• 18Apr

    SEC Issues Guidance on Registration and Deregistration Under Jobs Act

    Corporate Law Firm, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm No Comments

    On April 5, 2012 President Obama signed the JOBS Act into law.  Some of the rules went into effect immediately, such as the ability of an Emerging Growth Company to file a registration statement and seek confidential treatment during the review process.  For this process the EGC would avail itself of the new Securities Act Section 6(e).  The SEC issued, albeit limited, guidance on this process for EGC’s yesterday, April 10, 2012.

    SEC Guidance on the JOBS Act

    On April 11, 2012, the SEC issued guidance on the JOBS Act amendments to Section 12(g) and Section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act).  The full text of this guidance, and the guidance issued on new Section 6(e) is available on the SEC website.

    The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements for banks and bank holding companies.  This blog only addresses the rule changes not related to bank or bank holding companies.  The relevant rule changes effective April 5, 2012, are as follows:

    1.         The shareholder threshold before requiring registration and subsequent reporting with the SEC has been increased from 500 to either (a) 2,000 or more, or (b) 500 or more unaccredited shareholders;

    2.         In calculating the number of shareholders of record for purposes of determining registration requirements, or the ability to deregister (i.e. file a Form 15), Issuers may exclude may exclude those persons that received their shares as part of an employee compensation plan in an exempt transaction (i.e.  unregistered transaction).

    Retroactive Effect on JOBS Amendments

    Although the amendments are effective April 5, 2012, they have somewhat of a retroactive effect.  So if an Issuer reached the 500 shareholder limit for their fiscal year end prior to April 5, 2012, but has not yet filed a Form 10 registration statement, they no longer have to, unless of course, they have over 2,000 shareholders.  In this case, delinquency is forgiven.  If the Issuer has filed the registration statement but it has not yet gone effective they can withdraw.  Moreover, even if it has gone effective, as long as they are under the 2,000 shareholder limit, they can now file a Form 15 and relieve themselves of further reporting obligations.

    Likewise, the new calculation exclusion of employees that received their shares under an exempted employee compensation plan, are in essence retroactive.  An Issuer calculating the number of shareholders it has would use the new rule as a basis of calculation and could therefore exclude qualified employees, whether they are current or past employees or whether they received their shares under a current or prior compensation plan.

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 17Apr

    The JOBS Act Is Not Just Crowdfunding

    Corporate Law Firm, Crowdfunding, JOBS ACT, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm No Comments

    On April 5, 2012 President Obama signed the JOBS Act into law.  In my excitement over this ground-breaking new law, I have been zealously blogging about the Crowdfunding portion of the JOBS Act.  However, the JOBS Act impacts securities laws in many additional ways.  The following is a summary of the many ways the JOBS Act will amend current securities regulations, all in ways to support small businesses.

    A.       The New “Emerging Growth Company” Category

    The JOBS Act will create a new category of companies defined as “Emerging Growth Companies” (EGC).  An EGC will be defined as a company with annual gross revenues of less than $1 billion, that has been public and reporting for a minimum of five years and whose non-affiliated public float is valued at less than $700 million.  EGC’s will have reduced requirements associated with initial public offerings (IPO’s) and ongoing reporting requirements.  For many purposes, EGC’s will be allowed to use the less stringent reporting requirements now available for small public companies, defined as those with less than $75 million in revenues.

    In particular, (i) EGC’s will only need to provide two years of audited financial statements instead of the now required three years; (ii) EGC’s can report executive compensation as a small business and will not be required to obtain shareholder approval for executive officer compensation; (iii) no internal control over financial reporting audit requirements; (iv) relief from compliance with new US GAAP accounting requirements; (v) confidential treatment of IPO filing documents until just 21 days prior to commencing a road show; (vi) elimination of restrictions on publishing analyst research and communications while IPO’s are underway.

