• 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.

  Tags: Crowdfunding, EGC, going public, JOBS, OTCBB, regulation a, SEC Law Firm, SEC reporting requirements, securities attorney, US GAAP

• 04Aug

  An Introduction to Promissory Notes

  Securities Law Firm No Comments

  A promissory note is a written promise by a person, persons or entity to pay a specific amount of money (called “principal”) to another, usually to include a specified amount of interest on the unpaid principal amount.  In addition, a promissory note will include the basic specifics of the debt, including full names of both debtor and creditor and an address for making payments.  The specified time of payment may be written as: a) whenever there is a demand, b) on a specific date, c) in installments with or without the interest included in each installment, d) installments with a final larger amount (balloon payment).   In the event that the written note does not include language specifying the time of payment, the law assumes it is payable on demand by the creditor.

  Terms of Payment

  A promissory note may contain other terms such as the right of the promisee to order payment be made to another person, security or collateral, conversion into stock or other equity, penalties for late payments, a provision for attorney’s fees and costs if there is a legal action to collect, the right to collect payment in full upon certain facts (such as the sale of collateral or a default in the note obligations.

  There are legal limitations to the amount of interest which may be charged. When the amount due on the note, including interest and penalties (if any) is paid, the note must be cancelled and surrendered to the person(s) who signed it. The requirements of how a promissory note must be signed are governed by state law and vary from state to state. Some states require that a promissory note by witnessed, others require that it be notarized and some do not require witnessing or a notary.  Notes often contain enforcement provisions, such as notice requirements, jurisdiction and venue.

  The note is signed by the person borrowing the money. The note is then kept by the person lending the money as evidence of the loan and the repayment agreement (with a copy usually provided to the borrower).  It is recommended that the debtor sign in blue ink so that there can be no confusion as to which document is the original (and thus enforceable) note.

  Liens as Security

  In some cases, a promissory note is used when a loan is made for the purchase of real property. When this type of loan is made, the person lending the money often takes a mortgage on the property. That is, the borrower agrees (through a written document that is recorded with the local recorder’s office) that the lender has an interest or lien on the property until such time as the loan is repaid in full. If the loan is not paid in full, the mortgage holder can file a lawsuit, usually called a foreclosure, seeking to have the property sold and the proceeds generated from that sale paid to the lender to satisfy or pay off the loan.

  In cases where a loan is used for the purchase of specific personal property (i.e. property that is not land or real estate), a similar type of document can be used to secure the loan or to specify collateral for the repayment of the loan. A security interest can be obtained in the property that is purchased with the borrowed money – this is referred to as a purchase money security interest. If property other than the property purchased with the money is offered as collateral or security on the loan, this type of security is referred to as a non-purchase money security interest. The document that identifies these types of security interest is called a Security Agreement. This document sets forth the details on the type of collateral, location, and how the collateral is handled should the borrower not repay the loan as agreed.

  Personal Guarantees

  Some promissory notes provide for personal guarantees – if the person borrowing the money is a corporation or is an individual that does not appear to have a solid financial base, another individual will be required to sign the guarantee, thereby promising the lender to pay the loan if the borrower does not. These provisions are enforceable and will bind the person signing the guarantee in the same manner as the person who signed the note.

  Unless specifically prohibited in the language of the note, a promissory note is assignable by the lender.  That is, the lender can sell or assign the note to a third party who the borrower must then repay.  However, a promissory note is never assignable by the borrower, without the express written consent and approval of the lender.  Moreover, convertible promissory notes are generally not assignable unless the third party meets specific criteria.

  This is because a convertible promissory note is generally an investment decision (i.e. it can be converted into equity) and the exemption relied upon by the borrower may be limited to the lender meeting certain eligibility.  For example, generally lenders in a convertible promissory note must be accredited and not be disqualified from participating in stock offerings, such as by having a penny stock bar.

  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.

