• 13Aug

  Dodd-Frank Act Changes Definition Of Accredited Investor Effective Immediately

  Securities Attorneys No Comments

  On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). After many revisions, the final Dodd-Frank Act has only minor effects on securities Issuers and their investors. The primary change, which takes effect immediately, is a modification to the definition of “accredited investor” contained in the Securities Act of 1933. In particular: (i) as it relates to natural persons, the $1,000,000 net worth standard must now be calculated excluding the value of the primary residence of such natural person; and (2) the Securities and Exchange Commission (SEC) has been mandated to review the entire accredited investor definition within four (4) years and make appropriate changes within that time, without additional act of Congress.

  Increased Net Worth Requirements

  This change effectively increases the net worth requirements for investors, whose largest asset is often their primary residence. Although the SEC has not yet issued any guidance or other information on the change, it is anticipated that investors will also be allowed to exclude the value of any mortgages or other debt secured by the primary residence in calculating their net worth.

  Regulation D

  Under Regulation D of the Securities Act of 1933, the disclosure requirements for offerings made strictly to accredited investors are less comprehensive, and accordingly less expensive, than offerings which include non-accredited investors. Moreover, the increased disclosure requirements are applicable if even one non-accredited investor is offered the investment, regardless of whether they subsequent accept the offer and become an investor. In addition to detailed disclosure requirements related to the business, its financial history and the control persons background, offerings made to non-accredited investors must include financial statements, which in most cases must be audited.

  Dodd-Frank Act

  In addition, the Dodd-Frank Act has eliminated many exemptions from the requirement to be registered as a financial advisor. In particular, the previous “private advisor” exemption has been eliminated. The private advisor exemption allowed advisors to avoid SEC registration if they did not advise a business development company, had fewer than fifteen (15) clients and did not hold themselves out to the public as an investment advisor. The elimination of the private advisor exemption becomes effective July 21, 2011.

  Securities Attorney Laura Anthony

  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: accredited investor requirements, Dodd-Frank Act, going public, Reverse Mergers, SEC Law Firm, securities attorney, Wall Street reform

• 28Jan

  Section 4(6) Registration Exemption for Accredited Investors

  Securities Attorneys No Comments

  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!

  Tags: accredited investor, going public, private placement, Reg D, registration exemptions, regulation d, rule 504, rule 505, rule 506, SEC reporting requirements, Section 4(6), securities attorney

• 25Jan

  An In-Depth Review of Private Placements Under Section 4(2)

  Securities Attorneys No Comments

  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!

  Tags: going public, Over The Counter Bulletin Board, private placement, public offering, Reverse Mergers, rule 506, safe harbor, SEC Law Firm, SEC reporting requirements, Section 4(2), securities attorney

• 05Jan

  Rule 419 and Offerings by Shell or Blank Check Companies

  Securities Attorneys No Comments

  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!

  Tags: definition of shell company, form 10 registration statement, going public, Over The Counter Bulletin Board, registration statement, Reverse Mergers, Rule 419, SEC Law Firm, SEC reporting requirements, SEC Rule 419, securities attorney

• 29Dec

  A Comprehensive Analysis of Section 5

  Securities Attorneys No Comments

  Section 5 of the Securities Act of 1933, as amended, contains the basic registration requirements for all offerings and rules of securities. Section 5(a) provides that “unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly:

  (1) …to sell such security through the use or medium of any prospectus or otherwise; or
  (2) …to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale”

  Section 5(b) provides that “it shall be unlawful for any person directly or indirectly:

  (1) …to transmit through the mails or in interstate commerce, any prospectus relating to a security with respect to which a registration has been filed…., unless such prospectus meets the requirements of Section 10; or
  (2) …to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of Section 10”

  Section 5(c) provides that “it shall be unlawful for any person, directly or indirectly, … to offer to sell or to offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security…”
  In order to understand just what Section 5 covers, one must look to the definitions contained in

  Section 2. Section 2 defines a “sale” to include “every contract of sale or disposition of a security, or an interest in a security, for value.” An “offer to sell” and “offer for sale” are defined to include “every attempt to offer or dispose of, or solicitation of an offer to buy, a security or an interest in a security, for value.” Finally, a “security” is defined to include, among other items, any “note, stock, bond, debenture or evidence of indebtedness; any investment contract (including real estate for investment); any security future, put, call, straddle or option on a security; any fractional undivided interest in oil, gas or other mineral rights; any certificate of deposit; and any group or index of securities.”