    B.        Amendments to Regulation A

    The JOBS Act will increase the offering limit under Regulation A from $5million to $50 million and allow solicitation in association with a Regulation A offering.  A Regulation A offering involves the filing of a short form registration statement with the SEC, results in freely tradeable (unrestricted securities), but does not result in public reporting requirements.  That is, companies will now be able to use Regulation A to complete large private offerings, and then investors in the Regulation A offering will immediately be able to sell or transfer their interests using private company market places (PCMP’s).  A new public/private trading platform if you will.

    And – my favorite:

    C.        Crowdfunding

    The following is a summary of the new crowdfunding rules:

    (i)            Issuers are limited to raising no more than $1 million in any 12 month period (like the current Rule 504 exemption)

    (ii)           Each investor is limited to the greater of $2,000 or 5% of their annual income if such income is $100,000 or less; or $100,000 or 10% of annual income for investors with an annual income in excess of $100,000

    (iii)          Issuers must file a report with the SEC and provide investors with the report disclosing (a) financial statements (unaudited for offerings less than $500,000 and audited for over $500,000); (b) business description; (c) intended use of proceeds; (d) offering amount and term of offering; (e) pricing and method used to determine pricing; (f) management and bios of same; and (g) current ownership/capitalization

    (iv)         Issuers will be required to file limited annual financial statements for a period after the offering;

    (v)          offerings will need to be conducted through licensed intermediaries; intermediaries do not need to licensed broker dealers but will be required to be members of an SRO such as the new Crowdfund Intermediary Regulatory Association (CFIRA)

    (vi)         advertising will be allowed in a limited fashion such as a tombstone ad directing investors to the licensed intermediary;

    (vii)        securities sold will be subject to holding periods and resale restrictions

    (viii)       only available to U.S. organized entities;

    (ix)         only available to non-reporting entities;

    (x)          pre-empts state law such as Rule 506 does now;

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 16Apr

    Crowdfunding Act Signed Into Law

    Corporate Law Firm, Crowdfunding, JOBS ACT, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm No Comments

    On April 5, 2012 President Obama signed the JOBS Act into law.  In accordance with the JOBS Act requirement that all crowdfunding platforms (i.e. websites and intermediaries)  be a member of a national securities association, the new self regulatory organization (SRO), The Crowdfunding Intermediary Regulatory Association (CFIRA) has already been formed.   The CFIRA will be charged with ensuring investor protection and market integrity.  The CFIRA will have members from crowdfunding investor intermediaries as well as related industries such as venture capital firms.  In addition to regulating its members, the CFIRA will provide investors with information such as learning about crowdfunding and its risks.

    Opportunity For All Americans

    Crowdfunding provides an opportunity for all Americans, whether accredited or not, and whether connected with an elite investment banking firm or not, to invest small amounts of money in small businesses that they know or just believe in.  Small businesses provide jobs and sometimes small businesses become big businesses.  For the first time in history average Americans will have an opportunity to invest in these businesses at the ground level.  The crowdfunding bill accomplishes this goal in two ways.  First it creates a legal exemption to allow small investors to invest small amounts of money in businesses without first requiring registration with the SEC.  Second, it allows small businesses to advertise for these investors, through CFIRA member intermediaries, where before such advertisement was strictly prohibited.

    In addition to providing investors with the opportunity to invest on the ground floor level of businesses, the bill provides small businesses with access to capital, and access to capital means the ability to hire employees.

    SEC to Structure New Regulations

    The crowdfunding bill gives the SEC nine months to structure the new regulations.  The CFIRA will work closely with the SEC to accomplish this goal.  It is anticipated that the new regulatory framework will, at the least provide for (i) a method to test an investors understanding of the investment and risk; (ii) basic background on the Issuers including criminal checks; (iii) adequate disclosure on the investment; (iv) confidentiality regarding information provided by investors, including financial information; (v) centralized reporting by both issuers and investors to ensure that the statutory dollar limits are not exceeded; and (vi) set forth regulations for the operations of the intermediaries, including professional conduct and rules of fair play.

