Reverse Mergers

Definition Of A Shell Company In A Reverse Merger

Ten weeks of blogs on the new SPAC and shell company rules provides the perfect segue to discuss exactly what is a “shell company” in the context of a reverse merger and its implications – including one heartburn inducing unintended consequence. As I have been discussing over the past weeks, the new rules specifically apply to any reverse merger with a shell company, not just a SPAC shell company.

New Rule 145a deems any business combination of a reporting shell company involving another entity that is not a shell company to entail a sale of securities to the reporting shell company’s shareholders. Nothing in Rule 145a would prevent or prohibit the use of a valid exemption, if available, for the deemed sale of securities; however, I know of no such available exemption and the SEC rule release not only does not suggest one but specifically clarifies that Section 3(a)(9) would not be available.

As a result, the SEC release suggests

May 7, 2024

SEC Adopts Final Rules On SPACS, Shell Companies And The Use Of Projections – Part 7

On January 24, 2024, the SEC adopted final rules enhancing disclosure obligations for SPAC IPOs and subsequent de-SPAC business combination transactions. The rules are designed to more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. The new rules spread beyond SPACs to shell companies and blank check companies in general. The compliance date for the new rules is July 1, 2025.

In the first blog in this series, I provided background on and a summary of the new rules – see HERE. The second blog began a granular discussion of the 581-page rule release starting with partial coverage of new Subpart 1600 to Regulation S-K related to disclosures in SPAC IPO’s and de-SPAC transactions – see HERE. The third blog in the series continued the summary of Subpart 1600 and in particular the new dilution disclosure requirements – see HERE. Part 4 continued a review of

April 9, 2024

SPAC IPOs A Sign Of Impending M&A Opportunities

The last time I wrote about special purpose acquisition companies (SPACs) in July 2018, I noted that SPACs had been growing in popularity, raising more money in 2017 than in any year since the last financial crisis (see HERE). Not only has the trend continued, but the Covid-19 crisis, while temporarily dampening other aspects of the IPO market, has caused a definite uptick in the SPAC IPO world.

In April, the Wall Street Journal (WSJ) reported that SPACs are booming and that “[S]o far this year, these special-purpose acquisition companies, or SPACs, have raised $6.5 billion, on pace for their biggest year ever, according to Dealogic. In April, 80% of all money raised for U.S. initial public offerings went to blank-check firms, compared with an average of 9% over the past decade.”

I’m not surprised. Within weeks of Covid-19 reaching a global crisis and causing a shutdown of the U.S. economy, instead of my phone

June 9, 2020

NYSE MKT Listing Requirements

This blog is the second in a two-part series explaining the listing requirements for the two small-cap national exchanges, NASDAQ and the NYSE MKT. The first one, discussing NASDAQ, can be read HERE.

General Information and Background on NYSE MKT

The NYSE MKT is the small- and micro-cap exchange level of the NYSE suite of marketplaces. The NYSE MKT was formerly the separate American Stock Exchange (AMEX). In 2008, the NYSE Euronext purchased the AMEX and in 2009 renamed the exchange the NYSE Amex Equities. In 2012 the exchange was renamed to the current NYSE MKT LLC. The NASDAQ and NYSE MKT are ultimately business operations vying for attention and competing to attract the best publicly traded companies and investor following. The NYSE MKT homepage touts the benefits of choosing this exchange over others, including “access to dedicated funding, advocacy, content and networking and the industry’s first small-cap services package.”

Although there are substantial similarities among the different exchanges,

June 14, 2016

Mergers And Acquisitions – The Merger Transaction

Although I have written about document requirements in a merger transaction previously, with the recent booming M&A marketplace, it is worth revisiting. This blog only addresses friendly negotiated transactions achieved through share exchange or merger agreements. It does not address hostile takeovers.

A merger transaction can be structured as a straight acquisition with the acquiring company remaining in control, a reverse merger or a reverse triangular merger. In a reverse merger process, the target company shareholders exchange their shares for either new or existing shares of the public company so that at the end of the transaction, the shareholders of the target company own a majority of the acquiring public company and the target company has become a wholly owned subsidiary of the public company. The public company assumes the operations of the target company.

