Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than any other exemption. In particular, Regulation A provides for the filing of an offering prospectus which closely resembles a registration statement, with the Securities and Exchange Commission (“SEC”). The SEC then can, and often does, comment on the filing. Practitioners often refer to Regulation A as a short form registration.

Moreover, although the Regulation A offering prospectus does not go “effective” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement. For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus much the same as Section 8(a) for registration statements. Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified” much the same way as a registration statement’s automatic effectiveness can be delayed until the SEC declares it “effective”.

Regulation A and 134 Registration Statements

Regulation A mirrors registration in many other ways. For example, oral offers may be made after the offering prospectus is filed, just as with registration statements. Written offers must be accompanied by a preliminary offering prospectus, just as for registration statements, and advertising may be made on a limited basis in rules that match Rule 134 for registration statements.

Although Regulation A offerings have many things in common with registered offerings, they differ in many respects as well. One of the most important differences is that, in Regulation A offerings, an issuer may formally “test the waters” before the filing of an offering prospectus, by oral and written communications to potential buyers, designed to gauge interest in the offering. The written documents that may be used to “test the waters” are limited in content and must be filed with the SEC. Though a failure to file the document will not destroy the exemption if the document otherwise meets the Regulation A requirements.

Regulation A and Rule 504 Similarities

The limitations on the availability to use Regulation A are similar to Rule 504. In particular Regulation A is only available to US or Canadian companies. In addition, the issuer cannot be an Exchange Act reporting company or an investment company, and neither the Company nor is officers and directors can have had previous regulatory problems (the so called “bad boy” exclusion). The maximum dollar amount of securities that may be sold under Regulation A is $5 million in a twelve month period, of which $1.5 million can be sold by security holders.

Regulation A offerings generally require the same effort and cost as registered offerings.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

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

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

Convertible Security Defined

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

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

Death Spirals

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

Registration of Convertible Securities

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

Timing of Registration

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

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 3(b) of the Securities Act gives the SEC authority to exempt from registration certain offerings where the securities to be offered involve relatively small dollar amounts. Under this provision, the SEC has adopted Regulation A, a conditional ex-emption for certain public offerings not exceeding $5 million in any 12-month period. An offering statement (consisting of a notification, offering circular, and exhibits) must be filed with the SEC Regional Office in the region where the company’s principal business activities are conducted. Although Regulation A is technically an exemption from the registration requirements of the Securities Act, it is often referred to as a “short form” of registration since the offering circular (similar in content to a prospectus) must be sup-plied to each purchaser and the securities issued are freely tradeable in an aftermarket.

The principal advantages of Regulation A offerings, as opposed to full registration on Form S-1, SB-1 or SB-2, are:

1. Required financial statements are simpler and need not be audited; and
2. There are no periodic SEC reporting requirements (other than sales reports fol-lowing the sale of the securities) unless the issuer has more than $10 million in total assets and more than 500 shareholders.

Regulation A and Offering Circulars

There are three permitted offering circular formats under Regulation A, one of which is a simplified question-and answer document. This style of disclosure is useful to potential investors and may offer significant benefits to the issuer in the time expended and the costs of preparation.

All types of companies which are not reporting under the Exchange Act may use Regu-lation A, except “blank check” companies and investment companies registered or re-quired to be registered under the Investment Company Act of 1940.

In most cases, Regulation A may also be used by shareholders for the resale of up to $1.5 million of securities.

“Test The Waters” Provision

Regulation A includes a provision which allows an issuer to “test the waters” to deter-mine whether or not there is any investor interest in its securities before the filing of a complete offering document. Thus, an issuer may publish factual information about its business or proposed business before incurring a full range of legal, accounting and other costs, in order to gauge potential investor interest in a possible securities offering; however, the provision specifically provides that no money may be solicited or accepted until an offering statement has been qualified by the Commission, and prescribed offer-ing materials have been delivered to potential investors.

