Tag: SEC Law Firm

Definition Of A Shell Company In A Reverse Merger

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

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

As a result, the SEC release suggests

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

Proposed Rules Eliminating the Prohibition Against General Solicitation and Advertising in Rules 506 and 144A Offerings – Part I

As required by Title II of the JOBS Act, the SEC has published proposed rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings.  In a move that is widely supported by legal practitioners, including the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, the SEC has proposed simple modifications to Regulation D and Rule 144A mirroring the JOBS Act requirement.  In fact, in the rule release the SEC states that it is “proposing only those rule and form amendments that are, in our view, necessary to implement the mandate” in the JOBS Act.  The entire text of the rule release is available on the SEC website.

This Part I discussed the proposed amendments to Rule 506, Regulation D offerings.

Background

Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule

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;

SEC Approves Revision to FINRA Rule Regarding Broker Dealer FINRA Filing Requirements for Private Placement Offerings

On June 7, 2012 the SEC granted accelerated approval to a FINRA rule change regarding broker dealer FINRA filing requirements for activities associated with private placement offerings.  The rule was originally drafted to address disclosures that must be provided to investors prior to an investment and disclosure that must be provided to FINRA following a sale in a private placement, regarding use of proceeds, the amount and type of offering expenses, and all offering related compensation to be paid to placement agents, finders, associated persons and the like.

Summary of Rule Change

FINRA Rule 5123 (Private Placements of Securities) has been amended to require that each FINRA member firm that participates in a private placement of securities file with FINRA a copy of any private placement memorandum (PPM), term sheet, or other offering document used in connection with a sale, within 15 days of the date of the first sale and any material amendment thereto, or provide a notice to

The JOBS Act Is Not Just Crowdfunding

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

A.       The New “Emerging Growth Company” Category

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

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

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%

Private Capital Marketplace – A First Look

As I discussed in a recent blog, the attraction of the small cap and reverse merger market has diminished greatly in the past two years.  The Over the Counter market has become an expensive place to conduct business; the antithesis of the very reason small companies sought to list there to begin with. Accessing capital markets for microcap companies is not as simple as it once was.

In addition to the added expensive of complying with the Securities Exchange Act of 1934 disclosure requirements, the marketplace invites speculators who short sell (bet that the price of a stock will go down) and hedge with derivatives, often creating unpredictable volatility and share prices not indicative of the underlying value of the actual business.

No Automatic Liquidity for Issuers

Being public is no guarantee of liquidity either. It’s fantastic for an issuer to state that their stock is being quoted at $5.00 per share, but if there is no volume (the shares

Why Rule 419 Companies May Revitalize the Small-Cap Market

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

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

First – The General State of the Economy

Simply stated, it’s not good.

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

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

Third – The Rule 144 Changes Enacted in 2008

As discussed in previous blogs Rule 144(i),

DTC Eligibility and the OTC Issuer (Part 3)

This is the third in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets.  All technical information in this article comes from the DTC website.

DTC Eligibility

As detailed in my first two articles in this series, in order to become and remain DTC eligible, and Issuer must have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter.  In addition, all Issuers must meet the requirements set forth in the DTC Operational Arrangements (OA).  This article begins to discuss the OA necessary for an Issue to become and remain eligible for DTC service.  Moreover, the OA rules relate to and regard all Issuers.  This article will only discuss those rules and requirements for OTC Issuers.

The DTC OA states:

“Generally,

DTC Eligibility and the OTC Issuer (Part 2)

This is the second in a series of articles regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers.  OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. All technical information in this blog comes from the DTC website.

