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Proposed Crowdfunding Rules – Part IV

As required by Title III of the JOBS Act, on October 23, 2013, the SEC published proposed crowdfunding rules. The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire text of the rule release is available on the SEC website. In a series of blogs, I am summarizing the lengthy rule release. This Part IV of my series continues a discussion of the in-depth disclosure requirements for Issuers for use in their offering statements. In particular, Parts II and III addressed the Issuer disclosure requirements, other than financial disclosures. This Part IV in the series discusses Issuer financial disclosure obligations.

Summary Breakdown of Proposed New Rules – Requirements on Issuers

Disclosure Requirements

Pursuant to the CROWDFUND Act as set forth

January 14, 2014

The DPO Process Including Form S-1 Registration Statement Requirements

One of the methods of going public is directly through a public offering. In today’s financial environment, many Issuers are choosing to self-underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Management of companies considering a going public transaction have a desire to understand the required disclosures and content of a registration statement. This blog provides that information.

Pursuant to Section 5 of the Securities Act of 1933, as amended (“Securities Act”), it is unlawful to “offer” or “sell” securities without a valid effective registration statement unless an exemption is available. Companies desiring to offer and sell securities to the public with the intention of creating a public market or going public must file with the SEC and provide prospective investors with a registration statement containing all material information concerning the company and the securities offered. Currently all domestic Issuers must use either form S-1 or S-3. Form S-3 is limited to larger filers with

January 7, 2014

SEC Guidance on Rules Disqualifying Bad Actors from Participating in Rule 506 Offerings

On December 4, 2013, the SEC updated its Compliance and Disclosure Interpretations (“C&DI’s”) including new guidance on the rules disqualifying bad actors from participating in Rule 506 offerings.

Background

The Dodd-Frank Act required the SEC to implement rules which disqualify certain Rule 506 offerings based on the individuals involved in the Issuer and related parties. On July 10, 2013, the SEC adopted such rules by amending portions of Rules 501 and 506 of Regulation D, promulgated under the Securities Act of 1933. The new rules went into effect on September 23, 2013. The new rule disqualifies the use of Rule 506 as a result of certain convictions, cease and desist orders, suspensions and bars (“disqualifying events”) that occur on or after September 23, 2013, and adds disclosure obligation in Rule 506(e) for disqualifying events that occurred prior to September 23, 2013.

Rule 506 provides that disqualifying events committed by a list of specified “covered persons” affiliated with the Issuer or

December 17, 2013

Proposed Crowdfunding Rules – Part III

As required by Title III of the JOBS Act, on October 23, 2013, the SEC has published proposed crowdfunding rules. The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire text of the rule release is available on the SEC website. In a series of blogs, I am summarizing the lengthy rule release. This Part III in my series continues a discussion of the in-depth disclosure requirements for Issuers for use in their offering statements. Part IV will discuss financial disclosure obligations.

Summary Breakdown of Proposed New Rules – Requirements on Issuers

Disclosure Requirements

Pursuant to the CROWDFUND Act as set forth in the JOBS Act, an Issuer who offers or sells securities in a crowdfunding offering must file with the SEC and provide investors and the funding intermediary (whether a funding portal or broker-dealer) and make available to potential investors:

(a) The name, legal status, physical address, and website address of the Issuer (discussed in Part II of

December 10, 2013

Proposed Crowdfunding Rules – Part II

Background

Crowdfunding generally is where an entity or individual raises funds by seeking small contributions from a large number of people. The crowdfunder sets a goal amount to be raised from the crowd with the funds to be used for a specific business purpose. In addition, a crowdfunding campaign allows the crowd to communicate with each other, thus adding the benefit of the “wisdom of the crowd.” Small businesses can particularly benefit from crowdfunding as they are not limited by

December 3, 2013

Proposed Crowdfunding Rules – Part I

Background

Title III of the JOBS Act, called the Crowdfund Act, amends Section 4 of the Securities Act of 1933 (the Securities Act), adding new Section 4(a)(6) to

November 19, 2013

Mergers and Acquisitions; Merger Documents Outlined

An Outline Of the Transaction

The Confidentiality Agreement

Generally the first step in an M&A deal is executing a confidentiality agreement and letter of intent. These documents can be combined or separate. If the parties are exchanging information prior to reaching the letter of intent stage of a potential transaction, a confidentiality agreement should be executed first.

In addition to requiring that both parties keep information confidential, a confidentiality agreement sets forth important parameters on the use of information. For instance, a reporting entity may have disclosure obligations in association with the initial negotiations for a transaction, which would need to be exempted from the confidentiality provisions. Moreover, a confidentiality agreement may contain other provisions unrelated to confidentiality such as a prohibition against

November 5, 2013

Board of Directors Obligations as Applied to Mergers and Acquisitions

State corporate law generally provides that the business and affairs of a corporation shall be managed under the direction of its board of directors. Members of the board of directors have a fiduciary relationship to the corporation, which requires that they act in the best interest of the corporation, as opposed to their own. Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decision. This is referred to as the “business judgment rule.” However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e., get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors’ actions face a higher level of scrutiny. This is referred to as “enhanced scrutiny business judgment rule.” The same standards apply to officers of a

October 30, 2013

How to Complete an Unregistered Spin-Off

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

In particular, the subsidiary shares (the shares distributed to the parent company shareholders) do not need to be registered if the following five conditions are met: (i) the parent shareholders do not provide consideration for the spun-off shares; (ii) the spin-off is pro-rata to the parent shareholders; (iii)

October 22, 2013

OTC Markets Comments on Proposed SEC Rules Regarding Amendments to Regulation D, Form D and Rule 156

On July 10, 2013, the SEC issued proposed rules further amending Regulation D, Form D and Rule 156. On September 23, 2013 the OTC Markets Group published a letter responding to the SEC’s request for comments on the proposed rules. The entire OTC Markets comment letter is available on both the OTC Markets website and the SEC website. The OTC Markets Group, through OTC Link, owns and operates OTC Markets and its quotation platforms including OTCQX, OTCQB and pink sheets.

Summary of Proposed Rule Changes

The proposed amendments will (i) require the filing of a Form D to be made before the Issuer engages in any general solicitation or advertising in a Rule 506(c) offering and require the filing of a closing

October 15, 2013

DTC Unveils Procedures and Plans for a Rule Change that Applies to Issuers Affected By Chills and Locks

Background

Back in October and November of 2011, I wrote a series of blogs regarding DTC eligibility for OTC (over-the-counter) Issuers. A key eligibility criterion is that the securities that were distributed in accordance with Section 5 of the Securities Act of 1933 do not have transfer restrictions and are freely tradable. To meet this criterion, the securities must have been issued pursuant to an effective registration statement or valid exemption thereto. I have followed that series with various blogs regarding DTC chills and the evolving process to first learn the cause of the chill and second, to reach a resolution.

The Depository Trust Company (“DTC”) is a central securities depository in the U.S. which was originally created

October 8, 2013

SEC has Modified Policies on Offerings by Shell Companies

Recently, albeit not officially, the Securities and Exchange Commission (“SEC”) has materially altered its position on offerings by shell companies that are not blank-check companies. In particular, over the past year, numerous shell companies that are not also blank-check companies have completed offerings using an S-1 registration statement and successfully obtained market maker support and a ticker symbol from FINRA and are trading. As recently as 18 months ago, this was not possible.

Rule 419 and Blank-Check Companies

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

October 1, 2013

An Overview of Regulation S – The Offshore Offering Exclusion

As I’ve repeated many times in blogs in the past, all offers, offers to sell, sales and offers to buy securities must be either registered or exempted from registration under Section 5 of the Securities Act of 1933. Regulation S provides an exclusion from the Section 5 requirements for transactions that occur outside the United States. Both private and public securities offerings made outside the United States by U.S. Issuers are excluded from the registration requirements of Section 5 as long as all the requirements of Regulation S are met. Regulation S may also be relied upon by foreign issuers; however, this blog will concentrate on offerings by U.S. Issuers and affiliates.

Offshore Transactions

An offshore transaction is one in which (i) the offer is not made to a person in the U.S.; and (ii) Either (a) at the time the buy order is originated the buyer is outside the U.S. or the seller reasonably believes the buyer is outside

September 24, 2013

An Overview of Exemptions for Hedge Fund Advisors: Exemptions for Advisors to Venture Capital Funds, Private Fund Advisors with Less Than $150 Million in Assets Under Management, and Foreign Private Advisors – Part IV

The JOBS Act is not the only recent congressional act to change the landscape of hedge funds; the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made significant changes as well.

In particular, the Dodd-Frank Act eliminated the oft relied upon exemption from registration for private hedge fund advisors for those advisors with fewer than 15 clients. While eliminating the private advisor exemption, Dodd-Frank created three new exemptions, which are the operable hedge fund advisor exemptions today. These exemptions are for:

(1) Advisors solely to venture capital funds;

(2) Advisors solely to private funds with less than $150 million in assets under management in the U.S.; and

(3) Certain foreign advisers without a place of business in the U.S.

Moreover, the

September 17, 2013

State Crowdfunding Using Intrastate Offerings and Rule 147

The SEC has yet to publish proposed rules under Title III of the JOBS Act – the Crowdfunding Act. The Crowdfunding Act amends Section 4 by of the Securities Act of 1933 (the Securities Act) to create a new exemption to the registration requirements of Section 5 of the Securities Act. The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities as long as no individual investment exceeds certain threshold amounts.

The threshold amount sold to any single investor cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or net worth is less than $100,000; and (b) 10% of the annual

September 10, 2013

Will FINRA Rule Changes Related to Private Placement Further Deter Broker Dealers From Placing the Securities of Small Businesses?

On August 19, 2013, FINRA published Regulatory Notice 13-26 about the updated Private Placement Form that firms must file with FINRA when acting as a placement agent for the private placement of securities. A copy of the form is included with the regulatory notice at www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p325359.pdf. The Form went effective on July 1, 2013. FINRA has also updated the FAQs relating to the Private Placement Form. The updated Private Placement Form has six new questions:

Is this a contingency offering?
Does the issuer have

September 3, 2013

The SEC has Issued Proposed Rules Amending Regulation D, Form D and Rule 156 – Part II

July 10, 2013, the same day the SEC adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act, and adopted new rules disqualifying felons and other bad actors from participating in Rule 506 offerings as required by Section 926 of the Dodd-Frank Act, the SEC issued proposed rules further amending Regulation D, Form D and Rule 156. On August 19, 2013, I published a blog detailing the proposed rule changes

August 27, 2013

The SEC has Issued Proposed Rules Amending Regulation D, Form D and Rule 156 – Part I

On July 10, 2013, the same day the SEC adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act, and adopted new rules disqualifying felons and other bad actors from participating in Rule 506 offerings as required by Section 926 of the Dodd-Frank Act, the SEC issued proposed rules further amending Regulation D, Form D and Rule 156.