Rule 504

Rule 504 of Regulation D provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. The issuer may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting re-quirements. Like the other Regulation D exemptions, in general the issuer may not use public solicitation or advertising to market the securities and purchasers receive “re-stricted” securities. However, an issuer can use this exemption for a public offering of its securities and investors will receive freely tradable securities under certain specific cir-cumstances.

Filing of Form D

There are no periodic SEC reporting requirements (other than filing Form D) unless the 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 pri-vate 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!

Rule 145 addresses the registration and resale requirements for securities issued in a merger, consolidation, acquisition of assets or reclassification of securities. Rule 145 sets forth the Securities and Exchange Commission (SEC) view that an offer, offer to sell, offer for sale or sale occurs when there is submitted to security holders a plan or agreement pursuant to which such security holders are asked to vote on an exchange of their existing securities for new securities in a merger, consolidation, acquisition of assets or reclassification of securities transaction. Offers, offers to sell, offers for sale or sales all require registration pursuant to Section 5 of the Securities Act of 1933, as amended (Securities Act) unless an exemption to such registration is available.

Securities Registration Required

Accordingly, unless an exemption is otherwise available, Rule 145 requires that the following transactions require registration if security holders vote on such transaction (i) reclassifications of securities which involve the substitution of a security for another security; (ii) a merger or consolidation or similar plan or acquisition in which securities of a corporation or other entity are exchanged for securities in another corporation or other entity (other than a transaction solely for the purpose of a change of domicile); and (iii) transfers of assets where the consideration paid is securities of the purchaser corporation or entity and such securities will be distributed to the seller’s security holders.

The key points of Rule 145 are that the security holders vote on the transaction, thus making an investment decision and those voting security holders will be giving up the securities in one corporation or entity in exchange for the securities in another corporation or entity. In the case of an asset sale, the securities given up are the beneficial interest in the assets sold.

Restricted versus Unrestricted Securities

Securities received in a Rule 145 transaction are restricted or unrestricted to the same extent that the tendered or exchanged securities were restricted or unrestricted. However, unlike dividends and other in-kind distributions, restricted securities received in a Rule 145 transaction do not tack with the holding period of the securities surrendered or exchanged in the transaction. That is, a new holding period begins for restricted securities received in a Rule 145 transaction.

Provided however, if either party to the Rule 145 transaction was a shell company at the time the security holders voted on the transaction, Rule 145 specifically prohibits the resale of securities received in the transaction unless all of the requirements of Rule 144(i)(2) are met. These requirements include that the issuer no longer be a shell company, is subject to the reporting requirements of the Exchange Act for 12 months following the time that it filed Form 10 information indicating it was no longer a shell company, and is current with all Exchange Act reporting requirements.

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!

With the prevalence of investigations by the Securities and Exchange Commission (SEC), and other regulatory bodies, into corporate conduct, public companies often must decide whether, when and how to disclose to investors facts and information regarding such investigations. Although federal securities laws require the disclosure of specific events, some of which may occur as part of an investigation, neither the securities laws, nor court decisions interpreting such laws, provide clear guidance as investigation disclosure obligations. Accordingly, competent securities counsel must analyze all the facts and circumstances and make materiality assessments in advising clients on this difficult topic.

There is no statute, regulation or rule that explicitly imposes a duty on Companies to disclose an investigation. Moreover, the existence and details about a government investigation is not public information and is confidential. The SEC, and other regulatory bodies, takes care to maintain the confidentiality of such investigations and include documentation regarding the confidential nature of proceedings in all voluntary requests for information and subpoenas.

Certainly, federal securities laws require specific duties to disclose specific enumerated events and non-enumerated material information. Issuers have duties to make specific disclosures in quarterly forms 10-Q, annual forms 10-K and periodic reporting forms 8-K. Moreover, in the event that a limited or selective disclosure has been made, either intentionally or unintentionally, regulation FD would require general disclosure of such material information. Below I will list the items in these disclosure obligations which would most likely require the disclosure of an investigation. Each of the items would only require disclosure if the disclosable event is a “substantial certainty.” That is, the facts must be substantially certain to be material. In reality the fact of an investigation does not meet this criteria, however, the facts uncovered in the investigation, and the likelihood of a pending enforcement or other action, do.