    From a more specific legal standpoint, the new regulations will:

    • Create a new exemption under Regulation D allowing for the private placement of securities to unaccredited investors through crowdfunding intermediary websites;
    • Allow for the public advertising and promotion of private securities offerings;
    • Expand the number of private shareholders from 500 to 2,000 before mandatory SEC reporting;
    • Provide regulations to support private company market places (PCM’s)

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 16Apr

    Crowdfunding 101

    Corporate Law Firm, Crowdfunding, JOBS ACT, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm No Comments

    As I recently blogged, the President has signed the Jobs Act including the much anticipated Crowdfunding bill.  Crowdfunding is a process whereby companies will be able to raise small amounts of money either directly off their own website or using intermediaries set up for the purpose.  The Securities Act of 1933, as amended, (Securities Act) prohibits the sale or delivery of any security unless such security is either registered or exempt from registration.  Crowdfunding will be an exemption from registration.  The exemption will likely be codified as a new and separate exemption likely under Regulation D and will include an overhaul of the current general provisions of Regulation D found in Rules 501-503.

    Crowdfunding Exemption Possibilities

    The exemption will likely be limited to $1 million in any twelve (12) month period, or up to $2 million if the company provides certain financial disclosure such as audited financial statements.  As proposed, each investor will be limited $10,000 or 10% of their annual income, whichever is less.  As crowdfunding is structured as an exemption, the Issuer remains private until, when and if, it embarks on a going public transaction, such as filing a registration statement on its existing shareholders, completing an IPO, competing a reverse merger, etc..

    In addition to creating regulations for the raising of the funds, a new self regulatory organization (SRO) is being formed to regulate and oversee the intermediaries and portals which will serve the crowdfunding needs.  The new SRO is The Crowdfunding Intermediary Regulatory Association (CFIRA) and its formation is underway.  The CFIRA will be charged with ensuring investor protection and market integrity.  The CFIRA will have members from crowdfunding investor intermediaries as well as related industries such as venture capital firms.  In addition to regulating its members, the CFIRA will provide investors with information such as learning about crowdfunding and its risks.

    CAPS Program

    A new program initiative is also underway with the goal of educating and protecting investors, crowdfunding intermediaries and Issuers.  This program is the Crowdfunding Accreditation for Platform Standards (CAPS).  The CAPS program will, hopefully, provide funding and capital to assist in this new securities sector.  It will review the industry and provide feedback and qualification criteria.

    There is so much information already available on this exciting new securities sector.  I feel as if I’m in school again, and I’ll share the knowledge as I go.

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 16Apr

    Big Changes Are Coming

    Corporate Law Firm, Crowdfunding, JOBS ACT, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm No Comments

    I’ve been practicing securities law for 19 years this year (phew!) and for the first time in my career I am excited about changes, big changes, on the horizon for small businesses.  I’m talking about the JOBS Act and its ground breaking crowdfunding bill which has now been signed into law.

    A Whole New Exemption

    Over the years I have consistently received calls from potential clients that wish to use the exemptions provided for in Regulation D to raise money for small or start up ventures.  Many of these individuals believe, mistakenly, that Regulation D provides them with a method to raise money.  It does not.  Regulation D only lays out rules to follow to utilize an exemption from the registration requirements in the Securities Act of 1933.  These rules include such items as limitations on the dollar amount raised; who you can raise money from, how you can raise money, prohibitions on advertising and solicitation, disclosure documents required, etc…  All of these rules are necessary and serve a function, but the rules do not provide any insight on how to actually go about raising the money.  For the first time in history, or at least my history, the government may fashion a system that not only sets out an exemption from registration, but provides the “how to raise the money” aspect as well.

