• 04Nov

  SEC Rule 145 – Registration and Resale Requirements For Securities Issued in Merger, Consolidation or Acquisition

  Securities Law Firm No Comments

  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!

  Tags: acquisitions, going public, OTCBB, Over The Counter Bulletin Board, restricted securities, Reverse Mergers, Rule 145, SEC Law Firm, SEC reporting requirements, securities attorney, unrestricted securities

• 04Nov

  SEC Rule 144: Current Public Information and Reporting Requirements

  SEC Law Firm No Comments

  The current public information requirement is measured at the time of each sale of securities. That is, the Issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. Most attorney opinion letters and Forms 144 cover a three month period and many Sellers sell securities over that three month period. However, the Seller (or person selling on behalf of Seller such as the broker dealer) is required to make a determination that current public information is available at the time of each sale.

  Accordingly, if a reporting issuer does not file a required Q or K during this period, or 15c2-11 information lapses for a non-reporting issuer, sales must cease until the current public information requirement is again satisfied. Moreover, Sellers are taking a risk by selling during the 5-day or 15-day period following the filing of a Form 12b-25 because if the late report is not filed, such sales would not have been made in compliance with Rule 144. On the contrary, if the report is filed, the sales made after the filing of the 12b-25, still satisfy the current public information requirements.

  Non-Reporting Issuers

  For non-reporting issuers, the current public information requirement requires that information set forth in Rule 15c2-11 be publicly available and current. It is irrelevant that broker dealers may publish quotes on the securities or that the securities are piggy-back qualified. Although pinksheets.com is not affiliated with the Securities and Exchange Commission (“SEC”) and the SEC has not commented on the Pink Sheets self-imposed reporting requirements and tiers of reporting information, in light of the fact that the Pink Sheets models its voluntary reporting requirements after Rule 15c2-11, attorneys and sellers of securities, should feel confident relying on the existence of current information on pinksheets.com to satisfy the current public information requirement of Rule 144.

  In lieu of relying upon information posted on PinkSheets.com, a Seller desiring to rely on Rule 144 for the sale of securities of a non-reporting issuer, would need to ensure themselves that such 15c2-11 information was available and current by other means. These other means could include if such information was posted on the Issuers website, or such information was in the possession of the broker-dealer facilitating the sale.

  Holding Periods

  The holding period is determined as of the date of the proposed sale, provided however, that Rule 144 makes numerous specific provisions for the calculation of the holding period and enumerates specific instances when a holding period may be tacked onto the holding period of previously issued securities. In determining the holding period where the securities were paid with a promissory note, installment contract or other obligation to pay in the future, the holding period does not begin until payment has been made in full unless the promissory note or installment contract provides for full recourse against the purchaser of the securities, is secured by fair value collateral other than the securities purchased, and has been paid in full prior to the proposed Rule 144 sale date.

  Securities acquired from the issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to have acquired at the same time as the securities on which the dividend is paid or the securities surrendered in the recapitalization. If securities were acquired by the Issuer solely in exchange for other securities of the same issuer, such as in a 3(a)(9) transaction, the newly acquired securities are deemed to be acquired at the same time as the securities surrendered in the exchange or conversion.

  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: 12b-25, 15c-211, form 10-k, form 10-q, going public, non-reporting issuers, OTCBB, Over The Counter Bulletin Board, pink sheets, public shells, Reverse Mergers, Rule 144, SEC Law Firm, SEC reporting requirements, Section 3(a)(9), securities attorney

• 03Nov

  SEC Rule 144: Resale Conditions and Exempt Transactions

  SEC Law Firm No Comments

  There are many questions regarding the application of Securities Act of 1933 (“Securities Act”) Rule 144 for the resale of securities. Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Therefore, an understanding of the term “underwriter” is important in determining whether or not the Section 4(1) exemption from registration is available for the sale of the securities. Rule 144 provides a safe harbor from the definition of “underwriter”. If all the requirements for Rule 144 are met, the seller will not be deemed an underwriter and the purchaser will receive unrestricted securities.

