Despite numerous SEC enforcement actions, Rule 504 of Regulation D of the Securities Act remains a commonly misused exemption particularly in dilution schemes. The popularity of Rule 504 is simple – the Rule 504 exemption provides a way for dilution funders to issue illegally free trading shares using baseless legal opinions. Any experienced going public lawyer will tell you that Rule 504 does not allow a company to issue unrestricted shares. Read More
On January 21, 2015, the Securities and Exchange Commission (the “SEC”) announced fraud charges and an asset freeze against a Fort Lauderdale, Florida-based investment advisory firm, its manager, and three related funds in a scheme that raised more than $17 million since November 2013.
The SEC’s complaint filed in federal court in the Southern District of Florida charged Elm Tree Investment Advisors LLC, its founder and manager, Frederic Elm, and Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP. According to the complaint, Elm, formerly known as Frederic Elmaleh, his unregistered investment advisory firm, and the three funds misled investors and used most of the money raised to make Ponzi-like payments to the investors. Read More
In July 2009, Ross Mandell, founder of Sky Capital Holdings, Ltd., a venture capital firm and brokerage, was arrested by the Federal Bureau of Investigation and charged with violating the Securities Exchange Act of 1934. According to the U.S. Attorney’s Office for the Southern District of New York, he and a number of co-defendants had used Sky Capital to run a boiler room operation, and had defrauded investors of $140 million between 2001 and 2006. The firm had been raided by the FBI in late 2006, but was permitted to carry on with its business. Mandell sold his stake in it to a group of clients from the U.K., who renamed it Granta Capital. Read More
Rule 144 of the Securities Act of 1933, as amended provides a safe harbor for certain public resales of securities, if certain conditions are met. Rule 144 applies to unregistered shares acquired directly from an issuer, (“restricted securities”), and unrestricted shares held by an affiliate of the issuer (“control securities”). Under some circumstances, persons who rely on Rule 144 must file a “Notice of Sale” on Form 144 with the Securities and Exchange Commission (the “SEC”). This blog post addresses some recent questions we received about the SEC’s requirements for filing a Form 144 – Notice of Sale. Read More
On January 15, 2015, the Securities and Exchange Commission (the “SEC”) announced charges against attorneys, auditors, and others allegedly involved in a microcap scheme involving bogus Form S-1 registration statements filed with the SEC. According to the SEC, John Briner, a Canadian attorney and stock promoter caused the companies to file 20 bogus Form S-1 registration statements with phony cookie cutter business plans. According to the SEC, because John Briner had been suspended from practicing law before the Commission, he recruited clients and associates to become nominees while he secretly controlled the companies from behind the scenes. The registration statements falsely stated that each CEO was solely running the company when in fact Briner was making all material decisions. Read More
The Securities and Exchange Commission (the “SEC”) Division of Enforcement is pursuing unregistered broker-dealer activity which runs rampant in the penny stock markets. Since Rule 506(c) was created many unregistered broker-dealers have appeared in call centers and boiler rooms. Often these unregistered broker-dealers claim to be exempt from the broker-dealer registration requirements. SEC enforcement actions demonstrate there are serious consequences for those who engage in unregistered broker-dealer activity. We expect the regulatory focus on unregistered broker dealer activity to increase with the use of general solicitation and general advertising in Rule 506(c) offerings now permitted by the Jumpstart Our Business Startups (JOBS) Act.
This Securities Lawyer 101 Q &A addresses the most common questions we receive about unregistered broker-dealer activity. Read More
Below is a teaser from the new e-book by Michael T. Williams, a going public lawyer and Best-Selling Amazon E-Book author. The book will be available to the public in a few weeks.
Your are only subject to federal and state securities laws if you are selling what is defined as a “security.” If you are selling stock in your IPO Alternative transaction, you know you are selling a security. But Section 3(a)1 of the Securities Act of 1933 tells you all kinds of other instruments you sell may also be securities, as follows:
The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, …, or, in general, any interest or instrument commonly known as a “security.” Read More
Issuers often need to raise funds during their going public transactions to offset legal and accounting costs. The Securities & Exchange Commission‘s integration rules addresses the circumstances under which an issuer can raise capital privately while a Form S-1 registration statement is pending for a public offering. The integration rule was created to prevent companies from improperly avoiding registration by dividing a single securities offering into multiple offerings to take advantage of Securities Act exemptions that would not be available for the combined offering.
