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SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders

On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA. The amendments would increase regulatory oversight over these traders.

Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading. These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA. The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight.

The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to which they are a member. Currently, income

May 12, 2015

SEC Advisory Committee On Small And Emerging Companies Explores Venture Exchanges, Private And Secondary Securities Trading and The NASAA Coordinated Review Program- Part I

The SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

As previously written about, on March 4, 2015, the committee met and finalized its recommendation to the SEC regarding the definition of “accredited investor.” My blog on those recommendations can be read HERE. In addition to finalizing the accredited investor definition recommendation, at the March 4 meeting the Advisory Committee listened to presentations regarding and discussed several important and timely small business initiatives.

I’ve had the

May 5, 2015

SEC Congressional Testimony– Part II

SEC CONGRESSIONAL TESTIMONY – PART II

On three occasions recently, representatives of the SEC have given testimony to Congress. On March 24, 2015, SEC Chair Mary Jo White testified on “Examining the SEC’s Agenda, Operations and FY 2016 Budget Request”; on March 19, 2015, Andrew Ceresney, Director of the SEC Division of Enforcement, testified to Congress on the “Oversight of the SEC’s Division of Enforcement”; and on March 10, 2015, Stephen Luparello, Director of the Division of Trading and Markets, testified on “Venture Exchanges and Small-Cap Companies.” In a series of blogs, I will summarize the three testimonies.

In the first blog in the series, which can be read HERE, I summarized Mary Jo White’s testimony. This second blog in the series summarizes the testimony of Andrew Ceresney and in particular his words on the SEC’s enforcement focus for fiscal year 2016.

Andrew Ceresney, Director Division of Enforcement – Testimony to Congress

Mr. Ceresney began his testimony with a

April 28, 2015

SEC Division of Corporation Finance Issues Guidance On Bad Actor Waivers

Last month the SEC’s Division of Corporation Finance issued guidance on the granting waivers for the bad actor disqualifications under Regulation A and Rules 505 and 506 of Regulation D.

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 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.

On July 31, 2013, I summarized the final rules, which summary can be read HERE. On December 4,

April 21, 2015

SEC Congressional Testimony- Part I

On three occasions recently representatives of the SEC have given testimony to Congress. On March 24, 2015, SEC Chair Mary Jo White testified on “Examining the SEC’s Agenda, Operations and FY 2016 Budget Request”; on March 19, 2015, Andrew Ceresny, Director of the SEC Division of Enforcement, testified to Congress on the “Oversight of the SEC’s Division of Enforcement”; and on March 10, 2015, Stephen Luparello, Director of the Division of Trading and Markets, testified on “Venture Exchanges and Small-Cap Companies.” In a series of blogs, I will summarize the three testimonies. This first blog in the series summarizes the testimony of Mary Jo White.

Mary Jo White Testimony

On March 24, 2015, SEC Chair Mary Jo White gave testimony before the United States House of Representatives Committee on Financial Services. The testimony was titled “Examining the SEC’s Agenda, Operations and FY 2016 Budget Request.” As can be gleaned from the title, Mary Jo White was giving testimony in support

April 14, 2015

SEC Cracks Down On Confidentiality Agreements As Violating Whistleblower Rights And Protections

On April 1, 2015, the SEC announced its first filed, and settled, enforcement action against a company for using improperly restrictive language in confidentiality agreements as a method to stifle or retaliate against whistleblowers.

In recent months, the SEC has been issuing requests to companies for copies of confidentiality agreements, non-disclosure agreements, employment agreements, severance agreements and settlement agreements entered into with employees and former employees of the companies. The initiative specifically requests copies of documents since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and, in particular, the provisions of the Dodd Frank-Act which grant awards and protections for whistleblowers.

In addition, the SEC has been asking for copies of company human resource policies, employee memos, training guides and any and all documents that discuss “whistleblowers” either directly or indirectly. According to a Wall Street Journal article on the subject, the SEC believes that corporations are retaliating against potential

April 7, 2015

SEC Has Published Final Rules Adopting Regulation A+

On March 25, 2015, the SEC pleasantly surprised the business community by releasing final rules amending Regulation A. The new rules are commonly referred to as Regulation A+. The existing Tier I Regulation A, which does not preempt state law, has been increased to $20 million and the new Tier II, which does preempt state law, allows a raise of up to $50 million. Issuers may elect to proceed under either Tier I or Tier II for offerings up to $20 million. As is becoming common in the industry, I will refer to the new rules, including both Tier I and Tier II offerings, as Regulation A+.

In its press release announcing the passage, SEC Chair Mary Jo White was quoted as saying, “These new rules provide an effective, workable path to raising capital that also provides strong investor protections. It is important for the Commission to continue to look for ways that our rules can facilitate capital raising

March 31, 2015

The New FINRA Broker Background Check Rule

On December 30, 2014, the SEC approved FINRA Rule 3110(e), which requires FINRA member firms to verify the information provided by or contained in a broker’s Form U-4 within 30 days of filing the form with FINRA. The Rule becomes effective on July 31, 2015. The Rule is intended to help verify background information on a broker, including publicly available information through the FINRA Broker-Check system and to prevent high-risk, recidivist brokers from moving from firm to firm and continuing questionable or outright improper conduct.

Background

One of FINRA’s 2015 Regulatory and Examination Priorities is addressing concerns about high-risk brokers and improving background checks and due diligence by member firms on prospective hires. The new Rule is part of FINRA’s initiative in this regard. FINRA is taking additional steps in this area as well, including a one-time background and financial check of all registered representatives, which checks will be completed by August 2015.

The SEC release discussing and approving the

March 24, 2015

SEC Advisory Committee On Small And Emerging Companies’ Recommendations On Accredited Investor Definition

On December 17, 2014 and again on March 4, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding the definition of “accredited investor.” The Advisory Committee unanimously approved the recommendation, which is decidedly pro small business and supportive of facilitating capital formation, and communicated such recommendation to the SEC in a letter dated March 9, 2015 (the “Letter”). The Letter contains a pragmatic discussion of the importance of small business capital formation, the importance of the “accredited investor” definition, and the lack of connection between the definition and fraud prevention.