  As Rule 144 only addresses the resale of restricted securities, the rule first defines “restricted securities”. Restricted securities include: (i) securities acquired directly or indirectly from the Issuer, of from an affiliate of the Issuer (affiliate includes spouses and family members living in the same household), in a transaction or chain of transactions not involving a public offering; (ii) securities acquired from the Issuer in a Regulation D or Rule 701 transaction; (iii) securities acquired in a transaction or chain of transaction under Rule 144A; (iv) Securities acquired from the Issuer in a Regulation CE transaction; (v) Securities acquired in a transaction under Regulation S; (vi) Securities required in a rights offering to the same extent that the holder already held restricted securities; (vii) Securities required in a Rule 145 transaction to the same extent that the tendered or exchanged securities were restricted; and (viii) Securities acquired from the Issuer in transaction exempt under Section 4(6).

  Condition of Rule 144

  Rule 144 provides certain conditions to be met for sales by both affiliates and non-affiliates which conditions vary depending on whether the Issuer of the securities is a reporting or non-reporting Issuer. The following chart summarizes the Rule 144 requirements:

  	Affiliate or Person Selling on Behalf of an Affiliate	Non-Affiliate (and has not been an affiliate during the prior three months)
  Restricted Securities of Reporting Issuers	During six-month holding period – no resales under Rule 144 permitted   After six month holding period – may resell in accordance with all Rule 144 requirements, including: Current public information Volume limitations Manner of sale requirements Filing of Form 144	During six-month holding period – no resales under Rule 144 permitted   After six month holding period but before one year – unlimited public resales under Rule 144 except that the current public information requirement still applies   After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements
  Restricted Securities of Non-Reporting Issuers	During one year holding period – no resales under Rule 144 permitted   After one year holding period – may resell in accordance with all Rule 144 requirements, including: Current public information Volume limitations Manner of sale requirements Filing of Form 144	During one year holding period – no resales under Rule 144 permitted   After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements

   
  The six month holding period only applies to issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). As a voluntary filer is not subject to the Exchange Act reporting requirements, the longer one year holding period is applicable. However, the determination of whether the issuer is reporting or non-reporting is made as of the time of the proposed sale, as is the determination of the other Rule 144 requirements. Accordingly, if following the issuance of securities, a non-reporting issuer files a Form 10 registration statement and becomes subject to the reporting requirements of the Exchange Act, the six month holding period would apply.

  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: OTCBB, Over The Counter Bulletin Board, pink sheets, restricted securities, Reverse Mergers, Rule 144, SEC Law Firm, SEC reporting requirements, securities attorney, securities resale, unrestricted securities

• 31Oct

  Contracting Away Fiduciary Obligations In Delaware LLCs And Limited Partnerships

  Corporate Law Firm No Comments

  Delaware corporate and alternative entity law has long been the model for other states in drafting statutes and for practitioners in advising clients and preparing limited partnership agreements and limited liability company membership agreements.

  In 2005 the Delaware legislature amended its Limited Liability Company Act and Revised Uniform Limited Partnership Act to provide drafters of LP and LLC agreements with broad flexibility to modify default fiduciary duties. Both Acts now provide that default fiduciary obligations mat be restricted or eliminated, provided that the implied covenant of fair dealing and good faith may not be eliminated. Many states have followed suit.

  Delaware Corporate Law

  Under Delaware law, the purpose of the implied covenant of fair dealing and good faith is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself. Although the covenant of good faith and fair dealing itself cannot be waived, Delaware courts will not infer specific obligations that do not appear in the LLC or LP agreement. Moreover, courts will not override express provisions in the agreements. Accordingly, it is incumbent upon parties to set forth clear and unambiguous provisions to avoid doubt later. For instance, where management is entitled to compete with a company or exercise sole and unfettered discretion on matters, such provisions need to be clear and explicit.

  With respect to discretionary acts, it is very important to spell out the scope of such discretion. If the intent is to allow the General Partner act in its own best interest, it needs to be so stated. Sample sole discretion language which has been upheld is as follows:

        “Notwithstanding any other provision of this Agreement or otherwise applicable provision of law or equity, whenever in this Agreement, the General Partner is permitted or required to make a decision in its sole discretion or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall, to the fullest extent permitted by applicable law, have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership or Limited Partnership.”

  The bottom line is that parties to an LLC or LP Agreement cannot underestimate the necessity to specifically set forth any fiduciary obligations and expectations to each other to avoid the application of statutory default obligations, which can be cumbersome and unintended.