  Tags: Conversion into Stock, Convertible Debentures, convertible debt, going public, OTCBB, OTCQB, Promissory Notes, SEC Law Firm, securities attorney

• 17Jun

  SEC Approves BX Venture Market

  Securities Law Firm No Comments

  The SEC has recently approved the NASDAQ OMX Group, Inc.’s application to form the BX Venture Market (“BX Market”) as an alternative quotation medium to the OTCBB and OTC Markets, Inc. (including PinkSheets, OTCQB and OTCQX).  The new BX Market will provide companies that do not otherwise qualify for an exchange listing, an opportunity to list their shares.  The BX Market will compete with the OTCBB and the OTC Markets OTCQB and OTCQX (interestingly and as an aside, NASDAQ sold the OTCBB last year to a private buyer).  The SEC has issued an in-depth order approving the application.

  The OTCBB, OTCQB and OTCQX Alternative

  The BX Market is marketing itself as a more transparent, better regulated, listing alternative to both the OTCBB and OTCQB and OTCQX.  Presumably this means that companies trading on the BX Market would appear to have greater credibility than those on the OTCBB or OTCQB/QX.  The BX Market will be run through joint ventures with NASDAQ and FINRA for application review and maintaining listing requirements.  The BX Market is also touting its technological advances in real time trading and tech services for companies that choose to list their securities for trading on its platform.  Like the OTCBB and OTCQB, the BX Market will not be an exchange but rather a trading platform for the trading of over the counter securities, albeit with new rules related to listing requirements and corporate governance.

  Since the BX Market is not an exchange, listed companies will still be required to comply with the various state securities laws and be subject to their review and enforcement.  Currently, exchange listed companies are subject to the federal Private Securities Litigation Reform Act which states that federal law pre-empts (over rules) exchange listed securities. In short, state power is eliminated as to exchange listed securities.

  BX Market Listing Requirements

  The BX Market will have listing requirements.  According to the BX Venture website the requirements include: (i) a public float of 200,000 shares; (ii) 200 public shareholders each with a minimum of 100 shares; (iii) a market value of listed shares of $2 million; (iv) a minimum of 2 market makers; (v) a minimum bid price of $1.00 for companies not previously listed on an exchange and $0.25 for companies previously exchange traded; (vi) $1 million in equity or $5 million in assets; (vii) a one year operating history; (viii) a 12 month plan to maintain sufficient working capital; (ix) proper corporate governance; (x) prohibition of “bad boy” officers and directors; and (xi) current in its Exchange Act reporting requirements.  There are additional, which can be found on the SEC website in its approval order.

  The one year operating history requirement obviously eliminates shell companies from qualifying for listing.  The corporate governance standards will include the requirements to have an independent audit committee; independent directors; compensation committee, code of conduct for officers and directors and holding an annual shareholders meeting.

  Neither the OTCBB nor OTCQB have actual listing standards, other than being current with Securities Exchange Act of 1934 reporting requirements.  Moreover, neither the OTCBB or OTCQB require company applications, but rather just market maker applications to FINRA on Form 211 complying with the standards set forth in SEC Rule 15c2-11.

  New Motivation for Venture Capitalists

  Bob McCooey, Senior Vice President of NASDAQ OMX Group has gone so far as to state that “…the BX Venture Market can provide a new exit opportunity for the long-term investments made by venture capitalists who support job creation and ongoing U.S. competitiveness.”  Presumably the exit strategy he is referring to is the fact that securities listed with the BX Markets will be able to be quoted and traded and that market makers will be on the bid and offer.  Of course, this ability exists now with the OTCBB and OTCQB.  It will remain to be seen if long term venture capitalists will find the idea of future trading on the BX Market more enticing than the current exit strategies available with the OTCBB and OTCQB.

  One thing is for sure, the BX Markets will have some power and money behind it.  Currently the NASDAQ OMX Group is the world’s largest exchange company, offering trading technology and platforms over 6 continents and to over 70 exchanges.  Let’s not forget the NASDAQ name.  In fact, the NASDAQ name gave the SEC concern (among other things) in accepting the proposal.  Investors could be easily confused, thinking they were investing in a NASDAQ exchange listed company and not an over the counter security.