DTC Requirements for Eligibility

As discussed in my first article on this topic, Issuers, a sponsoring DTC Participant Member must make application to become DTC eligible.  The DTC Operational Arrangements criteria (available on the DTC website) set forth in-depth requirements for eligibility, which will be discussed in a separate articles in this series on DTC eligibility.  In addition to the Operational Arrangements, in order to be DTC eligible, an Issuer’s securities must:

(i)            be issued in a transaction registered with the SEC under the Securities Act of 1933, as amended (“Securities Act”);

(ii)        be issued in a transaction exempt from registration under the Securities Act and

DTC Eligibility and the OTC Issuer

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

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

The DTC Application Process

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

Convertible Promissory Notes; Flexible Financing Options

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

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

Notes Can Be Sold or Assigned

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

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,

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

SEC Approves BX Venture Market

The SEC has recently approved the NASDAQ OMX Group, Inc.’s application to form the BX Venture Market (“BX Market”) as an alternative quotation medium to the OTCBB and OTC Markets, Inc. (including PinkSheets, OTCQB and OTCQX).  The new BX Market will provide companies that do not otherwise qualify for an exchange listing, an opportunity to list their shares.  The BX Market will compete with the OTCBB and the OTC Markets OTCQB and OTCQX (interestingly and as an aside, NASDAQ sold the OTCBB last year to a private buyer).  The SEC has issued an in-depth order approving the application.

The OTCBB, OTCQB and OTCQX Alternative

The BX Market is marketing itself as a more transparent, better regulated, listing alternative to both the OTCBB and OTCQB and OTCQX.  Presumably this means that companies trading on the BX Market would appear to have greater credibility than those on the OTCBB or OTCQB/QX.  The BX Market will be run through joint ventures with NASDAQ

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

Mergers and Acquisitions – The Acquisition Agreement

Simply stated, the acquisition agreement sets forth the financial terms of the transaction and legal rights and obligations of the parties with respect to the transaction.  It provides the buyer with a detailed description of the business being purchased and provides for rights and remedies in the event this description proves to be materially inaccurate.  The agreement spells out closing procedures, pre-conditions to closing and post-closing obligations.  The agreement provides for representations and warranties and the rights and remedies if these representations and warranties are inaccurate.

The main components of the acquisition agreement and a brief description of each are as follows:

Representations and Warranties

Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date.  In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation

Public Company Compliance – Selecting An Auditor

The Sarbanes Oxley Act of 2002 (SOX) created the PCAOB, which is the Public Company Accounting Oversight Board. All public company auditors must be PCAOB licensed and qualified. Prior to the enactment of SOX, the profession was self regulated and any CPA could audit a public company. On its website, the PCAOB describes itself as “[T]he PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.”

Not All PCAOB Auditors are Created Equal

Licensing and membership with the PCAOB has stringent requirements. In fact, shortly after the enactment of SOX the number of accounting firms that provide public company services declined dramatically. Being held to a higher standard isn’t for everyone. However, as time has passed, even

Merger and Acquisitions – Board of Director Obligations, Part 4

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. The last in the series discussed a director’s duty of loyalty. This blog continues that discussion, focusing on the duty in particular fact circumstances.

Balancing Common and Preferred Shares

A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.

Directors’ Financial Motivation

Delaware courts have emphasized that involvement by disinterested, independent

Merger and Acquisitions – Board of Director Obligations, Part 3

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series detailed the directors’ basic duties of care, loyalty and disclosure. The second discussed the availability of indemnification and/or exculpation and the importance of acting in good faith. This third blog in the series will take a more in-depth look at a directors’ duty of loyalty in a merger and acquisition transaction.

Duty of Loyalty

The duty of loyalty demands that there be no conflict between the director’s duty to the company and their own self-interest. A director breaches that duty when he appropriates a corporate asset or opportunity or uses his corporate office to promote, advance or effectuate a transaction between the corporation and himself or a related party which isn’t entirely fair to the corporation.

Business Judgment Rule

The business judgment rule will not protect a director where there is a

Merger and Acquisitions – Board of Director Obligations, Part 2

This blog continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series went over the directors basic duties of care, loyalty and disclosure.

Indemnification of Corporate Officers

Many states’ corporate laws allow entities to include provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation refers to a complete elimination of liability whereas indemnification allows for the reimbursement of expenses incurred by an officer or director.

Delaware, for example, allows for the inclusion of a provision in the certificate of incorporation eliminating personal liability for directors in stockholder actions for breaches of fiduciary duty, except for breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification generally is only available where the director has acted in good faith. Exculpation is generally only available to directors whereas indemnification is available

Merger and Acquisitions – Board of Director Obligations, Part 1

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. As such, directors owe a corporation a duty of loyalty, honesty and good faith. Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decision. This is referred to as the “business judgment rule”.