The specific items which may require a disclosure include the following. First, Regulation S-K, Item 103 requires the disclosure of “Legal Proceedings.” In particular, Item 103 provides in pertinent part, “[D]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is subject…..[I]nclude similar information as to any such proceedings known to be contemplated by governmental authorities.” Generally disclosure of an investigation under Item 103 must be had when the SEC Enforcement staff issues a Wells notice.

Item 303 of Regulation S-K requires Issuers to disclose Management Discussion and Analysis, including the Issuers financial condition, changes in financial condition and known facts and circumstances which could change or affect such financial condition. If an investigation uncovers facts that could reasonably affect the Issuer’s financial condition, an Item 303 disclosure would be necessary. Item 503(c) requires a discussion of risk factors and changes in risk factors. Again if an investigation uncovers facts that would affect the Issuer’s risk factors, a disclosure is required. Item 401(f) requires disclosure of the involvement of directors or executive officers in legal proceedings. Many times an investigation will result in targeting a particular officer or director. Generally, such disclosure would not be necessary until a Wells notice has been issued.

Form 8-K requires disclosure of several events that may relate to an investigation or facts uncovered in an investigation, including, (i) the resignation or removal of a director or certain officers; (ii) the non-reliance on previously issued financial statements; (iii) the resignation or dismissal of the Company’s auditor; and (iv) entry into a material definitive agreement with a governmental agency to conclude an investigation.

If an Issuer determines that a disclosure need be made, the securities laws require that such disclosure be full and complete and fail to include all material information. Issuers should consider that the disclosure should include enough information to minimize the need to supplement it in the near future. However, the disclosure should not contain so much information as to potentially confuse a reader or convolute the issue.

In conclusion, counsel should consider all the facts and circumstances of an investigation, and continue to make materiality assessments on a continuous basis during the course of an investigation to ensure that Issuers meet their disclosure obligations without unnecessarily jumping the gun and facing potential negative market consequences.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 3(a)(10) of the Securities Act of 1933, as amended (“Securities Act”) is an exemption from the Securities Act registration requirements for the offers and sales of securities by Issuers. The exemption provides that “[E]xcept as hereinafter expressly provided, the provisions of this title [the Securities Act] shall not apply to any of the following classes of securities….(10) Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.”

The Securities and Exchange Commission (SEC) has given guidance on the operation of Section 3(a)(10) in its Division of Corporation Finance: Revised Staff Legal Bulleting No. 3. In particular, in order to rely on the exemption, the following conditions must be met:

• The securities must be issued in exchange for securities, claims, or property interests, not cash;
• A court or authorized governmental entity must approve the fairness of the terms and conditions of the exchange;
• The reviewing court or authorized governmental entity must (i) find that the terms and conditions of the exchange are fair to those that the securities will be issued to; and (ii) be properly advised that the Issuer will be relying on the court’s findings to issuer securities;
• The reviewing court or authorized governmental entity must hold a hearing before approving the fairness of the terms and conditions of the transaction;
• A governmental entity must be expressly authorized by law to hold the hearing;
• The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange;
• Adequate notice must be given to all those persons; and
• There cannot be any improper impediments to the appearance by those persons at the hearing.

In addition to complying with the above conditions, Issuers should be aware that many state securities law statutes that authorize a Section 3(a)(10) court process, require that there be a majority shareholder vote approving the transaction, prior to the hearing.

Importantly SEC Staff Bulletin 3 provides that the re-sale of securities issued in a Section 3(a)(10) transaction may be had without regard to Rule 144 if the seller is not an affiliate of the Issuer either before or after the Section 3(a)(10) transaction. If the seller is or will be an affiliate either before or after the Section 3(a)(10) transaction, re-sales may be made in accordance with Rule 144, except for the holding period and notice filing requirements. That is, affiliates would still be subject to the drip rules, manner of sale and current public information requirements.