Summary of Proposed Rule Changes

The proposed amendments will (i) require

August 20, 2013

SEC Issued Risk Alert on Options Trading Used to Evade Short Sale Requirements

On Friday August 9, 2013, the Securities and Exchange Commission issued a Risk Alert to help market participants detect and prevent options trading that circumvents an SEC short sale rule.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued the alert after its examiners observed options trading strategies that appeared to evade certain requirements of the short-sale rule. The alert describes and warns of the strategies used by some customers, broker-dealers and clearing firms, summarizes related enforcement actions, and makes suggestions regarding practices found to be effective in detecting and preventing trading intended to evade Regulation SHO.

Regulation SHO tightened requirements for short sales, which involve the selling of securities not already owned, usually by the borrowing of securities. Short sellers

August 15, 2013

SEC Updates May Benefit Equity Line Financing Providers and Issuers

On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations addressing the point at which an equity line agreement can be determined to be a completed transaction for purposes of filing a resale registration statement.

Background

Equity line financings are transactions where a company has a long-term contract to put shares to an investor (the equity line provider) at a price, generally determined by a formula based on a discount to market price. 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

August 13, 2013

An Overview of Exemptions for Hedge Fund Advisors: Exemptions for Advisors to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management, and Foreign Private Advisers – Part III

As the rules that will allow general solicitation and advertising for Rule 506(c) and 144A offerings near effectiveness, our firm has noticed a spike in inquiries related to small hedge funds and feeder funds. The JOBS Act is not the only recent congressional act to change the landscape of hedge funds; the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made significant changes as well.

(1) Advisors

August 7, 2013

SEC has Finalized Rules Disqualifying Felons and Other “Bad Actors” from Rule 506 Offerings

On July 10, 2013, the same day the SEC has adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act, the SEC adopted new rules disqualifying felons and other bad actors from participating in Rule 506 offerings as required by Section 926 of the Dodd-Frank Act.

Background

The Dodd-Frank Act required the SEC to implement rules which disqualify certain Rule 506 offerings based on the individuals involved in the

July 31, 2013

New SEC Rules Have Eliminated the Prohibition Against General Solicitation and Advertising in Rules 506 and 144A Offerings

In a historic 4-1 vote on July 10, 2013, the SEC has adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act. On the same day, the SEC adopted amendments to Rule 506 to disqualify “felons and bad actors” from participating in Rule 506 offerings. This blog discusses the rules eliminating the prohibition against general solicitation and advertising. A separate blog will discuss the felon and bad actor disqualifications.

The SEC has also adopted modifications to Form D to require Issuers to specify if they are conducting an offering that permits general solicitation and advertising and to change the required time of filing the Form D for

July 16, 2013

14C Information Statement Requirements for a Pre-Merger Recapitalization

Background on 14C Information Statements

All companies with securities registered under the Securities Exchange Act of 1934, as amended, (i.e., through the filing of a Form 10 or Form 8-A) are subject to the Exchange Act proxy requirements found in Section 14 and the rules promulgated thereunder. The proxy rules govern the disclosure in materials used to solicit shareholders’ votes in annual or special meetings held for the approval of any corporate action requiring shareholder approval. The information contained in proxy materials must be filed with the SEC in advance of any solicitation to ensure compliance with the disclosure rules.

Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which shareholders are asked to vote. The disclosure information filed with the SEC and ultimately provided to the shareholders is enumerated in SEC Schedules 14A.

Where a shareholder vote is not being solicited, such as when a Company has obtained shareholder approval through written

July 10, 2013

Section 3(a)(10) Debt Conversions in a Shell Company Pre-Reverse Merger

Section 3(a) (10) of the Securities Act of 1933, as amended (“Securities Act”) is an exemption from the Securities Act registration requirements for the offers and sales of securities by Issuers. The exemption provides that “Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such

July 2, 2013

SEC Announces it Will Seek an Admission of Fault to Settle Certain Cases

On June 18, the Securities and Exchange Commission (SEC) announced a policy change related to its settlement of certain civil matters. In particular, the SEC has stated that it will now require that the settling party admit wrongdoing as part of a settlement. Previously the standard language for all settlements has been that the defendants “neither admit nor deny wrongdoing.” Defendants, of course, cannot be required to make such an admission or settle a case, but the alternative is fighting it out in court, an expensive and risky process.

The change in policy began with a related change in which the SEC changed its policy to require admissions of wrongdoing to settle cases where the defendant had already admitted such wrongdoing in related criminal cases. Mary Jo White has now announced that, even in cases where there is no parallel criminal case, the SEC will now require individuals and companies to admit liability in “cases where… it’s very important to

June 25, 2013

Crowdfunding Using Regulation A? Yes, You Can- Right Now!

As everyone waits for the SEC to begin rule making on Title III of the JOBS Act, a few innovative entrepreneurs are using Regulation A as a vehicle to crowdfund today.Although the procedure, as described in this blog, is not the crowdfunding procedure that will be implemented under Title III of the JOBS Act, it does allow for the use of social media and the Internet to solicit and obtain equity investment funds from the general population including unaccredited investors, of a particular state or states.

Moreover, the laws that allow for this method of fundraising are not new.The vehicle of choice is Regulation A—the existing Regulation A, not the new Regulation A+, which will be implemented under Title IV of the JOBS Act. Using Regulation A to offer securities involves the time and expense of a registered offering; however, the registered securities are free trading and may be offered to unaccredited investors.Regulation A does not preempt state

June 19, 2013

OTC Market Group Has Modified Its Alternative Reporting Standard

Background

Over the past few years, the historical Pink Sheets has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its refurbished website and new URL, otcmarkets.com.Otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and Pink Sheets.

Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals.Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC but do not undergo additional quality review.

Issuers on the Pink Sheets are not required to be reporting with the SEC.However, such issuers are then further qualified based on the level of voluntary information provided to the otcmarkets.com.Issuers with no information are denoted by a skull and crossbones, Issuers with limited financial and business information are classified as “limited information,” and Issuers that provide information as set forth in the OTC

June 11, 2013

SEC Suspends Trading On 61 Shell Companies

The Securities and Exchange Commission (SEC) today suspended the trading in 61 dormant shell companies. The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. In May 2012, the SEC suspended the trading on 379 shell companies as part of the initiative. Each of the companies were dormant shells that were not current in public disclosures. Each of the companies failed to have adequate current public information available either through the news service on OTC Markets or filed with the SEC via EDGAR.

The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Once a company is suspended from trading, it cannot be quoted again until it provides updated information including complete disclosure of its business and accurate financial statements. In addition to providing the necessary information, to begin to trade again, a company must enlist a market maker to file a

June 3, 2013

The OTCQX And OTCQB Are Finally Recognized As “Established Public Markets” By The SEC

Back in October 2010 I wrote a blog titled “Has the OTCBB been replaced by the OTCQX and OTCQB”; at the time and up until May 16, 2013, my opinion was “yes” with one big caveat. Prior to May 16, 2013, all three tiers of the OTC Link were considered “pinksheets” by the SEC staff. Prior to May 16, 2013, the OTC Link was not considered a market and therefore: (1) there could be no at-the-market pricing of securities registered for resale by an Issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market), for OTC Link quoted securities.

On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations confirming that the OTCQB and OTCQX marketplaces are now considered public marketplaces for purposes of establishing

May 29, 2013

An Overview of Exemptions for Hedge Fund Advisors: Exemptions for Advisors to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management, and Foreign Private Advisers – Part II

As the delayed JOBS Act rule changes become imminent, our firm has noticed a spike in inquiries related to small hedge funds and feeder funds.The JOBS Act is not the only recent congressional act to change the landscape of hedge funds; the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made significant changes as well.

In particular, the Dodd-Frank Act eliminated the oft relied upon exemption from registration for private hedge fund advisors for those advisors with fewer than 15 clients.While eliminating the private advisor exemption, Dodd-Frank created three new exemptions, which are the operable hedge fund advisor exemptions today.These exemptions are for:

(1) Advisors solely to venture capital funds;

(2) Advisors solely to private funds with less than $150 million in assets under management in the U.S.; and

(3) Certain foreign advisers without a place of business in the U.S.

Moreover, the Dodd-Frank Private Fund Investment Advisers Registration Act of 2010 (the “Advisers Act“) imposed

May 21, 2013

An Overview of Exemptions for Hedge Fund Advisers: Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management, and Foreign Private Advisers – Part I

As I have blogged about in the past, the JOBS Act will have a significant impact on hedge funds, and in particular smaller hedge funds. As the delayed rule changes become imminent, our firm has noticed a spike in inquiries related to small hedge funds and feeder funds. The JOBS Act is not the only recent congressional act to change the landscape of hedge funds; the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made a significant impact as well.

In particular, the Dodd-Frank Act eliminated the oft-relied upon exemption from registration for private hedge fund advisers for those advisers with fewer than 15 clients. While eliminating the private adviser exemption, the Dodd-Frank created three new exemptions, which are the operable hedge fund adviser exemptions today. These exemptions are for:

(1) Advisers solely to venture capital funds;

(2) Advisers solely to private funds with less than $150 million in assets under management in the U.S.; and

(3) Certain

May 16, 2013

SEC Guidance On Social Media And Websites For Company Announcements And Communications- Part III

On April 2, 2013, in response to a Facebook post made by Reed Hastings, CEO of Netflix, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company. In the report the SEC stated that previously published guidance on the use of Company websites was applicable to the use of social media. Accordingly, in a series of blogs I am reviewing the SEC guidance on the use of company websites. This blog is Part III in the series.

Background

May 14, 2013

SEC Guidance On Social Media And Websites For Company Announcements And Communications- Part II

Background

May 3, 2013

SEC Guidance On Social Media And Websites For Company Announcements And Communications- Part I

On April 2, 2013, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company. The report was issued following an investigation into a Facebook posting made by Reed Hastings, CEO of Netflix. In the report the SEC stated that previously published guidance on the use of Company websites was applicable to the use of social media. Accordingly, a review of the SEC guidance on the use of company websites is in order.

Background

April 25, 2013

Structuring The Private Placement Or Venture Investment- Pre-Deal Considerations

I recently blogged about how to determine valuation in a start-up or development stage entity for purposes of structuring a prepackaged private placement, or for negotiating the venture capital transaction. I followed that blog with one explaining the various types of financial instruments that can be used for an investment.