As set forth in the Advisory Committee Letter, the committee was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies

March 17, 2015

SEC Supports FINRA’s Rule 6490 Authority Over Corporate Actions

In two recent administrative decisions, the SEC has upheld FINRA’s broad authority under Rule 6490 to approve and effectuate corporate actions by public companies trading on the OTC Markets. One of FINRA’s mandates is to protect investors and maintain fair and orderly markets and like broker-dealers, it acts as a gatekeeper in the small-cap industry. FINRA exercises its powers though the direct regulation of its member broker-dealer firms, but also through its Office of Fraud Detection and Market Intelligence, which monitors the trading activity and press releases of issues in the marketplace and conducts related investigations. FINRA works with the SEC as a front line in the detection, investigation and assistance with the prosecution of issuers.

Recently, through its power under Rule 6490, as more fully explained below, FINRA has, with the support of the SEC, expanded its impact on the small-cap marketplace by conducting in-depth reviews of issuers in conjunction with the processing of corporate actions, and denying such

March 10, 2015

SEC Suspends Trading On 128 OTC Markets Companies

On March 2, 2015, the Securities and Exchange Commission (SEC) suspended the trading in 128 dormant shell companies trading on the OTC Link. The SEC suspended the trading in these shell companies because of questions regarding the accuracy and adequacy of publicly disseminated information concerning the companies’ operating status, if any.

The SEC notes in its release that OTC Markets had been unable to contact each of the issuers for more than one year. None of the subject issuers had filed any information or updated with either OTC Markets or the SEC in over a year. The SEC staff then independently attempted to contact the issuers and was able to contact 10 of the 128 companies and confirm from those ten that they had either ceased operations or gone private.

The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. As part of the initiative, the SEC Enforcement Division’s Office of

March 3, 2015

Shareholder Proposals And Procedural Requirements

Although in the small cap marketplace, proxy season really spreads all year, the majority of issuers hold annual meetings in connection with the issuance of their annual reports and the majority of issuers have a December 31 fiscal year end. Accordingly, in the coming months, public companies will be preparing their annual shareholder meeting notices and be dealing with the associated shareholder proposals.

The regulation of corporate law rests primarily within the power and authority of the states. However, for public companies, the federal government imposes various corporate law mandates including those related to matters of corporate governance. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at annual meeting, Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder, govern the proxy process itself for publicly reporting companies.

February 24, 2015

Proposed Amendments To Disclosure Of Hedging Policies For Officers, Directors And Employees

On February 9, 2015, the SEC issued proposed rules that would increase corporate disclosure of company hedging policies for directors and employees in annual meeting proxy statements. The new rules are part of the ongoing rule-making requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In particular, the new rule would implement Section 14(j) of the Securities Exchange Act of 1934 (“Exchange Act”), which requires annual meeting proxy or consent solicitation statements to disclose whether employees or members of the board are permitted to purchase financial instruments, such as options, swaps, collars and the like, to hedge price decreases in the company securities.

The proposed rules regulate disclosure of company policy as opposed to directing the substance of that policy or the underlying hedging activities. In fact, the rule specifically does not require a company to prohibit a hedging transaction or otherwise adopt specific policies. The rule would require disclosure about whether directors, officers and

February 17, 2015

OTC Markets Quotation Levels, Listing Requirements, and Comprehensive Pubco Criteria

OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink. The OTC Pink, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. This page provides a summary of the listing requirements for each level of quotation on OTC Markets.

OTCQX

The OTCQX divides its listing criteria between U.S. companies and International companies, though they are very similar. The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX U.S. Premier (also eligible to quote on a national exchange); and (ii) OTCQX U.S. and two tiers for International companies: (i) OTCQX International Premier; and (ii) OTCQX International. Quotation is available for American Depository Receipts (ADR’s) or foreign ordinary securities of companies traded on a Qualifying Foreign Stock Exchange, and an expedited application process is available for such companies.

Issuers on the OTCQX must meet specified eligibility requirements. Moreover, OTC Markets have the discretionary

February 10, 2015

Understanding The NSMIA And Navigating State Blue Sky Laws- Part II

The National Markets Improvement Act of 1996 (NSMIA)

Generally, an offering and/or sale of securities must be either registered or exempt from registration under both the federal Securities Act of 1933 (“Securities Act”) and state securities laws. As a result of a lack of uniformity in state securities laws and associated burden on capital-raising transactions, on October 11, 1996, the National Securities Markets Improvement Act of 1996 (“NSMIA”) was enacted into law.

The NSMIA amended Section 18 of the Securities Act to pre-empt state “blue sky” registration and review of specified securities and offerings. The preempted securities are called “covered securities.” The NSMIA also amended Section 15 of the Exchange Act to pre-empt the state’s authority over capital, custody, margin, financial responsibility, making and keeping records, bonding or financial or operational reporting requirements for brokers and dealers.

In Part I of this blog, I summarized the NSMIA pre-emption provisions. In this Part II, I discuss state blue sky laws.

February 3, 2015

Understanding The NSMIA And Navigating State Blue Sky Laws- Part I

National Markets Improvement Act of 1996 (NSMIA)

In this Part I, I summarize the NSMIA pre-emption provisions. Part II discusses state blue sky laws.

Section 18; Exemption from State Regulation of

January 27, 2015

SEC Announces Examination Priorities For 2015; Focus On Transfer Agents, Investment Advisers and Broker Dealers

On January 13, 2015, the SEC published its Office of Compliance Inspections and Examinations (OCIE) priorities for 2015. The OCIE examines and reviews a wide variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies and national securities exchanges.

The priorities this year have a primary focus on (i) protecting retail investors, especially those saving for retirement; (ii) assessing market-wide risks; and (iii) using data analytics to identify signs of potential illegal activity. In addition, the SEC will examine municipal advisers, proxy services, never-before-examined investment companies, fees and expenses in private equity and transfer agents.

Transfer agents and broker-dealers will be scrutinized for potential claims of engaging in or aiding and abetting pump-and-dump or market manipulation schemes.

The SEC shares its annual examination priorities as a heads-up and to encourage industry participants to conduct independent reviews and make efforts for increased compliance, prior to an SEC examination, investigation or potential enforcement proceeding. Moreover, the SEC chooses

January 20, 2015

SEC Rules – The Commission Publishes List of New Regulations for Review

The SEC has published its annual list of rules that are scheduled to be reviewed this year and to invite comment from the public as to whether these rules should be continued without change, amended or rescinded. The SEC is required to review rules each year that have a significant impact on small entities.