  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: Delaware corporate law, going public, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, SEC Law Firm, SEC reporting requirements, securities attorney

• 30Oct

  Securities Attorneys Must Self-Regulate to Avoid Potential Insider Trading Pitfalls

  Securities Attorneys No Comments

  Attorneys who accept stock as compensation from public companies need to be aware of a vigilant regarding their insider trading obligations. Before analyzing the dynamics of proper compliance in stock compensation scenarios, it is assumed that the stock received by the attorney was issued pursuant to a registration statement or valid exemption and is being resold also pursuant to a registration statement or valid exemption to registration.

  Insider Trading

  Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Securities attorneys are in a unique position as they are often privy to material, non-public information regarding their public company clients.

  The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or the Securities Exchange Act of 1934, as amended. The law of insider trading is otherwise defined by judicial opinions construing these rules. Rule 10b-5 is the general anti-fraud provision under the Exchange Act. Rule 10b5-1 provides that a person can be guilty of insider trading if at the time of the purchase or sale, they are aware of material non-public information. The Rule also sets forth several affirmative defenses or exceptions to liability. In particular, the rule permits persons to trade in certain specific circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract or instruction that was made in good faith.

  Confidential Information

  Rule 10b5-2 clarifies how the misappropriation theory applies to insider trading. In particular, when a person is aware of confidential information and owes a duty of trust or confidence as to such information, such person is deemed to have misappropriated the information when they make a purchase or sale of securities while aware of such information. For example, when a person has signed a confidentiality agreement or is a party to an attorney/client or other trust relationship.

  Securities attorneys can violate both theories of insider trading. Attorneys need to be aware of their knowledge of insider information both at the time of purchase and the time of the sale of the securities. When an attorney accepts stock as compensation, they have “purchased” such stock. That is, the attorney has made an investment decision to accept stock instead of cash for their services. Clearly when an attorney sells such stock on the open market, they have engaged in a sale.

  Attorneys should exercise great caution in making the decision to accept stock as compensation from public company clients. Attorneys should systems and safeguards already in place to ensure absolute compliance at the time of accepting stock and at the time of sale. Particular care should be paid to the existence of pending transactions, or any other material non-public information that could impact the share price of the stock at a later date.

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

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

  Tags: going public, insider trading, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, Rule 10b5-2, s8 stock, SEC Law Firm, SEC reporting requirements, securities attorney

• 29Oct

  The Federalism of State Corporate Law

  Corporate Law Firm No Comments

  Historically the regulation of corporate law has been firmly within the power and authority of the states. However, over the past few decades the federal government has become increasingly active in matters of corporate governance. Typically this occurs in waves as a response to periods of scandal in specific business sectors or in the financial markets. Traditionally, when the federal government intervenes in these situations, they enact regulation either directly or indirectly by imposing upon state corporate regulations.

  Specifically, the predominant method of federal regulation of corporate governance is through the enactment of mandatory terms that either reverse or preempt state laws on the same point. The most recently prominent example is the passing of the Sarbanes Oxley Act of 2002 (SOX).

  Sarbanes Oxley (SOX)

  SOX regulates corporate governance in five matters: (i) SOX prevents corporations from engaging the same accounting firm to provide both audit and specified non-audit services; (ii) SOX requires that audit committees of listed companies be composed entirely of independent directors and to disclose which such directors are financial experts; (iii) SOX requires that the corporation’s CEO and CFO certify that the periodic reports do not contain material misstatements or omissions and that the financial statements are accurate; (iv) SOX compels forfeiture of CEO and CFO incentive compensation in the event of an earning restatement; and (v) SOX bars corporations from making loans to executive officers.

  Each of these provisions requires the corporation to govern itself accordingly, regardless of whether the board of directors deems the actions to be a useful deployment of resources and regardless of the individual facts and circumstances surrounding that corporate entity. Such provisions limit the ability of directors to negotiate, research and agree to corporate actions that solve and address the unique challenges faced by their individual organization. That is, each of these mandates directly contradicts the essence of state corporate governance.

  Delaware and Model Act

  State corporate law is generally based on the Delaware and Model Act and offers corporations a degree of flexibility from a menu of reasonable alternatives that can be tailored to companies’ business sectors, markets and corporate culture. Moreover, state judiciaries review and rule upon corporate governance matters considering the facts and circumstances of each case and setting factual precedence based on such individual circumstances. The traditional fiduciary duties that govern state corporation laws include the duties of care and loyalty and are tempered by the business judgment rule.