    Ok, so the JOBS Act doesn’t result in “pick your check up here” but it will allow entrepreneurs, innovators, job creators, and the world of small business to access capital markets in a way never before possible.  The crowdfunding bill provides for SEC regulations that will allow companies to utilize the internet to raise funds from a large number of smaller investors.  The bill removes SEC regulations prohibiting advertising and solicitation for private placements.

    In short, companies will be able to raise small amounts of money either directly off their own website or using intermediaries set up for the purpose.  The exemption will likely be codified as a new and separate exemption under Regulation D and will include an overhaul of the current general provisions of Regulation D found in Rules 501-503.  The exemption will be limited to $1 million in any twelve (12) month period.

    Crowdfunding Exemption

    The exemption is really designed for start-ups and smaller companies that need seed capital.  Since the amount raised is per twelve months, companies need to plan accordingly.  Moreover, since a Company could end up with a couple hundred shareholders to raise $1mill, they will likely need a transfer agent to maintain shareholder records.   At a couple hundred shareholders per round of financing, this is not a route that a company will want to tap more than once or twice.  If a Company will need $30 mil in the next 2-4 years, crowdfunding is not viable, but if they need $2 mil in the same time frame, it is a workable option.

    Attorneys for crowdfunding clients should make sure that the insiders maintain shareholder voting control under their state of incorporation to avoid problems getting shareholder approval for future financings or going public transactions.  Attorneys should carefully discuss future plans with their clients.  It is uncertain how venture capital firms, investment bankers and wall street in general will respond to companies that start off with a large shareholder base.  There will definitely be a learning curve, so companies that foresee the need to go the traditional IPO or wall street route within a few years should be cautious.  That doesn’t mean that they shouldn’t partake in the crowdfunding though.  I firmly believe that the markets will quickly adjust and find ways to move these companies up the food chain, where the product, revenues and interest exist.

    Other than this brief statement, I will not devote time in this blog to the naysayers because I see too much positive potential and too much of a serious need for this bill to dilute with the negative.   The naysayers are concerned that the changes open the door to additional fraud and scams in the investment world.  There has always been and will likely always be financial crimes committed by the unscrupulous, and opportunistic fraudsters will always find a way to commit their crimes using our capital markets.   Part of progress is dealing with that reality, not ceasing progression.

    I’ll discuss more on that in the next blog.

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 21Mar

    DTC Chills, Due Process and Rule 22

    Corporate Law Firm, Reverse Mergers, SEC Law Firm, Securities Attorneys, Securities Law Firm Comments Off

    Back in October and November of 2011 I wrote a series of blogs regarding DTC eligibility for OTC (over the counter) Issuers.  OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets.  Many OTC Issuers have faced a “DTC chill” without understanding what it is; let alone how to correct the problem.  In technical terms, a DTC chill is the suspension of book-entry clearing and settlement services with respect to an Issuer’s securities.  In layman’s terms it means your stock can’t clear or trade electronically.  Since all trading in today’s world is electronic, it really means your stock doesn’t trade.

    The SEC’s Stance

    As noted in the SEC opinion:

    “…DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States.  In 2010, DTC processed 295,000,000 book entry transfers of securities worth $273.8 trillion.”

    If DTC doesn’t process and settle trading in your securities, it just doesn’t happen.

    My previous blogs discussed how to become DTC eligible.  From the DTC perspective, a chill does not change the eligibility status of an Issuer’s securities, just what services the DTC will offer for those securities.  So while an Issuer’s securities may still be in street name (a CEDE account), DTC can refuse to allow the book entry trading and settlement of those securities.

    International Power Group, Ltd.

    On March 15, 2012 the Securities and Exchange Commission (SEC) issued an administrative opinion that sheds some light, though not much, on the DTC process (In the Matter of the Application of International Power Group, Ltd. Admin. Proc. File No. 3-13687).  As further discussed herein, the SEC ultimately issued an opinion stating that an Issuer is entitled to due process proceedings by DTC as a result of a DTC chill placed on an Issuers securities.

