Securities Law

Mergers And Acquisitions: Types Of Transactions

As merger and acquisition (M&A) transactions completed its most active year since the financial crisis, it is helpful to go back to basics. Activity has been prevalent in all market sectors, including large, mid and small cap and across all industries, including biotech, financial services, technology, consumer goods and services, food and beverage and healthcare, among others.

Although I’ve written about M&A transactions multiple times, this will be the first time I’ve given a broad overview of the forms that an M&A transaction can take.

Types of Mergers and Acquisitions

A merger or acquisition transaction is the combination of two companies into one resulting in either one corporate entity or a parent-holding and subsidiary company structure. Mergers can categorized by the competitive relationship between the parties and by the legal structure of the transaction. Related to competitive relationship, there are three types of mergers: horizontal, vertical and conglomerate. In a horizontal merger, one company acquires another that is in the

April 5, 2016

Responding To SEC Comments

Background

The SEC Division of Corporation Finance (CorpFin) reviews and comments upon filings made under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and to enhance such disclosures as to each particular issuer. CorpFin will also be cognizant of the anti-fraud provisions of the federal securities laws and may refer a matter to the Division of Enforcement where material concerns arise over the adequacy and accuracy of reported information or other securities law violations, including violations of the Section 5 registration requirements. CorpFin has an Office of Enforcement Liason in that regard.

CorpFin’s review and responsibilities can be described with one word: disclosure!

CorpFin selectively reviews filings, although generally all first-time filings, such as an S-1 for an initial public offering or Form 10 registration under

March 29, 2016

SEC Advisory Committee On Small And Emerging Companies Reviews Capital Formation

On February 25, 2016, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and listened to three presentations on access to capital and private offerings. The three presentations were by Jeffrey E. Sohl, Professor of Entrepreneurship and Decision Science Director, Center For Venture Research at University of New Hampshire; Brian Knight, Associate Director of Financial Policy, Center for Financial Markets at the Milken Institute; and Scott Bauguess, Deputy Director, Division of Economic and Risk Analysis at the SEC. The presentations expound upon the recent SEC study on unregistered offerings (see blog HERE).

The presentations were designed to provide information to the Advisory Committee as they continue to explore recommendations to the SEC on various capital formation topics. This blog summarizes the 3 presentations.

March 22, 2016

House Passes More Securities Legislation

In what must be the most active period of securities legislation in recent history, the US House of Representatives has passed three more bills that would make changes to the federal securities laws. The three bills, which have not been passed into law as of yet, come in the wake of the Fixing American’s Surface Transportation Act (the “FAST Act”), which was signed into law on December 4, 2015.

The 3 bills include: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts imbedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. None of the bills have been passed by the Senate as of yet.

Meanwhile, the SEC continues to finalize rulemaking under both the JOBS Act, which was passed into law on April 5,

March 15, 2016

SEC Gives Insight On 2016 Initiatives

SEC Chair Mary Jo White gave a speech at the annual mid-February SEC Speaks program and, as usual, gave some insight into the SEC’s focus in the coming year. This blog summarized Chair White’s speech and provides further insight and information on the topics she addresses.

Consistent with her prior messages, Chair White focuses on enforcement, stating that the SEC “needs to go beyond disclosure” in carrying out its mission. That mission, as articulated by Chair White, is the protection of investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. In 2015 the SEC brought a record number of enforcement proceedings and secured an all-time high for penalty and disgorgement orders. The primary areas of focus included cybersecurity, market structure requirements, dark pools, microcap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal offerings and protection of retail investors and retiree savings. In 2016 the SEC intends to focus enforcement on financial reporting, market structure, and the

March 8, 2016

State Blue Sky Concerns; Florida and New York

I have often written about state blue sky compliance and issues in completing offerings that do not pre-empt state law, including Tier 1 of Regulation A+ and initial or direct public offerings on Form S-1. I’ve also often expressed my opinion that the SEC, together with FINRA, is best suited to govern most securities-related registrations and exemptions, including both for offerings and broker-dealer matters, and that the states should be more focused on state-specific registrations and exemptions (such as intrastate offerings) and investigation and enforcement with respect to fraud or deceit, or unlawful conduct.

Despite the SEC support for the NASAA-coordinated review program to simplify the state blue sky process for securities offerings, such as under Tier 1 of Regulation A+, only 43 states participate. I say “only” in this context because the holdouts – including, for example, Florida, New York, Arizona and Georgia – are extremely active states for small business development and private capital formation. Moreover, even

March 1, 2016

SEC Proposes Transfer Agent Rules

On December 22, 2015, the SEC issued an advance notice of proposed rulemaking and concept release on proposed new requirements for transfer agents and requesting public comment. The transfer agent rules were adopted in 1977 and have remained essentially unchanged since that time. An advance notice of proposed rulemaking (ANPR) describes intended new and amended rules and seeks comments on same, but is not in fact that actual proposed rule release. The SEC indicates that following the comment process associated with this ANPR, it intends to propose actual new rules as soon as practicable.