  Duty of Care

  The duty of care requires that directors exercise the same level of care that would be expected from an ordinarily prudent person in the conduct of his or her own affairs. This includes making an informed decision, seeking the advice of experts when necessary and considering both the positive and negative impacts of a decision. The duty of loyalty is essentially a proscription against conflict of interest and self dealing. The business judgment rule basically says that if a director follows both his duty of loyalty and duty of care, than the decision should be deferred to.

  Although the federal government may have the right motives in enacting regulations which effect corporate governance, there is always controversy when they cross “sate lines.” State regulators and judiciaries are usually the best posture to establish and enforce corporate governance regulations. It is a given that director actions that result in a fraud upon shareholders and investors is actionable under federal (and state) securities laws, however, it is still questionable as to whether the federal government is the proper regulatory authority to set forth particular mandates of director responsibility.

  Delaware Corporations Act

  The Delaware Corporations Act together with decisions of the Delaware Court of Chancery provides a reliable source for corporate governance matters. These state laws allow for the quick response to emerging problems in a way that the strict mandates of the federal government cannot.

  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 governance, corporate law, delaware corporations act, due diligence, going public, OTCBB, Over The Counter Bulletin Board, Reverse Mergers, sarbanes-oxley, SEC Law Firm

• 28Oct

  Five Essential Conditions for Unregistered Spin-Offs

  Corporate Law Firm No Comments

  A spin-off occurs when a parent company distributes shares of a subsidiary to the parent company’s shareholders such that the subsidiary separates from the parent and is no longer a subsidiary. In Staff Legal Bulletin No. 4, the Securities and Exchange Commission (SEC) explains how and under what circumstances a spin-off can be completed without the necessity of filing a registration statement.

  In particular, the subsidiary shares (the shares distributed to the parent company shareholders) do not need to be registered if the following five conditions are met: (i) the parent shareholders do not provide consideration for the spun-off shares; (ii) the spin-off is pro-rata to the parent shareholders; (iii) the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets; (iv) the parent has a valid business purpose for the spin-off; and (v) if the parent spins-off restricted securities, it has held those securities for at least one year. Below is a discussion of each of the five conditions.

  Essential Conditions

  The first condition is that the parent shareholders do not provide consideration for the spun-off shares. This is because if value is provided, a “sale” has occurred and a “sale” requires registration under Section 5 of the Securities Act of 1933, as amended, unless an exemption is available. In a spin-off, an exemption is rarely available due to the wide variety of shareholders receiving the spun-off shares.

  The second condition is that the spin-off must be pro rata. When the spin-off is pro rata, the parent shareholders have the same proportionate interest in the parent and the subsidiary both before and after the spin-off. If a spin-off is not pro rata, the shareholders’ relative interests change and some shareholders give up value for the spun-off shares, requiring registration pursuant to the first condition.

  The third condition requires that adequate information be provided to the shareholders. If the subsidiary is a non-reporting company it can satisfy this condition by providing the shareholders with an information statement which satisfies the Section 14 proxy rules of the Securities Exchange Act of 1934 prior to or contemporaneously with providing the spun-off shares. In addition, the non-reporting subsidiary must file a Form 10 registration statement, which can be accomplished after the spin-off but prior to trading on the spun-off subsidiary, begins. A reporting subsidiary is deemed to have satisfied its information requirements as long as it is current in its reporting obligations, plus provides any pertinent information directly related to the spin-off itself.

  Adequate Information Requirement

  Where both the parent company and the subsidiary are non-reporting, the adequate information requirement is met if the by the date of the spin-off: (i) the parent provides the shareholders with an information statement which satisfies the Section 14 proxy rules of the Securities Exchange Act of 1934’ (ii) the shares are restricted until such time as a Form 10 is filed; and (iii) the transfer restrictions are enforced such as by means of stop transfer instructions to the transfer agent.

  The fourth condition is that there is a valid business purpose for the spin-off. Although there may be many valid business purposes, the SEC specifically recognizes the following as valid: (i) allowing management of each business to focus solely on that business; (ii) providing employees of each business stock-based incentives linked solely to her or her employer; (iii) enhancing access to financing by allowing investments into each business separately; and (iv) enabling the companies to do business with each other’s competitors.