  Protecting the NASDAQ Name

  To counter this concern the BX Market has indicated that companies that refer to themselves as listed on the NASDAQ or NASDAQ exchange will be subject to immediate de-listing from the BX Market.  Still just stating the true fact that the BX Market is owned by and supported by the NASDAQ OMX Group and that is the NASDAQ Listing department that will review and process listing applications for the BX Market, can, and probably will, create confusion.

  In summary, the BX Markets will serve as a much needed middle ground between exchange listing and the existing over the counter markets. Since this particular market venue has never existed before, the formative stages should be of particular interest to investors, issuers, securities attorneys, PCAOB auditors and pretty much everyone else in the industry.

  Generally speaking, more competition is usually a good thing. Let’s see how this one is received.

  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.

  Tags: BX Venture Market, NASDAQ OMX Group, OTCBB, OTCQB, OTCQX, PCAOB Auditors, SEC Law Firm, securities attorney

• 13Dec

  New FINRA Rules For Corporate Actions

  SEC Law Firm No Comments

  Effective September 27, 2010, the SEC has approved new FINRA Rule 6490 (Processing of Company Related Actions). Rule 6490 requires that corporations whose securities are trading on the over the counter market (OTCQX, OTCQB, OTCBB or PinkSheets) timely notify FINRA of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes. The Rule grants FINRA discretionary power when processing documents related to the announcements, and implements fees for these services.

  FINRA and the OTCBB

  FINRA (the Financial Industry National Regulatory Authority) operates the OTC Bulletin Board and processes corporate actions for changes such as splits and name changes. FINRA also issues trading symbols to over the counter (non-exchange) traded issuers and maintains a symbols database for issuers. When processing by FINRA of a corporate action is complete, FINRA notifies the OTC marketplace of such changes and actions, such as repricing securities following a forward or reverse split, or issuing a new trading symbol following a name change or merger.

  Historically, FINRA’s role has been largely ministerial with limited jurisdiction to impose informational or other requirements, and no power to reject requested changes. However, the SEC began to express concern that certain parties were using FINRA to assist in fraudulent activities, such as usurping the corporate identity of publicly traded entities by either reinstating an entity with no authority or creating new entities with the same name as the public entity. Accordingly, Rule 6490 was created.

  FINRA and Issuer Actions

  The Rule codifies FINRA’s authority to conduct in-depth reviews of company related actions and allows the staff discretion not to process such actions where the information or forms are incomplete or when certain indicators of potential fraud exist. The staff now has broad discretion to ask for additional documents and evidence to support and verify the accuracy of submitted information.

  Factors that may be considered by FINRA to deny an application for a change are limited to: (1) FINRA staff reasonably believes the forms and provided documentation is not complete or accurate; (2) a reporting issuer is not current with its reporting obligations; (3) FINRA has actual knowledge that the Company or Company related parties are the subject of a pending investigation by a regulatory body or have been adjudicated against adversely; (4) a government authority or regulatory has informed FINRA that the company related action may be potentially related to fraud or pose a threat to public investors; or (5) there is significant uncertainty in the settlement clearance process for that security.

  FINRA and Processing Fees

  In addition, the new Rule allows FINRA to charge fees to issuers for processing these corporate actions. In furtherance of the Rule and its new duties, FINRA has created certain forms and information requirements for Issuers to complete and submit. In addition to information forms which must be completed by the Issuers, FINRA now requires notarized and verified background corporate records, board and shareholder resolutions, proof of change of control (including resignations and appointments for all changes in officers and directors) and attorney opinion letters. All requests must be accompanies with the newly imposed fees. The new FINRA fees range from $200 for a timely notice to $5,000 for a late notice (with $1,000 and $2,000 in between fees), and a $4,000 fee to appeal an adverse decision.

  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: FINRA Rule 6490, going public, OTCBB, OTCQB, OTCQX, pink sheets, Reverse Mergers, SEC Law Firm, securities attorney

• 09Dec

  Has The OTCBB Been Replaced By The OTCQX And OTCQB?