To invoke thoughtful comment and response, the SEC summarized the history of the role of transfer agents within the securities clearing system as well as the current rules and proposed new rules. In addition, the SEC discusses and seeks comments on broader topics that may affect transfer agents and the securities system as a whole. This blog gives a high level review of the whole APNR

February 23, 2016

SEC’s Financial Disclosure Requirements For Sub-Entities Of Registered Companies

As required by the JOBS Act, in 2013 the SEC launched its Disclosure Effectiveness Initiative and has been examining disclosure requirements under Regulation S-K and Regulation S-X and methods to improve such requirements. In September 2015, the SEC issued a request for comment related to the Regulation S-X financial disclosure obligations for certain entities other than the reporting entity. In particular, the SEC is seeking comments on the current financial disclosure requirements for acquired businesses, subsidiaries not consolidated, 50% or less owned entities, issuers of guaranteed securities, and affiliates whose securities collateralize the reporting company’s securities.

It is important to note that the SEC release relates to general financial statement and reporting requirements, and not the modified reporting requirements for smaller reporting companies or emerging growth companies. In particular, Article 8 of Regulation S-X applies to smaller reporting companies and Article 3 to those that do not qualify for the reduced Article 8 requirements. The SEC discussion and request for

February 16, 2016

SEC Study On Unregistered Offerings

In October 2015, the SEC Division of Economic and Risk Analysis issued a white paper study on unregistered securities offerings from 2009 through 2014 (the “Report”). The Report provides insight into what is working in the private placement market and has been on my radar as a blog since its release, but with so many pressing, timely topics to write about, I am only now getting to this one. The SEC Report is only through 2014; however, at the end of this blog, I have provided supplemental information from another source related to PIPE (private placements into public equity) transactions in 2015.

Private offerings are the largest segment of capital formation in the U.S. markets. In 2014 private offerings raised more than $2 trillion. The SEC study used information collected from Form D filings to provide insight into the offering characteristics, including types of issuers, investors and financial intermediaries that participate in offerings. The Report focuses on Regulation D offerings

February 9, 2016

SEC Issues Rules Implementing Certain Provisions Of The FAST Act

On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the “FAST Act”) into law, which included many capital markets/securities-related bills. The FAST Act is being dubbed the JOBS Act 2.0 by many industry insiders. The FAST Act has an aggressive rulemaking timetable and some of its provisions became effective immediately upon signing the bill into law on December 4, 2015. Accordingly there has been a steady flow of new SEC guidance, and now implementing rules.

On January 13, 2016, the SEC issued interim final rules memorializing two provisions of the FAST Act. In particular, the SEC revised the instructions to Forms S-1 and F-1 to allow the omission of historical financial information and to allow smaller reporting companies to use forward incorporation by reference to update an effective S-1. This blog summarizes these rules.

On December 10, 2015, the SEC Division of Corporate Finance addressed the FAST Act by making an announcement with guidance and issuing

February 2, 2016

FINRA Proposes New Category Of Broker-Dealer For “Capital Acquisition Brokers”

In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

As with all FINRA rules, the proposed

January 26, 2016

The SEC Issues Guidance On The FAST Act As It Relates To Savings And Loan Companies

On December 10, 2015, the SEC Division of Corporate Finance addressed the FAST Act by making an announcement with guidance and issuing two new Compliance & Disclosure Interpretations (C&DI). As the FAST Act is a transportation bill that rolled in securities law matters relatively quickly and then was signed into law even quicker, this was the first SEC acknowledgement and guidance on the subject.

My blog on the FAST Act and the first two C&DI on the Act can be read HERE.

On December 21, 2015, the SEC issued 4 additional C&DI on the FAST

January 19, 2016

SEC Issues Report On Accredited Investor Definition

On December 18, 2015, the SEC issued a 118-page report on the definition of “Accredited Investor” (the “Report”). The report follows the March 2015 SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) recommendations related to the definition. The SEC is reviewing the definition of “accredited investor” as directed by the Dodd-Frank Act, which requires that the SEC review the definition as relates to “natural persons” every four years to determine if it should be modified or adjusted.

The definition of “accredited investor” has not been comprehensively re-examined by regulators since its adoption in 1982; however, in 2011 the Dodd-Frank Act amended the definition to exclude a person’s primary residence from the net worth test of accreditation.

Although the Report contains detailed discussions on the various aspects of the definition of an accredited investor, the history of the different aspects of the definition, a discussion of different approaches taken in other U.S. regulations and in foreign

January 12, 2016

SEC Guidance On Proxy Presentation Of Certain Matters In The Merger And Acquisition Context

In late October the SEC issued its first updated Staff Legal Bulletin on shareholder proposals in years – Staff Legal Bulletin No. 14H (“SLB 14H”). Please see my blog on SLB 14H HERE. On the same day the SEC published two new Compliance and Disclosure Interpretations (“C&DI”) related to the unbundling of matters presented for a vote to shareholders in merger and acquisition transactions. The new C&DI has in essence granted voting rights to target company shareholders, on acquiring company organizational documents, where none existed before and has in essence pre-empted state law on the issue.

Unbundling under Rule 14a-4(a)(3) in the M&A Context

Exchange Act Rule 14a-4 relates to the requirements for a proxy card general. Rule 14a-4(a) provides:

(a) The form of proxy:

(1) Shall indicate in bold-face type whether or not the proxy is solicited on behalf of the registrant’s board of directors or, if provided other than by a majority of the board

January 5, 2016

OTC Markets Amends Listing Standards For The OTCQX

OTC Markets has unveiled changes to the quotations rule and standards for the OTCQX, which changes become effective January 1, 2016. The amended listing standards increase the quantitative criteria for listing and add additional qualitative requirements continuing to align the OTCQX with standards associated with a national stock exchange. Companies already listed on the OTCQX as of December 31, 2015 will have until January 2017 to meet the new ongoing eligibility requirements.