    In the Matter of the Application of International Power Group, Ltd. (IPWG), in September 2009, DTC put a chill on the trading of IPWG’s securities following the initiation by the SEC of an action against certain defendants, not IPWG, for improper issuance and trading in certain OTC securities, including IPWG and 3 other Issuers.  Neither IPWG nor any of its officers or directors was a party to the SEC proceeding.

    The portion of the SEC action related to IPWG indicated that about 80,000,000 shares of IPWG stock was sold in the public markets without proper registration or an exemption from registration.  In May 2010 the SEC settled with the Defendants related to IPWG for the usual penalties and permanent injunctions, which settlement did not address the already issued securities.

    DTC Hearings and Rule 22

    Upon learning of the DTC chill, IPWG requested that DTC provide a hearing in accordance with its Rule 22, the only DTC rule that allows for some sort of hearing process.  Rule 22 provides an opportunity for Interest Persons to be heard on any determination by DTC that an Issuer’s security is no longer an eligible security.  DTC denied IPWG’s request for a hearing stating that IPWG’s securities were still eligible and that it would lift the chill “once the matter of the unregistered IPWG shares is resolved with the SEC.”  DTC suggested IPWG take the matter up with the SEC.

    IPWG was in a quandary.

    There was no action pending with the SEC within which IPWG was a party and the SEC action related to IPWG shares had been settled, without addressing the “matter of the unregistered IPWG shares.”

    No Clear Way Out

    There was no clear way to take the matter up with the SEC.  In addition, there was no clear way to take the matter up with DTC.  DTC works through Participants – i.e. licensed broker-dealers not Issuers.  (See my previous blog on DTC eligibility).  Moreover, the shares it actually holds and trades are already issued and belong to shareholders, not the Issuer.  So, although IPWG was clearly and undeniably greatly impacted by the DTC chill, DTC took the position that it didn’t have any particular obligation to IPWG for its actions.

    IPWG filed an administrative appeal with the SEC looking for assistance.  A discussion of jurisdiction and the rules vis a vie getting this matter in front of the SEC is beyond the scope of this blog, but suffice it to say, after much legal wrangling and a realization by all involved that there was no precedent to look upon, the SEC agreed to take the matter on.

    Definition of Interested Person

    In its opinion, the SEC held that an Issuer, in this case IPWG, was an Interested Person for purposes of Rule 22 and was impacted by the DTC chill such that they are entitled to due process and fair proceedings. The SEC did not tell DTC what the criteria for determining whether the chill was appropriate or not should be, only that the Issuer is entitled to “fair procedures”.  However, prior to the March 15, 2012 opinion, DTC could affect a chill on the trading of an Issuer’s security for an indefinite time, at its sole discretion, without recourse.  In fact, the way Rule 22 was written, prior to the March 15, ruling, not even a Participant broker dealer could appeal a chill.

    Moreover, and importantly, the SEC held that in the future, an Issuer who is negatively impacted by DTC action can avail itself of the SEC administrative proceedings process for appeal following a negative decision in a DTC hearing and proceeding.

    Emergency Chills and Fair Practice

    Finally, the SEC confirmed that DTC can still put a chill on an Issuer’s security, prior to giving notice and an opportunity to be heard to that Issuer, in an emergency situation, stating “[H]owever, in such circumstances, these processes should balance the identifiable need for emergency action with the issuer’s right to fair procedures under the Exchange Act.  Under such procedures, DTC would be authorized to act to avert imminent harm, but it could not maintain such a suspension indefinitely without providing expedited fair process to the affected issuer.”

    The Author

    Attorney Laura Anthony,
    Founding Partner, Legal & Compliance, LLC
    Securities, Reverse Mergers, Corporate Transactions

    Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

    Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

    Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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  • 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!

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  • 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!

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  • 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!

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  • 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!

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