• 13Aug

  Dodd-Frank Act Changes Definition Of Accredited Investor Effective Immediately

  Securities Attorneys No Comments

  On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). After many revisions, the final Dodd-Frank Act has only minor effects on securities Issuers and their investors. The primary change, which takes effect immediately, is a modification to the definition of “accredited investor” contained in the Securities Act of 1933. In particular: (i) as it relates to natural persons, the $1,000,000 net worth standard must now be calculated excluding the value of the primary residence of such natural person; and (2) the Securities and Exchange Commission (SEC) has been mandated to review the entire accredited investor definition within four (4) years and make appropriate changes within that time, without additional act of Congress.

  Increased Net Worth Requirements

  This change effectively increases the net worth requirements for investors, whose largest asset is often their primary residence. Although the SEC has not yet issued any guidance or other information on the change, it is anticipated that investors will also be allowed to exclude the value of any mortgages or other debt secured by the primary residence in calculating their net worth.

  Regulation D

  Under Regulation D of the Securities Act of 1933, the disclosure requirements for offerings made strictly to accredited investors are less comprehensive, and accordingly less expensive, than offerings which include non-accredited investors. Moreover, the increased disclosure requirements are applicable if even one non-accredited investor is offered the investment, regardless of whether they subsequent accept the offer and become an investor. In addition to detailed disclosure requirements related to the business, its financial history and the control persons background, offerings made to non-accredited investors must include financial statements, which in most cases must be audited.

  Dodd-Frank Act

  In addition, the Dodd-Frank Act has eliminated many exemptions from the requirement to be registered as a financial advisor. In particular, the previous “private advisor” exemption has been eliminated. The private advisor exemption allowed advisors to avoid SEC registration if they did not advise a business development company, had fewer than fifteen (15) clients and did not hold themselves out to the public as an investment advisor. The elimination of the private advisor exemption becomes effective July 21, 2011.

  Securities Attorney Laura Anthony

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

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

  Tags: accredited investor requirements, Dodd-Frank Act, going public, Reverse Mergers, SEC Law Firm, securities attorney, Wall Street reform

• 05Aug

  Special Purpose Acquisition Companies (SPACs)

  Reverse Mergers No Comments

  A SPAC is a company organized to purchase one or more operating businesses and which generally intends to raise capital through an initial public offering (IPO), direct public offering (DPO) or private offering.

  IPO’s, DPO’s and Rule 419

  SPAC’s that engage in either an IPO or DPO are subject to Rule 419 of the Securities Act of 1933, as amended. The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, by a blank check company.  Rule 419 requires that the blank check company filing such registration statement deposit the securities being offered and proceeds of the offering, less reasonable offering expenses, into an escrow or trust account pending the execution of an agreement for an acquisition or merger.  In addition, the registrant is required to file a post effective amendment to the registration statement containing the same information as found in a Form 10 registration statement, upon the execution of an agreement for such acquisition or merger.  The rule provides procedures for the release of the offering funds in conjunction with the post effective acquisition or merger.

  Dissenting Shareholders

  However, if an acquisition or other business combination is not completed within 18-24 months, the investor funds must be returned. Moreover, the SEC generally takes the position that the fair market value of the acquisition must be at least 60%-80% of the escrowed funds from the raise. Proposed business combinations must be approved by the shareholders as well and dissenting shareholders can convert their shares into a pro-rata portion of the escrow balance.

  If the post IPO SPAC shares are listed on an exchange, they are “federally covered” and the Issuer is not subject to state blue sky laws. However, if the SPAC shares are listed on the over the counter bulletin board, they are not federally covered and the Issuer must comply with individual state blue sky laws, which can be cumbersome.

  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: form 10 registration statement, going public, Reverse Mergers, Rule 419, SEC Law Firm, securities attorney, SPAC's, special purpose acquisition companies

• 18Jun

  PIPE Transactions, Terms and Requirements

  SEC Law Firm No Comments

  A PIPE (Private Investment in Public Equity) transaction is typically a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the SEC. Generally the securities are sold at a discount to market price. A traditional PIPE generally involves a fixed number of securities at a fixed price, with the closing conditioned only on the effectiveness of a resale registration statement. Any transaction that does not fall within this parameter is considered non-traditional and the structure can vary widely, including for example price variables (such as a death spiral), warrants and options, convertible securities and equity line transactions.