As part of the rule changes, OTC Markets has renamed its U.S. Designated Advisor for Disclosure (DAD) to an OTCQX Advisor. All U.S. companies that are quoted on the OTCQX must have either an attorney or an Investment Bank OTCQX Advisor. A company may appoint a new OTCQX Advisor at any time, provided that the company retains an approved OTCQX Advisor at all times.

All International companies that are quoted on the OTCQX must have either an Attorney Principal American Liaison (“PAL”) or an Investment Bank PAL –

December 29, 2015

Title III Crowdfunding

As required by Title III of the JOBS Act, on October 30, 2015, the SEC has published the final crowdfunding rules. Regulation Crowdfunding has been long in the making, with the JOBS Act having been passed on April 5, 2012, and the first set of proposed crowdfunding rules having been published on October 23, 2013. The new rules will be effective 180 days after publication, but the forms for registering a funding portal with the SEC will be effective and available January 29, 2016.

The SEC has dubbed the new rules “Regulation Crowdfunding.” Regulation Crowdfunding provides the rules implementing Section 4(a)(6) of the Securities Act of 1933 (the Securities Act) and the regulatory framework for registered funding portals and broker-dealers that companies are required to use as intermediaries in crowdfunding offerings. In addition, Regulation Crowdfunding exempts securities sold under Section 4(a)(g) from the mandatory registration requirements found in Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”).

December 22, 2015

The Fast Act (Fixing American’s Surface Transportation Act)

On December 4, 2015, President Obama signed the Fixing American’s Surface Transportation Act (the “FAST Act”) into law, which included many capital markets/securities-related bills. The FAST Act is being dubbed the JOBS Act 2.0 by many industry insiders. The FAST Act has an aggressive rulemaking timetable and some of its provisions became effective immediately upon signing the bill into law on December 4, 2015.

In July 2015, the Improving Access to Capital for Emerging Growth Companies Act (the “Improving EGC Act”) was approved by the House and referred to the Senate for further action. Since that time, this Act was bundled with several other securities-related bills into a transportation bill (really!) – i.e., the FAST Act.

In addition to the Improving EGC Act, the FAST Act incorporated the following securities-related acts: (i) the Disclosure Modernization and Simplifications Act (see my blog HERE ); (ii) the SBIC Advisers Relief Act; (iii) the Reforming Access for Investments in Startup Enterprises Act; (iv)

December 15, 2015

SEC Guidance on Shareholder Proposals and Procedural Requirements

In late October the SEC issued its first updated Staff Legal Bulletin on shareholder proposals in years – Staff Legal Bulletin No. 14H (“SLB 14H”). The legal bulletin comes on the heels of the SEC’s announcement on January 16, 2015, that it would no longer respond to no-action letters seeking exclusion of shareholder proposals on the grounds that the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders and the same meeting, as further discussed herein. SLB 14H will only allow exclusion of a shareholder proposal if “a reasonable shareholder could not logically vote in favor of both proposals.” As a result of the restrictive language in SLB 14H, it is likely that the direct conflict standard will rarely be used as a basis for excluding shareholder proposals going forward. With the publication of SLB 14H, the SEC will once again entertain and review no-action requests under the “direct conflict” grounds for exclusion.

SLB

December 8, 2015

SEC Proposes Amendments Related To Intrastate And Regional Securities Offerings- Part II- Rules 504 And 505

On October 30, 2015, the SEC published proposed rule amendments to facilitate intrastate and regional securities offerings. The SEC has proposed amendments to Rule 147 to modernize the rule and accommodate adopted state intrastate crowdfunding provisions. In addition, the SEC has proposed amendments to Rule 504 of Regulation D to increase the aggregate offering amount from $1 million to $5 million and to add bad actor disqualifications from reliance on the rule. The SEC has also made technical amendments to Rule 505 of Regulation D.

In Part I of the blog, I discussed the Rule 147 amendment, and in this Part II will discuss the changes to Rules 504 and 505. I have never really written about either Rules 504 or 505 in the past, the simple reason being that they are rarely used exemptions. Perhaps with the current proposed changes, Rule 504 will have a new life. I do not think Rule 505 will gain favor, and in fact,

December 1, 2015

SEC Advisory Committee Recommendations Related To Finders

On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding the regulation of finders and other intermediaries in small business capital formation transactions. This is a topic I have written about often, including a recent comprehensive blog which can be read HERE.

By way of reminder, 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 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.”

The Advisory Committee made four recommendations related to the regulation of finders and other

November 24, 2015

SEC Proposes Amendments Related To Intrastate And Regional Securities Offerings- Part 1

On October 30, 2015, the SEC published proposed rule amendments to facilitate intrastate and regional securities offerings. This rule proposal comes following the September 23, 2015, Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) recommendation to the SEC regarding the modernization of the Rule 147 Intrastate offering exemption. The SEC has proposed amendments to Rule 147 to modernize the rule and accommodate adopted state intrastate crowdfunding provisions. The proposed amendment eliminates the restriction on offers and eases the issuer eligibility requirements, provided however the issuer must comply with the specific state securities laws. In addition, the SEC has proposed amendments to Rule 504 of Regulation D to increase the aggregate offering amount from $1 million to $5 million and to add bad actor disqualifications from reliance on the rule. Finally, the SEC has made technical amendments to Rule 505 of Regulation D.