  Securities Law Firm No Comments

  Over the past few years, the historical “PinkSheets” has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its newly refurbished website and new URL www.otcmarkets.com. Where the term “PinkSheets” used to denote an over the counter quotation system using the website www.pinksheets.com it now simply refers to the lower tier of entities that trade on the over the counter market. In fact the URL www.pinksheets.com no longer exists with users being redirected to the new www.otcmarkets.com.

  Three Levels of Reporting

  The new www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and PinkSheets. The new website also provides quotes for the OTCBB but it seems this is just more as a comfort or segue until the industry gets used to the idea that the “bulletin board” is no more. The OTCBB has no particular listing or quotation requirements other than that the issuer be subject to the reporting requirements of the Securities Exchange Act of 1934, and be current in their reports. As noted below this is the exact same requirement for issuers on the OTCQB.

  OTCQX

  Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals. Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC but do not undergo additional quality review. Issuers on the PinkSheets are not required to be reporting with the SEC. However, such issuers are then further qualified based on the level of voluntary information provided to the www.otcmarkets.com. Issuers with no information are denoted by a skull and crossbones, where Issuers with information analogous to that contained in a 15c2-11 application, are denoted with a “current information” symbol and those in between by a “limited information” symbol.

  SEC and FINRA Reporting Requirements

  Although the entire over the counter market is regulated by the SEC and FINRA, both www.otcmarkets.com and www.otcbb.com are now privately owned and merely serve as quotation mediums. Moreover, www.otcmarkets.com is more user friendly and up to date than www.otcbb.com. In fact, FINRA just sold www.otcbb.com and its trademark to an independent third party, in an effort to remove itself from operating the over the counter market to overseeing the market and being its primary regulator. So if all over the counter quotes can be found at www.otcmarkets.com and companies trading on the OTCQB have the exact same standards as the OTCBB, and FINRA is no longer directly associated with the OTCBB; where does that leave the OTCBB? I believe as an acronym which will soon find itself antiquated.

  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: going public, OTC markets, OTCBB, OTCQB, OTCQX, pink sheets, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney

• 16Jan

  Equity Line Financing Examined

  Corporate Law Firm No Comments

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

  Similar to PIPE Transactions

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

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

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

  Investors Must Be Bound to Purchase All Securities

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

  Investors May Not Possess Ability to Make Investment Related Decisions

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

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

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

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

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

  Tags: equity line financing, going public, OTCBB, Over The Counter Bulletin Board, PIPE transactions, registration statement, Reverse Mergers, SEC Law Firm, 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

• 10Nov

  Responsibilities of Independent Directors Increases in Response to Sarbanes Oxley

  SEC Law Firm No Comments

  Serving as an independent director carries serious obligations and responsibilities.

  Following the passage of the Sarbanes Oxley Act of 2002 (SOX), the role of independent directors has become that of securities monitor. They must be informed of developments within the company, ensure good processes for accurate disclosures and make reasonable efforts to assure that disclosures are adequate. Independent directors, like inside directors, should be fully aware of the company’s press releases, public statements and communications with security holders and sufficiently engaged and active to questions and correct inadequate disclosures.

  Disclosure and Transparency

  The basic premise of federal securities laws is disclosure and transparency. The theory behind this regulatory structure is that if a Company is forced to disclose information about particular transactions, plans or programs, the company and its officers and directors will take greater care in making business decisions. If a director knows or should know that his or her company’s statements concerning particular issues are inadequate or incomplete, he or she has an obligation to correct that failure.

  It is the Securities and Exchange Commission’s (SEC) viewpoint that independent directors should play a significant role in the direction of a company’s affairs, particularly when they have relevant expertise, experience and sophistication. According to the SEC, independent directors must not only be familiar with their company’s communications to the public, but must also compare these communications with what they know to be the facts. Additionally, they are then responsible to follow up and practice vigilance in ensuring that communications are complete and accurate.