The current list includes 25 rules that were adopted by the SEC in 2003. I note that many of these rules were enacted as a follow-on to the Sarbanes Oxley Act of 2002 and in response to the then current financial crisis. Persons interested in submitting comments to the SEC regarding these rules can do so through the SEC website. I have ordered the list such that rules that most impact my clients appear first.

Below is a list of rules that will be reviewed this year for potential amendment and a brief summary of the existing rule.

Conditions for Use of Non-GAAP Financial Measures –

January 13, 2015

SEC Issues Several Proposed Rule Changes Pertaining To JOBs Act

ABA Journal’s 10th Annual Blawg 100

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On December 18, 2014, the SEC published proposed rule amendments to implement portions of Title V and Title VI of the JOBS Act by amending rules promulgated under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). The proposed amendments will revise the Section 12(g) rules to reflect the new, higher shareholder thresholds for triggering registration requirements and for allowing the voluntary termination of registration or suspension of reporting obligations. The proposed rules also make similar changes related to banks, bank holding companies, and savings and loan companies.

The proposed rules establish the time for determining accredited status for purposes of calculating shareholders of record and the corresponding application of the registration and deregistration rules. In particular, the proposed rules set the last day of the fiscal year as the relevant calculation moment effectively imposing an obligation on issuers to obtain, and investors to give, updated representations following an initial

January 6, 2015

First Issuer Completes NASAA Coordinated Review For Regulation A Offering

ABA Journal’s 10th Annual Blawg 100

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The first issuer has completed the NASAA coordinated review process to qualify to sell securities in multiple states under Regulation A. As the first and only issuer to complete this process, the issuer (Groundfloor Finance, Inc.) took the time to write a comment letter to the SEC with respect to its Regulation A+ rulemaking and in particular to discuss its experience with the NASAA coordinated review process. The issuer’s comment letter was followed by a letter to SEC Chair Mary Jo White from the House Financial Services Committee requesting that the SEC study the NASAA Coordinated Review Program.

The Coordinated Review Process

The NASAA coordinated review process is well put together and seems to have a focus on both investor protection and supportive assistance for the issuer. An issuer elects to complete the coordinated review process by completing a Form CR-3b and submitting the application together with a copy of the completed Form

December 30, 2014

Will the Disclosure Modernization and Simplification Act of 2014 Simplify Reporting Requirements for ECG’s and Smaller Reporting Companies?

ABA Journal’s 10th Annual Blawg 100

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In early December the House passed the Disclosure Modernization and Simplification Act of 2014, which will now go to the Senate for action—or inaction, as the case may be.

The bill joins a string of legislative and political pressure on the SEC to review and modernize Regulation S-K to eliminate burdensome, unnecessary disclosure with the dual purpose of reducing the costs to the disclosing issuer and ensure readable, material information for the investing public.

The Disclosure Modernization and Simplification Act of 2014, if passed, would require the SEC to adopt or amend rules to: (i) allow issuers to include a summary page to Form 10-K; and (ii) scale or eliminate duplicative, antiquated or unnecessary requirements in Regulation S-K. In addition, the SEC would be required to conduct yet another study on all Regulation S-K disclosure requirements to determine how best to amend and modernize the rules to reduce costs and burdens while

December 23, 2014

SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements

ABA Journal’s 10th Annual Blawg 100

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On December 8, 2014, the SEC settled charges against a creative, but ill informed, entrepreneur for acting as an unlicensed broker-dealer and for violations of Section 5 of the Securities Act of 1933, as amended. Ethan Burnside and his company, BTC Trading Corp., operated two online enterprises, BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange, that traded securities using virtual currencies, bitcoin or litecoin. Neither of these exchanges were registered as broker-dealers or stock exchanges. In addition, Burnside and his company conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated. These offerings were not registered with the SEC as required under the federal securities laws.

According to the SEC release on the matter, “the exchanges provided account holders the ability to use bitcoin or litecoin to buy,

December 16, 2014

Delaware General Corporate Law; 2014 Amendments Summarized

ABA Journal’s 10th Annual Blawg 100

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Although the federal government and FINRA have become increasingly active in matters of corporate governance, the states still remain the primary authority and regulator of corporate law. State corporation law is generally based on the Delaware Model Act and offers corporations a degree of flexibility from a menu of reasonable alternatives that can be tailored to companies’ business sectors, markets and corporate culture. Moreover, state judiciaries review and rule upon corporate governance matters, considering the facts and circumstances of each case and setting factual precedence based on such individual circumstances. In 2014 there were several changes to the Delaware General Corporation Law (DGCL) which impact public and private companies incorporated in Delaware, and elsewhere, since most states follow the DGCL.

The 2014 amendments which became effective on August 1, 2014, address: (1) mergers under DGCL Section 251(h) permitting a merger without a stockholder vote following certain tender or exchange offers; (2) director and

December 9, 2014

Private Offering Rule Changes Since JOBS Act

ABA Journal’s 10th Annual Blawg 100

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As the end of 2014 approaches, I find myself reflecting on the significant successes and failures in the private offering arena since the enactment of the Jumpstart our Business Startups Act (“JOBS Act”) on April 5, 2012. Some provisions under the JOBS Act became law without further rule-making action on the part of the SEC; others took time to pass; and significantly, Title III Crowdfunding, the most anticipated change in capital market access, has completely stalled. This blog is a summary of the in-depth detailed blogs I’ve previously written on each of these topics with some added commentary.

506(c) – The Elimination of the Prohibition Against General Solicitation and Advertising in Private Offerings to Accredited Investors; Broker-Dealer Exemption for 506(c) Funding Websites

The enactment of new 506(c) resulting in the elimination of the prohibition against general solicitation and advertising in private offerings to accredited investors has been a slow but sure success. Trailblazers

December 2, 2014

What Is A Security? The Howey Test And Reves Test

ABA Journal’s 10th Annual Blawg 100

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Sometimes it’s good to go back to basics. In my blogs I often refer to the registration and exemption requirements in the Securities Act of 1933, as amended (“Securities Act”). Section 5 of the Securities Act makes it unlawful to offer or sell any security unless a registration statement is in effect as to that security or there is an available exemption from registration. Similarly, I often refer to the broker-dealer registration requirements. To be a “broker” or “dealer,” a person must be engaged in the business of effecting transactions in securities.