Mergers and Acquisitions

However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e. get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors actions face a higher level of scrutiny. This is referred

Gunjumping Restrictions On Communications Related To IPOs

”Gunjumping” is the dissemination of information regarding the Issuer before a complete prospectus has been filed with the Securities and Exchange Commission (“SEC”). Communications prior, during and immediately following the filing of a registration statement are strictly regulated to prevent an Issuer from hyping the market in association with an offering. In addition, the SEC wants to ensure that investors decisions to participate in an offering are based on information that has been reviewed by the SEC and meets the disclosure standards set forth in the securities laws.

Registration Requirements for Sales

During the pre-filing period, Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) makes it “unlawful for any person, directly or indirectly, to… offer to sell or offer to buy… any security, unless a registration statement has been filed as to such security.” An offer to sell or offer to buy are broadly defined to include every attempt or offer to dispose of a

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

Basic Refresher On The Private Placement Exemption

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

The Ralston Purina Standard

The leading case interpreting Section

New FINRA Rules For Corporate Actions

Effective September 27, 2010, the SEC has approved new FINRA Rule 6490 (Processing of Company Related Actions). Rule 6490 requires that corporations whose securities are trading on the over the counter market (OTCQX, OTCQB, OTCBB or PinkSheets) timely notify FINRA of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes. The Rule grants FINRA discretionary power when processing documents related to the announcements, and implements fees for these services.

FINRA and the OTCBB

FINRA (the Financial Industry National Regulatory Authority) operates the OTC Bulletin Board and processes corporate actions for changes such as splits and name changes. FINRA also issues trading symbols to over the counter (non-exchange) traded issuers and maintains a symbols database for issuers. When processing by FINRA of a corporate action is complete, FINRA notifies the OTC marketplace of such changes and actions, such as repricing securities following a forward or reverse split, or issuing a new trading symbol

Has The OTCBB Been Replaced By The OTCQX And OTCQB?

Over the past few years, the historical “PinkSheets” has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its newly refurbished website and new URL www.otcmarkets.com. Where the term “PinkSheets” used to denote an over the counter quotation system using the website www.pinksheets.com it now simply refers to the lower tier of entities that trade on the over the counter market. In fact the URL www.pinksheets.com no longer exists with users being redirected to the new www.otcmarkets.com.

Three Levels of Reporting

The new www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and PinkSheets. The new website also provides quotes for the OTCBB but it seems this is just more as a comfort or segue until the industry gets used to the idea that the “bulletin board” is no more. The OTCBB has no particular listing or quotation requirements other than that the issuer be subject to the reporting requirements of

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,

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

Subsidiary Spin-Offs

A subsidiary spin-off is a transaction where a parent corporation’s stock ownership of a subsidiary is distributed to the parent corporation’s shareholders giving the shareholders direct ownership of the former subsidiary. Typically, the subsidiary shares are distributed to the shareholders pro rata as a dividend. In fact, two of the requirements for an unregistered spin-off, as set forth in Staff Legal Bulletin No. 4 issued by the Securities and Exchange Commission, are that the distribution be pro rata and that no consideration be paid by the shareholders (i.e. a dividend).

A more complex form of a spin-off is commonly referred to as a Reorganized (“D”/355) which is where the parent corporation forms a shell subsidiary, transfers the stock to the shell subsidiary, which in turn distributes the stock to the parent shareholders.

Reasons for Spin-Offs

There are many reasons a company may choose to complete a spin-off, however, the most common reasons include: (i) to separate profit centers to increase

PIPE Transactions, Terms and Requirements

A PIPE (Private Investment in Public Equity) transaction is typically a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the SEC. Generally the securities are sold at a discount to market price. A traditional PIPE generally involves a fixed number of securities at a fixed price, with the closing conditioned only on the effectiveness of a resale registration statement. Any transaction that does not fall within this parameter is considered non-traditional and the structure can vary widely, including for example price variables (such as a death spiral), warrants and options, convertible securities and equity line transactions.

Traditional PIPE Transactions

In particular, a traditional PIPE is generally a set number of securities at a set price (which may be a discount to market at the time of close) and is conditioned only upon the effectiveness of a re-sale registration statement. A traditional

Direct Public Offerings And The Internet

In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.