In this Part I of the blog, I will discuss the Rule 147 amendment and in

November 17, 2015

Mergers And Acquisitions; Appraisal Rights

Unless they are a party to the transaction itself, such as in the case of a share-for-share exchange agreement, shareholders of a company in a merger transaction generally have what is referred to as “dissenters” or “appraisal rights.” An appraisal right is the statutory right by shareholders that dissent to a particular transaction, to receive the fair value of their stock ownership. Generally such fair value may be determined in a judicial or court proceeding or by an independent valuation. Appraisal rights and valuations are the subject of extensive litigation in merger and acquisition transactions. As with all corporate law matters, the Delaware legislature and courts lead the way in setting standards and precedence.

Delaware Statutory Appraisal Rights

Although the details and appraisal rights process vary from state to state (often meaningfully), as with other state corporate law matters, Delaware is the leading statutory example and the Delaware Chancery Court is the leader in judicial precedence in this area of

November 10, 2015

The Materiality Standard; NYSE Amends Rules; FASB Proposed Guidance

The recent increase in regulatory activity and marketplace discussion on the topic of disclosure has not been limited to the small business arena or small cap marketplace. Effective September 28, 2015, the New York Stock Exchange (“NYSE”) amended its Rule 202.06 of the NYSE Listed Company Manual, which governs the procedures that listed companies must follow for the release of material information. Also, the Financial Accounting Standards Board (FASB) has issued two exposure drafts providing guidance and seeking comments on the use of materiality to help companies eliminate unnecessary disclosures in their financial statements and to determine what is “material” for inclusion in notes to the financial statements. Both exposure drafts solicit public comment on proposed amendments to the Statement of Financial Accounting Concepts published by FASB.

NYSE Rule 202.06 Amendment

As published in the federal register, the NYSE proposes to amend Section 202.06 of the Manual to “(i) expand the premarket hours during which listed companies are required to

November 3, 2015

SEC Small Business Advisory Committee Public Company Disclosure Recommendations

On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies.

The topic of disclosure requirements for smaller public companies under the Securities Exchange Act of 1934 (“Exchange Act”) has come to the forefront over the past year. In early December the House passed the Disclosure Modernization and

October 27, 2015

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

SEC Advisory Committee On Small And Emerging Companies Recommends Modernizing Rule 147 for Intrastate Crowdfunding Offerings

On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding the modernization of the Rule 147 Intrastate offering exemption. The recommendations are focused on facilitating recently enacted and future state-based crowdfunding initiatives.

I have written about the Advisory Committee on numerous occasions, but by way of reminder, 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 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.”

In formulating its recommendations, the Advisory Committee gave specific consideration to the belief

October 13, 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

The Stronger Enforcement Of Civil Penalties Act; A Push For Higher SEC Penalties

In July a Democratic senator and a Republican senator together introduced the Stronger Enforcement of Civil Penalties Act of 2015 (SEC Penalties Act), which would give the SEC the ability to levy much heftier penalties for securities fraud, and against recidivists. The Act was referred to the Senate Baking, Housing and Urban Affairs Committee for review and further action. The proposed SEC Penalties Act would increase the limits on civil monetary penalties and directly link the size of the penalty to the scope of harm and associated investor losses, and substantially increase the penalties for repeat offenders.

Background: A Trend Towards Increased Enforcement

The SEC Penalties Act continues a trend to deter securities law violations through regulations and stronger enforcement including the SEC Broken Windows policy, increased Dodd-Frank whistleblower activity and reward payments, and increased bad actor prohibitions. See my prior blog on bad actor prohibitions HERE.

The SEC Broken Windows policy is one in which the SEC is

September 22, 2015

SEC Issues Investor Alert Warning That Fantasy Stock Trading Websites May Violate Securities Laws

At the end of June, the SEC Office of Investor Education and Advocacy issued an Investor Alert and reminded us all that the net of federal securities laws is far-reaching. The Investor Alert warns investors that fantasy stock trading and similar websites violate federal securities laws and, in particular, the “security-based swap” regulations enacted by the Dodd-Frank Act.

The SEC Investor Alert warns against websites that claim to offer a chance to make money from publicly traded or privately held companies without actually buying stock. Generally the sites are set up as a “fantasy” trading game or competition and involve a small entry fee with the chance to win a larger payment if you win the fantasy competition. The SEC has taken the position that these fantasy stock trading programs could potentially involve security-based swaps and implicate both the federal securities and commodities laws. The SEC has and is continuing to investigate the matter. The investigation has progressed enough that

September 15, 2015

SEC Has Adopted Final Pay Ratio Disclosure Rules

span style=”font-family: Calibri;”On August 5, 2015, the SEC published and adopted final pay ratio disclosure rules. The final rules are substantially the same as the proposed rules which were published in September 2013. The rules will require inclusion of the new disclosures in proxy materials, registration statements and annual reports beginning in the fiscal year starting on or after January 1, 2017.

The proposed new rules implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) by amending Item 402 of Regulation S-K. The recently proposed “pay vs. performance” rules, which I discussed in my blog HERE would also amend Item 402. As an Item 402 disclosure, the new pay ratio disclosure will also be the subject of the “say on pay” advisory vote. My blog on say on pay for smaller reporting companies can be read Here.