The most common exemptions from registration for both public companies and private companies seeking to go public are those provided by Regulation D of the Securities Act of 1933, as amended (“Securities Act”). Many issuers who go public do not realize that the filing of a Form D with the Securities and Exchange Commission (the “SEC”) is required in Regulation D offerings. Form D is a notice of an exempt offering of securities in reliance upon Regulation D (or Section 4(6) of the Securities Act). Form D requires specific information about the issuer and the offering it is conducting. This information includes (i) the issuer’s identity, (ii) its principal place of business and contact information, (iii) its state of domicile, (iv) the names and addresses of its executive officers and directors, (v) the specific exemption claimed under the Securities Act, and (vi) the identity and contact information of any broker-dealer, finder or other person receiving any commission or other similar compensation relating to the sale of securities in the offering. Read More
Typically, foreign companies seeking to raise capital attempt to obtain public company status. Foreign companies that go public in the U.S. can register shares with the Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1933, as amended (the “Securities Act”) or register a class of securities pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”). Read More
The Securities Act of 1933 (the “Securities Act”) is referred to as the “truth in securities” act. The Securities Act has two stated goals. These are to require that issuers provide investors with financial and other significant information concerning securities being offered for public sale, and to prohibit deceit, misrepresentations, and other fraud in the sale of securities. The primary way companies provide investors with financial and other significant information when going public is by filing a registration statement with the Securities and Exchange Commission (the “SEC”). This provides transparency to investors and protects the issuer from liability. Read More
Companies seeking capital are frequently approached by intermediaries who offer to locate investors in exchange for a fee. Most intermediaries also known as “finders” are not registered as broker-dealers with the Securities and Exchange Commission (the “SEC”). These intermediaries wear many hats and may refer to themselves as fund managers, receivers, turnaround experts, investment bankers, stock promoters, placement agents, business brokers, investor relations firms or consultants. They may be attorneys, CPAs, insurance brokers, custodianship shell purveyors or other market participants. Often these intermediaries claim that they do not need to be registered with the SEC or FINRA as broker-dealers because of a “finder’s exemption”. Read More
A spin-off (“Spin-off”) involves a transaction in which a parent company (“Parent”) distributes shares of its subsidiary (“Subsidiary”) to the Parent’s shareholders so that the Subsidiary becomes a separate, independent company. Spin-off shares are usually distributed on a pro-rata basis. A going public lawyer can assist the company in determining whether state corporate law and the rules of stock exchanges require shareholder approval of the spin-off. Read More
On January 9, 2015, The Financial Industry Regulatory Authority (“FINRA”) announced that a hearing panel expelled John Thomas Financial, and barred its Chief Executive Officer, Anastasios “Tommy” or “Thomas”) Belesis, from the securities industry for violations in connection with the sale of penny stock issuer, America West Resources, Inc. (“AWSR”) common stock, including trading ahead of customers’ orders, recordkeeping violations, violating just and equitable principles of trade, and for providing false testimony. The FINRA hearing panel also ordered John Thomas Financial and Belesis to pay $1,047,288, plus interest. Additionally, John Thomas Financial and Belesis were suspended for two years and jointly and severally fined $100,000, and John Thomas Financial’s Chief Compliance Officer Joseph Castellano was suspended for one year and fined $50,000, for harassing and intimidating registered representatives. Read More
Section 16 of the Securities Exchange Act of 1934 requires that officers, directors and holders of more than 10% of a company’s equity securities disclose their ownership of, and transactions in, equity securities, including stock options, warrants and other convertible securities. Section 16 requires that such persons file an Annual Statement of Changes in Beneficial Ownership on Form 5 with the Securities and Exchange Commission (the “SEC”). SEC Form 5 reports any transactions in the Company’s equity securities that the reporting person engaged in during the company’s most recently completed fiscal year that were not previously reported on a Form 4, other than transactions that are exempt from Form 5’s reporting obligations. Read More
Many private companies that go public are opting for the listing on the OTC Market’s OTC Pinks due to the increased costs and more stringent regulations associated with Securities and Exchange Commission (“SEC”) reporting. Rule 15c2-11 (“SEC Rule 15c2-11”) of the Securities Exchange Act of 1934 (the “Exchange Act”) can be used by a private company seeking to go public without an SEC registration statement by a sponsoring market maker submitting a Form 211 with the Financial Industry Regulatory Authority (“FINRA”). Read More
Between January of 2000 and present, the Securities and Exchange Commission (the “SEC”) has suspended or halted thousands of publicly traded companies. Many were dormant penny stock issuers suspended to prevent corporate hijackings by fraudsters setting up receivership or custodianship shells. Others were penny stock issuers engaged in massive pump and dump schemes. Some of the suspended companies had been dormant for almost a decade. How did all of these dormant companies manage to continue trading, albeit infrequently, for so long? Some market participants speculate that these vehicles are controlled by jammed up government informants with sealed dockets from Operation Uptick and the Mob on Wall Street indictments of more than a decade ago. Could there be any other explanation for why the SEC has taken no action against these participants for their obvious violations of the securities laws? Read More
On January 6, 2014, the United States Attorney for the Southern District of New York announced today the arrests of Steven Kaitz, Latchmee Mahato, Jonathan Wheeler, Kathleen Smith and Zachary Kairt former executives and employees of a New Jersey-based company that provided in-store displays for retailers (the “Company”), and Kathleen Smith a former employee of a New York-based sports apparel and footwear retailer that was a major customer of the Company (“Customer-1”), in connection with an elaborate scheme to defraud the Company’s lenders and customers out of millions of dollars. Read More
The last step in going public transactions is most often obtaining a stock trading or ticker symbol from the Financial Industry Regulatory Authority (“FINRA”). For a company to obtain a ticker, a market maker must submit a Form 211 on the issuer’s behalf to FINRA. This last step is required of all companies including those filing Form S-1 registration statements with the SEC. Only a Market Maker can submit a Form 211 to obtain a ticker symbol assignment. An issuer cannot submit the form itself. As such, the sponsoring market maker plays an important role in the going public process.
The Securities and Exchange Commission (“SEC”), Division of Corporate Finance frequently notes disclosure failures of reverse merger transactions in Form 8-K also known as “Super 8-K”. This blog post summarizes SEC staff comments in response to reports on Form 8-K reporting of reverse mergers with public shell companies and similar transactions that result in a public company no longer being designated as a shell company. Read More