  Literally read, Section 5 of the Securities Act applies to every sale of every security by every person, with a security including almost anything. Literally read, Section 5 requires a registration statement to be filed before any offer to sell a security could be made. Obviously, the business world could not function within such strict confines and accordingly congress enacted Sections 3 and 4 of the Securities Act to provide exemptions to the strict and all encompassing confines of Section 5.

  However, the business world does have to operate within and understand that Section 5 is all encompassing and that only if a transaction falls within a specifically enumerated exemption in Sections 3 or 4 or the rules and regulations of the SEC, can the requirements of Section 5 be avoided.

  Accordingly, prior to entering into business discussions which could be interpreted as falling under Section 5 of the Securities Act, it is important to consult with and retain the services of experienced securities counsel.

  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: Exchange Act Section 5, going public, OTCBB, Over The Counter Bulletin Board, registration statement, Reverse Mergers, SEC Law Firm, SEC reporting requirements, Section 5, securities act o, securities act of 1933, securities attorney

• 27Nov

  Transparency in the Financial Markets and the Materiality Standards

  Securities Attorneys No Comments

  The disclosure requirements at the heart of the federal securities laws involve a delicate and complex balancing act. Too little information provides an inadequate basis for investment decisions; too much can muddle and diffuse disclosure and thereby lessen its usefulness. The legal concept of materiality provides the dividing line between what information companies must disclose, and must disclose correctly, and everything else. Materiality, however, is a highly judgmental standard, often colored by a variety of factual presumptions.

  Transparency in Financial Markets

  The guiding purpose of the many and complex disclosure provisions of the federal securities laws is to promote “transparency” in the financial markets. However, the task of winnowing out the irrelevant, redundant and trivial from the potentially meaningful material falls on corporate executives and their professional advisors in the creation of corporate disclosure, and on investment advisors, stock analysts and individual investors in its interpretation. The concept of materiality represents the dividing line between information reasonably likely to influence investment decisions and everything else. However, materiality is a notoriously elusive, ever changing and unpredictable concept.

  Only those misstatements and omissions that are material violate many provisions of the securities laws, including the bedrock provisions requiring accurate financial reporting. In 1976, the U.S. Supreme Court set the standard for a materiality evaluation, which standard remains today. In TSC Industries, Inc. v. Northway, Inc., the Supreme Court held that information should be deemed material if there exists a substantial likelihood that it would have been viewed by the reasonable investor as having significantly altered the total mix of information available to the public.

  All Facts Must be Considered

  Despite this standard, the concept remains fact driven and difficult to apply. There are no numeric thresholds to establish materiality, and market reaction is inconsistent and not always available. Ultimately professionals and company management must consider all facts and circumstances available to them on any given day to determine the materiality of a given disclosure in light of the standard established by the Supreme Court in TSC Industries.

  Generally, professionals and company management must look in the first instance at specific disclosure guidelines set out in the federal securities rules and regulations (such as Regulations S-X and S-K and Forms 10-Q, 10-K and 8-K). Secondly, professionals and company management must consider all facts presently affecting the Company. For instance, a specific disclosure may be highly relevant in light of current economic conditions and of little importance in a different economic climate. Ethical issues are generally not considered material, unless specifically required by statute (such as the Foreign Corrupt Practices Act).

  Selective Disclosure Prohibited

  The SEC has issued further guidance on materiality in Staff Accounting Bulletin No. 99 (SAB 99). Although SAB 99 is meant to clarify some materiality issues, many practitioners find that it confuses rather than clarifies. For the most part SAB 99 simply reiterates that materiality cannot be defined by law or standards but must be determined anew for each fact and disclosure issue.

  In determining materiality practitioners should keep in mind Regulation FD which prohibits the selective disclosure of material information. That is, Regulation FD requires that if material information is to be disclosed, it must be disclosed to the entire market, either through a press release or Form 8-K or both, and not selectively, such as to certain analysts or market professionals.

  Professionals and company management should also consider that the SEC has consistently pushed for greater and more complete disclosures. Accordingly, it is better to err on the side of disclosure than against it.

  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 compliance, form 10-k, form 10-q, form 8-k, going public, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney, securities disclosure requirements, staff accounting bulletin no. 99

• 06Nov

  Securities Law Update: Intrastate Offerings Section 3(a)(11) and Rule 147 Examined

  Securities Attorneys No Comments

  Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 of the Securities Act for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” (“Intrastate Exemption”) Rule 147 promulgated under the Securities Act provides for further application of the Intrastate Exemption.