Before a company can package a private placement offering or effectively negotiate with a venture or angel investor, it has to have its proverbial house in order. This blog circles back to the beginning discussing pre-deal considerations.

General

In order to successfully attract quality investors, a company must have its financial and legal house in order. I always advise my clients to act as if they are public, even if they never intend to go public. What is meant by that is to maintain proper corporate books and records. Draft and sign minutes of meetings of the board of directors, officers or committees. Keep systems in place to make

April 17, 2013

MARY JO WHITE HAS BEEN SWORN IN AS THE NEW CHAIR OF THE SEC

On April 10, 2013 Mary Jo White was sworn in as chair of the Securities and Exchange Commission (SEC). Ms. White was nominated by President Obama on February 7, 2008 and was confirmed by the U.S. Senate on April 8, 2013.

Chairman White is the first former prosecutor to lead the SEC. Chairman White served as the U.S. Attorney for the Southern District of New York from 1993 to 2002 where she specialized in prosecuting complex securities and financial institution frauds and international terrorism cases. She is the only woman to ever have held that position.

As set forth on the SEC website, ” Prior to becoming the U.S. Attorney for the Southern District of New York, Chairman White served as the First Assistant U.S. Attorney and later Acting U.S. Attorney for the Eastern District of New York from 1990 to 1993. She previously served as an Assistant U.S. Attorney for the Southern District of New York from 1978

April 11, 2013

SEC Clears Social Media As An Acceptable Form For Company Announcements

On April 2, 2013, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company. The report was issued following an investigation into a Facebook posting made by Reed Hastings, CEO of Netflix. The SEC declined to pursue an enforcement action against Mr. Hastings.

Regulation FD requires that companies take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner such that the public as a whole has simultaneous access to the information. Regulation FD is designed to ensure that all investors are on an even playing field in terms of access to material information. Regulation FD ended the era of invitation-only conference calls between company management and a select group

April 10, 2013

Structuring The Private Placement Investment- The Form Of The Investment

I recently blogged about how to determine valuation in a start-up or development stage entity for purposes of structuring a prepackaged private placement, or for negotiating the venture capital transaction. Determining a valuation is instrumental to answering the overriding questions of what percentage of a company is being sold and at what price. However, once you determine the value, you must determine what financial instrument is being sold, or put another way, what will be the form of the investment.

The world of financial instruments can appear daunting and complicated, and no entity should attempt to structure a private offering or enter into an investment agreement without the advice of competent counsel. However, an understanding of the basic components of financial instruments will increase the efficiency of counsel and greatly add to the comfort level of all parties involved. This blog is limited to a discussion of the basic components of financial instruments that would be used to finance

March 28, 2013

SEC Issues Guidance Regarding The Exemption From Broker-Dealer Registration In Title II Of The JOBS Act

Background

Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are accredited investors and such accredited status is reasonably verified by the Issuer.

In addition, Title II creates a limited exemption to the broker dealer registration requirements for certain intermediaries that facilitate these Rule 506 offerings. In particular, new Section 4(b) to the Securities Act of 1933, has added a new exemption to the broker dealer registration requirements for:

(A) a person that maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, permits general solicitations, general advertisements, or similar related activities by issuers of such securities, whether online, in person, or through any other means

(B) that person or any person associated with that person co-invests in such securities; or

March 12, 2013

NASDAQ To Acquire Sharepost And Create The NASDAQ Private Exchange

NASDAQ acquires Sharepost

On Wednesday March 6, 2013, NASDAQ surprised the small cap and investment community when it announced it is acquiring Sharepost’s private company market place (PCMP) exchange and rebranding it the Nasdaq Private Exchange.

In December, 2011, I wrote a few blogs on PCMPs. A PCMP is a trading platform, such as SharePost or SecondMarket that provides a market place for illiquid restricted securities, such as private company securities, 144 stock, debt instruments, warrants, and the like or alternative assets. It is on a PCMP that pre-IPO Facebook, Groupon and LInkedin received their trading start. Following the IPO of these large entities, and in particular Facebook, traffic and use of PCMP sites declines, but NASDAQ clearly believes the decline is temporary, and I agree.

Private Company Market Places

Each PCMP offers a fully automated back office, documentation, escrow, transfer and settlement support. Users open trading accounts, like they would with any other broker dealer. The PCMP provider collects

March 11, 2013

Implementation Of The Elimination Of The Prohibition Against Advertising For Private Accredited Investor Offerings And The Crowdfunding Act, Continues To Be Delayed

The annual “SEC Speaks” conference, in which Securities and Exchange Commission (SEC) representatives review the agency’s efforts over the past year and preview the year to come, was held on February 22-23, 2013.

During the conference the SEC laid out the numerous items on its agenda for the year to come and beyond. The list included the careful implementation of the various titles of the JOBS Act, including Title II and Title III.

February 27, 2013

Structuring The Private Placement Investment- Development Stage Or Start Up Company Valuation

The question:

As the economy has been gaining strength, so have the number of entrepreneurs seeking private equity investments through pre-packaged structured private placement offerings, and negotiated venture and angel capital sources. A question that arises almost daily in my practice is how to determine a valuation for a development stage or start-up venture. Determining a valuation is instrumental to answering the overriding questions of what percentage of a company is being sold and at what price.

The Answer:

For business entities with operating history, revenue, profit margins and the like, valuation is determined by mathematical calculations and established mathematically based matrixes. For a development stage or start-up venture, the necessary elements to complete a mathematical analysis simply do not exist.

In the case of a pre-packaged private placement offering for a development stage or start up venture, valuation is an arbitrary guess, a best estimate. In the case of a negotiated investment with a venture capital or angel

February 26, 2013

How To Bring A Delinquent Exchange Act Reporting Company Current

SEC Delinquent Filers Program

In 2004 the Securities and Exchange Commission (“SEC”) instituted the Delinquent Filers Program and created the Delinquent Filers Branch as part of its Division of Enforcement. The Delinquent Filers Branch was instituted to encourage publicly traded companies that are delinquent in the filing of their required periodic reports (Forms 10-K and 10-Q) under the Securities Exchange Act of 1934 (“Exchange Act”) to provide investors with accurate financial information upon which to make informed investment decisions. The securities registrations of issuers that fail to make their required periodic filings are subject to suspension or revocation by the SEC and other enforcement proceedings.

Since it was instituted, the SEC Delinquent Filers Branch has suspended the trading and/or revoked the registration of hundreds of companies, often in sweeps of large groups of filers in a single day. Generally, a delinquent filer would receive a letter from the SEC giving the Company 10 days in which to make the

January 25, 2013

Legal & Compliance, LLC Adds Lazarus Rothstein, Esq. as Of Counsel as Economic Confidence Builds in 2013 among its Clients

WEST PALM BEACH, FLORIDA (January 10, 2013) – Legal & Compliance, LLC is pleased to announce that Lazarus Rothstein, Esq. has recently joined the firm as Of Counsel to bring additional depth to its corporate and securities law practice. Mr. Rothstein has been a legal and business executive for a wide variety of public and private companies based in South Florida with worldwide operations.

Mr. Rothstein has held senior legal positions at CD International Enterprises, a company that produces pure magnesium in China and provides business and financial corporate consulting services; Elizabeth Arden, a global prestige fragrance and beauty products company with operations in over 17 countries; Sports Authority, the nation’s largest full-line sporting goods retailer, operating over 385 stores throughout the United States; Daleen Technologies, a billing and customer care software provider; and Let’s Talk Cellular & Wireless, a specialty retailer of wireless communication products and services that operated over 270 stores in the United States. In his role

January 11, 2013

OTC Market Groups Has Modified Its Alternative Reporting Standard Effective January 3, 2013

Background

Over the past few years, the historical “pinksheets” has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its refurbished website and new url “www.otcmarkets.com”. The www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and pinksheets.

Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals. Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC but do not undergo additional quality review.

Issuers on the pinksheets are not required to be reporting with the SEC. However, such issuers are then further qualified based on the level of voluntary information provided to the www.otcmarkets.com. Issuers with no information are denoted by a skull and crossbones, Issuers with limited financial and business information are classified as “limited information and Issuers which provide information as set forth in the

January 4, 2013

The ABA Pushes To Allow For The Payment Of Finder’s Fees

In April of this year, the American Bar Association Private Placement Broker Task Force delivered to the SEC and published a recommendation for a limited federal exemption from SEC registration for securities intermediaries that would be able to assist in the private raise of capital for both private and public entities. The Task Force previously published a lengthy recommendation and even drafted proposed rules, in June 2005, and has been advocating the rules since that time. The full text of both the April 2012 submission and June 2005 report with proposed rules can be read on the SEC website.

The SEC’s Position and Current Rules on Finder’s Fees

The Securities and Exchange Commission (SEC) strictly prohibits the payments of commissions or other transaction based compensation to individuals or entities that assist in a capital raise, unless that entity is a licensed broker dealer.

Periodically, and most recently in April 2008, the SEC updates its Guide to Broker Dealer Registration explaining

January 3, 2013

An Update On Dealing With The DTC Following The SEC’s Ruling On International Power Group, Ltd.

Background

Back in October and November of 2011, I wrote a series of blogs regarding DTC eligibility for OTC (over-the-counter) Issuers. OTC Issuers include all companies, whose securities trade on the over-the-counter market, including the OTCBB, OTCQB and pinksheets. Many OTC Issuers have faced a “DTC chill” without understanding what it is, let alone how to correct the problem. In technical terms, a DTC chill is the suspension of certain DTC services with respect to an Issuer’s securities. Those services can be book-entry clearing and settlement services, deposit services or withdrawal services. A chill can pertain to one or all of these services. In the case of a chill on all services, the term of art is a “global lock.”

I have previously blogged on how to become DTC-eligible. From the DTC perspective, a chill does not change the eligibility status of an Issuer’s securities, just what services the DTC will offer for those securities. So while

December 6, 2012

New FINRA Rule 5123 Takes Effect Requiring Notice of Private Placements by Member Firms

The Financial Industry Regulatory Authority has adopted new Rule 5123 requiring members to file notice of their participation in private placements. The Rule took effect on December 3^rd 2012. The new rule does not contain a definition of “private placements” and accordingly is presumed to cover all private placements including those involving general solicitation and advertising under the new Rule 506(c) created by the JOBS Act.

Rule 5123 requires member firms to file a copy of the private placement memorandum, term sheet or other disclosure document with FINRA, for all offering in which they sell securities, within 15 calendar days of the first sale.

