• 04Aug

    Subsidiary Spin-Offs

    Corporate Law Firm No Comments

    A subsidiary spin-off is a transaction where a parent corporation’s stock ownership of a subsidiary is distributed to the parent corporation’s shareholders giving the shareholders direct ownership of the former subsidiary. Typically, the subsidiary shares are distributed to the shareholders pro rata as a dividend. In fact, two of the requirements for an unregistered spin-off, as set forth in Staff Legal Bulletin No. 4 issued by the Securities and Exchange Commission, are that the distribution be pro rata and that no consideration be paid by the shareholders (i.e. a dividend).

    A more complex form of a spin-off is commonly referred to as a Reorganized (“D”/355) which is where the parent corporation forms a shell subsidiary, transfers the stock to the shell subsidiary, which in turn distributes the stock to the parent shareholders.

    Reasons for Spin-Offs

    There are many reasons a company may choose to complete a spin-off, however, the most common reasons include: (i) to separate profit centers to increase shareholder value; (ii) shedding in-house providers to free up regulatory or other conflicts; and (iii) separating regulated and unregulated businesses.

    Using a dividend to distribute the subsidiary stock usually means no shareholder vote or approval is required. However, a vote may be required if the subsidiary constitutes all or substantially all of the parent’s assets. Practitioners must review state corporate law to be sure to abide by voting requirements.

    Parent Company Compliance

    Under federal securities laws, if a vote is required, the parent must comply with the proxy requirements of Section 14 of the Exchange Act of 1934 and the rules promulgated thereunder. If no shareholder vote is required, the parent corporation must comply with Staff Legal Bulletin No. 4. 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.

    The mechanics of actually distribution the subsidiary shares involve: (i) setting the exchange ratio; (ii) fixing the record date; and (iii) having the transfer agent issue and mail the shares.

    The risks of a spin-off are generally minimal and include losing valuable revenue of the subsidiary and shareholder complaints or lawsuits.

    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: , , , , , , ,

  • 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: , , , , , , , , ,

  • 19Mar

    Form 10 Registration Statements

    SEC Law Firm No Comments

    A Form 10 Registration Statement is a registration statement used to register a class of securities pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). To explain a Form 10 registration statement, let’s start with what it isn’t. It is not used to register specific securities for sale or re-sale and does not change the transferability of any securities. That is, a Form 10 registration statement does not register a security for the purposes of Section 5[1] of the Securities Act of 1933 (“Securities Act”) . Following the effectiveness of a Form 10 registration statement, restricted securities remain restricted and free trading securities remain free trading.

    The Purpose of Form 10 Registration Statements

    Now onto what a Form 10 registration is. As indicated above a Form 10 registration statement is used to register a class of securities. Any Company with in excess of $10,000,000 in total assets and 750 or more record shareholders is required to file a Form 10 registration statement with the Securities and Exchange Commission (“SEC”). In addition, any company, whether publicly held or not and with or without assets, may voluntarily file a Form 10 registration statement at any time. A Form 10 registration statement automatically becomes effective sixty (60) days following filing.

    Upon effectiveness the Company which filed the Form 10 registration statement is subject to the reporting requirements of the Exchange Act. That is, they must file annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K. In addition, such Company is then subject to the proxy rules in Section 14 of the Exchange Act, and ownership rules and reporting requirements in Sections 13 and 16 of the Exchange Act.

    What Makes a Company Public?

    Interestingly, even though a Company that files a Form 10 registration statement becomes subject to the reporting requirements of the Exchange Act, a Form 10 registration statement does not make a company public, and there is no pre-requisite that a company be public prior to filing a Form 10. A public company, by definition, has public shareholders. A Form 10 registration statement can be filed by an entity with a single shareholder. Moreover, regardless of the filing of a Form 10, a Company must satisfy other regulatory obligations to trade on either the over the counter market (PinkSheets or Bulletin Board) or on an exchange (AMEX; NASDAQ; etc.). A prerequisite to trading on either the over the counter market or an exchange, would be to have public shareholders holding freely tradeable shares. As explained in this article, a Form 10 does not impact upon this requirement.

    Following the changes in Securities Act Rule 144 in February 2009, a Form 10 registration statement has become an important avenue for many previously non-reporting entities. 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.

    Rule 144 and Form Registration Statements

    In layman terms, Rule 144, allows shareholders to sell their unregistered shares. However, Rule 144(i), as amended, provides in pertinent part that 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.

    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.

    Evergreen Requirements

    In other words, if a non-reporting entity ever was a shell company, even ten years ago, one of the only ways its shareholders can avail themselves of Rule 144 is for that company to file a Form 10 registration statement and thereafter remain current in their Exchange Act reporting requirements. Note, that a company could comply with Rule 144(i) by the filing of an S-1 registration statement, which also contains “Form 10
    information.”

    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!

    [1] Section 5 of the Securities Act provides that it is unlawful to sell, offer to sell or offer to buy a security unless there is a registration statement in effect for such security, or a valid exemption exists.

    Tags: , , , , , , , , ,

  • 28Jan

    Section 4(6) Registration Exemption for Accredited Investors

    Securities Attorneys No Comments

    Section 4(6) provides a registration exemption for offerings to accredited investors, if the aggregate offering amounts up to the dollar limit of Section 3(b) (currently $5,000,000), if there is no advertising or public solicitation in connection with the transaction by the Issuer or anyone acting on the Issuer’s behalf.

    The term accredited investor is defined in section 2(a)(15) and generally includes:

    • 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.

