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
The Securities & Exchange Commission (SEC) Provides Guidance Regarding Section 3(a)(10) of the Securities Act of 1933
Section 3(a)(10) of the Securities Act of 1933, as amended (“Securities Act”) is an exemption from the Securities Act registration requirements for the offers and sales of securities by Issuers. The exemption provides that “[E]xcept as hereinafter expressly provided, the provisions of this title [the Securities Act] shall not apply to any of the following classes of securities….(10) Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United
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
New FINRA Requirements for Corporate Actions Require More Thorough Documentation on Behalf of Issuers
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.
As of December 1, 2008, the Financial Industry Regulation Authority (FINRA) began a new policy for effectuating corporate actions for OTCBB quoted and traded securities (securities quoted and traded on the Over the Counter Bulletin Board and the PinkSheets). Corporate actions include anything that would require notification to FINRA and the issuance of a new trading symbol, such as a name change, reverse or forward stock split.
Prior to the initiation of the new procedures, Issuers making corporate changes were only required to submit a short cover letter explaining the action and providing the new CUSIP number. In addition, they were required to submit a copy of the documents evidencing the corporate action, including board
Necessity of Background Searches on Officers and Directors as Part of Due Diligence Prior to a Reverse Merger or IPO
If you are a private company looking to go public on the OTCBB, securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel. Ms. Anthony counsels private and small public companies nationwide regarding reverse mergers, corporate transactions and all aspects of securities law.
Many private companies go public either through a reverse merger with a public shell or initial public offering (IPO) process. A reverse merger allows a private company to go public by purchasing a controlling percentage of shares of a public shell company and merging the private company into the shell. An initial public offering is where the private company files a registration statement with the Securities and Exchange Commission and once the registration statement is effective proceeds to sell stock either directly (a DPO) or more commonly through an underwriter.
It is very important that management of public shells and underwriters conduct a background check on the private company’s officers and directors prior to embarking
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,
Potential Impact of Rule SEC Release #34-60515 Regarding Proposal to Extend Regulation NMS Coverage to OTC Securities
FINRA, in August of 2009, filed Release No. 34-60515 with the SEC. FINRA proposes to extend certain NMS protections to quoting and trading in the OTC market for equity securities.
In summary:
- Restrictions on sub-penny quoting;
- Prohibitions on locked or crossed markets;
- Implementation of caps on access fees;
- Requirements of transparency of customer limit orders.
FINRA’s goals, part of broadly anticipated changes in financial systems, are proposed as part of efforts to both modernize and achieve higher “quality” in the OTC marketplace.
1. Sub-Penny Quote Restrictions
FINRA addresses both issues of modernization and higher quality by proposing to restrict sub-penny quoting in conjunction with removing the requirement that ATS’s include non-subscriber access fees within its quote. Restricting sub-penny quoting may help prevent the practice of “stepping ahead” of displayed limit orders by trivial amounts.
The proposal will most effect small businesses whose securities trade for under $1.00. Under FINRA’s proposal, market participants will be able to quote in increments ranging
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,
OTCBB Reporting Requirements Enable Successful Reverse Mergers
Companies subject to the reporting requirements of the Securities Exchange Act of 1934 (amended to the “Exchange Act”), without current business operations, and trading on the NASDAQ Over the Counter Bulletin Board (“OTCBB”), commonly known as Bulletin Board Shells, have become the vehicle of choice for private companies seeking to go public through a reverse merger.
Although the domestic economy has slowed, reverse mergers still flourish, and Chinese-based companies in particular have taken the lead in reverse mergers with Bulletin Board Shells. As old sectors slow, new sectors such as biofuels, health supplements, and agricultural science have risen to lead the charge into the public arena.
SEC Reporting Requirements Make Due Diligence Practical
Bulletin Board Shells have become the vehicle of choice for private companies seeking public status. This is due in part to increasing industry pressure for public companies to maintain total disclosure of their financial condition and operations.
Bulletin Board Shells and OTCBB Companies must prepare and file
Market Makers Rely on Due Diligence in Reverse Mergers
Following approval of the 15c2-11 application by FINRA, and the consistent quotation of a company’s securities, market makers may “piggy back” on the approved and completed 15c2-11. In short, a market maker may quote the share price of the Bulletin Board Shell while relying on the due diligence of other market makers and the company’s current SEC filings.
Although highly technical, the due diligence process can be completed quickly and thoroughly by an experienced securities attorney; the key is knowing where to look and what to look for. For example:
- All articles and amendments are ordered from the company’s state of domicile and reviewed for procedural correctness and historical understanding.
- DTC (the Depository Trust Company) is contacted to confirm the company is in a transferable status.
- In addition to financial statement review, using several proprietary online search services, the firm conducts comprehensive debt and litigation searches to identify any miscellaneous debts as well as pending or past litigation.
- A tax