  Traditional PIPE Transactions

  In particular, a traditional PIPE is generally a set number of securities at a set price (which may be a discount to market at the time of close) and is conditioned only upon the effectiveness of a re-sale registration statement. A traditional PIPE where the price is a discount to market would differentiate from a non-traditional death spiral in that there would only be one closing in the traditional PIPE and there would be multiple closings with continued downward pressure on the stock price and a continued dilutive effect with a non-traditional death spiral. The transaction documents associated with a traditional PIPE are generally very straight forward and do not contain ongoing negative covenants relating to information rights, future financing or corporate governance.

  The terms of a non-traditional PIPE can vary widely but the basic requirements that the investment decision be completed in a private transaction prior to the filing of a registration statement and that the investor bear the risk of an investment are consistent.

  Re-Sale Registration Statements

  The SEC allows the filing of a re-sale registration statement for a PIPE if 1) the initial sale or placement of securities is conducted in a manner consistent with a private placement (no general solicitation or advertising and offerings made to accredited investors) and 2) the investors enter into definitive commitments which are only subject to the satisfaction of closing conditions outside the control of the investor, such as the effectiveness of a re-sale registration statement (that is, investor has made the investment decision and assumed the risk prior to the filing of the registration statement).

  Section 9 of the Securities and Exchange Act of 1934, as amended, prevent the Investor from entering into hedging transactions (short sales and the like) from the time of entering into the PIPE transaction agreement through the effectiveness of the registration statement. In addition, Investors must be aware of insider trading rules (Section 10 of the Exchange Act and rules promulgated thereunder), throughout the period of the PIPE transaction. Moreover, the SEC has taken the position that an Investor that engages in short-selling prior to the final closing of PIPE and effectiveness of a registration statement, is engaging the unregistered sale of securities in violation of Section 5 of the Securities Act of 1933, as amended.

  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, PIPE transactions, private investment in public equity, re-sale registration statements, Reverse Mergers, sec, SEC Law Firm, securities attorney

• 12May

  Regulation A – An Exemption By Any Other Name Is A Short Form Registration

  Securities Law Firm No Comments

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

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

  Regulation A and 134 Registration Statements

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

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

  Regulation A and Rule 504 Similarities

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

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

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

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

  Tags: going public, offering prospectus, regulation a, Reverse Mergers, rule 252(g), rule 504, SEC Law Firm, SEC reporting requirements, securities attorney, short form registration

• 25Jan

  An In-Depth Review of Private Placements Under Section 4(2)

  Securities Attorneys No Comments

  Section 4(2) of the Securities Act of 1933 provides that the registration requirements of Section 5 do not apply to “transactions by an issuer not involving any public offering.” The definition of an “issuer” is pretty straightforward as found in Section 2(a)(4) and includes, “the person who issues or proposes to issue” a security and is understood to mean the entity that originally sells the securities. However, not so straightforward is what constitutes a “public offering,” which term is not defined in the Securities Act. In reliance on Section 4(2) the SEC enacted Rule 506 as part of Regulation D.

  Rule 506 as a Safe Harbor Provision

  Rule 506 is a Safe Harbor. In other words, if all the conditions of Rule 506 are met, you can rest assured that the conditions of Section 4(2) have been satisfied. However, Section 4(2) can be satisfied as a standalone exemption separate from Rule 506. The importance of the distinction between Section 4(2) and Rule 506 cannot be underestimated. Often, when the technical requirements of Rule 506 have not been met, usually inadvertently, the Section 4(2) exemption will still stand and save the day. Moreover, many Issuers satisfy the Section 4(2) exemption “by chance” when other exemptions fail. Section 4(2) does not have filing requirements and at times may be the only exemption available to save an Issuer from civil or even criminal liability.