  Invalid Purposes

  Likewise, although there are numerous purposes that would not be valid, the SEC specifically lists the following as not valid: (i) creating a market in the spun-off securities without providing adequate information and (ii) creating a public market in a shell or development stage company.

  Finally, the last condition is that the parent has held the shares for a minimum of one year. This is so the receiving shareholder may tack with the parent’s holding period and thereby satisfy the holding period requirements of Rule 144.

  The SEC has also taken the position, that as long as all the above conditions have been satisfied, the spin-off will not require registration under Rule 145 merely because the shareholders have voted on the spin-off and/or assets are transferred into the subsidiary as part of the spin-off. Furthermore, except where specifically delineated above (non-reporting parent and subsidiary) as long as all the above conditions are satisfied, the shares issued in the spin-off are not restricted 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: due diligence, going public, OTCBB, Over The Counter Bulletin Board, public company spin-offs, registration statement, Reverse Mergers, Rule 144, Rule 145, SEC Law Firm, SEC reporting requirements, securities attorney

• 22Oct

  The Demise of the Death Spiral – SEC Interpretation of Rule 415

  Securities Attorneys No Comments

  Without fanfare, publications, or other notice, in mid 2006, PIPE investors and the Issuers that utilized them noticed a big difference in the way that the Securities and Exchange Commission’s (SEC) division of corporate finance reviewed and commented upon, resale registration statements. Although the SEC staff contended that its position on Rule 415 had not changed, there was, incontrovertibly, a dramatic impact felt by Issuers and PIPE investors.

  For years, Issuers had relied upon Rule 415 in order to register the resale of shares issued in PIPE transactions (a “secondary offering”). Rule 415 governs the registration requirements for the sale of securities to be offered on a delayed or continuous basis, such as in the case of the take down or conversion of convertible debt and warrants. In the years prior to 2006, Issuers would register shares they sold in a PIPE transaction, which could represent in excess of 50% of their outstanding public float.

  Convertible Debt and Subsequent Resale

  In a typical convertible debt and/or warrant PIPE transaction, the exercise price to convert the debt or warrant was based on a discount to current market price. Accordingly, the PIPE investor would convert a small percentage of the debt or warrant into common shares and immediately sell those shares on the open market, thus forcing down the price of the stock. The PIPE investor would then convert another small percentage of the debt or warrant at a discount to the new lower market price and again immediately re-sell the shares, further depressing the market price. This process could continue infinitum until all of the debt or warrants had been converted leaving the Company’s stock price considerably lower than where it started. Thus the term “death spiral”.

  The SEC recognized this pattern and the negative effect it had on the marketplace. Beginning in mid 2006, the SEC staff began tightening the availability of Rule 415 for secondary offerings, particularly where the number of shares being registered exceeded 30% of the Issuers public float. The SEC was able to do this without rule amendments or such by simply taking the position that the registration of in excess of 30% of the public float should be closely reviewed and possibly considered a primary offering and not a secondary offering at all. A primary offering is one where the securities are being sold by the Issuer (or in this case on behalf of the Issuer) as opposed to a third party, such as a PIPE investor.

  Primary versus Secondary Offerings

  The consequences of deeming an offering a primary offering as opposed to a secondary offering are two-fold. First, Rule 415, the rule that allows securities to be registered for sale on a delayed or continuous basis, is generally unavailable for primary offerings by small business issuers. Second, a primary offering requires that each of the investors named as a selling security holder be identified as an underwriter. Underwriter status exposes the named underwriter to full liability for any misstatements or omissions in that registration statement (subject to a due diligence defense). Most PIPE investors want to be just that, investors, not guarantors of the statements, or misstatements, of an Issuer.

  Toxic Offerings

  The SEC staff made it clear that its interpretation of Rule 415 was meant to curtail death spirals and other “toxic offerings” which tended to flood the market with penny stocks whose value continued to decline. The SEC’s efforts worked. Since mid 2006 the number of Rule 415 registered PIPE offerings declined dramatically. Prominent PIPE investors such as Cornell Capital and the Laurus Fund significantly decreased their investments in small business issuers.

  Small business issuers found it considerably harder to attract PIPE and other speculative investors. In fact, it is the pressure from these small business issuers that has since prompted other changes in federal securities laws, such as the decreased holding period under Rule 144, and the use of registration exemptions to lure investors, such as Section 3(a)(9) and (10) of the Securities Act.

