Rule 144

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

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

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

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

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

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

Why Rule 419 Companies May Revitalize the Small-Cap Market

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

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

First – The General State of the Economy

Simply stated, it’s not good.

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

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

Third – The Rule 144 Changes Enacted in 2008

As discussed in previous blogs Rule 144(i),

November 16, 2011

Convertible Promissory Notes; Flexible Financing Options

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

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

Notes Can Be Sold or Assigned

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

August 10, 2011

Form 10 Registration Statements

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

The Purpose of Form 10 Registration Statements

Now onto what a Form 10 registration is. As indicated above a Form 10 registration statement is used to register a class of securities. Any Company with in excess of $10,000,000 in total assets and 750 or more record shareholders

March 19, 2010

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

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Rule 144

SEC has Modified Policies on Offerings by Shell Companies

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

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

NASDAQ To Acquire Sharepost And Create The NASDAQ Private Exchange

CROWDFUNDING FROM A TO Z

Resale of Crowdfunding Securities And An Aftermarket

Why Rule 419 Companies May Revitalize the Small-Cap Market

Convertible Promissory Notes; Flexible Financing Options

Form 10 Registration Statements

Rule 144 and the Evergreen Requirement Examined

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