  Rule 147, Issuers and Corporate Counsel

  In addition to complying with Rule 147, Issuers and their counsel need to be cognizant of and comply with applicable state securities laws regulating intrastate offerings. The Intrastate Exemption is only available for bona fide local offerings. That is, the Issuer must be a resident of, and doing business, within the state in which all offers and sales are made and no part of the offering may be offered or sold to nonresidents. Because of the strict rules against any sales or offers to non-residents, Issuers conducting concurrent or consecutive offerings, need to be extra careful to avoid the integration of any non-intrastate transactions with the Intrastate Exemption. Integration occurs when two or more offerings are considered a single offering such that all requirements for the exemption relied on in each offering must be present for each and every sale in all of the integrated offerings.

  Rule 502(a) and Securities and Exchange Commission (SEC) release 33-4434 set forth the factors to be considered in determining whether two or more offerings may be integrated. In particular, the following factors need to be considered in determining whether multiple offerings are integrated: (i) are the offerings part of a single plan of financing; (ii) do the offerings involve issuance of the same class of securities; (iii) are the offerings made at or about the same time; (iv) is the same type of consideration to be received; and (v) are the offerings made for the same general purpose.

  Safe Harbor Provisions

  In addition, Rule 147(b)(2) provides an integration safe harbor. That is, offerings made under Section 3 or Section 4(2) of the Securities Act or pursuant to a registration statement will not be integrated with an Intrastate Exemption offering if such offerings take place six month prior to the beginning or six month following the end of the Intrastate Exemption offering. To rely on this safe harbor, during the six month periods, an Issuer may not make any offers or sales of securities of the same class as those offering in the intrastate offering. Rule 147(b)(2) is merely a safe harbor. Issuers and practitioners may still conduct their own analysis in accordance with the five factor test enumerated above.

  For purposes of the Intrastate Exemption, an Issuer shall be deemed to be a resident of the state in which: (i) it is incorporation or organized if it is an entity requiring incorporation or organization; (ii) its principal office is located if it is an entity not requiring incorporation or organization; or (iii) his or her principal residence is located, if an individual.

  Earmarks of Intrastate Exemptions

  For purposes of the Intrastate Exemption, an Issuer shall be deemed to be doing business within a state if: (i) the Issuer derived at least 80% of its gross revenues in the past six months from that state; (ii) the Issuer had 80% of its assets located in that state in the most recent semi-annual fiscal year; (iii) the Issuer intends to use and uses at least 80% of the net proceeds from the Intrastate offering in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services in that state; and (iv) the principal office of the Issuer is located within that state.

  For the purpose of determining the residence of an offeree or Purchaser: (i) a corporation, partnership, trust or other form of business organization shall be deemed to be a resident of a state if, at the time of the offer and sale, it has its principal office within such state; (ii) an individual shall be deemed to be a resident of a state if, at the time of the offer and sale, his or her principal residence is within that state; and (iii) a corporation partnership, trust or other form of business organization formed specifically to take part in an Intrastate offering, will not be resident of the state unless all of its beneficial owners are resident of that state.

  Resale Prohibitions

  Even though securities issued relying on the Intrastate Exemption are not restricted securities for purposes of Rule 144, Rule 147(e) prohibits the resales of any such securities for a period of nine months except for resales made in the same state as the Intrastate Offering. Moreover, market makers or dealers desiring to quote such securities after the nine month period must comply with all the requirements of Rule 15c2-11 regarding current public information.

  There is no prohibition in Rule 147 regarding general advertising or general solicitation as long as such general advertising or solicitation complies with applicable state law and does not result in an offer or sale to non-residents of such state.

  Although the Intrastate Exemption is available for sales by Issuers only, and not for resales, the SEC has interpreted the rule to permit offers and sales by control persons of the Issuer as well. The Intrastate Exemption rule is not available to any person with respect to any offering which, although in technical compliance with the rules, is part of a plan or scheme to make interstate offers or sales of 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: 15c-211, going public, intrastate exemption, intrastate offerings, OTCBB, otcbb securities, Over The Counter Bulletin Board, registered offerings, Reverse Mergers, Rule 144, rule 147, rule 502(a), SEC Law Firm, SEC reporting requirements, section 3(a)(11), 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

• 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

• 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

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