FINRA enacted the rule in an effort to further police the private placement market and to ensure that members participating in these private offerings conduct sufficient due diligence on the securities and its issuer

In filings with the SEC, FINRA expressed its position that Rule 5123 is consistent with the JOBS Act in

December 5, 2012

Mary Schapiro to Be Replaced By Elisse Walter as Head of SEC

President Obama has chosen Elise Walter to temporarily head the Securities and Exchange Commission (SEC) when Mary Schapiro steps down next month. With Mary Schapiro leaving and Walter, a current commissioner stepping up, the SEC will be run by only one acting chairman and two other commissioners. This means that the already delayed rule making for both the Dodd-Frank Wall Street Reform Act and the Jumpstart our Business Startups Act (JOBS) are likely to be further delayed.

The already taxed SEC will be headed by a small and temporary team. Accordingly, it is the popular belief among experts that rule making will continue at a snail’s pace and that no major reform or policy changes should be expected.

Ms. Walter was originally appointed to the SEC by President George W. Bush in 2008 and has worked alongside Mary Schapiro both at the SEC and FINRA prior to both joining the SEC. Moreover, Walter served as acting chairman after the departure

November 27, 2012

COMPREHENSIVE REVIEW OF TITLE I OF THE JOBS ACT AS RELATED TO EMERGING GROWTH COMPANIES

On April 5, 2012, President Obama signed the Jumpstart our Business Startups Act (JOBS Act) into law. The JOBS Act was passed on a bipartisan basis by overwhelming majorities in the House and Senate. The Act seeks to remove impediments to raising capital for emerging growth public companies by relaxing disclosure, governance and accounting requirements, easing the restrictions on analyst communications and analyst participation in the public offering process, and permitting companies to “test the waters” for public offerings. The following is an in-depth review of Title I of the JOBS Act related to Emerging Growth Companies.

Introduction – What is an Emerging Growth Company?

The JOBS Act created a new category of company: an “Emerging Growth Company” (EGC). An EGC is defined as a company with annual gross revenues of less than $1 billion that first sells equity in a registered offering after December 8, 2011. In addition, an EGC loses its EGC status on the earlier

November 14, 2012

Proposed Rules Eliminating the Prohibition Against General Solicitation and Advertising in Rule 506 Offerings Meet With Opposition by NASAA

As required by Title II of the JOBS Act, on August 29, 2012, the SEC has published proposed rules eliminating the prohibition against general solicitation and advertising in Rules 506. I previously wrote blogs outlining the content of the proposed rules. The rules are currently in the public comment period.

As I previously noted, the SEC proposed simple modifications to Regulation D mirroring the JOBS Act requirement stating that it is “proposing only those rule and form amendments that are, in our view, necessary to implement the mandate” in the JOBS Act. The entire text of the rule release is available on the SEC website.

Background

Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are accredited investors. The JOBS Act requires that the rules require the issuer to take reasonable steps to verify

October 18, 2012

CROWDFUNDING FROM A TO Z

As the expected deadline for the SEC to publish rules and regulations enacting the Crowdfunding Act (Title III of the Jumpstart Our Business Startups Act (JOBS Act)) grows nearer, it is a good time for a complete overview of crowdfunding. New Sections 4(6) and 4A of the Securities Act of 1933 codify the crowdfunding exemption and its various requirements as to Issuers and intermediaries. The SEC is in the process of drafting the underlying rules and regulations which will implement these new statutory provisions.

A. WHAT IS CROWDFUNDING?

The Crowdfunding Act amends Section 4 of the Securities Act of 1933 (the Securities Act) to create a new exemption to the registration requirements of Section 5 of the Securities Act. The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities as long as no individual investment exceeds certain threshold amounts.

The threshold amount sold to any single investor cannot exceed (a) the greater of $2,000

October 4, 2012

Proposed Rules Eliminating the Prohibition Against General Solicitation and Advertising in Rules 506 and 144A Offerings – Part II

As required by Title II of the JOBS Act, the SEC has published proposed rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings. In a move that is widely supported by legal practitioners, including the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, the SEC has proposed simple modifications to Regulation D and Rule 144A mirroring the JOBS Act requirement. The entire text of the rule release is available on the SEC website.

This Part II discussed the proposed amendments to Rule 144A.

Background

Title II of the JOBS Act, requires the SEC to amend Rule 144A to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are qualified institutional buyers (QIB). The JOBS Act requires that the rules require the issuer to take reasonable steps to verify that purchasers of the securities are QIB’s, using such

September 5, 2012

Proposed Rules Eliminating the Prohibition Against General Solicitation and Advertising in Rules 506 and 144A Offerings – Part I

As required by Title II of the JOBS Act, the SEC has published proposed rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings. In a move that is widely supported by legal practitioners, including the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, the SEC has proposed simple modifications to Regulation D and Rule 144A mirroring the JOBS Act requirement. In fact, in the rule release the SEC states that it is “proposing only those rule and form amendments that are, in our view, necessary to implement the mandate” in the JOBS Act. The entire text of the rule release is available on the SEC website.

This Part I discussed the proposed amendments to Rule 506, Regulation D offerings.

Background

Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule

September 4, 2012

House Subcommittee Demands Explanation of SEC’s Delayed JOBS Act Rulemaking

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. However, on June 27, 2012 Mary Schapiro, Securities and Exchange Commission chairman told the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs that the SEC would not meet the 90 day deadline. At that time, Ms. Schapiro told the U.S. House committee that the SEC expected the rules to be implemented by late summer 2012.

The SEC scheduled a hearing on the general solicitation rules for August 22, 2012, but then rescheduled the hearing for August 29, 2012. The House is not happy with the delay. In a

August 27, 2012

The OTCBB – Nearly Extinct, OTCQB is the Micro-Cap Reporting Standard

For the past two years it had appeared that the OTCBB had been replaced by the OTC Link run OTCQB and the OTCQX. For all intents and purposes since the fall of 2010, the industry-wide proliferation of the OTCQB and OTCQX has marginalized the OTCBB to the brink of extinction. It is has now become incredibly apparent that the OTCQB is the new micro-cap reporting standard.

Background

Over the past few years the historical “Pink Sheets” and its online presence has undergone some considerable changes, starting with the creation of several well-defined “tiers” of issuers and culminating in a completely refurbished website and a new URL – www.otcmarkets.com; and new name for the Inter-dealer quotation system – the OTC Link. The OTC Link divides issuers into three levels: OTCQX; OTCQB and Pink Sheets. Quotation on both the OTCQB and OTCQX requires that the Issuer be subject to and current with the reporting requirements of the Securities Exchange Act

August 23, 2012

Crowdfunding Direct Public Offerings

Background:

As a reminder, on April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended. Although the Crowdfunding Act is, by definition, an exemption from the registration requirements and therefore a new form of private placement, innovative and forward thinking minds have already come up with a method of utilizing the crowdfunding methodology for a public, registered offering.

What is a crowdfunding registered offering:

A crowdfunding registered offering is a combination of direct public offering (DPO) and initial public offering (IPO). As I have blogged about in the past, a DPO is like an IPO except the Issuing Company does not use an underwriter to

August 21, 2012

Regulation A+; A Brief History

Title IV of the JOBS Act – Small Capital Formation – is quickly being called the new Regulation A+. Title IV of the JOBS Act technically amends Section 3(b) of the Securities Act of 1933, which up to now has been a general provision allowing the Securities and Exchange Commission (SEC) to fashion exemptions from registration, up to a total offering amount of $5,000,000. The new provision will be Section 3(b)(2) with the old statutory language remaining and being relabeled as Section 3(b)(1).

Technically speaking Regulation D, Rule 504 and 505 offerings and Regulation A offerings are promulgated under Section 3(b) and Rule 506 is promulgated under Section 4(2). This is important because federal law does not pre-empt state law for Section 3(b) offerings but it does so for Section 4(2) offerings. The cost of compliance with the various and varied state laws can be prohibitive with an offering limit of $5,000,000. Moreover, although Regulation A is technically

July 30, 2012

Q2 By The Numbers – An Analysis of Market

First, I’d like to give credit to The DealFlow Report which was my initial source for the numerical factual information in this blog.

The Numbers and Facts

Q2 reflects the uncertainty that goes along with an election year and the concerns over tax increases (or decreases) that go along with election years. There also remains the ongoing worry over European markets. In short, it is a time of change and uncertainty. Moreover, according to Adam Lyon, a managing director and co-head of private capital at Conaccord Genuity, the small cap financing market, “is probably in for the usual seasonal fluctuations: a tough summer followed by a pick-up in late August and September.” I note that my law firm has seen this trend consistently for the past decade.

According to data from Dealogic, the number of IPO’s dropped by 41.4% in Q2, however, mainly as a result of the facebook IPO, the dollar value of those IPO’s rose by 56.4%.

July 24, 2012

What is an Accredited Investor or a Qualified Institutional Investor Anyway?

ABA Journal’s 10th Annual Blawg 100

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Title II of the JOBS Act provides that the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers. Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of

July 12, 2012

FINRA Seeks Public Comment in Advance of Crowdfunding Rulemaking

The Financial Industry Regulatory Authority (FINRA) has requested public comment and input in advance of preparing and publishing proposed rules related to the Crowdfunding Act. The scope of the FINRA rules will be written specifically for registered funding portals and although they will need to be complementary to the SEC rules, it is intended that they not be duplicative. FINRA has set August 31, 2012 as the deadline for receiving comments.

As Related to Registered Funding Portals

Section 302 of the Crowdfunding Act requires that all Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC. Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such registration and ongoing rule and reporting requirements. In accordance with Section 304, Funding Portals must be “subject

July 10, 2012

SEC Still on Track to Meet the 270 Deadline to Enact Crowdfunding Rules

The SEC is still on track and expects to meet the 270 day deadline to draft rules and enact Title III of the JOBS Act creating the new crowdfunding exemption.

As I wrote about before the July 4^th holiday, on June 25^th, in prepared testimony, Mary Schapiro told a U.S. House oversight panel that certain rule writing deadlines imposed by the JOBS Act “are not achievable.” In particular, the SEC could not meet the 90 day deadline to amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. “The 90-day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the commission, and an opportunity for public input,” she said.

However

July 10, 2012

SEC Will Not Meet Deadline to Remove Ban on General Solicitation and Advertising in Private Offerings and Hedge Funds

The SEC won’t make the 90-day deadline to draft rules and enact Title II of the JOBS Act eliminating the ban on advertising and general solicitation for private placements and allowing advertising by hedge funds, Mary Schapiro, Securities and Exchange Commission chairman told a U.S. House oversight panel on June 27, 2012. In prepared testimony, Mary Schapiro told a U.S. House oversight panel that certain rule writing deadlines imposed by the JOBS Act “are not achievable.”