  Internal Systems Protect Company Operations

  All independent directors have an obligation to question employees or legal counsel as to the background of issues or the need for disclosure of specific information. If they are aware of specific non-disclosures, they must inquire into the situation. All independent directors should insist on internal systems so that they have regular and sufficient information about the company’s affairs. Moreover, directors who review, approve, or sign their company’s proxy statements and periodic reports must take steps to ensure the accuracy and completeness of the statements, or face personal regulatory liability for the failure to do so.

  The SEC has the power to bring actions against independent directors for misstatements or omissions in offering documents under the Securities Act of 1933, as amended, for fraud under Section 10 of the Securities Exchange Act of 1934, as amended or for aiding and abetting Company securities laws violations. SOX specifically authorizes the SEC to seek “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC often utilizes this power to pursue injunctive relief such as a prohibition to act as a public company director in the future, which reputational damage potential can act as a motivator.

  Although all directors have direct personal liability for statements made in a registration statement or other filing signed by such directors, Rule 176 promulgated under the Securities Act of 1933, as amended, provides a due diligence defense to such actions. To invoke the due diligence defense the defending director needs to be diligent and verify facts and statements.

  Better Compliance Limits Exposure

  Even though independent directors are not responsible for every single company statement or even all of the company’s securities compliance, certain directors may be well situated to achieve better compliance, such as members of the audit committee or directors who sign company filings. The SEC has indicated that it intends to utilize its powers to require directors to take their role as securities monitors seriously. To date, however, the SEC has pursued very few cases against independent directors, and most of such cases have been settled without fanfare and generally involve injunctive relief. Moreover, successful private litigation against independent directors is rare.

  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, corporate law, due diligence, going public, independent directors, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, sarbanes-oxley, SEC Law Firm, securities attorney

• 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

• 05Nov

  SEC Rule 144: Pledged Securities, Holding Periods and Subscriptions Agreements

  SEC Law Firm No Comments

  Securities which are bona fide pledged may be tacked to the holding period of the pledgor as long as the pledge has full recourse against the pledgor. Gifted securities may be tacked with the holding period of the donor. Securities transferred to a trust may be tacked with the holding period of the settlor. Likewise securities transferred to a 401(k) or other individual retirement account will tack to the original issuance date. Securities obtained by beneficiaries of an estate may be tacked with the holding period of the deceased.

  Securities acquired solely by the cashless exercise of an option or warrant are deemed to have been issued on the date of issuance of the underlying option or warrant; provided however, that the payment of any consideration, even a de minimus amount of cash, for the newly issued securities will restart the holding period. Accordingly, securities issued upon exercise of options or warrants in a stock option plan are deemed issued upon exercise of such option or warrant and not before.

  Subscription Agreements

  For purposes of Rule 144, shares acquired pursuant to anti-dilution rights attaching to restricted securities are restricted securities themselves, but their holding period dates back to the original placement of shares, not the exercise of the anti-dilution provisions. The holding period for restricted securities acquired pursuant to a subscription agreement begins at the time the agreement is accepted by the issuer, rather than the date it is signed by the purchaser or the date the shares are issued, assuming the full purchase price has been paid.

  When relying on Rule 144 for the resale of over the counter traded securities (Pink Sheets or Bulletin Board), sellers may only sell 1% of the outstanding securities of the issuer in every 90 day period. Calculations of volume restrictions based on trading volume are only available for the sale of exchange traded securities.

  The manner of sale requirements, require that securities sold in reliance on Rule 144 be sold only in broker’s transactions, directly with a market maker or in a riskless principal transactions. Moreover, the person selling the securities may not arrange for the solicitation of sale orders. The posting of a customer limit order is not considered a solicitation for purposes of this rule.

  Finally, and importantly, Issuers and sellers must be aware that Rule 144 is not available for the sale of securities initially issued by a shell company or any issuer that has at any time previously been a shell company unless all 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!

  Tags: 15c-211, form 10-k, going public, OTCBB, Over The Counter Bulletin Board, pink sheets, public shells, restricted securities, Reverse Mergers, Rule 144, SEC Law Firm, securities attorney, subscription agreements, unrestricted securities

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