Interestingly, in the final published rules, the SEC makes a point of stating that

September 8, 2015

SEC Issues Guidance On General Solicitation And Advertising In Regulation D Offerings

Effective September, 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. 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 such as realtymogul.com, circleup.com, wefunder.com and seedinvest.com proved that the model can work, and the rest of the capital marketplace has taken notice. Recently, more established broker-dealers have begun their foray into the 506(c) marketplace with accredited investor-only crowdfunding websites accompanied by marketing and solicitation to draw investors.

The historical Rule 506 was renumbered to Rule 506(b) and issuers have the option of completing offerings under either Rule 506(b) or 506(c). Rule 506(b) allows offers and sales to an unlimited number of accredited investors and up to 35 unaccredited investors, provided however that if any unaccredited investors

September 1, 2015

Finders- The Facts Related To Broker-Dealer Registration Requirements

Introduction

As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services. I have previously discussed the 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 and 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. I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders. I’ve included links to each of these prior articles in the conclusion to this blog.

A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace. In that case the investor group utilizes the services of a finder

August 25, 2015

A Summary Of The 2015 Amendments To The Nevada Revised Statutes

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. The two most popular states for incorporation by business entities remain Nevada and Delaware, both of which offer corporations a degree of flexibility from a menu of reasonable alternatives that can be tailored to the companies’ business sectors, markets and corporate culture.

In 2015 the Nevada Legislature made several changes to the Nevada Revised Statutes (NRS) which impact public and private companies incorporated in Nevada. The changes go into effect on October 1, 2015. I begin this blog by reviewing the benefits offered by Nevada as a choice of state of incorporation and then follow with a summary of the 2015 amendments.

Nevada as a Choice of Corporate Domicile

Together with Delaware, Nevada is one of the most popular state choice for entity domicile. The following is a summary of the most

August 18, 2015

Delaware General Corporate Law Amended to Prohibit Fee-Shifting Clauses; Permit Forum Selection Provisions

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.

On June 24, 2015, Delaware amended the Delaware General Corporation Law (“DGCL”) to prohibit fee shifting provisions. The DGCL amendments also allow Delaware corporations to adopt exclusive (and non-exclusive) forum selection provisions in their corporate charters. The amendments went into effect August 1, 2015.

Fee Shifting Provisions

As a result of increasing shareholder activism and filed or threatened shareholder lawsuits, corporations have started adding provisions in their corporate charters (articles

August 11, 2015

SEC Proposed Executive Compensation Clawback Rules

On July 1, 2015, the SEC published the anticipated executive compensation clawback rules (“Clawback Rules”). The rules are in the comment period and will not be effective until the SEC publishes final rules. The proposed rules require national exchanges to enact rules and listing standards requiring exchange listed companies to adopt and enforce policies requiring the clawback of certain incentive-based compensation from current and former executive officers in the event of an accounting restatement.

In particular, the proposed rules implement Section 10D of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Section 10D requires the SEC to adopt rules directing national exchanges to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for (i) disclosure of the company’s policy on incentive-based compensation that is based on financial statement results and (ii)

August 3, 2015

Intrastate Crowdfunding Legislation Has Passed in Florida

Florida Has Passed Intrastate Crowdfunding Legislation

As the country waits for the SEC to publish final Title III crowdfunding rules as required by the JOBS Act, states continue to enact and introduce state-specific crowdfunding legislation. As of today, it is unclear when the final federal rules will be released and passed into law though SEC Chair Mary Jo White has publicly stated on several occasions that it will be this year. 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 the final rules. Federal crowdfunding is coming, but it is a slow process.

Florida is the newest state to pass intrastate crowdfunding legislation. The new Florida Intrastate Crowdfunding Exemption takes effect October 1, 2015. As a Florida resident, I have a personal

July 28, 2015

SEC Issues Guidance On “Voting Power” For Purposes Of Bad Actor Rules

The SEC has published clarifying guidance and information on defining “voting equity securities” for purposes of the application of the bad actor rules under Rule 506 of Regulation D of the Securities Act of 1933, as amended (“Securities Act”). The clarifying language was contained within the SEC’s March 25, 2015 release of the final rules amending and adopting Regulation A+.

Rules 262 and 505 of the Securities Act disqualify the use of offerings under Regulation A and Rule 505 of Regulation D if an issuer, its predecessor, or an affiliate of the issuer is considered a “bad actor” as defined by such rules. In particular, the rules disqualify the issuer if the specified covered person is subject to certain administrative orders, industry bars, an injunction involving certain securities law violations or certain specified criminal convictions. “Covered persons” under the rules extends to the issuer, predecessor, affiliate, directors, officers, general partners, 20% or greater beneficial owners, promoters, underwriters, persons

July 21, 2015

More On Regulation A/A+; Thoughts On The Practical Effects And New SEC Guidance

On March 25, 2015, the SEC released 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 2, which does preempt state law, allows a raise of up to $50 million. Issuers may elect to proceed under either Tier I or Tier 2 for offerings up to $20 million. The new rules went into effect on June 19, 2015.

On June 23, 2015, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI) to provide guidance related to Regulation A/A+. The SEC published 11 new C&DI’s and deleted 2 related to forms and in particular, related to paper filings and annotations which are no longer relevant or applicable.

Practical Effects of New Regulation A/A+

I believe, and the feedback I hear supports, that new Regulation A+ will be widely

July 14, 2015

OTC Markets Amends Listing Standards For OTCQB To Include Regulation A+ Issuers

OTC Markets has unveiled changes to the quotations rule and standards for the OTCQB, which changes become effective July 10, 2015. The OTC Markets rule amendments will allow a company to use its required Regulation A+ ongoing reporting requirements to satisfy the initial and ongoing OTCQB disclosure requirements.