A reverse merger is often structured as a reverse triangular merger. In that case, the acquiring company forms a new subsidiary which merges with the

October 20, 2015

Mergers And Acquisitions: Board of Director Responsibilities

I have written about mergers and acquisitions, including reverse mergers, extensively in the past, but as both traditional mergers and acquisitions and reverse mergers are a large part of my practice, it is a topic worth revisiting and drilling down on regularly. In fact over the past year, the M&A market has been booming with activity. A question that often arises involves the obligations of the board of directors during the merger process.

Board of Directors’ Fiduciary Duties in the Merger Process

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 decisions. This

October 6, 2015

SEC Footnote 32 and Sham S-1 Registration Statements

Over the past several years, many direct public offering (DPO) S-1 registration statements have been filed for either shell or development-stage companies, claiming an intent to pursue and develop a particular business, when in fact, the promoter intends to create a public vehicle to be used for reverse merger transactions. For purposes of this blog, I will refer to these S-1 registration statements the same way the SEC now does, as “sham registrations.” I prefer the term “sham registrations” as it better describes the process than the other used industry term of art, “footnote 32 shells.”

Footnote 32 is part of the Securities Offering Reform Act of 2005 (“Securities Offering Reform Act”). In the final rule release for the Securities Offering Reform Act, the SEC included a footnote (number 32) which states:

“We have become aware of a practice in which the promoter of a company and/or affiliates of the promoter appear to place assets or operations within

September 29, 2015

Going Public Transactions For Smaller Companies: Direct Public Offering And Reverse Merger

Introduction

One of the largest areas of my firms practice involves going public transactions. I have written extensively on the various going public methods, including IPO/DPOs and reverse mergers. The topic never loses relevancy, and those considering a transaction always ask about the differences between, and advantages and disadvantages of, both reverse mergers and direct and initial public offerings. This blog is an updated new edition of past articles on the topic.

Over the past decade the small-cap reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly. The decline was a result of both regulatory changes and economic changes. In particular, briefly, those reasons were: (1) the recent Great Recession; (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

June 30, 2015

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

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

14C Information Statement Requirements for a Pre-Merger Recapitalization

Background on 14C Information Statements

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

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

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

July 10, 2013

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

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

July 2, 2013

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

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

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

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

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.

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

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

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

May 8, 2012

JOBS Act Amendments to General Solicitation and Advertising of Private Offerings

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

May 3, 2012

At-The-Market Offerings

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

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

May 2, 2012

Crowdfunding intermediaries- Hurry Up and Wait

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

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

April 26, 2012

SEC Grapples With Crowdfunding Rulemaking

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

The SEC’s Rulemaking Duty

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

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

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

April 24, 2012

SEC Issues Guidance on Title 1 of the JOBS Act

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

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

Determining When and If a Company Qualifies As

April 23, 2012

Crowdfunding Timing and Investor Protections

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

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

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

Crowdfunding Has Been Around For Several Years

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

April 20, 2012

SEC Issues Guidance on Registration and Deregistration Under Jobs Act

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

SEC Guidance on the JOBS Act

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

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

April 18, 2012

The JOBS Act Is Not Just Crowdfunding

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

A. The New “Emerging Growth Company” Category

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

April 17, 2012

Crowdfunding Act Signed Into Law

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

Opportunity For All Americans

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

April 16, 2012

Crowdfunding 101

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

Crowdfunding Exemption Possibilities

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

April 16, 2012

Big Changes Are Coming

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

A Whole New Exemption

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

April 16, 2012

DTC Chills, Due Process and Rule 22

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

The SEC’s Stance

As noted in the SEC opinion:

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

March 21, 2012

DTC Eligibility and the OTC Issuer

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

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

The DTC Application Process

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

October 5, 2011

Back To Basics – IPO Or Not To IPO?

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

The advantages of an IPO include:

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

The disadvantages of an IPO include:

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

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

A Section 4(2) and/or Regulation D

February 23, 2011

Basic Refresher On The Private Placement Exemption

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

The Ralston Purina Standard

The leading case interpreting Section

February 14, 2011

Special Purpose Acquisition Companies (SPACs)

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

IPO’s, DPO’s and Rule 419

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

August 5, 2010

Rule 144 and the Evergreen Requirement Examined

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In addition, Rule 144 is used to remove the restrictive legend from securities in advance of a sale. In layman terms, Rule 144, allows shareholders to either remove the restrictive legend or sell their unregistered shares.

Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and

January 22, 2010

Overview of Recognized Exemptions From Section 5

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

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

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

Exempt Transactions

The exempt transactions are set forth in Sections 3(a)(9), 3(b) and Section 4 of the Securities Act. Exempt transactions allow a security to be offered or sold in a particular

January 8, 2010

Section 3(a)(9) Exchanges Evaluated

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

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

December 11, 2009

Rule 144 and Pink Sheet Shells; Selling Shares Post Merger

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

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

Rule 144

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

November 11, 2009

Necessity of Background Searches on Officers and Directors as Part of Due Diligence Prior to a Reverse Merger or IPO

If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.

Many private companies go public either through a reverse merger with a public shell or initial public offering (IPO) process. A reverse merger allows a private company to go public by purchasing a controlling percentage of shares of a public shell company and merging the private company into the shell. An initial public offering is where the private company files a registration statement with the Securities and Exchange Commission and once the registration statement is effective proceeds to sell stock either directly (a DPO) or more commonly through an underwriter.

It is very important that management of public shells and underwriters conduct a background check on the private company’s officers and directors prior to embarking

October 17, 2009

OTCBB Reporting Requirements Enable Successful Reverse Mergers

Companies subject to the reporting requirements of the Securities Exchange Act of 1934 (amended to the “Exchange Act”), without current business operations, and trading on the NASDAQ Over the Counter Bulletin Board (“OTCBB”), commonly known as Bulletin Board Shells, have become the vehicle of choice for private companies seeking to go public through a reverse merger.

Although the domestic economy has slowed, reverse mergers still flourish, and Chinese-based companies in particular have taken the lead in reverse mergers with Bulletin Board Shells. As old sectors slow, new sectors such as biofuels, health supplements, and agricultural science have risen to lead the charge into the public arena.

SEC Reporting Requirements Make Due Diligence Practical

Bulletin Board Shells have become the vehicle of choice for private companies seeking public status. This is due in part to increasing industry pressure for public companies to maintain total disclosure of their financial condition and operations.

Bulletin Board Shells and OTCBB Companies must prepare and file

October 5, 2009

Market Makers Rely on Due Diligence in Reverse Mergers

Following approval of the 15c2-11 application by FINRA, and the consistent quotation of a company’s securities, market makers may “piggy back” on the approved and completed 15c2-11. In short, a market maker may quote the share price of the Bulletin Board Shell while relying on the due diligence of other market makers and the company’s current SEC filings.

Although highly technical, the due diligence process can be completed quickly and thoroughly by an experienced securities attorney; the key is knowing where to look and what to look for. For example:

All articles and amendments are ordered from the company’s state of domicile and reviewed for procedural correctness and historical understanding.
DTC (the Depository Trust Company) is contacted to confirm the company is in a transferable status.
In addition to financial statement review, using several proprietary online search services, the firm conducts comprehensive debt and litigation searches to identify any miscellaneous debts as well as pending or past litigation.
A tax

October 3, 2009

Reverse Mergers Hinge on Due Diligence and Cleaning Up Public Shells

When a publicly traded company “goes dark” and becomes delinquent in its filing requirements, it generally becomes a public shell and is no longer quoted on the Over the Counter Bulletin Board Exchange (OTCBB). However, with the assistance of an experienced securities attorney, the shell company can be restored so that a merger candidate can be introduced.

Some of the specific details that constitute the clean-up process include:

Reinstating the Company’s corporate charter and paying franchise taxes to the Company’s state of domicile, if necessary
Working with a PCOAB (Public Company Oversight Accounting Board) auditor to update all necessary financial statements and audits
Holding a shareholder meeting for purposes of electing directors and amending articles of incorporation and bylaws as necessary
Updating the Company’s articles of incorporation and bylaws to ensure they suit the needs of the successor Company
Conducting reverse splits of the Company’s outstanding shares of common stock in order to decrease the size of the outstanding common

October 1, 2009

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