To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:

• An electronic prospectus must provide the same information as a paper written prospectus;
• The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
• The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
• The Investor must be immediately notified of any amendments or changes in the offering documents; and
• The Issuer must

Regulation A – An Exemption By Any Other Name Is A Short Form Registration

Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than any other exemption. In particular, Regulation A provides for the filing of an offering prospectus which closely resembles a registration statement, with the Securities and Exchange Commission (“SEC”). The SEC then can, and often does, comment on the filing. Practitioners often refer to Regulation A as a short form registration.

Moreover, although the Regulation A offering prospectus does not go “effective” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement. For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus much the same as Section 8(a) for registration statements. Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified” much

Form 10 Registration Statements

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

The Purpose of Form 10 Registration Statements

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

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)

Rule 144 and the Evergreen Requirement Examined

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

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

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

Equity Line Financing Examined

In a typical “equity line” financing arrangement, an investor and an Issuer enter into a written agreement whereby the Issuer has the right to “put” its securities to the investor. That is, the Issuer has the right to tell the investor when to buy securities from the Issuer over a set period of time and the investor has no right to decline to purchase the securities (or a limited right to decline). Generally the dollar value of the equity line is set in the written agreement, but the number of securities varies based on a formula tied to the market price of the securities at the time of each “put”.

Similar to PIPE Transactions

Most equity line financing arrangements are similar to a PIPE (private investment into public entity) transaction such that the Issuer relies on the private placement exemption from registration to sell the securities under the equity line and then files a registration statement for the re-sale of

Registering Convertible Securities

Many clients seek to register convertible securities, such as convertible debentures, warrants, options or convertible preferred stock. The question most often asked is how many share need to be registered, and in particular, does the Company need to register the shares underlying the convertible security.

First, it is essential to review a few basic facts on what a convertible security is and how it works.

Convertible Security Defined

A “convertible security” is a security that can be converted into a different security – typically shares of the company’s common stock. In most cases, the holder of the convertible determines whether and when a conversion occurs. In other cases, the company may retain the right to determine when the conversion occurs.

Companies that may be unable to tap conventional sources of funding sometimes offer convertible securities as a way to raise money more quickly. In a conventional convertible security financing, the conversion formula is generally fixed – meaning that the convertible

Overview of Recognized Exemptions From Section 5

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

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

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

Exempt Transactions

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

Rule 419 and Offerings by Shell or Blank Check Companies

The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, as amended, by a blank check company. Rule 419 requires that the blank check company filing such registration statement deposit the securities being offered and proceeds of the offering into 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 such acquisition or merger. The rule provides procedures for the release of the offering funds in conjunction with the post effective acquisition or merger. The obligations to file post effective amendments are in addition to the obligations to file Forms 8-K to report both the entry into a material non-ordinary course agreement and the completion of the transaction. Rule 419 applies to

Rule 701 – Exemption for Offers and Sales to Employees of Non-Reporting Entities

While the issuance of small numbers of shares as prizes or awards to employees may be made without Securities Act Registration, if such awards are tied to the achievement of specific goals (eg. sales goals) by individual employees, an offer or sale requiring registration may be involved. When tied to the achievement of specific goals, the share awards may constitute compensation for services performed or to be performed by the employees that would amount to a disposition of the shares for value and a “sale” of the shares to employees requiring either registration or an exemption from registration under the Securities Act of 1933.

Although many exemptions may be available for the issuance of securities to employees, Rule 701 provides an excellent exemption for non-reporting entities. In particular, Rule 701 is only available to issuers that are not subject to the reporting requirements of the Securities Exchange Act 1934. The beauty of Rule 701 is that ninety days after the

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:

1. …to sell such security through the use or medium of any prospectus or otherwise; or
2. …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:

1. …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
2. …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

Section 3(a)(9) Exchanges Evaluated

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

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

When Can Separate Issuer Offerings That Occur Within a Short Time Be Integrated?

The integration doctrine prevents issuers from circumventing the registration requirements of the Securities Act of 1934 by determining whether two or more securities offerings are really one offering that does not qualify as an exempt offering, or an exempt offering is really part of a registered public offering.