June 29, 2012

Native American Energy Granted Full Eligibility for DTC Services After Four-Year Appeal

Native American Energy Group (NAGP), an oil and gas exploration company has been granted full eligibility for clearing and settlement services through the Depository Trust Co., in the latest in a series of victories by microcap companies involving the DTC. According to several sources, the effort was a four-year battle for Native American Energy that cost the company $175,000 in legal fees, left it $2 million in debt and caused it to lose more than 30 funding opportunities.

The DTC Dilemma

Over the past couple of years, DTC eligibility has become a concern for many OTC Issuers as clearance and eligibility has become a daily obstacle for penny stock and over the counter Issuers. Obtaining and maintaining eligibility is of utmost importance for the smooth trading of an Issuer’s float in the secondary market. Moreover, DTC eligibility is a prerequisite for OTC Issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name.

June 25, 2012

SEC Grants Accelerated Approval to FINRA Rule Amendment Regarding Minimum Quotation Size Requirements for OTC Equity Securities

On June 15, 2012, the SEC granted accelerated approval to an amendment to FINRA rule 6433 related to the minimum quotation size for OTC equity securities. Rule 6433 applies to all market makers. Rule 6433 sets forth the specific minimum quotation size requirements in tiers that are based on the price of the OTC equity security being quoted by the market maker. In addition, the rule change will require market makers to publish customer limit orders.

The new rule amends and lowers the current 9 tier quotation size requirements to 6 tiers as follows:

$175.00 per share and above, the minimum quotation size would be 1 share;

$1.00 through $174.99 per share, the minimum quotation size would be 100 shares;

$0.51 through $0.9999 per share, the minimum quotation size would be 1,000 shares;

$0.20 through $0.5099 per share, the minimum quotation size would be 2,500 shares;

$0.10 through $0.1999 per share, the minimum quotation size would be 5,000 shares;

June 19, 2012

Crowdfunding Act – What about state securities laws?

Introduction

In addition to federal securities laws, each state has its own securities laws and governing body which oversees and enforces such laws. The individual state securities statutes are not uniform – every state is different. However, many aspects of federal securities law pre-empt state securities laws. This is a major advantage to issuers because abiding by the myriad of disclosure and pre and post-filing requirements of the federal statutes and individual state statutes concurrently is an arduous and expensive effort.

For instance federal law does not pre-empt state law for a Rule 505 offering, but it does for a Rule 506

June 14, 2012

SEC Approves Revision to FINRA Rule Regarding Broker Dealer FINRA Filing Requirements for Private Placement Offerings

On June 7, 2012 the SEC granted accelerated approval to a FINRA rule change regarding broker dealer FINRA filing requirements for activities associated with private placement offerings. The rule was originally drafted to address disclosures that must be provided to investors prior to an investment and disclosure that must be provided to FINRA following a sale in a private placement, regarding use of proceeds, the amount and type of offering expenses, and all offering related compensation to be paid to placement agents, finders, associated persons and the like.

Summary of Rule Change

FINRA Rule 5123 (Private Placements of Securities) has been amended to require that each FINRA member firm that participates in a private placement of securities file with FINRA a copy of any private placement memorandum (PPM), term sheet, or other offering document used in connection with a sale, within 15 days of the date of the first sale and any material amendment thereto, or provide a notice to

June 13, 2012

American Bar Association Comments On Title II Of The JOBS Act

Summary of Title II

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers. Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that

June 11, 2012

Comments In Advance To Rule Making On Elimination On Advertising And Solicitation Ban For Certain Private Offerings

Summary of Title II

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers. Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that only accredited

June 6, 2012

Crowdfunding Intermediaries-Questions

Intermediary Use and Registration Requirements

Section 302 of the Crowdfunding Act requires that all Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and a member of a securities organization registered under Section 15A of the Securities Exchange Act of 1934. Currently that securities organization is the SRO, Financial Industry Regulatory Authority (FINRA).

The Crowdfunding Act carves out a new class of “broker dealer” called “Funding Portals” that can act as Crowdfunding intermediaries. Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such

June 5, 2012

The JOBS Act IPO On-Ramp

I’ve written extensively on the Crowdfunding Act, or Title III of the Jobs Act, and much less extensively on the other five titles of the Act. Today’s blog will focus on Title I of the Jobs Act – Reopening American Capital Markets to Emerging Growth Companies. Several industry types have been referring to Title I as the IPO On Ramp and so will I.

The Jobs Act

The JOBS Act created a new category of companies defined as “Emerging Growth Companies” (EGC). An EGC is defined as a company with annual gross revenues of less than $1 billion that first sells equity in a registered offering after December 8, 2011. In addition, an EGC loses its EGC status on the earlier of (i) the last day of the fiscal year in which it exceeds $1 billion in revenues; (ii) the last day of the fiscal year following the fifth year after its IPO; (iii) the date on which it

June 4, 2012

Resale of Crowdfunding Securities And An Aftermarket

In accordance with Section 302(e) of the Crowdfunding Act, the securities issued in a crowdfunding offering are restricted securities. The Crowdfunding Act states that the securities purchased in a crowdfunding offering may not be resold during a one year holding period, beginning on the date of purchase, unless such securities are transferred (A) to the issuer of the securities; (B) to an accredited investor; (C) as part of an offering registered with the SEC; or (D) to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the SEC. To a layman this provision may seem straight forward and innocuous enough, it’s not!

SEC Will Need To Draft New Rules

The SEC will need to draft new rules to cover these re-sale restrictions as they do not fit within the parameters of the current rule regarding the resale of restricted

June 1, 2012

More Information on Crowdfunding Requirements for Issuers

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act, creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended.

On May 23, 2012 I blogged about crowdfunding requirements for Issuers as summarized in the text of the Crowdfunding Act (the “Act”). This blog continues that discussion providing further information from the Act.

June 1, 2012

SEC Staff Meeting with National Crowdfunding Association

On May 14, 2012, the SEC staff met with representative of the National Crowdfunding Association to discuss issues regarding the implementation of Title III of the JOBS Act, i.e. the Crowdfunding Act. The SEC posted a memo on the meeting, which is available for review on the SEC website. This blog summarizes the memo, which memo was prepared by the National Crowdfunding Association prior to the meeting as an agenda and discussion memo and was subsequently posted on the SEC website, by the SEC.

National Crowdfunding Association Compiles List of Issues and Comments

The National Crowdfunding Association set forth a list of issues and comments on the pending Crowdfunding Act SEC rules and regulations. Unless otherwise stated, I agree with and support all of the comments and issues discussed by the National Crowdfunding Association.

The issues and comments are summarized as follow:

1. Investment Limitations. The crowdfunding exemption allows Issuers to raise up to $1 million in a twelve

May 25, 2012

CFIRA Submits Crowdfunding Letter to SEC

The CFIRA (Crowdfund Intermediaries Regulatory Advocates) was established by crowdfunding industry professionals for the purpose of working with the SEC and FINRA on establishing and maintaining crowdfunding rules and industry practices. As I blogged in the past, I believed at one point, based on news and information released from the CFIRA, that the CFIRA intended to become a self regulatory organization (SRO) and register with the SEC under Section 15A. As of today, it appears that the CFIRA is still working towards the goal of becoming an SRO. In any event, I expect that the CFIRA will be an active participant in the crowdfunding industry and invaluable source of input and information.

CFIRA and the SEC

On May 15, 2012, the CFIRA submitted a comment letter to the SEC regarding the pending Crowdfunding regulations. The comment letter specifically addressed issues regarding how the general solicitation rules will interact with social media and the internet. The letter addressed the general solicitation

May 24, 2012

Crowdfunding Requirements For Issuers

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act, creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended.

The new crowdfunding exemption allows Issuers to raise up to $1 million in a twelve month period, as long as no individual investment exceeds certain threshold amounts. The threshold amount sold to any single investor, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or next worth is less and $100,000; and (b) 10% of the annual income or net worth of such investor, not to exceed a maximum $100,000, if their annual income or net worth is more than $100,000.

May 23, 2012

Crowdfunding Intermediaries – SEC Issues Guidance

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The SEC has been mandated with the task of drafting the crowdfunding rules and regulations by early 2013. In addition to fashioning the exemption that will allow companies to raise funds using the Crowdfunding Act, the SEC must also fashion rules to govern the crowdfunding intermediaries that companies will be required to use in the process.

Crowdfunding Intermediaries or Funding portals (the terms are interchangeable) are hurrying up to be ready to implement rules that will be enacted in early 2013 while at the same time, waiting to find out what those rules will be. On May 7, 2012, the SEC issued limited guidance for crowdfunding intermediaries. As has been the case since enactment of the JOBS Act,

May 16, 2012

SEC Suspends Trading for Record Number of Shell Companies

The Securities and Exchange Commission (SEC) today suspended the trading in 379 dormant shell companies. This is the most trading suspensions in a single day in the history of the SEC. The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. Each of the companies was a dormant shell that was lacking any and all public disclosures. That is, each of the companies failed to have adequate current public information available either through the news service on OTC Markets or filed with the SEC via EDGAR.

May 14, 2012

NASDAQ Lowers Price Per Share Initial Listing Requirement

The SEC has approved the recent NASDAQ rule change to lower the minimum bid listing requirement from $4.00 to either $2.00 or $3.00 depending on qualification for certain other listing requirements. The text of the entire new rule is available on the SEC website.

Pursuant to the new rule, a security would qualify for listing on the NASDAQ Capital Market if, for at least five consecutive business days prior to approval, the security has a minimum closing price of:

A. At least $3 per share, if the issuer meets either of the following standards determined as follows:

I. Under the Equity Standard, the Issuer would need to meet, among other things:

(i) stockholders’ equity of at least $5 million;

(ii) market value of publicly held shares of at least $15 million; and

(iii) two year operating history.

II. Under the Net Income Standard, the Issuer would have to meet, among other things:

(i) net income from continuing operations

May 10, 2012

THE JOBS ACT IMPACT ON HEDGE FUND MARKETING

On April 5, 2012 President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. The other day I blogged about the changes to the general solicitation and advertising rules brought about by the JOBS Act. Today I am focusing on the impact those rule changes will have on hedgefunds, and in particular, smaller hedgefunds.

Summary of JOBS Act Changes Effecting General Solicitation and Advertising of Private Offerings

May 8, 2012

JOBS Act Amendments to General Solicitation and Advertising of Private Offerings

Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that only accredited investors, or qualified institutional

May 3, 2012

At-The-Market Offerings

Anyone that reads the trade journals knows that at-the-market offerings, or ATM’s as they are now known, have recently gained in popularity and are expected to continue to do so. An ATM is the offering of securities by an Issuer either directly or through an underwriter, which securities are offered and distributed at the existing trading price. In layman’s terms, an ATM occurs when an already public trading Issuer registers and sells additional securities to the public at the existing trading price, as opposed to a fixed price. Accordingly, the price that shares sell at in an ATM will vary with the market price on any given day, or even throughout the day.