In today’s small cap world corporate finance transactions often take the form of a convertible note and/or options and warrants, the conversion of which relies on Section 3(a)(9) of the Securities Act. Section 3(a)(9) is an exemption available for the exchange of one security for another (such as a convertible note for common stock). Likewise, Rule 144(d)(3)(i) allows the tacking of

November 25, 2014

Risk Factor Disclosures For Reporting Public Companies

ABA Journal’s 10th Annual Blawg 100

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A risk factor disclosure involves a discussion of circumstances, trends, or issues that may affect a company’s business, prospects, operating results, or financial condition. Risk factors must be disclosed in registration statements under the Securities Act and registration statements and reports under the Exchange Act. In addition, risk factors must be included in private offering documents where the exemption relied upon requires the delivery of a disclosure document, and is highly recommended even when such disclosure is not statutorily required.

The Importance of Risk Factors

Risk factors are one of the most often commented on sections of a registration statement. The careful crafting of pertinent risk factors can provide leeway for more robust discussion on business plans and future operations, and can satisfy a wide arrange of SEC concerns regarding existing financial and non-financial matters (such as potential default provisions in debt, dilution matters, inadvertent rule violations, etc.).

Although smaller reporting companies are

November 18, 2014

PCAOB Amends Auditing Standards For Related-Party And Significant, Unusual Transactions

ABA Journal’s 10th Annual Blawg 100

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On October 21, 2014, the SEC approved amendments to certain auditing standards that impact small cap companies that maintain GAAP compliant audits and file reports with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”). The SEC Order approved proposed rule changes that had been submitted to by the Public Company Accounting Oversight Board (the “PCAOB”) regarding the auditing standards for related party transactions and the standards regarding significant unusual transactions.

The amended rules apply to all SEC audits including those for broker-dealers and go into effect for the audits for fiscal year ends beginning on or after December 15, 2014.

Related Party Transactions

The SEC has approved new Auditing Standard No. 18 (AU No. 18) setting forth guidance and procedures for auditors to use in identifying and evaluating related party transactions. AU No. 18 is intended to strengthen requirements for identifying, assessing and responding to the risks of material misstatement

November 11, 2014

Penny Stock Rules And Broker Dealers

ABA Journal’s 10th Annual Blawg 100

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In last week’s blog regarding FINRA’s request to eliminate the OTC Bulletin Board quotation service (OTCBB) and to adopt rules relating to the quotation requirements for OTC equity services by inter-dealer quotation services, I touched upon the significance of penny stock rules related to the OTC marketplace. As further described herein, penny stocks are low-priced securities (under $5.00 per share) and are considered speculative and risky investments.

Penny stock rules focus on the activity of broker-dealers in effectuating trades in penny stocks. As a result of the risk associated with penny stock trading, Congress enacted the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) requiring the SEC to enact rules requiring brokers or dealers to provide disclosures to customers effecting trades in penny stocks. The rules prohibit broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange

November 4, 2014

FINRA Seeks to Eliminate the OTCBB and Impose Regulations on the OTC Markets

ABA Journal’s 10th Annual Blawg 100

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On October 7, 2014, the SEC published a release instituting proceedings to determine whether to approve FINRA’s request to delete the rules related to, and the operations of, the OTC Bulletin Board quotation service. On June 27, 2014, FINRA quietly filed a proposed rule change with the SEC seeking to adopt rules relating to the quotation requirements for OTC equity services and to delete the rules relating to the OTCBB and thus cease its operations. Although the rule filing was published in the Federal Register, it garnered no attention in the small cap marketplace. Only one comment letter, from OTC Market Group, Inc. (“OTC Markets”) (i.e., the entity that owns and operates the inter-dealer quotation system known by its OTC Pink, OTCQB and OTCQX quotation tiers) was submitted in response to the filing.

The OTCBB has become increasingly irrelevant in the OTC marketplace for years. In October 2010, I wrote a blog titled

October 28, 2014

SEC Issues Advertising Guidance Related to State-Specific Crowdfunding

ABA Journal’s 10th Annual Blawg 100

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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 584-page text of the rule release is available on the SEC website. As of today, it is unclear when final rules will be released and passed into law and what changes those final rules will have from the proposed rules. Moreover, upon passage of the final rules, there will be a period of ramping-up time in which crowdfunding portals complete the process of registering with the SEC, becoming members of FINRA and completing the necessary steps to ensure that their portal operates in compliance with those final rules. Federal crowdfunding is coming, but it is a slow process.

In the meantime, several states have either enacted or introduced state-specific crowdfunding legislation.

Federal Authority for State Crowdfunding Legislation

Both the federal government

October 21, 2014

Depositing Penny Stocks with Brokers Creates Obstacles; SEC Charges E*Trade with Section 5 Violation

ABA Journal’s 10th Annual Blawg 100

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Introduction

On October 9, 2014, the Securities and Exchange Commission (“SEC”) filed an enforcement action against E*Trade Securities and E*Trade Capital Markets for selling billions of shares of unregistered and otherwise restricted penny stocks for their customers. The SEC found that the firms processed the sales on behalf of three customers while ignoring red flags that the offerings being conducted were in violation of the federal securities laws in that the shares were neither registered nor subject to an available exemption from registration. E*Trade Securities and E*Trade Capital Markets settled the enforcement proceeding by agreeing to pay a total of $2.5 million in disgorgement and penalties.

The SEC press release on the matter quoted Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, as saying, “Broker-dealers serve an important gatekeeping function that helps prevent microcap fraud by taking measures to ensure that unregistered shares don’t reach the market if the registration rules

October 14, 2014

Insider Trading- A Case Study

ABA Journal’s 10th Annual Blawg 100

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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. Any and all persons that buy and sell stock may be subject to insider trading liability. This blog sets forth a particular hypothetical fact scenario and analyzes the associated insider trading implications.