Securities Act Release No. 33-4552 (November 6, 1962) sets forth a five factor test that is used as a guideline in determining whether the separate offerings of an issuer that occur within a short time of one another will be integrated. These same factors are set forth in the Note to Rule 502(a) of Regulation D, which factors address whether the offerings:

1. are part of a single plan of financing;
2. involve the issuance of the same class of securities (convertible securities, warrants, and other
3. derivative instruments generally are deemed to be the same class as the underlying security unless the terms of the primary security prohibit exercises until at least the one

Regulation A and Rule 504

Section 3(b) of the Securities Act gives the SEC authority to exempt from registration certain offerings where the securities to be offered involve relatively small dollar amounts. Under this provision, the SEC has adopted Regulation A, a conditional ex-emption for certain public offerings not exceeding $5 million in any 12-month period. An offering statement (consisting of a notification, offering circular, and exhibits) must be filed with the SEC Regional Office in the region where the company’s principal business activities are conducted. Although Regulation A is technically an exemption from the registration requirements of the Securities Act, it is often referred to as a “short form” of registration since the offering circular (similar in content to a prospectus) must be sup-plied to each purchaser and the securities issued are freely tradeable in an aftermarket.

The principal advantages of Regulation A offerings, as opposed to full registration on Form S-1, SB-1 or SB-2, are:

1. Required financial statements are simpler and need not

SEC Stock Buyback Rules Examined

SEC Rule 10b-18 provides issuers with a safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 under the Exchange Act when issuers bid for or repurchase their common stock in the market in accordance with the Rule’s manner, timing, price and volume conditions. Each of the conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made.

Rule 10b-18

The material portions of Rule 10b-18 are as follows:

Definition. A “Rule 10b-18 purchase” is generally defined as a purchase or any bid or limit order of an issuer’s common stock by or for the issuer or any of the issuer’s affiliated purchasers.

To be able to rely on Rule 10b-18 in make repurchases, the following four (4) conditions must be met.

1. Time of Purchase. The Rule restricts issuers from making repurchases that constitute the opening transaction in the security on a trading day, or

Transparency in the Financial Markets and the Materiality Standards

The disclosure requirements at the heart of the federal securities laws involve a delicate and complex balancing act. Too little information provides an inadequate basis for investment decisions; too much can muddle and diffuse disclosure and thereby lessen its usefulness. The legal concept of materiality provides the dividing line between what information companies must disclose, and must disclose correctly, and everything else. Materiality, however, is a highly judgmental standard, often colored by a variety of factual presumptions.

Transparency in Financial Markets

The guiding purpose of the many and complex disclosure provisions of the federal securities laws is to promote “transparency” in the financial markets. However, the task of winnowing out the irrelevant, redundant and trivial from the potentially meaningful material falls on corporate executives and their professional advisors in the creation of corporate disclosure, and on investment advisors, stock analysts and individual investors in its interpretation. The concept of materiality represents the dividing line between information reasonably likely to influence

10b5-1 Trading Plans and Material Non-Public Information

As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.

Good Faith Practices When Establishing Trading Plans

In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial

Proper Use of S-8 Registration Statements

A Form S-8 registration statement is popular with small business issuers because it becomes effective immediately upon filing and allows for incorporation by reference, two benefits 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 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 Securities and Exchange Commission (SEC) at

Rule 144 and Pink Sheet Shells; Selling Shares Post Merger

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

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

Rule 144

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

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,

Securities Law Update: Intrastate Offerings Section 3(a)(11) and Rule 147 Examined

Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 of the Securities Act for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” (“Intrastate Exemption”) Rule 147 promulgated under the Securities Act provides for further application of the Intrastate Exemption.