Concurrently with this substantive amendment, OTCQB has made clarifying general amendments to its listing standards for all listed and prospective OTCQB companies. OTC Markets has invited comments on the proposed changes.

To summarize, the Regulation A related amendment to the OTCQB rules and regulations includes:

The addition of definitions for “Regulation A” and “Regulation A Reporting Company”
Initial Disclosure Obligations – a Regulation A Reporting Company can meet the OTCQB initial disclosure obligations by having filed all required reports on EDGAR, including annual audited financial statements;
OTCQB Certification – clarifying amendment to the OTCQB Certification including that a Regulation A Reporting Company is required to file periodic reports with the SEC under

July 7, 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

The Section 4(a)(1) And 4(a)(1½) Exemption; Recommendations For An Amendment To Rule 144 Related To Shell Companies

What are the Section 4(a)(1) and Section 4(a)(1½) exemptions, and how do they work?

Section 4(a)(1) of the Securities Act of 1933 (“Securities Act”) provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Rule 144 provides a non-exclusive safe harbor for the sale of securities under Section 4(a)(1). In the event that Rule 144 is unavailable, a holder of securities may still rely upon Section 4(a)(1). Section 4(a)(2) of the Securities Act provides an exemption for sales by the issuer not involving a public offering. The issuer itself may not rely on Section 4(a)(1), and selling security holders may not rely on Section 4(a)(2).

Case law and the SEC unilaterally conclude that an affiliate (officer, director or greater than 10% shareholder) of the issuer may not rely on Section 4(a)(1) for the resale of securities. In particular, an affiliate is presumptively deemed an underwriter unless such affiliate meets the requirements for use of

June 23, 2015

SEC Has Approved A Two-Year Tick Size Pilot Program For Smaller Public Companies

On May 6, 2015 the SEC approved a two-year pilot program with FINRA and the national securities exchanges that will widen the minimum quoting and trading increments, commonly referred to as tick sizes, for the stocks of smaller public companies. The goal of the program is to study whether wider tick sizes improve the market quality and trading of these stocks.

The basic premise is that if a tick size is wider, the spread will be bigger, and thus market makers and underwriters will have the ability to earn a larger profit on trading. If market makers and underwriters can earn larger profits on trading, they will have incentive to make markets, support liquidity and issue research on smaller public companies. The other side of the coin is that larger spreads and more profit for the traders equates to increased costs to the investors whose accounts are being traded.

The tick size program includes companies that meet the following $3

June 16, 2015

Regulation A+; An In-Depth Overview

On March 31, 2015, I published a blog with a high-level summary of the new rules. In this blog, I will give a deeper review of the entire new Regulation and then in future installments will drill down on different aspects of the new rules as such become relevant to this new offering regime.

Background on Rules

On December 18, 2013, the SEC published proposed rules to implement Title

June 9, 2015

ABA Federal Regulation Of Securities Committee Makes Recommendations On Regulation S-K

On March 6, 2015, the Federal Regulation of Securities Committee (“Committee”) of the American Bar Association (“ABA”) submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K. The Committee’s recommendations are aimed at improving the quality of business and financial information that must be disclosed in periodic reports and registration statements in accordance with Regulation S-K. I note that I am a member of the Committee, but not a member of the sub-committee that drafted the comment letter, nor did I have any input in regard to the comment letter.

The recommendations fall into four major categories: materiality; duplication; consolidation of existing interpretive and other guidance from the SEC; and obsolescence. The recommendations in the letter are based on themes articulated by the Division of Corporation Finance in a 2013 report to Congress mandated by the JOBS Act and subsequent speeches by the Division’s Director, Keith F. Higgins.

Materiality

The Committee’s letter recommends that

June 1, 2015

SEC Congressional Testimony – Part 3

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 this last blog in the series I am summarizing the testimony of Stephen Luparello, Director of the Division of Trading and Markets, on “Venture Exchanges and Small-Cap Companies.” The topic of venture exchanges and small-cap companies is of particular importance to me and my clients – it is the world in which we participate.

On May 5, 2015, I published a blog introducing and discussing the

May 26, 2015

SEC Proposed Pay Versus Performance

On April 29, 2015, the SEC published the anticipated pay versus performance proposed rules. The rules are in the comment period and will not be effective until the SEC publishes final rules. Although timing is unclear, some commentators believe the new rules will be implemented as soon as the 2016 proxy season.

The proposed rules require companies to clearly and concisely disclose the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions. The new proposed disclosure requirements will not apply to emerging growth companies or foreign private issuers. In addition, smaller public companies will have a scaled back disclosure requirement.

The proposed new rules implement Section 14(i) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)

May 19, 2015

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

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

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

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

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

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

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

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

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

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

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 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

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

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

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

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

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

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?

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.

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

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

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

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

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

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

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

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

An Introduction to Promissory Notes

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 full names of both debtor and creditor and an address for making payments. The specified time of payment may be written as: a) whenever there is a demand, b) on a specific date, c) in installments with or without the interest included in each installment, d) installments with a final larger amount (balloon payment). In the event that the written note does not include language specifying the time of payment, the law assumes it is payable on demand by the creditor.