Hypothetical Fact Pattern: Company X (the “Company”) sells shares to a group of 35 unaffiliated shareholders pursuant to an effective S-1 registration statement. These same 35 unaffiliated shareholders (the “Sellers”) sell their registered stock to a group of 35 unaffiliated purchasers (the Buyers”) in a private transaction (the “Transaction”). At or near the same time as the Transaction, the control block

October 7, 2014

The ECOS Matter; When Is A Reverse Split Effective?

ABA Journal’s 10th Annual Blawg 100

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In what was presumably an unintended consequence, the application of an SEC- approved FINRA regulation has resulted in a conflict between state and federal corporate law for a small publicly traded company.

On September 16, 2014, Ecolocap Solutions, Inc. (“ECOS”) filed a Form 8-K in which it disclosed that FINRA had refused to process its 1-for-2,000 reverse split. At the time of the FINRA refusal, ECOS had already received board and shareholder approval and had filed the necessary amended articles with the State of Nevada, legally effectuating the reverse split in accordance with state law. Moreover, ECOS is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and had filed a preliminary and then definitive 14C information statement with the SEC, reporting the shareholder approval of the split.

The ECOS 8-K attached a copy of the FINRA denial letter, which can be viewed HERE.

September 30, 2014

SEC Filed Actions Against 19 Firms and One Individual Trader for Violation of Rule 105 of Regulation M

ABA Journal’s 10th Annual Blawg 100

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On September 16, 2014, the SEC filed actions against 19 firms and one individual trade for short selling violations in advance of public stock offerings in violation of Rule 105 of Regulation M. The SEC has actively enforced Regulation M since its enactment in 1996. Regulation M is designed to prevent stock manipulation during public offerings and Rule 105 particularly prohibits short selling of stock within five business days of participating in an offering for the same stock. That is, you cannot short stock and cover your short by buying the same stock from the underwriter in a public offering. Rule 105 prevents downward pressure on a company’s stock price during the offering process.

The SEC’s current investigation found that 19 firms and one individual trader charged in these latest cases engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on

September 23, 2014

SEC Files Dozens of Charges for Violations of the Section 16 and Section 13 Corporate Insider Reporting Requirements

ABA Journal’s 10th Annual Blawg 100

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Introduction

On September 10, 2014, the SEC filed 28 separate actions against officers, directors and major shareholders and an additional 6 actions against reporting companies, all stemming from violations of the reporting requirements contained in Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The SEC announced that it had created a task force to investigate violations using quantitative data sources and ranking algorithms to identify repetitive late filers. The SEC settled with all but one of the charged for a total of $2.6 million in penalties.

The actions against insiders and major shareholders were based on direct violations of their individual reporting requirements. The actions against reporting companies were for “contributing to” the violations. In these cases, the companies had contractually agreed to take on the responsibility of making the filings for their insiders, and had been delinquent in doing so.

Historically the SEC has rarely

September 15, 2014

OTCQX Listing and Quotation Eligibility and Requirements for International Companies

ABA Journal’s 10th Annual Blawg 100

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On May 23, 2014, OTC Markets Group, Inc., published its updated OTCQX Rules for International Companies version 6.7. This blog summarizes those rules. A complete copy of the rules is available on the OTC Link website, otcmarkets.com.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX International Premier; and (ii) OTCQX International. International issuers on the OTCQX must meet specified eligibility requirements. Quotation is available for American Depository Receipts (ADR’s) or foreign ordinary securities of companies traded on a Qualifying Foreign Stock Exchange.

International issuers on the OTCQB must either be fully reporting and current in their SEC reporting obligations or qualify for the Rule 12g3-2(b) exemption from SEC registration for foreign private issuers. In addition, OTCQB entities must meet minimum price standards, file annual reports and pay annual fees, but do not undergo additional quality

September 8, 2014

Public Company and Affiliate Stock Buyback Rules; Rule 10b-18

ABA Journal’s 10th Annual Blawg 100

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The SEC allows for limited methods that an issuer can utilize to show confidence in its own stock and assist in maintaining or increasing its stock price. One of those methods is Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Exchange Act Rule 10b-18 provides issuers with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Exchange Act when issuers bid for or repurchase their common stock in the open market in accordance with the Rule’s manner, timing, price and volume conditions. Each of the four main conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made.

Sections 9 and 10 of the Exchange Act are the general anti-fraud and anti-manipulation provisions under the Act. Section 9(a)(2) of the Exchange Act makes it unlawful for any person to, directly or indirectly, create

September 2, 2014

CEO and CFO Certifications for Forms 10-Q and 10-K

ABA Journal’s 10th Annual Blawg 100

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A public company with a class of securities registered under Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC. The underlying basis of the reporting requirements is to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

These reports are signed by company officers and directors. Moreover, the Sarbanes-Oxley Act of 2002 (“SOX”) implemented a requirement that the company principal executive officer or officers and principal financial officer or officers execute certain personal certifications included with each Form 10-Q and 10-K. Certifications are not required on a

August 26, 2014

NASAA and US Senate Oppose State Law Pre-Emption in Proposed Regulation A+

On December 18, 2013, the SEC published proposed rules to implement Title IV of the JOBS Act, commonly referred to as Regulation A+. Since that time there has been very little activity towards the advancement of a final rule. The comment period closed March 24, 2014, and presumably the SEC is analyzing the information and deciding on the next reiteration.

NASAA

The North American Securities Administrators Association (NASAA), a group whose members are comprised of state securities regulators, while supportive of the Regulation A+ concept as a whole, has been vocal of its opposition of the proposed state law pre-emption provisions.

Notably, on April 8, 2014, Commissioner Luis A. Aguilar, the NASAA liaison, gave a speech at the North American Securities Administrators Association commenting on the NASAA’s position. In the speech Mr. Aguilar praised the concept of the rule itself, including the two-tier structure, offering amount limits and importantly ongoing reporting requirements. He expressed agreement with many of the same

August 19, 2014

Corporate Communications During the Public Offering Process; Avoid Gun Jumping

The public offering process is divided into three periods: (1) the quiet or pre-filing period, (2) the waiting or pre-effective period, and (3) the post-effective period. Communications made by the company during any of these three periods may, depending on the mode and content, result in violations of Section 5 of the Securities Act of 1933 (the “Securities Act”). Communication related violations of Section 5 are often referred to as “gun jumping.” All forms of communication could create “gun jumping” issues (e.g., press releases, interviews, and use of social media). “Gun jumping” refers to written or oral offers of securities made before the filing of the registration statement and written offers made after the filing of the registration statement other than by means of a prospectus that meet the requirements of Section 10 of the Securities Act, a free writing prospectus or a communication falling within one of the several safe harbors from the gun-jumping provisions.

