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!

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!

One of the most common inquiries received by securities attorneys today involves Issuers wanting to know when they and their shareholders can sell their shares on the open market following a merger with a Pink Sheet shell. In many cases, the answer they get is not the answer they want; twelve months after the Pink Sheet Company becomes a fully reporting entity.

If a private entity has merged with a Pink Sheet shell under the assumption that they can avoid the Securities and Exchange Commission (SEC) reporting requirements, this revelation is devastating. As a result of the amendments to Rule 144 and Rule 145, enacted in February, 2009, private companies that wish to go public on the Pink Sheets are advised to do so directly, and not through a reverse merger with a shell company.

Rule 144

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In layman terms, Rule 144, allows shareholders to sell their unregistered shares. When a private entity merges with a Pink Sheet shell, the shareholders of the private entity receive restricted shares. Historically, other than registration, Rule 144 provided the only method for such shareholders to sell their shares on the open market. The February 2009 amendment eliminated this ability.

Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.

When a Shell is No Longer a Shell

In order to use Rule 144, a Company must have ceased to be a shell company, be subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and have filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer a shell company, then those securities may be sold subject to the requirements of Rule 144 after one year has elapsed from the date that the issuer filed “Form 10 information” with the SEC.

Lastly, Rule 145, which is the rule that addresses the issuance of securities in mergers, consolidations and reclassifications, was amended to provide an analogous provision.

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!

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!

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!

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:

 
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!