Terms of Payment

A promissory note may contain other terms such as the right of the promisee to order payment be made to another person, security or collateral,

August 4, 2011

S-8 Stock, Use and Misuse

A Form S-8 registration statement is popular with small business issuers as it becomes effective immediately upon filing and allows for incorporation by reference, both of which benefits are not always available to smaller public companies. A Form S-8 registration statement can be used by Issuers to register securities to be offered to employees and certain consultants under certain employee benefit plans.

To qualify to use an S-8 registration statement the Issuer must: (i) be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended; (ii) have filed all reports required to be filed during the preceding 12 months, or such shorter period of time that the Issuer has been subject to the reporting requirements; (iii) is not a shell company and has not been a shell company for at least 60 calendar days previously; and (iv) if it has been a shell company at any time previously, has filed current Form 10 information with the

July 14, 2011

Filing Deadlines for Exchange Act Quarterly and Annual Reports

It should be noted that this article focuses specifically on non-accelerated filers.

Companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. In additional articles, I will discuss in depth the contents and specific disclosure requirements of both forms. However, in summary, the quarterly report on 10-Q contains unaudited reviewed quarterly financial statements together with management discussion and analysis of those statements.

Form 10-K

The annual report on Form 10-K contains audited annual financial statements, together with management discussion and analysis of those statements as well as other disclosures including but not limited to management bios, management compensation, unregistered issuances of stock, generally background on the registrant, internal control reports, litigation matters and more.

Quarterly reports on form 10-Q are due 45 days from the end of the quarter and annual reports on Form 10-K are due

June 1, 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

Dodd-Frank Act Changes Definition Of Accredited Investor Effective Immediately

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). After many revisions, the final Dodd-Frank Act has only minor effects on securities Issuers and their investors. The primary change, which takes effect immediately, is a modification to the definition of “accredited investor” contained in the Securities Act of 1933. In particular: (i) as it relates to natural persons, the $1,000,000 net worth standard must now be calculated excluding the value of the primary residence of such natural person; and (2) the Securities and Exchange Commission (SEC) has been mandated to review the entire accredited investor definition within four (4) years and make appropriate changes within that time, without additional act of Congress.

Increased Net Worth Requirements

This change effectively increases the net worth requirements for investors, whose largest asset is often their primary residence. Although the SEC has not yet issued any guidance or other information on the change,

August 13, 2010

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

Section 4(6) Registration Exemption for Accredited Investors

Section 4(6) provides a registration exemption for offerings to accredited investors, if the aggregate offering amounts up to the dollar limit of Section 3(b) (currently $5,000,000), if there is no advertising or public solicitation in connection with the transaction by the Issuer or anyone acting on the Issuer’s behalf.

The term accredited investor is defined in section 2(a)(15) and generally includes:

Banks, insurance companies and pension plans;
Corporations, partnerships and business entities with over $5 million in assets;
Directors, executive officers and general partners of the issuer;
Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
Entities, all of whose equity owners are accredited.

In addition, the SEC has the power to define as an accredited investor any person, who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor.

Section 4(6) and

January 28, 2010

An In-Depth Review of Private Placements Under Section 4(2)

Section 4(2) of the Securities Act of 1933 provides that the registration requirements of Section 5 do not apply to “transactions by an issuer not involving any public offering.” The definition of an “issuer” is pretty straightforward as found in Section 2(a)(4) and includes, “the person who issues or proposes to issue” a security and is understood to mean the entity that originally sells the securities. However, not so straightforward is what constitutes a “public offering,” which term is not defined in the Securities Act. In reliance on Section 4(2) the SEC enacted Rule 506 as part of Regulation D.

Rule 506 as a Safe Harbor Provision

Rule 506 is a Safe Harbor. In other words, if all the conditions of Rule 506 are met, you can rest assured that the conditions of Section 4(2) have been satisfied. However, Section 4(2) can be satisfied as a standalone exemption separate from Rule 506. The importance of the distinction between Section 4(2)

January 25, 2010

Compliance When Conducting Concurrent Private and Public Offerings

The Securities and Exchange Commission’s (SEC) integration guidance in Securities Act Release No. 8828 (August 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Rule 4(2) or the Securities Act Rule 506 safe harbor, with a registered public offering.

Qualified Institutional Investors

Previously it was thought that a private offering could only take place concurrently with a public offering if limited to qualified institutional investors (must have at least $100 million under management) and two or three additional large institutional accredited investors as set forth in the Black Box no action letter (June 26, 1990), or to an Issuer’s key officers and directors. In addition, many practitioners previously utilized the integration rule set forth in Securities Act Rule 502 in determining whether a private and public offering should be integrated. In

January 19, 2010

A Comprehensive Analysis of Section 5

Section 5 of the Securities Act of 1933, as amended, contains the basic registration requirements for all offerings and rules of securities. Section 5(a) provides that “unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly:

…to sell such security through the use or medium of any prospectus or otherwise; or
…to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale”

Section 5(b) provides that “it shall be unlawful for any person directly or indirectly:

…to transmit through the mails or in interstate commerce, any prospectus relating to a security with respect to which a registration has been filed…., unless such prospectus meets the requirements of Section 10; or
…to transmit through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a

December 29, 2009

Responsibilities of Independent Directors Increases in Response to Sarbanes Oxley

Serving as an independent director carries serious obligations and responsibilities.