Section 5(a) of

August 12, 2014

The Sale of Unregistered Securities Must Satisfy Form 8-K Filing Requirements In a 3(a)(10) Transaction

Introduction and Background

Recently the Securities and Exchange Commission (“SEC”) has been taking action against public reporting companies for the failure to file a Form 8-K upon the completion of a transaction exempt under Section 3(a)(10) of the Securities Act of 1933, as amended (“Securities Act”). The SEC has served a Wells notice on numerous companies for the failure to file such Form 8-K without any prior communication with such companies. Since enforcement actions for the failure to file a Form 8-K are very rare, it is my view that the SEC is concerned with the 3(a)(10) transaction itself.

A Wells notice, often referred to as a Wells letter, is a notice delivered by the SEC to persons and entities under investigation providing the opportunity to such persons and entities to present their position to the SEC prior to the commencement of an enforcement proceeding. A Wells letter gives notice of the SEC’s intended charges and enforcement recommendation and

August 5, 2014

Direct Public Offerings by Shell Companies- Tread Carefully

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As I’ve written about previously, 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 direct public offerings using a S-1 registration statement and successfully obtained market maker support and a ticker symbol from FINRA and are trading.

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

July 29, 2014

Completing A Name Change Without Shareholder Approval

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Generally a name change is completed through an amendment to a company’s articles of incorporation. Moreover, amendments to articles of incorporation generally require shareholder consent, which can be time-consuming and expensive and become even more so if the company is subject to the reporting requirements of the Securities Exchange Act of 1934.

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

July 22, 2014

SEC Extends Valuable Guidance to Determine and Verify Accredited Investors

On July 3, 2014, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations ) to provide guidance as to the determination and verification of accredited investor status for purposes of Rule 506 offering. The SEC published six new C&DI’s on the topic.

Background

Effective September 23, 2013, 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. For a complete discussion of the final rules, please see my blog Here.

Title II of the JOBS Act required the SEC to amend Rule 506 of Regulation D

July 15, 2014

Case Study of Online Funding as Related to Broker-Dealer Exemptions

Introduction

As a recurring topic, I am discussing exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services. On February 18th I published a blog about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act. Further on, I wrote on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

This blog addresses the statutory and related exemptions that affect, and would permit, the operation of a funding website, including the statutory exemption from broker-dealer registration enacted into law as part of the JOBS Act on April 5, 2012. This blog also includes an analysis of a fictional funding website.

Summary of Exemption from Broker-Dealer Registration Found in Title II of the JOBS Act

Title II of the JOBS Act created

July 7, 2014

Section 16 Insider Reporting and Potential Liability for Short-Swing Trading Practices

A public company with a class of securities registered under Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”). The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

Last week, I wrote about the “certain shareholder” filing requirements under Sections 13d and 13g of the Exchange Act, Regulation 13D-G beneficial ownership reporting and related Schedules 13D and 13G. This blog is a summary of the “certain shareholder and affiliate” reporting and related requirements under Section 16 of the Exchange Act. In particular, all directors, executive officers and 10% stockholders (“Insiders”) of reporting companies are subject to the reporting and insider trading provisions of Section 16 of the Exchange Act. At the end of the blog is a reference chart related to the

June 30, 2014

Schedule 13D and 13G Filing Requirements for Public Company Shareholders

ABA Journal’s 10th Annual Blawg 100

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A public company with a class of securities registered under Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”). The underlying basis of the Reporting Requirements is to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

This blog discusses the “certain shareholder” filing requirements under Sections 13d and 13g of the Exchange Act, Regulation 13D-G beneficial ownership reporting and related Schedules 13D and 13G. This blog is a summary of the large body of rules and interpretations related to Sections 13d and 13g,

June 24, 2014

SEC Chair Mary Jo White Speaks on Equity Market Structure

On June 5, 2014, Mary Jo White gave a speech at a conference on the topic of the structure of equity markets, the entire text of which is available on sec. gov. The speech was very high-level and broad-based with few specific initiative announcements. However, it does provide some insight into the direction of planned market structure initiatives and rule releases. This blog is a summary of her speech.

Ms. White began her speech by acknowledging that the SEC agrees with the basic premise that “investors and public companies benefit greatly from robust and resilient equity markets.”

Ms. White announced that she is recommending additional measures to “further promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets for smaller companies.” In addition, she will request that the SEC create a new Market Structure Advisory Committee of experts to review specific initiatives and rule proposals.

Current Market Structure

As noted in Ms. White’s speech, today’s

June 16, 2014

An Overview of MD&A

Management’s discussion and analysis of financial condition and results of operation, commonly referred to as MD&A, is an integral part of annual (Form 10-K) and quarterly (Form 10-Q) reports filed with the Securities and Exchange Commission (SEC). MD&A is also included in registration statements filed under both the Securities Exchange Act of 1934 (Form 10) and Securities Act of 1933 (Form S-1). MD&A requires the most input and effort from officers and directors of a company and, due to the many components of required information, often generates SEC review and comments. Item 303 of Regulation S-K sets forth the required content for MD&A. This discussion will be limited to the requirements for small public companies (i.e., those with revenues of less than $75 million).

A MD&A discussion for quarterly reports on Form 10-Q is abbreviated from the requirements for annual reports on Form 10-K and registration statements and should concentrate on updating and supplementing the annual report discussion. Although

June 10, 2014

FINRA Amends Rules 5110 and 5121 Related to Corporate Financing and Conflicts Of Interest

On April 28, 2014 and on May 7, 2014, the SEC approved the Financial Industry Regulatory Authority’s (FINRA) amendments to Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) and 5121 (Public Offerings of Securities with Conflicts of Interest) in order to simplify and refine the scope of the rules. FINRA is the self-regulatory body that regulates and governs securities firms. All securities firms are required to be licensed broker-dealers and are required to be members of FINRA.