Under an ATM offering program, an exchange-listed company incrementally sells newly issued shares into the trading market through a designated broker-dealer at prevailing market prices, rather than via a traditional underwritten offering of a fixed number of shares at a fixed price all at once. To

May 2, 2012

Crowdfunding intermediaries- Hurry Up and Wait

I have been blogging extensively on the JOBS Act and Crowdfunding Act. My last blog addressed Herculean effort the SEC must undertake to write the laws and rules which will bring the Crowdfunding Act to fruition by early 2013. In addition to fashioning the exemption that will allow companies to raise funds using the Crowdfunding Act, the SEC must also fashion rules to govern the funding portals that companies will be required to use in the process.

Funding Portals are popping up everywhere, at least in name and concept. All of these portals are busy putting together systems internally, but all of those systems are subject to the SEC

April 26, 2012

SEC Grapples With Crowdfunding Rulemaking

On April 5, 2012 President Obama signed the JOBS Act into law.

The SEC’s Rulemaking Duty

Some of the rules went into effect immediately; others are in the drafting process. Within 90 days of the signing of the Act (i.e. mid July), the SEC is required to issue enabling rules as to other portions of the Act, including rules related to general solicitation and advertising of accredited investors under Rule 506 of Regulation D. For the SEC that is the easy part.

Finally, the SEC has up to 270 days (beginning of 2013) to release rules relating to the new crowdfunding exemption and crowdfunding platform portal regulations. That will be difficult part. As a matter of background, the biggest opponents of the crowdfunding bill were the SEC and FINRA. It is easy to see why, the SEC’s mission, direct from their website is:

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly,

April 24, 2012

SEC Issues Guidance on Title 1 of the JOBS Act

On April 5, 2012 President Obama signed the JOBS Act into law. Some of the rules went into effect immediately; others are busily in the drafting process. The SEC has begun issuing guidance and it is expected will continue to do so often.

On April 16, 2012, the SEC issued guidance on Title 1 of the JOBS Act. The full text of this guidance is available on the SEC website. Title 1 of the JOBS Act provides scaled- down business disclosure for Emerging Growth Companies (EGC’s) effectively treating them as small business issuers. In particular, EGC’s need only provide two years of audited financials (instead of 3) for a registration of an IPO; are treated as small businesses for the reporting of executive compensation; have no Sarbanes-Oxley Act 404(b) auditor attestation requirements and are able to test the waters with communications to QIB’s and institutional accredited investors prior to an offering.

Determining When and If a Company Qualifies As

April 23, 2012

Crowdfunding Timing and Investor Protections

On April 5, 2012 President Obama signed the JOBS Act into law.

Some of the rules went into effect immediately, such as the ability of an Emerging Growth Company to file a registration statement and seek confidential treatment during the review process. For this process the EGC would avail itself of the new Securities Act Section 6(e). The SEC issued, albeit limited, guidance on this process for EGC’s yesterday, April 10, 2012.

Within 90 days of the signing of the Act (i.e. mid July), the SEC is required to issue enabling rules as to other portions of the Act, including rules related to general solicitation and advertising under Regulation D. Finally, the SEC has up to 270 days (beginning of 2013) to release rules relating to the new crowdfunding exemption and crowdfunding platform portal regulations.

Crowdfunding Has Been Around For Several Years

It seems to many that the JOBS Act appeared, was enacted into law and is zooming forward

April 20, 2012

SEC Issues Guidance on Registration and Deregistration Under Jobs Act

On April 5, 2012 President Obama signed the JOBS Act into law. Some of the rules went into effect immediately, such as the ability of an Emerging Growth Company to file a registration statement and seek confidential treatment during the review process. For this process the EGC would avail itself of the new Securities Act Section 6(e). The SEC issued, albeit limited, guidance on this process for EGC’s yesterday, April 10, 2012.

SEC Guidance on the JOBS Act

On April 11, 2012, the SEC issued guidance on the JOBS Act amendments to Section 12(g) and Section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). The full text of this guidance, and the guidance issued on new Section 6(e) is available on the SEC website.

The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements for banks and bank holding companies. This blog

April 18, 2012

The JOBS Act Is Not Just Crowdfunding

On April 5, 2012 President Obama signed the JOBS Act into law. In my excitement over this ground-breaking new law, I have been zealously blogging about the Crowdfunding portion of the JOBS Act. However, the JOBS Act impacts securities laws in many additional ways. The following is a summary of the many ways the JOBS Act will amend current securities regulations, all in ways to support small businesses.

A. The New “Emerging Growth Company” Category

The JOBS Act will create a new category of companies defined as “Emerging Growth Companies” (EGC). An EGC will be defined as a company with annual gross revenues of less than $1 billion, that has been public and reporting for a minimum of five years and whose non-affiliated public float is valued at less than $700 million. EGC’s will have reduced requirements associated with initial public offerings (IPO’s) and ongoing reporting requirements. For many purposes, EGC’s will be allowed to use the less

April 17, 2012

Crowdfunding Act Signed Into Law

On April 5, 2012 President Obama signed the JOBS Act into law. In accordance with the JOBS Act requirement that all crowdfunding platforms (i.e. websites and intermediaries) be a member of a national securities association, the new self regulatory organization (SRO), The Crowdfunding Intermediary Regulatory Association (CFIRA) has already been formed. The CFIRA will be charged with ensuring investor protection and market integrity. The CFIRA will have members from crowdfunding investor intermediaries as well as related industries such as venture capital firms. In addition to regulating its members, the CFIRA will provide investors with information such as learning about crowdfunding and its risks.

Opportunity For All Americans

Crowdfunding provides an opportunity for all Americans, whether accredited or not, and whether connected with an elite investment banking firm or not, to invest small amounts of money in small businesses that they know or just believe in. Small businesses provide jobs and sometimes small businesses become big businesses. For the first time

April 16, 2012

Crowdfunding 101

As I recently blogged, the President has signed the Jobs Act including the much anticipated Crowdfunding bill. Crowdfunding is a process whereby companies will be able to raise small amounts of money either directly off their own website or using intermediaries set up for the purpose. The Securities Act of 1933, as amended, (Securities Act) prohibits the sale or delivery of any security unless such security is either registered or exempt from registration. Crowdfunding will be an exemption from registration. The exemption will likely be codified as a new and separate exemption likely under Regulation D and will include an overhaul of the current general provisions of Regulation D found in Rules 501-503.

Crowdfunding Exemption Possibilities

The exemption will likely be limited to $1 million in any twelve (12) month period, or up to $2 million if the company provides certain financial disclosure such as audited financial statements. As proposed, each investor will be limited $10,000 or 10%

April 16, 2012

Big Changes Are Coming

I’ve been practicing securities law for 19 years this year (phew!) and for the first time in my career I am excited about changes, big changes, on the horizon for small businesses. I’m talking about the JOBS Act and its ground breaking crowdfunding bill which has now been signed into law.

A Whole New Exemption

Over the years I have consistently received calls from potential clients that wish to use the exemptions provided for in Regulation D to raise money for small or start up ventures. Many of these individuals believe, mistakenly, that Regulation D provides them with a method to raise money. It does not. Regulation D only lays out rules to follow to utilize an exemption from the registration requirements in the Securities Act of 1933. These rules include such items as limitations on the dollar amount raised; who you can raise money from, how you can raise money, prohibitions on advertising and solicitation, disclosure documents required,

April 16, 2012

DTC Chills, Due Process and Rule 22

Back in October and November of 2011 I wrote a series of blogs regarding DTC eligibility for OTC (over the counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. Many OTC Issuers have faced a “DTC chill” without understanding what it is; let alone how to correct the problem. In technical terms, a DTC chill is the suspension of book-entry clearing and settlement services with respect to an Issuer’s securities. In layman’s terms it means your stock can’t clear or trade electronically. Since all trading in today’s world is electronic, it really means your stock doesn’t trade.

The SEC’s Stance

As noted in the SEC opinion:

“…DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States. In 2010, DTC

March 21, 2012

Private Capital Market Places – A Second Look

Last week I wrote a blog introducing, at least to me, Private Company Market Places (PCMP). A PCMP is a trading platform, such as SharePost or SecondMarket that provides a market place for illiquid restricted securities, such as private company securities, 144 stock, debt instruments, warrants, and the like or alternative assets. It is on a PCMP that Facebook’s shares currently trade and where pre-IPO Groupon and LInkedin received their trading start.

This week I reviewed some of the top PCMP players, including Gate Technologies, SecondMarket, Sharespost and Xpert Financial. I have no affiliation, have never worked with and maintain no accounts with any of these PCMPs.

PCMP’s are Broker Dealers or Affiliated

Each PCMP is a licensed broker dealer or affiliated with a licensed broker dealer, that has either created or licensed an electronic trading board, available at their respective websites, which allows investors to view, buy, and sell otherwise illiquid, restricted or alternative assets. These securities are

December 16, 2011

Private Capital Marketplace – A First Look

As I discussed in a recent blog, the attraction of the small cap and reverse merger market has diminished greatly in the past two years. The Over the Counter market has become an expensive place to conduct business; the antithesis of the very reason small companies sought to list there to begin with. Accessing capital markets for microcap companies is not as simple as it once was.

In addition to the added expensive of complying with the Securities Exchange Act of 1934 disclosure requirements, the marketplace invites speculators who short sell (bet that the price of a stock will go down) and hedge with derivatives, often creating unpredictable volatility and share prices not indicative of the underlying value of the actual business.

No Automatic Liquidity for Issuers

Being public is no guarantee of liquidity either. It’s fantastic for an issuer to state that their stock is being quoted at $5.00 per share, but if there is no volume (the shares

December 9, 2011

Why Rule 419 Companies May Revitalize the Small-Cap Market

Are Rule 419 Companies poised to be the next big thing in the small-cap sector?

Recently, the small-cap and reverse merger market has diminished substantially. Operating businesses are wary of completing reverse mergers, and PIPE investors are harder to come by. The reasons for this are easily identifiable.

First – The General State of the Economy

Simply stated, it’s not good.

Second – The Backlash from a Series of Fraud Allegations, SEC Enforcement Actions, and Trading Suspensions of Chinese Company’s Following Reverse Mergers

Chinese company reverse mergers dominated the shell company business for years; now there are none. Moreover, it is unlikely that this area will recover any time soon. The Chinese government and US regulators must reach agreement and a mutual understanding regarding PCAOB review of Chinese audits. Even then, it may take years for the stigma to fade.