As a practical matter, many over the counter traded securities (Over the Counter Bulletin Board or OTCBB and Pink Sheets) have been utilizing the exemption found in Section 3(a)(10) to convert debt into common stock. The conversion of debt into common stock can assist an Issuer in two ways. First, and obviously, it eliminates the debt from the balance sheet and increases liquidity and solvency. Second, and less obvious, is that the Section 3(a)(10) exemption can be used to convince lenders to make investments into a company, without the investor relying solely on the Company cash flows for repayment.

Moreover, in these trying economic times, it seems there is the potential for a substantial increase in the use of this exemption by OTCBB and Pink Sheet Companies as a tool to clean up their balance sheets and induce additional capital investments. In fact, the hearing process can be quick and relatively inexpensive. The court must only opine on the fairness of the transaction to those that the securities will be issued, the creditor whose debt will be exchanged for stock.

The court does not render their decision based upon the potential impact on the shareholders of record, the Company or the potential marketplace shareholders. In most cases the creditor is highly motivated to convert its debt into common stock and realize the opportunity for immediate cash through resale or the opportunity for long-term gain through holding the stock.

As with the use of all registration exemptions, Issuers are cautioned that they are still subject to the anti-fraud, civil liability and other provisions of the federal securities laws. Moreover, Section 3(a)(10) is not available to exempt any transaction that is in part of a plan or scheme to evade the registration provisions of the Act. In any of these cases, registration under the Act is required unless another exemption is available.

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.

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!

FINRA, in August of 2009, filed Release No. 34-60515 with the SEC. FINRA proposes to extend certain NMS protections to quoting and trading in the OTC market for equity securities.

In summary:

1. Restrictions on sub-penny quoting;
2. Prohibitions on locked or crossed markets;
3. Implementation of caps on access fees;
4. Requirements of transparency of customer limit orders.

FINRA’s goals, part of broadly anticipated changes in financial systems, are proposed as part of efforts to both modernize and achieve higher “quality” in the OTC marketplace.

1. Sub-Penny Quote Restrictions

FINRA addresses both issues of modernization and higher quality by proposing to restrict sub-penny quoting in conjunction with removing the requirement that ATS’s include non-subscriber access fees within its quote. Restricting sub-penny quoting may help prevent the practice of “stepping ahead” of displayed limit orders by trivial amounts.

The proposal will most effect small businesses whose securities trade for under $1.00. Under FINRA’s proposal, market participants will be able to quote in increments ranging from pennies to ten thousandths of a penny depending on the price of the security. There is some doubt as to the appropriateness of this level, however, for MPVs under $1.00.

2. Locked & Crossed-Markets Restrictions

FINRA’s proposal requires members to implement policies and procedures to avoid locking and crossing quotations and to enable the reconciliation of locked or crossed quotations. Displaying locked quotations is inconsistent with the maintenance of fair and orderly markets and prevents market efficiency. FINRA’s proposal aims to enhance investor protections, allowing member firms to immediately post a routed order to full-display size.

3. Capping Access Fees

Current rules limit most alternative trading systems (“ATS”) from charging either access or post-transaction fee to non-subscribers, unless that fee is already included in the ATS’s posted quote. FINRA would improve application of the Interpositioning Rule’ by reflecting access fees. Thus, posted quotes may foster more accurate competitive price quotes, by emphasizing an order-driven market, to encourage ECN competition.

4. Require Immediate Customer Limit Order Displays

Will the new rules competition, provide increased liquidity, and increase transparency? That is FINRA’s hope. Under the proposal, a market maker displaying a priced quote must immediately display customer limit orders that better market displayed price and size. Requirements of displaying customer limit orders may increase quote competition and ultimately narrow spreads. The FINRA goal here, as with most of FINRA’s proposed changes, is squarely aimed at reducing transactional costs.

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!