FINRA rules and regulations are subject to review and approval by the SEC. Section 15A of the Securities Exchange Act of 1934, as amended, requires that FINRA rules be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in

June 3, 2014

What is A CUSIP and Legal Entity Identifier (LEI) Number?

CUSIP stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies securities, specifically U.S. and Canadian registered stocks, and U.S. government and municipal bonds. The CUSIP system—owned by the American Bankers Association and operated by Standard & Poor’s—facilitates the clearing and settlement process of securities by giving each such security a unique identifying number.

The CUSIP number consists of a combination of nine characters, both letters and numbers, which act as individual coding for the security—uniquely identifying the company or issuer and the type of security. The first six characters identify the issuer and are alphabetical; the seventh and eighth characters, which can be alphabetical or numerical, identify the type of issue; and the last digit is used as a check digit. A CUSIP number changes with each change in the security, including splits and name changes.

Whereas CUSIP identifies securities, a Legal Entity Identifier (LEI) identifies issuers. An LEI is a new global standard identifier for

May 27, 2014

Exemption to Broker-Dealer Registration Requirements for Officers, Directors and Key Employees

The topic of using unlicensed persons to assist in fundraising activities is discussed almost daily in the small and microcap community. For many years the SEC has maintained a staunch view that any and all activities that could fall within the broker-dealer registration requirements set forth in Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require registration. See also the SEC Guide to Broker-Dealer Registration on the SEC website.

In my blog on February 18th, 2014 I talked about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act. In this blog, I am focusing on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

Exchange Act Rule 3a4-1 – Persons Associated with an Issuer that are not Required to be Licensed as

May 20, 2014

Once Again, DTC Amends Proposed Procedures for Issuers Affected by Chills and Proposes Subsequent Rule Change

Background

On October 8, 2013, I published a blog and white paper providing background and information on the Depository Trust Company (“DTC”) eligibility, chills and locks and the DTC’s then plans to propose new rules to specify procedures available to issuers when the DTC imposes or intends to impose chills or locks. On December 5, 2013, the DTC filed these proposed rules with the SEC and on December 18, 2013, the proposed rules were published and public comment invited thereon. Following the receipt of comments on February 10, 2014, and again on March 10, 2014, the DTC amended its proposed rule changes. This blog discusses those rule changes and the current status of the proposed rules.

The new rules provide significantly more clarity as to the rights of the DTC and issuers and the timing of the process. For a complete discussion on background and DTC basics such as eligibility and the evolving procedures in dealing with chills and locks,

May 13, 2014

Say-On-Pay for Smaller Reporting Companies

Effective April 4, 2011, the SEC adopted final rules implementing shareholder advisory votes on executive compensation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Upon enactment smaller reporting companies were given a two-year exemption from the compliance requirements. Smaller reporting companies are defined as entities which, as of the last business day of their second fiscal quarter, have a public float of less than $75 million. Beginning in 2013, that exemption expired and now these smaller reporting companies are required to include say-on-pay voting. Although smaller reporting companies have been subject to the rules for a year now, I still encounter questions from the entities as to their obligations and requirements under the rules.

The say-on-pay rules were implemented by adding Section 14A, which requires companies to conduct a separate shareholder advisory vote to approve the compensation of executives, which pay is disclosed pursuant to Item 402 (the “say-on-pay” vote).

May 6, 2014

SEC Issues New Guidance on Use of Twitter and Other Social Media Communications

On April 21, 2014, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI) to provide guidance as to the use of Twitter and other social media communications in conjunction with a public offering or business combination transaction.

Background

Previously, 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.

April 29, 2014

OTCQX Listing and Quotation Eligibility and Requirements for U.S. Companies

On February 13, 2014, OTC Markets Group, Inc., published its OTCQX Rules For U.S. Companies version 6.5. This blog summarizes those rules. A complete copy of the rules are available on the OTC Link website, otcmarkets.com.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX U.S. Premier (also eligible to quote on a national exchange); and (ii) OTCQX U.S. issuers on the OTCQX must meet specified eligibility requirements, which interestingly do not include a requirement as to being subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) for OTCQX U.S. Moreover, OTC Markets has the discretionary authority to allow quotation to substantially capitalized acquisition entities that are analogous to SPAC’s.

Issuers on the OTCQB must be fully reporting and current in their SEC reporting obligations, meet minimum price standards, file annual reports and pay annual fees, but do

April 22, 2014

Public Company SEC Reporting Requirements

A public company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”). The underlying basis of the Reporting Requirements is to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

A company becomes subject to the Reporting Requirements by filing an

April 15, 2014

Concurrent Public and Private Offerings

Background

Conducting concurrent private and public offerings has historically been very tricky and limited, mainly as a result of the SEC’s position that the filing of an S-1 registration statement and unlimited ability to view such registration statement on the SEC EDGAR database in and of itself acted as a general solicitation and advertisement negating the availability of most private placement exemptions. In addition to the impediment of finding a private exemption to rely on, concurrent private and public offerings raised concerns of gun jumping by offering securities for sale prior to the filing of a registration statement, as prohibited by Section 5(c) of the Securities Act of 1933, as amended. However, with the enactment of the JOBS Act including its Rule 506(c) allowing general solicitation and advertising in an exempt offering, rules allowing the confidential submittal of registration statements for emerging growth companies (EGC) and rules permitting testing the waters communications prior to and after the filing of a

April 8, 2014

OTC Markets has Modified its OTCQB Eligibility Criteria Effective May 1, 2014

OTC Markets has unveiled changes to be quoted on the OTCQB, which changes become effective May 1, 2014. The OTC Markets changes are designed to attract venture investors to provide more information to investors and to improve such information with Real-Time Level 2 quotes. The OTC Markets press and informational releases related to the change concentrate on the push to create a successful venture-stage marketplace by removing underperforming companies.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

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

April 1, 2014

The NASDAQ Private Market

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. On March 5, 2014, NASDAQ officially launched the NASDAQ Private Market (“NPM”) a new marketplace for private companies. A PCMP is a trading platform, such as SharePost or SecondMarket, that provides a marketplace 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.

The official NASDAQ press release announcing the launch of the NPM states that the NPM will “provide qualifying private companies the tools and resources to efficiently

March 25, 2014

Guide to Reverse Merger Transaction

What is a reverse merger? What is the process?