Third – The Rule 144 Changes Enacted in 2008

As discussed in previous blogs Rule 144(i),

November 16, 2011

DTC Eligibility and the OTC Issuer (Part 3)

This is the third in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. All technical information in this article comes from the DTC website.

DTC Eligibility

As detailed in my first two articles in this series, in order to become and remain DTC eligible, and Issuer must have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter. In addition, all Issuers must meet the requirements set forth in the DTC Operational Arrangements (OA). This article begins to discuss the OA necessary for an Issue to become and remain eligible for DTC service. Moreover, the OA rules relate to and regard all Issuers. This article will only discuss those rules and requirements for OTC Issuers.

The DTC OA states:

“Generally,

November 3, 2011

DTC Eligibility and the OTC Issuer (Part 2)

This is the second in a series of articles regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. All technical information in this blog comes from the DTC website.

DTC Requirements for Eligibility

As discussed in my first article on this topic, Issuers, a sponsoring DTC Participant Member must make application to become DTC eligible. The DTC Operational Arrangements criteria (available on the DTC website) set forth in-depth requirements for eligibility, which will be discussed in a separate articles in this series on DTC eligibility. In addition to the Operational Arrangements, in order to be DTC eligible, an Issuer’s securities must:

(i) be issued in a transaction registered with the SEC under the Securities Act of 1933, as amended (“Securities Act”);

(ii) be issued in a transaction exempt from registration under the Securities Act and

October 10, 2011

DTC Eligibility and the OTC Issuer

This is the first in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the Over the Counter market, including the OTCBB, OTCQB and PinkSheets.

DTC eligibility has become a major concern for OTC Issuers in the past year. Obtaining and maintaining eligibility is of utmost importance for the smooth trading of an Issuer’s float in the secondary market. Moreover, DTC eligibility is a prerequisite for OTC Issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name. Most Issuers and many legal practitioners do not know or understand the eligibility requirements or procedures.

The DTC Application Process

First and foremost, like a Form 211 submittal to FINRA, an Issuer cannot make direct application to DTC for eligibility. An application must be submitted and sponsored by a DTC Participant. A current list of DTC Participants

October 5, 2011

Convertible Promissory Notes; Flexible Financing Options

I have explored the topic of promissory notes in previous articles. This analysis shall specifically concentrate on convertible promissory notes.

As a reminder, a promissory note is a written promise by a person, persons or entity to pay a specific amount of money (called “principal”) to another, usually to include a specified amount of interest on the unpaid principal amount. In addition, a promissory note will include the basic specifics of the debt, including the debtor and creditor, when payment or payments are due, interest rates, if the debt is secured, and whether the debt may be converted into stock or other equity. A promissory note that may be converted is often referred to as either a debenture or a convertible promissory note.

Notes Can Be Sold or Assigned

Unless specifically prohibited in the language of the note, a promissory note is assignable by the lender. That is, the lender can sell or assign the note to a third party

August 10, 2011

An Introduction to Promissory Notes

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

Terms of Payment

A promissory note may contain other terms such as the right of the promisee to order payment be made to another person, security or collateral,

August 4, 2011

S-8 Stock, Use and Misuse

A Form S-8 registration statement is popular with small business issuers as it becomes effective immediately upon filing and allows for incorporation by reference, both of which benefits are not always available to smaller public companies. A Form S-8 registration statement can be used by Issuers to register securities to be offered to employees and certain consultants under certain employee benefit plans.

To qualify to use an S-8 registration statement the Issuer must: (i) be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended; (ii) have filed all reports required to be filed during the preceding 12 months, or such shorter period of time that the Issuer has been subject to the reporting requirements; (iii) is not a shell company and has not been a shell company for at least 60 calendar days previously; and (iv) if it has been a shell company at any time previously, has filed current Form 10 information with the

July 14, 2011

SEC Approves BX Venture Market

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

The OTCBB, OTCQB and OTCQX Alternative

The BX Market is marketing itself as a more transparent, better regulated, listing alternative to both the OTCBB and OTCQB and OTCQX. Presumably this means that companies trading on the BX Market would appear to have greater credibility than those on the OTCBB or OTCQB/QX. The BX Market will be run through joint ventures with NASDAQ

June 17, 2011

Filing Deadlines for Exchange Act Quarterly and Annual Reports

It should be noted that this article focuses specifically on non-accelerated filers.

Companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. In additional articles, I will discuss in depth the contents and specific disclosure requirements of both forms. However, in summary, the quarterly report on 10-Q contains unaudited reviewed quarterly financial statements together with management discussion and analysis of those statements.

Form 10-K

The annual report on Form 10-K contains audited annual financial statements, together with management discussion and analysis of those statements as well as other disclosures including but not limited to management bios, management compensation, unregistered issuances of stock, generally background on the registrant, internal control reports, litigation matters and more.

Quarterly reports on form 10-Q are due 45 days from the end of the quarter and annual reports on Form 10-K are due

June 1, 2011

Mergers and Acquisitions – The Acquisition Agreement

Simply stated, the acquisition agreement sets forth the financial terms of the transaction and legal rights and obligations of the parties with respect to the transaction. It provides the buyer with a detailed description of the business being purchased and provides for rights and remedies in the event this description proves to be materially inaccurate. The agreement spells out closing procedures, pre-conditions to closing and post-closing obligations. The agreement provides for representations and warranties and the rights and remedies if these representations and warranties are inaccurate.

The main components of the acquisition agreement and a brief description of each are as follows:

Representations and Warranties

Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date. In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation

May 27, 2011

Public Company Compliance – Selecting An Auditor

The Sarbanes Oxley Act of 2002 (SOX) created the PCAOB, which is the Public Company Accounting Oversight Board. All public company auditors must be PCAOB licensed and qualified. Prior to the enactment of SOX, the profession was self regulated and any CPA could audit a public company. On its website, the PCAOB describes itself as “[T]he PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.”

Not All PCAOB Auditors are Created Equal

Licensing and membership with the PCAOB has stringent requirements. In fact, shortly after the enactment of SOX the number of accounting firms that provide public company services declined dramatically. Being held to a higher standard isn’t for everyone. However, as time has passed, even

May 21, 2011

Merger and Acquisitions – Board of Director Obligations, Part 5

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. This blog focuses on the director’s duty of disclosure. A director’s duty of disclosure is part and parcel with their duty of loyalty. That is, the duty of disclosure primarily focuses on a director’s duty to disclose conflicts of interest he may have with respect to any corporate action. However, the duty also extends to a director’s duty to inform shareholders fully on matters involving a shareholder vote and in making any public disclosures.

Duty to Disclose

The duty to disclose (like other duties) only extends to material facts and circumstances. “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). In the

May 9, 2011

Merger and Acquisitions – Board of Director Obligations, Part 4

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. The last in the series discussed a director’s duty of loyalty. This blog continues that discussion, focusing on the duty in particular fact circumstances.

Balancing Common and Preferred Shares

A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.

Directors’ Financial Motivation

Delaware courts have emphasized that involvement by disinterested, independent

May 6, 2011

Merger and Acquisitions – Board of Director Obligations, Part 3

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series detailed the directors’ basic duties of care, loyalty and disclosure. The second discussed the availability of indemnification and/or exculpation and the importance of acting in good faith. This third blog in the series will take a more in-depth look at a directors’ duty of loyalty in a merger and acquisition transaction.

Duty of Loyalty

The duty of loyalty demands that there be no conflict between the director’s duty to the company and their own self-interest. A director breaches that duty when he appropriates a corporate asset or opportunity or uses his corporate office to promote, advance or effectuate a transaction between the corporation and himself or a related party which isn’t entirely fair to the corporation.

Business Judgment Rule

The business judgment rule will not protect a director where there is a

May 4, 2011

Merger and Acquisitions – Board of Director Obligations, Part 2

This blog continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series went over the directors basic duties of care, loyalty and disclosure.

Indemnification of Corporate Officers

Many states’ corporate laws allow entities to include provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation refers to a complete elimination of liability whereas indemnification allows for the reimbursement of expenses incurred by an officer or director.

Delaware, for example, allows for the inclusion of a provision in the certificate of incorporation eliminating personal liability for directors in stockholder actions for breaches of fiduciary duty, except for breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification generally is only available where the director has acted in good faith. Exculpation is generally only available to directors whereas indemnification is available

April 29, 2011

Merger and Acquisitions – Board of Director Obligations, Part 1

Mergers and Acquisitions

However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e. get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors actions face a higher level of scrutiny. This is referred

April 21, 2011

Gunjumping Restrictions On Communications Related To IPOs

”Gunjumping” is the dissemination of information regarding the Issuer before a complete prospectus has been filed with the Securities and Exchange Commission (“SEC”). Communications prior, during and immediately following the filing of a registration statement are strictly regulated to prevent an Issuer from hyping the market in association with an offering. In addition, the SEC wants to ensure that investors decisions to participate in an offering are based on information that has been reviewed by the SEC and meets the disclosure standards set forth in the securities laws.

Registration Requirements for Sales

During the pre-filing period, Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) makes it “unlawful for any person, directly or indirectly, to… offer to sell or offer to buy… any security, unless a registration statement has been filed as to such security.” An offer to sell or offer to buy are broadly defined to include every attempt or offer to dispose of a

February 25, 2011

Back To Basics – IPO Or Not To IPO?

Initial Public Offerings (IPO’s) are on the rise once again. I have potential clients calling me daily interested in going public through an IPO, most have little or no prior knowledge of the public company arena – so back to basics. An IPO is an initial public offering of securities. Prior to proceeding with an IPO, an Issuer should consider the advantages, disadvantages and alternatives.

The advantages of an IPO include:

Access to capital
Liquidity of stock
Public image and prestige; and
Ability to attract and retain better personnel

The disadvantages of an IPO include:

Expense – both of the initial transaction and ongoing compliance;
Public disclosure of business information – public companies are required to be transparent which can give private competitors an edge;
Limitations on long term strategic decisions
Civil and criminal liability of executive officers and directors; and
Takeover danger

The alternatives to an IPO for an Issuer seeking capital include:

A Section 4(2) and/or Regulation D

February 23, 2011

Basic Refresher On The Private Placement Exemption

Section 4(2) of the Securities Act of 1933, as Amended (“Securities Act”) provides the statutory basis for private placement offerings. In particular, Section 4(2) exempts “transactions by an issuer not involving any public offering.” The key components of this statutory exemption are that the offering must be by the Issuer, not an affiliate, agent or third party, and that the transactions must not involve a public offering. In order to determine if there is a public offering, practitioners must consider Section 2(11) of the Securities Act which defines an underwriter. The Securities and Exchange Commission (“SEC”) and courts limit the scope of Section 4(2) by preventing indirect public offerings by issuers and control persons through third parties. Accordingly, if an investor acts as a link in the chain of transactions resulting in securities being distributed to the public, they are an underwriter, and the exemption under Section 4(2) is not available.

