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Financial Industry Regulatory Authority (FINRA)

The 211 Rules And Shell Companies

In September 2020, the SEC adopted a complete overhaul of the 15c2-11 rules, the new rules of which went into effect on September 28, 2021.  From a very high level, the new 211 rules: (i) require that information about the company and the security be current and publicly available in order to initiate or continue to quote a security; (ii) limit certain exceptions to the rule including the piggyback exception where a company’s information becomes unavailable to the public or is no longer current; (iii) limit certain exceptions to the rule including the piggyback exception where a company becomes and remains a shell company for a period of 18 months; (iv) reduce regulatory burdens to quote securities that may be less susceptible to potential fraud and manipulation; (v) allow OTC Markets itself to evaluate and confirm eligibility to rely on the rule; and (vi) streamline the rule and eliminate obsolete provisions.  For an in-depth discussion on the 15c2-11 rules,

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February 28, 2023

Small-Cap IPO Volatility – The China Connection

Less than two months after the PCAOB and the China Securities Regulatory Commission and Ministry of Finance signed a Statement of Protocol reaching a tentative deal to allow the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong, Nasdaq effectively halted all small-cap IPOs with a China connection.  This time, the issue is not audit-related.

During the week of September 19, one of our clients had a deal ready to be priced and begin trading on Nasdaq.  We had thought we cleared all comments when a call came from our Nasdaq reviewer – all small-cap IPOs were being temporarily halted while the Exchange investigated recent volatility.  The same day, an article came out on Bloomberg reporting on 2200% price swings (up and then steeply back down) on recent IPOs involving companies with ties to China – a repeat of similar volatility in the late ’80’s and early ’90’s despite three decades of

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December 6, 2022

SEC Proposed Changes To The Definition Of A “Dealer”

Following a continuous stream of litigation against small-cap and penny stock convertible debt lenders, the SEC has proposed some statutory changes to the definition of a “dealer” under the Exchange Act.  The SEC’s enforcement attack on convertible debt lenders began in 2017 and has been decried by industry participants as regulation by enforcement which, unfortunately, is not resulting in judicial orders or settlements offering clear guidance (see HERE).  Also, unfortunately, the proposed new rules, which were published in March 2022 and are likely to reach final rule stage this year, still do not help small-cap investors navigate the regulatory highway.

The rule is intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable.  The proposed rules would amend Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.

Proposed Rules

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November 8, 2022

The SEC Drafts Strategic Plan For Fiscal Years 2022-2026

On August 24, 2022, the SEC released its draft strategic plan for the fiscal years 2022 to 2026 and sought public comment on same.  The three primary goals set forth in the plan include: (i) protecting working families against fraud, manipulation, and misconduct; (ii) developing and implementing a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and (iii) supporting a skilled workforce that is diverse, equitable, inclusive, and is fully equipped to advance agency objectives.

To achieve these goals, the SEC intends to use of market and industry data to prevent, detect, and prosecute improper behavior.  The SEC also seeks to modernize design, delivery, and content of disclosures to investors so they can access consistent, comparable, and material information while making investment decisions.

These statements are very broad, but even at face value, the different focus of the SEC as compared to the last plan published in 2018 is clear.  In 2018 the three primary

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November 1, 2022

SEC Proposes Rules Related To Securities Lending Market

In November 2021, the SEC proposed new Exchange Act Rule 10c-1, which would require lenders of securities to provide the material terms of securities lending transactions to a registered national securities association (RNSA), such as FINRA.  FINRA would then make the information publicly available.  The proposed rules are part of an initiative by the SEC and FINRA to increase public access to information on short positions and borrowing related to short positions.

Although the rule would definitely provide an improved level of transparency to market participants regarding short positions, it will also add a significant compliance burden to broker dealers and clearing agencies.

Consistent with recent SEC proposals, the comment period was only open for 30 days following publication in the federal registrar and as such comments closed January 7, 2022.

Background

Securities lending is the market practice by which securities are transferred temporarily from one party, a securities lender, to another, a securities borrower, for a fee.  Most

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March 1, 2022

Public Market Listing Standards

One of the bankers that I work with often once asked me if I had written a blog with a side-by-side comparison of listing on Nasdaq vs. the OTC Markets and I realized I had not, so it went on the list and with the implementation of the new 15c2-11 rules, now seems a very good time to tackle the project.  I’ve added NYSE American to the list as well.

Quantitative and Liquidity Listing Standards

Nasdaq Capital Markets

To list its securities on Nasdaq Capital Markets, a company is required to meet: (a) certain initial quantitative and qualitative requirements and (b) certain continuing quantitative and qualitative requirements.  The quantitative listing thresholds for initial listing are generally higher than for continued listing, thus helping to ensure that companies have reached a sufficient level of maturity prior to listing.  NASDAQ also requires listed companies to meet stringent corporate governance standards.

Requirements Equity Standard  Market Value of

Listed Securities

Standard

 Net
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November 9, 2021

A Review of FINRA’s Corporate Finance Rule

As the strongest U.S. IPO market in decades continues unabated, it seems a good time to talk about underwriter’s compensation.  FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) governs the compensation that may be received by an underwriter in connection with a public offering.

Rule 5110 – The “Corporate Financing Rule”

Rule 5110 regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities.  The Rule prohibits member firms from participating in a public offering of securities if the underwriting terms and conditions, including compensation, are unfair as defined by FINRA.  The Rule requires FINRA members to make filings with FINRA disclosing information about offerings they participate in, including the amount of all compensation to be received by the firm or its principals, and affiliations and relationships that could result in the existence of a conflict of interest.  As more fully described herein, underwriter’s compensation is subject to lock-up provisions.

Filing Requirements

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October 5, 2021

FINRA Granted Oversight Of OTC Markets In The 211 Process

Clearly not completely pleased with the power bestowed on OTC Markets as part of the amended Rule 15c2-11, on June 9, 2021, FINRA filed a request for a rule change to increase its regulatory oversight and require OTC Markets to file a Form 211 as part of the new process. The SEC published the proposal on June 15 and sought comments.  Only one comment letter was received, and that was from OTC Markets itself.  On September 10, 2021, SEC approved the rule change with an effective date of September 28, 2021, the same day as the compliance date for the amended Rule 15c2-11.  On that date, any company that does not comply with the current publicly available information requirements in the amended 15c2-11 rules (see HERE and HERE for in-depth discussions on the new rules), will cease to trade and become what the industry refers to as “grey market.”

Amended Rule 6432 will: (i) require OTC Markets to submit a

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September 14, 2021

SEC Denies Expert Market – For Now

As the compliance date for the new 15c2-11 rules looms near, on August 2, 2021, in a very short statement, the SEC shot down any near-term hope for an OTC Markets operated “expert market.”  The SEC short statement indicated that a review of the proposed exemptive order that would allow the expert market is not on its agenda in the short term.  The SEC continued that “[A]ccordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.”

The statement acts as a great segue for a review as to just what those exceptions may be.  In addition, this blog will discuss the OTC Markets proposed expert market and finish with a broader refresher on the new 211 rules including the

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August 17, 2021

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