  Reverse Merger Exceptions

  It should be noted as well, that in the past year, the SEC staff is again routinely allowing the registration of securities in excess of 30% of the public float in cases where the registrant was a shell company and has just completed a reverse merger or other transaction that causes it to cease being a shell company. Presumably this has been to assist small business issuers attract investors following the depressive effects of the prohibition of the use of Rule 144 for companies that are or become shell companies.

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

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

  Tags: going public, OTCBB, Over The Counter Bulletin Board, PIPE offerings, Reverse Mergers, Rule 144, rule 415, SEC Law Firm, SEC reporting requirements, Section 3(a)(10), Section 3(a)(9), securities attorney

• 21Oct

  The Securities & Exchange Commission (SEC) Provides Guidance Regarding Section 3(a)(10) of the Securities Act of 1933

  Securities Law Firm No Comments

  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!

  Tags: convertible debt, due diligence, going public, OTCBB, Over The Counter Bulletin Board, public shells, Reverse Mergers, SEC Law Firm, Section 3(a)(10), securities attorney

• 20Oct

  Elements Constituting “Solicitation” Such that a 14A Proxy Solicitation is Required Instead of a 14C Information Statement Under the Section 14 Proxy Rules of the Securities Exchange Act of 1934

  Securities Attorneys No Comments

  If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.

  Companies with securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are subject to the Exchange Act proxy rules found in Section 14 and the rules promulgated thereunder. The proxy rules govern the disclosure in materials used to solicit shareholders’ votes in annual or special meetings held for the election of directors and the approval of other corporate action.

  The information contained in proxy materials must be filed with the SEC in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote. The disclosure information filed with the SEC and ultimately provided to the shareholders is enumerated in SEC Schedule 14A.

  In instances when a shareholder vote is not being solicited, such as when a Company has obtained shareholder approval through written consent in lieu of a meeting, a Company may satisfy its Section 14 requirements by filing an information statement with the SEC and mailing this statement to its shareholders. In this scenario, the disclosure information filed with the SEC and mailed to shareholders is enumerated in SEC Schedule 14C.

  As with the proxy solicitation materials filed in Schedule 14A, Schedule 14C information is reviewed by the SEC to ensure all important facts are disclosed. However, Schedule 14C does not solicit or request shareholder approval or any other action for that matter, but rather informs shareholders of an approval already obtained and corporate actions which are imminent.

  The information requirements in Schedule 14C are less arduous in the respect that they do not include lengthy material regarding what a shareholder must do to vote or approve a matter. Moreover, the Schedule 14C process is much less time consuming, as the shareholder approval has already been obtained. Accordingly, when possible, Companies prefer to utilize the Schedule 14C Information Statement as opposed to the Schedule 14A proxy solicitation.

  The SEC requires the use of a Schedule 14A proxy solicitation whenever the Company is making a solicitation of shareholder approval, however small that solicitation. A “solicitation” is defined by Rule 14a-1(l) as;

  1. any request for a proxy whether or not accompanied by or included in a form of proxy
  2. any request to execute or not to execute, or to revoke a proxy
  3. the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

  Simply stated, whenever a Company requests a shareholder to consent to action, it is soliciting that shareholder’s approval and accordingly must abide by the Schedule 14A proxy solicitation requirements. According to the exact language of these SEC rules, a Schedule 14A proxy solicitation is required since the Company is requesting a shareholder to vote. In reality, a Company is nothing more than the officers and directors that run it and often these officers and directors are shareholders as well.

  Although the SEC has not issued definitive guidance on the subject, by practice they have taken the position that where required shareholder consent can be had without requesting any shareholders other than the officers and directors of a company to issue such consent, a 14C Information Statement may be used rather than the 14A proxy solicitation.

  That is, a 14C Information Statement is only appropriate where the majority shareholder(s) are comprised of only the officers and directors. This is so even in cases where the majority of shareholders is comprised of a small group of family and friends of officers and directors, or a small group of consultants or other insiders.

  Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

  Tags: Exchange Act Section 14, going public, OTCBB, Over The Counter Bulletin Board, public shells, Reverse Mergers, schedule 14A, schedule 14C, SEC Law Firm, SEC reporting requirements

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