The Ralston Purina Standard

The leading case interpreting Section

February 14, 2011

New FINRA Rules For Corporate Actions

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

FINRA and the OTCBB

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

December 13, 2010

Has The OTCBB Been Replaced By The OTCQX And OTCQB?

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

Three Levels of Reporting

The new www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and PinkSheets. The new website also provides quotes for the OTCBB but it seems this is just more as a comfort or segue until the industry gets used to the idea that the “bulletin board” is no more. The OTCBB has no particular listing or quotation requirements other than that the issuer be subject to the reporting requirements of

December 9, 2010

Dodd-Frank Act Changes Definition Of Accredited Investor Effective Immediately

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,

August 13, 2010

Special Purpose Acquisition Companies (SPACs)

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

August 5, 2010

Subsidiary Spin-Offs

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

August 4, 2010

PIPE Transactions, Terms and Requirements

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

June 18, 2010

Direct Public Offerings And The Internet

In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.

To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:

An electronic prospectus must provide the same information as a paper written prospectus;
The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
The Investor must be immediately notified of any amendments or changes in the offering documents; and
The Issuer must

June 16, 2010

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

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

May 12, 2010

Form 10 Registration Statements

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

March 19, 2010

Section 4(6) Registration Exemption for Accredited Investors

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

January 28, 2010

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

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)

January 25, 2010

Rule 144 and the Evergreen Requirement Examined

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

January 22, 2010

Compliance When Conducting Concurrent Private and Public Offerings

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

January 19, 2010

Equity Line Financing Examined

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

January 16, 2010

Registering Convertible Securities

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

January 12, 2010

Overview of Recognized Exemptions From Section 5

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

January 8, 2010

Rule 419 and Offerings by Shell or Blank Check Companies

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

January 5, 2010

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

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

January 1, 2010

A Comprehensive Analysis of Section 5

Section 5 of the Securities Act of 1933, as amended, contains the basic registration requirements for all offerings and rules of securities. Section 5(a) provides that “unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly:

…to sell such security through the use or medium of any prospectus or otherwise; or
…to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale”

Section 5(b) provides that “it shall be unlawful for any person directly or indirectly:

…to transmit through the mails or in interstate commerce, any prospectus relating to a security with respect to which a registration has been filed…., unless such prospectus meets the requirements of Section 10; or
…to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a

December 29, 2009

Section 3(a)(9) Exchanges Evaluated

Section 3(a)(9) of the Securities Act of 1933, provides an exemption from the registration requirements for “[E]xcept with respect to a security exchanged in a case under title 11 of the United States Code, any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.” Generally, in an exchange offer, the issuer offers to exchange new debt or equity securities for its outstanding debt or equity securities.

Since Section 3(a)(9) is a transactional exemption, the new securities issued are subject to the same restrictions on transferability, if any, of the old securities, and any subsequent transfer of the newly issued securities will require registration or another exemption from registration. However, since the new securities take on the character of the old securities, tacking of a holding period is generally permitted allowing for subsequent resales under Rule 144 (assuming all other conditions have

December 11, 2009

When Can Separate Issuer Offerings That Occur Within a Short Time Be Integrated?

The integration doctrine prevents issuers from circumventing the registration requirements of the Securities Act of 1934 by determining whether two or more securities offerings are really one offering that does not qualify as an exempt offering, or an exempt offering is really part of a registered public offering.

Securities Act Release No. 33-4552 (November 6, 1962) sets forth a five factor test that is used as a guideline in determining whether the separate offerings of an issuer that occur within a short time of one another will be integrated. These same factors are set forth in the Note to Rule 502(a) of Regulation D, which factors address whether the offerings:

are part of a single plan of financing;
involve the issuance of the same class of securities (convertible securities, warrants, and other
derivative instruments generally are deemed to be the same class as the underlying security unless the terms of the primary security prohibit exercises until at least the one

December 9, 2009

Regulation A and Rule 504

Section 3(b) of the Securities Act gives the SEC authority to exempt from registration certain offerings where the securities to be offered involve relatively small dollar amounts. Under this provision, the SEC has adopted Regulation A, a conditional ex-emption for certain public offerings not exceeding $5 million in any 12-month period. An offering statement (consisting of a notification, offering circular, and exhibits) must be filed with the SEC Regional Office in the region where the company’s principal business activities are conducted. Although Regulation A is technically an exemption from the registration requirements of the Securities Act, it is often referred to as a “short form” of registration since the offering circular (similar in content to a prospectus) must be sup-plied to each purchaser and the securities issued are freely tradeable in an aftermarket.

The principal advantages of Regulation A offerings, as opposed to full registration on Form S-1, SB-1 or SB-2, are:

Required financial statements are simpler and need not

December 7, 2009

SEC Stock Buyback Rules Examined

SEC Rule 10b-18 provides issuers with a safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 under the Exchange Act when issuers bid for or repurchase their common stock in the market in accordance with the Rule’s manner, timing, price and volume conditions. Each of the conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made.

Rule 10b-18

The material portions of Rule 10b-18 are as follows:

Definition. A “Rule 10b-18 purchase” is generally defined as a purchase or any bid or limit order of an issuer’s common stock by or for the issuer or any of the issuer’s affiliated purchasers.

To be able to rely on Rule 10b-18 in make repurchases, the following four (4) conditions must be met.

Time of Purchase. The Rule restricts issuers from making repurchases that constitute the opening transaction in the security on a trading day, or

December 4, 2009

Transparency in the Financial Markets and the Materiality Standards

The disclosure requirements at the heart of the federal securities laws involve a delicate and complex balancing act. Too little information provides an inadequate basis for investment decisions; too much can muddle and diffuse disclosure and thereby lessen its usefulness. The legal concept of materiality provides the dividing line between what information companies must disclose, and must disclose correctly, and everything else. Materiality, however, is a highly judgmental standard, often colored by a variety of factual presumptions.

Transparency in Financial Markets

The guiding purpose of the many and complex disclosure provisions of the federal securities laws is to promote “transparency” in the financial markets. However, the task of winnowing out the irrelevant, redundant and trivial from the potentially meaningful material falls on corporate executives and their professional advisors in the creation of corporate disclosure, and on investment advisors, stock analysts and individual investors in its interpretation. The concept of materiality represents the dividing line between information reasonably likely to influence

November 27, 2009

10b5-1 Trading Plans and Material Non-Public Information

As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.

Good Faith Practices When Establishing Trading Plans

In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial

November 23, 2009

Proper Use of S-8 Registration Statements

A Form S-8 registration statement is popular with small business issuers because it becomes effective immediately upon filing and allows for incorporation by reference, two benefits not always available to smaller public companies. A Form S-8 registration statement can be used by Issuers to register securities to be offered to employees under certain employee benefit plans.

November 17, 2009

Rule 144 and Pink Sheet Shells; Selling Shares Post Merger

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

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

Rule 144

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption

November 11, 2009

Responsibilities of Independent Directors Increases in Response to Sarbanes Oxley

Serving as an independent director carries serious obligations and responsibilities.

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

Disclosure and Transparency

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

November 10, 2009

Securities Law Update: Intrastate Offerings Section 3(a)(11) and Rule 147 Examined

Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 of the Securities Act for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” (“Intrastate Exemption”) Rule 147 promulgated under the Securities Act provides for further application of the Intrastate Exemption.

Rule 147, Issuers and Corporate Counsel

In addition to complying with Rule 147, Issuers and their counsel need to be cognizant of and comply with applicable state securities laws regulating intrastate offerings. The Intrastate Exemption is only available for bona fide local offerings. That is, the Issuer must be a resident of, and doing business, within the state in which all offers and sales are made

November 6, 2009

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

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

Securities acquired solely by the cashless exercise of an option or warrant are deemed to have been issued on the date of issuance of the underlying option or warrant; provided however, that the payment of any consideration, even a de minimus amount of cash, for the newly issued securities will restart the holding period. Accordingly, securities issued upon exercise of options or warrants in a stock option plan are deemed issued

November 5, 2009

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

ABA Journal’s 10th Annual Blawg 100

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Rule 145 addresses the registration and resale requirements for securities issued in a merger, consolidation, acquisition of assets or reclassification of securities. Rule 145 sets forth the Securities and Exchange Commission (SEC) view that an offer, offer to sell, offer for sale or sale occurs when there is submitted to security holders a plan or agreement pursuant to which such security holders are asked to vote on an exchange of their existing securities for new securities in a merger, consolidation, acquisition of assets or reclassification of securities transaction. Offers, offers to sell, offers for sale or sales all require registration pursuant to Section 5 of the Securities Act of 1933, as amended (Securities Act) unless an exemption to such registration is available.

Securities Registration Required

Accordingly, unless an exemption is otherwise available, Rule 145 requires that the following transactions require registration if security holders vote on such transaction (i) reclassifications of securities which

November 4, 2009

SEC Rule 144: Current Public Information and Reporting Requirements

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

Accordingly, if a reporting issuer does not file a required Q or K during this period, or 15c2-11 information lapses for a non-reporting issuer, sales must cease until the current public information requirement is again satisfied. Moreover, Sellers are taking a risk by selling during the 5-day or 15-day period following the filing of

November 4, 2009

SEC Rule 144: Resale Conditions and Exempt Transactions

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

As Rule 144 only addresses the resale of restricted securities, the rule first defines “restricted securities”. Restricted securities include: (i) securities acquired directly or indirectly from the Issuer, of from an affiliate of the Issuer (affiliate includes spouses and family members living in the same household), in a transaction or chain of transactions not

November 3, 2009

Contracting Away Fiduciary Obligations In Delaware LLCs And Limited Partnerships

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

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

Delaware Corporate Law

Under Delaware law, the purpose of the implied covenant of fair dealing and good faith is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself. Although the covenant of good faith and fair dealing itself cannot be waived,

October 31, 2009

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

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

Insider Trading

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

The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or

October 30, 2009

The Federalism of State Corporate Law

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

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

Sarbanes Oxley (SOX)

SOX regulates corporate governance in five matters: (i) SOX prevents corporations from engaging the same accounting firm to provide both audit and specified non-audit services; (ii) SOX requires that audit committees of listed companies be

October 29, 2009

Recent News

Proposed Crowdfunding Rules – Part IV

January 14, 2014

Summary Breakdown of Proposed New Rules – Requirements on Issuers

Disclosure Requirements

Pursuant to the CROWDFUND Act as set forth