Following the passage of the Sarbanes Oxley Act of 2002 (SOX), the role of independent directors has become that of securities monitor. They must be informed of developments within the company, ensure good processes for accurate disclosures and make reasonable efforts to assure that disclosures are adequate. Independent directors, like inside directors, should be fully aware of the company’s press releases, public statements and communications with security holders and sufficiently engaged and active to questions and correct inadequate disclosures.

Disclosure and Transparency

The basic premise of federal securities laws is disclosure and transparency. The theory behind this regulatory structure is that if a Company is forced to disclose information about particular transactions, plans or programs, the company and its officers and directors will take greater care in making business decisions. If a director knows or should know that his or her company’s statements concerning particular issues are inadequate or incomplete,

November 10, 2009

Securities Attorneys Must Self-Regulate to Avoid Potential Insider Trading Pitfalls

Attorneys who accept stock as compensation from public companies need to be aware of a vigilant regarding their insider trading obligations. Before analyzing the dynamics of proper compliance in stock compensation scenarios, it is assumed that the stock received by the attorney was issued pursuant to a registration statement or valid exemption and is being resold also pursuant to a registration statement or valid exemption to registration.

Insider Trading

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. Securities attorneys are in a unique position as they are often privy to material, non-public information regarding their public company clients.

The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or

October 30, 2009

The Federalism of State Corporate Law

Historically the regulation of corporate law has been firmly within the power and authority of the states. However, over the past few decades the federal government has become increasingly active in matters of corporate governance. Typically this occurs in waves as a response to periods of scandal in specific business sectors or in the financial markets. Traditionally, when the federal government intervenes in these situations, they enact regulation either directly or indirectly by imposing upon state corporate regulations.

Specifically, the predominant method of federal regulation of corporate governance is through the enactment of mandatory terms that either reverse or preempt state laws on the same point. The most recently prominent example is the passing of the Sarbanes Oxley Act of 2002 (SOX).

Sarbanes Oxley (SOX)

SOX regulates corporate governance in five matters: (i) SOX prevents corporations from engaging the same accounting firm to provide both audit and specified non-audit services; (ii) SOX requires that audit committees of listed companies be

October 29, 2009

Five Essential Conditions for Unregistered Spin-Offs

A spin-off occurs 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. 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) the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets; (iv) the parent has a valid business purpose for the spin-off; and (v) if the parent spins-off restricted securities, it has held those securities for at least one year. Below is

October 28, 2009

The Demise of the Death Spiral – SEC Interpretation of Rule 415

Without fanfare, publications, or other notice, in mid 2006, PIPE investors and the Issuers that utilized them noticed a big difference in the way that the Securities and Exchange Commission’s (SEC) division of corporate finance reviewed and commented upon, resale registration statements. Although the SEC staff contended that its position on Rule 415 had not changed, there was, incontrovertibly, a dramatic impact felt by Issuers and PIPE investors.

For years, Issuers had relied upon Rule 415 in order to register the resale of shares issued in PIPE transactions (a “secondary offering”). Rule 415 governs the registration requirements for the sale of securities to be offered on a delayed or continuous basis, such as in the case of the take down or conversion of convertible debt and warrants. In the years prior to 2006, Issuers would register shares they sold in a PIPE transaction, which could represent in excess of 50% of their outstanding public float.

Convertible Debt and Subsequent Resale

October 22, 2009

Elements Constituting “Solicitation” Such that a 14A Proxy Solicitation is Required Instead of a 14C Information Statement Under the Section 14 Proxy Rules of the Securities Exchange Act of 1934

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.

Companies with securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are subject to the Exchange Act proxy rules 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 election of directors and the approval of other corporate action.

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 holders are asked to vote. The disclosure information filed with

October 20, 2009

Analysis of Section 404(b) of the Sarbanes-Oxley Act of 2002 for Non-Accelerated Filers

On October 13, 2009, the Securities and Exchange Commission (SEC) officially extended the date for non-accelerated filers to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX) until their fiscal years ending on or after June 15, 2010. Since the adoption of the rules implementing Section 404(b) on June 5, 2003, the time period for compliance by non-accelerated filers has been extended several times. It is widely believed that this extension, for six additional months, will be the last. Companies other than non-accelerated filers are already subject to Section 404 compliance. Although “non-accelerated” filers are not specifically defined, such filers include small business entities.

Among other things, Section 404(b) of SOX requires companies to include in their annual reports filed with the SEC, an accompanying auditor’s attestation report, on the effectiveness of the Company’s internal control over financial reporting. In other words, reporting companies must employ their auditor to audit and attest upon their financial internal control process,

October 15, 2009

Examination of Rule 144 and Potential Interpretations

The SEC revised Rule 144, effective February 15, 2008. Section 144 rules are used to ascertain if a company falls into an exemption from registration, because of non-underwriter status. But if securities, or the transaction, are registered as required, 144 doesn’t apply. The revisions aimed to reduce previous limits on resale of restricted securities by reporting companies. Unfortunately, a certain amount of ambiguity has also crept in.

The Rule had clearly required a one-year holding period. But included in the new Rule 144(i) is the following: (paraphrased) “if a company has ever been a shell company[1], past or present, then the company must be current on its periodic SEC filings for twelve months following the time it ceases to be a shell, before 144 is available.”

For non-affiliates of non-reporting companies, the one year holding period requirement remains.

Rule 144 thus allows non-affiliates of a reporting company to resell restricted securities after a six-month holding period,

October 6, 2009

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