    In addition, the SEC has the power to define as an accredited investor any person, who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor.

    Section 4(6) and Regulation D

    Section 4(6) is rarely used as a free standing exemption; rather it is thought that Section 4(6) falls under the mandate of Regulation D although none of the three enumerated exemptions under Regulation D (Rules 504, 505 and 506) are strictly limited to accredited investors.

    Practitioners seeking to rely on Section 4(6) should be aware that such securities are not considered federally covered under Section 18 of the Securities Act of 1933 and accordingly, in addition to abiding by the federal securities regulations, individual state securities laws must be considered.

    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: , , , , , , , , , , ,

  • 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: , , , , , , , , , ,

  • 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: , , , , , , , , , ,

  • 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: , , , , , , , , ,

  • 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: , , , , , , , , , ,

  • 05Jan

    Rule 419 and Offerings by Shell or Blank Check Companies

    Securities Attorneys No Comments

    The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, as amended, 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 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. The obligations to file post effective amendments are in addition to the obligations to file Forms 8-K to report both the entry into a material non-ordinary course agreement and the completion of the transaction. Rule 419 applies to both primary and re-sale or secondary offerings.

    Investors Must Be Notified in Timely Fashion

    Within five (5) days of filing a post effective amendment setting forth the proposed terms of an acquisition, the Company must notify each investor whose shares are in escrow. Each investor then has no fewer than 20 and no greater than 45 business days to notify the Company in writing if they elect to remain an investor. A failure to reply indicates that the person has elected to not remain an investor. As all investors are allotted this second opportunity to determine to remain an investor, acquisition agreements should be conditioned upon enough funds remaining in escrow to close the transaction.

    Intended Purposes

    For purposes of Rule 419 as defined within the Rule, the term “blank check company” means a company that:

    1. Is a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person; and
    2. Is issuing “penny stock,” as defined in Rule 3a51-1 under the Securities Exchange Act of 1934.

    Definition of a Shell Company

    The definition of “shell company” as set forth in Rule 405 of the Securities Act (and Rule 12b-2 of the Securities Exchange Act of 1934) means a Company that has:

    1. No or nominal operations; and
    2. Either:
      1. No or nominal assets;
      2. Assets consisting solely of cash and cash equivalents; or
      3. Assets consisting of any amount of cash and cash equivalents and nominal other assets.

    Although the definitions do not appear to be the same, as per the definitions a “shell company” may have nominal operations and may have a specific business plan, the SEC has firmly held the position that Rule 419 applies equally to shell and development stage companies. Although the SEC position may be subject to challenge by a willing challenger and federal court judge, to date, none of have taken up the fight.

    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: , , , , , , , , , ,

  • 01Jan

    Rule 701 – Exemption for Offers and Sales to Employees of Non-Reporting Entities

    SEC Law Firm No Comments

    While the issuance of small numbers of shares as prizes or awards to employees may be made without Securities Act Registration, if such awards are tied to the achievement of specific goals (eg. sales goals) by individual employees, an offer or sale requiring registration may be involved. When tied to the achievement of specific goals, the share awards may constitute compensation for services performed or to be performed by the employees that would amount to a disposition of the shares for value and a “sale” of the shares to employees requiring either registration or an exemption from registration under the Securities Act of 1933.

    Although many exemptions may be available for the issuance of securities to employees, Rule 701 provides an excellent exemption for non-reporting entities. In particular, Rule 701 is only available to issuers that are not subject to the reporting requirements of the Securities Exchange Act 1934. The beauty of Rule 701 is that ninety days after the Issuer becomes subject to the reporting requirements of the Exchange Act, securities issued under this Rule may be resold by persons who are not affiliates under Rule 144 without compliance with the current public information, holding period, amount or Form 144 requirements. That is, generally speaking, ninety days after an Issuer becomes reporting, Rule 701 issued securities may be freely sold. Regardless of whether an Issuer becomes reporting, resales may be made under any available exemption, or pursuant to registration.

    Compliance with Rule 701

    To comply with Rule 701, an Issuer must have a written compensatory benefit plan for the participation of its employees, director, general partners, trustees, officers, or consultants and advisors. Rule 701 is only available for consultants and advisors if: (i) they are natural persons; (ii) they provide bona fide services to the issuer; and (iii) the services are not in connection with the offer or sale of securities in a capital raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities. A copy of the plan must be delivered to all individuals receiving stock under the plan.

    The amount of securities sold in reliance on Rule 701 may not exceed, in any 12 month period, the greater of: (i) $1,000,000; (ii) 15% of the total assets of the issuer; or (iii) 15% of the outstanding amount of the class of securities being offered and sold in reliance on the exemption. Rule 701 issuances do not integrate with the offer and sales of any other securities under the Act whether registered or exempt.

    Antifraud Provisions Still Apply

    As with all other Securities Act registration exemptions, the issuer is still subject to the antifraud, civil liability and other provisions of the federal securities laws. Issuers and persons acting on their behalf have an obligation to provide all investors, including employees, with disclosure adequate to satisfy the antifraud provisions of the federal securities laws. In addition, Rule 701 is not available for plans or schemes to circumvent the purpose of the Rule, which is for compensatory purposes, and not to raise capital. Moreover, Rule 701 is not available to exempt any transaction that is in technical compliance with this section but is part of a plan or scheme to evade the registration provisions of the Securities Act. Finally, in addition to complying with Rule 701, the Issuer also must comply with any applicable state law relating to the issuance.

    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: , , , , , , , , , ,

« Previous Entries