet begun actual mining.  The 19 entities used the same attorney, who is the subject of a separate SEC action filed in August 2013 alleging involvement in a pump-and-dump scheme.  Each of the entities was incorporated at around the same time using the same registered agent service.  The 19 S-1’s read substantially the same.

Importantly, each of the 19 S-1’s lists a separate officer, director and sole shareholder, and each claims that this person is the sole control person.  The SEC complains that contrary to the representations in the S-1, a separate single individual is the actual control person behind each

Jan212014

Direct Public Offering or Reverse Merger; Know Your Best Option for Going Public

Introduction

For at least the last twelve months, I have received calls daily from companies wanting to go public.  This interest in going public transactions signifies a big change from the few years prior.

Beginning in 2009, the small-cap and reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly.  I can identify at least seven main reasons for the downfall of the going public transactions.  Briefly, those reasons are:  (1) the general state of the economy, plainly stated, was not good; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stock with broker dealers and FINRA’s enforcement of broker-dealer and clearing house due diligence requirements related to penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following

Dec102013

Proposed Crowdfunding Rules – Part III

As required by Title III of the JOBS Act, on October 23, 2013, the SEC has published proposed crowdfunding rules.  The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire text of the rule release is available on the SEC website.  In a series of blogs, I am summarizing the lengthy rule release.  This Part III in my series continues a discussion of the in-depth disclosure requirements for Issuers for use in their offering statements.  Part IV will discuss financial disclosure obligations.

Summary Breakdown of Proposed New Rules – Requirements on Issuers

Disclosure Requirements

Pursuant to the CROWDFUND Act as set forth in the JOBS Act, an Issuer who offers or sells securities in a crowdfunding offering must file with the SEC and provide investors and the funding intermediary (whether a funding portal or broker-dealer) and make available to potential investors:

(a) The name, legal status, physical address, and website address of the Issuer (discussed in Part II of

Dec032013

Proposed Crowdfunding Rules – Part II

As required by Title III of the JOBS Act, on October 23, 2013, the SEC has published proposed crowdfunding rules.  The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire text of the rule release is available on the SEC website.

Background

Crowdfunding generally is where an entity or individual raises funds by seeking small contributions from a large number of people.  The crowdfunder sets a goal amount to be raised from the crowd with the funds to be used for a specific business purpose.  In addition, a crowdfunding campaign allows the crowd to communicate with each other, thus adding the benefit of the “wisdom of the crowd.”  Small businesses can particularly benefit from crowdfunding as they are not limited by