SEC Rule 15c2-11

The SEC Has Adopted Final Amendments To Rule 15C2-11; Major Change For OTC Markets Companies

Despite an unusual abundance of comments and push-back, on September 16, 2020, one year after issuing proposed rules (see HERE), the SEC has adopted final rules amending Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The primary purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC believes the final amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.

From a high level, the amended rule will require that a company have current and publicly available information as a precondition for a broker-dealer to either initiate or continue to quote its securities; will narrow reliance on certain of the rules

September 22, 2020

SEC Spring 2020 Regulatory Agenda

In July 2020, the SEC published its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term. The Agenda is published twice a year, and for several years I have blogged about each publication.

Like the prior Agendas, the spring 2020 Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame has decreased to 42 items as compared to 47 on the

August 18, 2020

Division of Enforcement 2019 Annual Report

As my firm does not practice in the enforcement arena, it is not an area I always write about, but this year I found a few trends that are interesting. In particular, just by following published enforcement matters on the SEC’s website, I’ve noticed a large uptick in actions to suspend the trading in, or otherwise take action against, micro- and small-cap companies, especially delinquent filers. I’ve also noticed a large uptick of actions against smaller public and private companies that use misleading means to raise capital from retail investors, and the concurrent use of unlicensed broker-dealers. Of course, there have always been a significant number of actions involving cryptocurrencies. In light of my own observations, I decided to review and report on the SEC’s view of its actions.

As an aside, before discussing the report, I note that the Government Accountability Office (GAO) has raised concerns about the quality of record keeping and documentation maintained by the

December 24, 2019

Drill Down On NASDAQ Audit Committee Requirements

I’ve written several times about Nasdaq listing requirements including the general listing requirements (see HERE) and the significant listing standards changes enacted in August of this year (see HERE). This blog will drill down on audit committees which are part of the corporate governance requirements for listed companies. Nasdaq Rule 5605 delineates the requirements for a Board of Directors and committees. The Nasdaq rule complies with SEC Rule 10A-3 related to audit committees for companies listed on a national securities exchange.

SEC Rule 10A-3

SEC Rule 10A-3 requires that each national securities exchange have initial listing and ongoing qualification rules requiring each listed company to have an audit committee comprised of independent directors. Although the Nasdaq rules detail its independence requirements, the SEC rule requires that at a minimum an independent director cannot directly or indirectly accept any consulting, advisory or other compensation or be affiliated with the company or any of its subsidiaries. The prohibition against compensation

December 17, 2019

Nasdaq Board Independence Standards

Nasdaq Rule 5605 delineates the listing qualifications and requirements for a board of directors and committees, including the independence standards for board members. Nasdaq requires that a majority of the board of directors of a listed company be “independent” and further that all members of the audit, nominating and compensation committees be independent.

Under Rule 5605, an “independent director” means a person other than an executive officer or employee of a company or any individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In other words, the question of independence must ultimately be determined by the board of directors who must make an affirmative finding that a director is independent. However, the Nasdaq rules specify certain relationships that would disqualify a person from being considered independent. Stock ownership is not on the list and is not enough, without

December 3, 2019

SEC Proposes To Tighten Shareholder Proposal Thresholds

As anticipated on November 5, 2019, the SEC issued two highly controversial rule proposals. The first is to amend Exchange Act rules to regulate proxy advisors. The second is to amend Securities Exchange Act Rule 14a-8(b) to increase the ownership threshold requirements required for shareholders to submit and re-submit proposals to be included in a company’s proxy statement. The ownership thresholds were last amended in 1998 and the resubmission rules have been in place since 1954. Together the new rules would represent significant changes to the proxy disclosure and solicitation process and shareholder rights to include matters on a company’s proxy statement. Not surprisingly, given the debate surrounding this topic, each of the SEC Commissioners issued statements on the proposed rule changes.

I am in support of both rules. This blog addresses the proposed rule changes related to shareholder proposals. Shareholder proposals, and the process for including or excluding such proposals in a company’s proxy statement, have been

November 26, 2019

SEC Solicits Input To Improve Markets For Thinly Traded Securities

On October 17, 2019, the SEC made a statement inviting stock exchanges and market participants to submit “innovative proposals designed to improve the secondary market structure for exchange listed equity securities that trade in lower volumes, commonly referred to as ‘thinly traded securities.’” On the same day the SEC issued a staff background paper on the subject. The SEC is not asking for input on how a company can better promote its stock and gain investor awareness, but rather how the capital market system, including trading rules and regulations, can be amended or improved to benefit thinly traded securities.

The staff background paper cites many statistics on the number of thinly traded securities, which they define as trading less than 100,000 shares daily. It also refers to the U.S. Department of the Treasury report entitled “A Financial System That Creates Economic Opportunities; Capital Markets” – see HERE for a summary of the report. As a result of

November 12, 2019

SEC Strategic Plan

On June 19, 2018, the SEC published a draft Strategic Plan and requested public comment on the Plan. The Strategic Plan would guide the SEC’s priorities through fiscal year 2022. The Plan reiterates the theme of serving the interests of Main Street investors, but also recognizes the changing technological world with a priority of becoming more innovative, responsive and resilient to market developments and trends. The Plan also broadly focuses on improving SEC staff’s performance using data and analytics.

The Strategic Plan begins with a broad overview about the SEC itself, a topic I go back to and reiterate on occasion, such as HERE. The SEC’s mission has remained unchanged over the years, including to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. In addition, according to the Strategic Plan, the SEC:

Engages and interacts with the investing public directly on a daily basis through a variety of channels, including investor roundtables and education

September 18, 2018

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

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

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

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

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

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

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

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

Crowdfunding Intermediaries-Questions

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”.

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

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

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

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

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SEC Rule 15c2-11

The SEC Has Adopted Final Amendments To Rule 15C2-11; Major Change For OTC Markets Companies

SEC Spring 2020 Regulatory Agenda

Division of Enforcement 2019 Annual Report

Drill Down On NASDAQ Audit Committee Requirements

Nasdaq Board Independence Standards

SEC Solicits Input To Improve Markets For Thinly Traded Securities

SEC Strategic Plan

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

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

SEC Proposes Rules for Regulation A+

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

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

State Crowdfunding Using Intrastate Offerings and Rule 147

OTC Market Group Has Modified Its Alternative Reporting Standard

SEC Suspends Trading On 61 Shell Companies

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

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

Crowdfunding Intermediaries-Questions

SEC Suspends Trading for Record Number of Shell Companies

Why Rule 419 Companies May Revitalize the Small-Cap Market

Market Makers Rely on Due Diligence in Reverse Mergers

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