  SEC vs. Ralston Purina Company

  The leading case defining a public vs. a private offering is SEC vs. Ralston Purina Co., wherein the U.S. Supreme Court laid down its guidelines. The U.S. Supreme Court focuses on the sophistication of the investor coupled with their access and receipt of disclosure information from the Issuer. Disclosure information should be the “kind of information which registration would disclose.” Importantly, the U.S. Supreme Court refused to establish a quantity standard based on the number of investors. Although, ultimately quantity may be considered, the important factors remain investor qualification and access to disclosure information.

  SEC Release No. 4552

  The leading SEC pronouncement on Section 4(2) is SEC Release No. 4552 in which it set forth what it considers to the requirements for a private placement. According to the release, all the surrounding circumstances must be considered, “including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering.” Unfortunately, the release does not offer much guidance on each of the factors. Release No. 4552 does however discuss two important concepts in analyzing an offering. The first is “coming to rest” and the second is “integration.”

  Coming to Rest

  “Coming to rest” is a concept that deals with the issue of when a particular offering is over. The SEC considers an offering to be continuing until the offered securities have “come to rest” in the hands of the persons who are not “merely conduits for a wider distribution.” Integration deals with the issuer of when purportedly singe offerings are integrated to form one larger offering and whether when viewed as a whole, this larger offering, qualifies for an exemption. The list of factors relevant in analyzing integration include, whether:

  • The different offerings are part of a single plan of financing;
  • The offerings involve the issuance of the same class of security;
  • The offerings are made at or about the same time;
  • The same type of consideration is to be received; and
  • The offerings are made for the same general purpose.

  Courts of Appeals have offered guidance on their interpretations of SEC vs. Ralston Purina Co. and Release No. 4552. In particular, in determining whether an offering is private or public (for purposes of the Section 4(2) exemption), courts consider such factors as:

  • The number of offerees and their relationship to each other and to the Issuer;
  • The number of units offered;
  • The size of the offering;
  • The manner of the offering;
  • Whether the offerees are sophisticated and/or accredited;
  • Access and availability of information that would otherwise be found in a registration; and
  • Absence of redistribution.

  Investor Qualifications

  The American Bar Association offers excellent guidance in determining the qualification of the investor, which is a key point regardless of whose guidance is followed. In particular, the following factors should be considered:

  • Risk-bearing ability (it is assumed an accredited investor can bear the risk of an investment);
  • Degree of sophistication (whether the offeree can understand and evaluate the offering);
  • The offerees representative (including investment advisors, accountants and attorneys);
  • The manner of disclosure (the clearer and more thorough the disclosure, the less concentration on sophistication);
  • Nonqualified offerees (and the impact they have on the entire offering); and
  • Economic bargaining power.

  In conclusion, the best way to analyze whether a particular offering meets the requirements of the Section 4(2) exemption is to examine the offering through the eyes of the state and federal securities regulators and/or plaintiff’s attorneys. If they could reasonably find problems with the offering, either changes those problem areas before embarking on the offering or come up with a new strategy.

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

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

  Tags: going public, Over The Counter Bulletin Board, private placement, public offering, Reverse Mergers, rule 506, safe harbor, SEC Law Firm, SEC reporting requirements, Section 4(2), securities attorney

• 22Jan

  Rule 144 and the Evergreen Requirement Examined

  SEC Law Firm No Comments

  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 addition, Rule 144 is used to remove the restrictive legend from securities in advance of a sale. In layman terms, Rule 144, allows shareholders to either remove the restrictive legend or sell their unregistered shares.

  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.

  Form 10 Information

  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.

  The Evergreen Requirement

  Rule 144 now affects any company who was ever in its history a shell company by subjecting them to additional restrictions when investors sell unregistered stock under Rule 144. The new language in Rule 144(i) has been dubbed the “evergreen requirement”. The new Rule has the impact of punishing a company that was ever a shell in perpetuity and more importantly, its investors. Brian Breheny, deputy director of the Securities and Exchange Commission’s corporate finance division, referred to the so-called evergreen requirement in Rule 144(i) of the Securities Act, as an “unfortunate result” and said it was “probably not something that the commission intended.”