A reverse merger is the most common alternative to an initial public offering (IPO) or direct public offering (DPO) for a company seeking to go public. A “reverse merger” allows a privately held company to go public by acquiring a controlling interest in, and merging with, a public operating or public shell company. The SEC defines a “shell company” as a publically traded company with (1) no or nominal operations and (2) either no or nominal assets or assets consisting solely of any amount of cash and cash equivalents.

In a reverse merger process, the private operating company shareholders exchange their shares of the private company for either new or existing shares of the public company so that

March 18, 2014

Crowdfunding Using Intrastate Offerings and Rule 147 – Is Florida Next?

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 584-page text of the rule release is available on the SEC website. The proposed rules invite public comment on many points and have indeed resulted in such comments. As of today, it is unclear when final rules will be released and passed into law and what changes those final rules will have from the proposed rules. Moreover, upon passage of the final rules, there will be a period of ramping up time in which crowdfunding portals complete the process of registering with the SEC, becoming members of FINRA and completing the necessary steps to ensure that their portal operates in compliance with those final rules. Federal crowdfunding it coming, but it is a slow process.

In the meantime, many states have recently either enacted or introduced state-specific crowdfunding

March 11, 2014

Understanding Section 3(a)(9) Exchanges and Conversions as Related to Convertible Promissory Notes

As an attorney specializing in the representation of companies and investment funds in the micro, small and mid cap arena, we work on corporate financing transactions involving convertible debt almost daily. These transactions provide a tremendous amount of benefit to these small cap companies, in that they obtain cash today that will be repaid with common stock tomorrow. Financing using convertible instruments that are repaid with stock is one of the many reasons an entity may choose to go public. However, the financing comes at a price including both dilution to existing stockholders and likely a reduced stock price resulting from the selling pressure when the debt is converted. Of course, all financing has pros and cons and public entities need to consider

March 4, 2014

SEC Proposes Rules for Regulation A+

On December 18, 2013, the SEC published proposed rules to implement Title IV of the JOBS Act, commonly referred to as Regulation A+. The proposed rules both add the new Section 3(b)(2) (i.e., Regulation A+) provisions and modify the existing Regulation A. This blog is limited to a discussion of the new Regulation A+.

Background

Title IV of the JOBS Act technically amends Section 3(b) of the Securities Act, which up to now has been a general provision allowing the SEC to fashion exemptions from registration, up to a total offering amount of $5,000,000. Regulation A is and has historically been an exemption created under the powers afforded the SEC by Section 3(b).

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(a)(2). This is important because federal law does not pre-empt state law for Section 3(b) offerings, but it does so for Section

February 25, 2014

The SEC Establishes Key Exemption to the Broker-Dealer Registration Requirements for M&A Brokers

On January 31, 2014, the SEC Division of Trading and Markets issued a no-action letter in favor of entities effecting securities transactions in connection with the sale of equity control of private operating businesses (“M&A Broker”). The SEC stated that it would not require broker-dealer registration for M&A Brokers arranging for the sale of private businesses, in accordance with the facts and circumstances set forth in the no action letter, as described below.

For many years the SEC has maintained a staunch view that any and all activities that could fall within the broker-dealer registration requirements set forth in Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require registration. See also the SEC Guide to Broker-Dealer Registration (2008) on the SEC website.

In accordance with the SEC Guide to Broker-Dealer Registration, providing any of the following services may require the individual or entity to be registered as a broker-dealer:

“finders,” “business brokers,” and

February 18, 2014

A Basic Overview of Rule 144

The Securities Act of 1933 (“Securities Act”) Rule 144 sets forth certain requirements for the use of Section 4(1) 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.” The terms “Issuer” and “dealer” have pretty straightforward meanings under the Securities Act, but the term “underwriter” does not. 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.

Although not set out in the statute, all transfer agents and Issuers, along with most clearing and brokerage firms, require an opinion of

February 11, 2014

SEC Files Proceedings Against 19 S-1 Companies and Suspends Trading on 255 Shell Companies

A. S-1 Proceedings

On February 3, 2014, the SEC initiated administrative proceedings against 19 companies that had filed S-1 registration statements. The 19 registration statements were all filed with an approximate 2-month period around January 2013. Each of the companies claimed to be an exploration-stage entity in the mining business without known reserves, and each claimed they had not yet begun actual mining. The 19 entities used the same attorney, who is the subject of a separate SEC action filed in August 2013 alleging involvement in a pump-and-dump scheme. Each of the entities was incorporated at around the same time using the same registered agent service. The 19 S-1’s read substantially the same.

Importantly, each of the 19 S-1’s lists a separate officer, director and sole shareholder, and each claims that this person is the sole control person. The SEC complains that contrary to the representations in the S-1, a separate single individual is the actual control person behind each

February 4, 2014

DTC Has Published Proposed Rules Related To Chills and Locks

Background

On October 8, 2013, I published a blog and white paper providing background and information on the Depository Trust Company (“DTC”) eligibility, chills and locks and the DTC’s then plans to propose new rules to specify procedures available to Issuers when the DTC imposes or intends to impose chills or locks. On December 5, 2013, DTC filed these proposed rules with the SEC and on December 18, 2013, the proposed rules were published and public comment invited thereon (“Rule Release”). For background on DTC basics such as eligibility and the evolving procedures in dealing with chills and locks, please see my prior blog here .

The Depository Trust Company (“DTC”) is a central securities depository in the U.S. which was originally created as a central holding and clearing system to handle the flow of trading securities and the problems with moving physical certificates among trading parties. The DTC is regulated by the SEC, the Federal Reserve System and the

January 28, 2014

Direct Public Offering or Reverse Merger; Know Your Best Option for Going Public

Introduction

For at least the last twelve months, I have received calls daily from companies wanting to go public. This interest in going public transactions signifies a big change from the few years prior.

Beginning in 2009, the small-cap and reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly. I can identify at least seven main reasons for the downfall of the going public transactions. Briefly, those reasons are: (1) the general state of the economy, plainly stated, was not good; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stock with broker dealers and FINRA’s enforcement of broker-dealer and clearing house due diligence requirements related to penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following

January 21, 2014

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

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 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

Recent News

SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders

May 12, 2015