Rule 147, Issuers and Corporate Counsel

In addition to complying with Rule 147, Issuers and their counsel need to be cognizant of and comply with applicable state securities laws regulating intrastate offerings. The Intrastate Exemption is only available for bona fide local offerings. That is, the Issuer must be a resident of, and doing business, within the state in which all offers and sales are made

SEC Rule 144: Pledged Securities, Holding Periods and Subscriptions Agreements

Securities which are bona fide pledged may be tacked to the holding period of the pledgor as long as the pledge has full recourse against the pledgor. Gifted securities may be tacked with the holding period of the donor. Securities transferred to a trust may be tacked with the holding period of the settlor. Likewise securities transferred to a 401(k) or other individual retirement account will tack to the original issuance date. Securities obtained by beneficiaries of an estate may be tacked with the holding period of the deceased.

Securities acquired solely by the cashless exercise of an option or warrant are deemed to have been issued on the date of issuance of the underlying option or warrant; provided however, that the payment of any consideration, even a de minimus amount of cash, for the newly issued securities will restart the holding period. Accordingly, securities issued upon exercise of options or warrants in a stock option plan are deemed issued

SEC Rule 145 – Registration and Resale Requirements For Securities Issued in Merger, Consolidation or Acquisition

ABA Journal’s 10th Annual Blawg 100

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Rule 145 addresses the registration and resale requirements for securities issued in a merger, consolidation, acquisition of assets or reclassification of securities. Rule 145 sets forth the Securities and Exchange Commission (SEC) view that an offer, offer to sell, offer for sale or sale occurs when there is submitted to security holders a plan or agreement pursuant to which such security holders are asked to vote on an exchange of their existing securities for new securities in a merger, consolidation, acquisition of assets or reclassification of securities transaction. Offers, offers to sell, offers for sale or sales all require registration pursuant to Section 5 of the Securities Act of 1933, as amended (Securities Act) unless an exemption to such registration is available.

Securities Registration Required

Accordingly, unless an exemption is otherwise available, Rule 145 requires that the following transactions require registration if security holders vote on such transaction (i) reclassifications of securities which

SEC Rule 144: Current Public Information and Reporting Requirements

The current public information requirement is measured at the time of each sale of securities. That is, the Issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. Most attorney opinion letters and Forms 144 cover a three month period and many Sellers sell securities over that three month period. However, the Seller (or person selling on behalf of Seller such as the broker dealer) is required to make a determination that current public information is available at the time of each sale.

Accordingly, if a reporting issuer does not file a required Q or K during this period, or 15c2-11 information lapses for a non-reporting issuer, sales must cease until the current public information requirement is again satisfied. Moreover, Sellers are taking a risk by selling during the 5-day or 15-day period following the filing of

SEC Rule 144: Resale Conditions and Exempt Transactions

There are many questions regarding the application of Securities Act of 1933 (“Securities Act”) Rule 144 for the resale of securities. Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Therefore, an understanding of the term “underwriter” is important in determining whether or not the Section 4(1) exemption from registration is available for the sale of the securities. Rule 144 provides a safe harbor from the definition of “underwriter”. If all the requirements for Rule 144 are met, the seller will not be deemed an underwriter and the purchaser will receive unrestricted securities.

As Rule 144 only addresses the resale of restricted securities, the rule first defines “restricted securities”. Restricted securities include: (i) securities acquired directly or indirectly from the Issuer, of from an affiliate of the Issuer (affiliate includes spouses and family members living in the same household), in a transaction or chain of transactions not

Contracting Away Fiduciary Obligations In Delaware LLCs And Limited Partnerships

Delaware corporate and alternative entity law has long been the model for other states in drafting statutes and for practitioners in advising clients and preparing limited partnership agreements and limited liability company membership agreements.

In 2005 the Delaware legislature amended its Limited Liability Company Act and Revised Uniform Limited Partnership Act to provide drafters of LP and LLC agreements with broad flexibility to modify default fiduciary duties. Both Acts now provide that default fiduciary obligations mat be restricted or eliminated, provided that the implied covenant of fair dealing and good faith may not be eliminated. Many states have followed suit.

Delaware Corporate Law

Under Delaware law, the purpose of the implied covenant of fair dealing and good faith is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself. Although the covenant of good faith and fair dealing itself cannot be waived,

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

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

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

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:

1. Restrictions on sub-penny quoting;
2. Prohibitions on locked or crossed markets;
3. Implementation of caps on access fees;
4. 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,

Reverse Mergers Hinge on Due Diligence and Cleaning Up Public Shells

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

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

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