  Going Public and Reverse Mergers

  Under the so called “Evergreen Requirement”, a company that ever reported as a shell must be current in its filings with the SEC for 12 months before investors can sell unregistered shares. Here is the hitch. As a result, the restrictive legend can never be removed in advance of a sale. The rule affects all companies going public through a reverse merger or SPAC. Moreover, the Rule effects all companies that have ever been a shell, even if a reverse merger was completed decades ago. It paints a “scarlet letter” on all former shell companies, as this requirement continues literally forever – famous former shells like Blockbuster Entertainment, Texas Instruments and Berkshire Hathaway are now burdened by this restriction decades after their reverse mergers.

  So basically, you have to register the shares to get the legend removed. Practitioners have requested that the SEC either amend the Rule or issue additional guidance removing this requirement from Companies that were no longer shells at the time the Rule was enacted. So far no such changes have been made.

  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: evergreen requirements, going public, public offerings, public shells, Reverse Mergers, Rule 144, SEC Law Firm, SEC reporting requirements, SEC Rule 144, securities attorney, underwriter defined

• 19Jan

  Compliance When Conducting Concurrent Private and Public Offerings

  SEC Law Firm No Comments

  The Securities and Exchange Commission’s (SEC) integration guidance in Securities Act Release No. 8828 (August 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Rule 4(2) or the Securities Act Rule 506 safe harbor, with a registered public offering.

  Qualified Institutional Investors

  Previously it was thought that a private offering could only take place concurrently with a public offering if limited to qualified institutional investors (must have at least $100 million under management) and two or three additional large institutional accredited investors as set forth in the Black Box no action letter (June 26, 1990), or to an Issuer’s key officers and directors. In addition, many practitioners previously utilized the integration rule set forth in Securities Act Rule 502 in determining whether a private and public offering should be integrated. In Release No. 8828, the SEC clarified that Rule 502 provides the test to be used in determining whether two or more otherwise exempt offerings should be integrated. As a public offering is not an exempt offering this rule does not apply when determining the integration of concurrent private and public offerings.

  Solicitation of Investors

  The SEC guidance focuses on how the investors in the private offering are solicited and in particular, whether by the registration statement or through some other means that would not otherwise foreclose the use of the Section 4(2) exemption (for example, solicitation through general solicitation or advertising would prohibit the use of Section 4(2)). If the potential investors become interested in a private investment through the registration statement, then it is deemed that a general solicitation has occurred and Section 4(2) would not be available. However, if the investors become interested in the private offering through some other means, such as where there is a substantive pre-existing relationship with the Issuer, then Section 4(2) would be available for use.
  Moreover, an Issuer that completes a Section 4(2) private offering concurrently with a public offering may amend its registration statement to include the newly sold securities in its re-sale registration statement.

  Clarification of Concurrent Offerings

  The SEC also clarifies that in the specific situation of a concurrent private and public offering, only the guidance set forth in Release No. 8828 applies, and not the integration rules for exempt offerings set forth in Rule 502 or the integration rules relating to abandoned private and public offerings as set forth in Rule 155. In addition, an analysis under Release No. 8828 is factually specific and must be determined on a case by case basis.

  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, private offerings, registered public offerings, Reverse Mergers, rule 506, SEC Law Firm, SEC reporting requirements, securities act rule 4(2), securities act rule 506, 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

• 12Jan

  Registering Convertible Securities

  Securities Law Firm No Comments

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

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

  Convertible Security Defined

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

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

  Death Spirals

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

  Registration of Convertible Securities

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

  Timing of Registration

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

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

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

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

  Tags: conversion formulas, convertible securities, death spirals, going public, public offerings, Reverse Mergers, SEC compliance, SEC Law Firm, securities attorney, securities registration

• 08Jan

  Overview of Recognized Exemptions From Section 5

  Reverse Mergers No Comments

  The Securities Act of 1933 recognizes two broad types of exemptions to the registration requirements of Section 5, exempt securities and exempt transactions.

  The Exempt securities are set forth in Sections 3(a)(1) – (8), (13) and (14) of the Securities Act. Exempt securities are continuously exempt from the registration requirements regardless of the nature of the transaction in which they may be offered, issued, sold or resold. Examples of exempt securities which may be publicly offered, issued, sold and resold by their issuers or any other person without registration include:

  • Securities issued or guaranteed by the federal government;
  • Any security issued or guaranteed by a bank;
  • Commercial paper with a maturity of nine months or less;
  • Securities issued by non-profit religious, educational or charitable organizations; and
  • Insurance contracts

  Exempt Transactions

  The exempt transactions are set forth in Sections 3(a)(9), 3(b) and Section 4 of the Securities Act. Exempt transactions allow a security to be offered or sold in a particular transaction or circumstance or by a particular person or entity, although a subsequent offer or sale of the security could require registration under Section 5. Examples of exempted transactions include:

  • Transactions by any person other than an issuer, underwriter or dealer (Section 4(1) – which permits most secondary trading of securities are form the basis for Rule 144)
  • Transaction by an issuer not involving any public offering (Section 4(2) – often called the private placement exemption and is only available for use by the issuer and not for re-sale transactions)
  • Brokers transactions (Section 4(3)); and
  • An exchange of securities by an issuer with its existing security holders exclusively where no commission or other remunerations is paid or given (Section 3(a)(9) – conversion of convertible debt or equity securities and cashless exercises of warrants are typically accomplished using this exemption)

  Examples of other common exemptions include:

  • Offer or sales of a debtor through a bankruptcy court;
  • Small offerings of less than $5 million under either Regulations A or D
  • Offers and sales under written employee benefit plans (Rule 701); and
  • Offshore offers and sales and Regulation S.

  Of these exemptions the most commonly used are Regulations S, D and A. Regulation S is not technically an exemption but a jurisdictional provision regarding the reach of the Securities Act of 1933. In particular, Rule 901 provides “[F]or the purposes of Section 5 of the Act, the terms “offer to sell”, “sell”, “sale”, and “offer to buy” shall be deemed to include offers and sales that occur with the United States and shall be deemed not to include offers and sales that occur outside the United States.”

  Regulation S

  Regulation S covers (i) sales of securities to non-U.S. persons and to foreign securities markets by U.S. issuers, (ii) sales of securities to non-U.S. persons and in foreign securities markets by foreign issuers whose securities are not listed in the U.S. securities markets and which are non reporting companies under the Exchange Act, (iii) sales of securities to non-U.S. persons and in foreign securities markets by foreign issuers which are reporting companies under the Exchange Act, and (iv) resales of these securities.

  Regulation D

  Regulation D consists of eight (8) rules. Rule 501 through 503 contain definitions, conditions and other provisions that apply to Regulation D generally. Rules 504, 505 and 506 are the three current, specific exemptions from registration. Rule 504 provides an exemption for companies that are not subject to the reporting requirements of the Exchange Act of 1934 for the offer and sale of up to $1 million of securities in a 12 month period. Rule 505 exempts offers by companies of up to $5 million of securities in a 12 month period as long as offers are made without general solicitation or advertising, and there are no more than 35 unaccredited purchasers.

  Rule 506

  Rule 506 is a safe harbor under the private placement exemption (Section 4(2)). There is no limit on the amount of securities that can be offered or sold, so long as (i) offers are made without general solicitation or advertising, and (ii) the sales are made only to accredited investors or no more than 35 unaccredited investors and all investors must be sophisticated.

  Accredited investors are generally defined to include:

  • Banks, insurance companies and pension plans;
  • Corporations, partnerships and business entities with over $5 million in assets;
  • Directors, executive officers and general partners of the issuer;
  • Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
  • Entities, all of whose equity owners are accredited.

  Regulation A

  Regulation A permits a public offering of up to $5 million by issuers, including up to $1.5 million by selling stockholders, within any 12 month period. Regulation A is only available to issuers who are not subject to the reporting requirements of the Securities Exchange Act. Affiliate resales are not permitted unless the issuer has had net income from continuing operations in one of its last two fiscal years.

  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, public offerings, regulation a, regulation d, regulation s, Reverse Mergers, rule 506, SEC Law Firm, SEC reporting requirements, section 5 exemptions, securities attorney

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