OTC Pink Listings l Pink Paper Series

Securities Lawyer 101

Securities Lawyer 101

Securities Law Blog

A private company seeking to go public can obtain a stock ticker or trading symbol assignment from the Financial Industry Regulatory Authority (“FINRA”) if it meets certain requirements. This enables the company to be quoted on OTCMarkets OTC Pink Sheets. Many private companies that decide to go public are opting for the Pink Sheet option because of the increased costs and more stringent regulations associated with SEC reporting. Rule 15c2-11 (Rule 15c2-11”) of the Securities Exchange Act of 1934 (the “Exchange Act”) can be used by an issuer seeking to go public without a registration statement.

The OTC Pink Sheets is no longer perceived as the venue for wash, rinse, repeat scams used by fraudsters in illegal custodianship and recevership hijackings. Instead, successful American small businesses going public for the first time are testing the waters by listing on the OTC Pinks and enjoying the benefits a Pink Sheet listing offers.

SEC Rule 15c2-11 Requirements

Generally, a private company can go public using Rule 15c2-11 if it meets the following requirements:

●  The private company must have at least 30 or more non-affiliates that have paid cash consideration for their shares, and have owned those shares for at least 12 months;

● The private company must have at least 1 million shares outstanding, of which at least 250,000 are free trading shares;

● The private company must never have been a shell company; and

● The private company must locate a sponsoring market maker to submit a Form 211 application to FINRA on its behalf.

15c2-11 Market Maker Obligations in Going Public Transactions

In order to use 15c2-11 to go public, the private company needs to locate a sponsoring market maker who is a FINRA member to file a 15c-211 application on its behalf. The market maker submits a 15c2-11 application (“Form 211”) to FINRA to obtain a trading symbol for the company.  Once the form is filed, FINRA may comment or ask questions; the sponsoring market maker and company must respond.  When FINRA is satisfied that the disclosures meet the requirements of Rule 15c2-11, a trading symbol will be assigned and the market maker can quote the company’s securities.  At that time, the securities of the private company going public can be quoted by OTCMarkets on the Pink Sheets. The sponsoring market maker has the exclusive right to publish quotations for the security for 30 days.  After that, other market makers can “piggyback” on his Form 211, and publish their own quotations.

The market maker chosen by the company to file the Form 211 is not permitted to accept payment for his services.

15c2-11 Disclosure Requirements in Going Public Transactions

The disclosures required by SEC Rule 15c2-11 are provided on the Form 211 submitted by the sponsoring market maker. FINRA requires specific disclosures in the Form 211 and in the Information and Disclosure Statement including, among other things, the following:

●  Detailed description of the issuer’s business, products/services offered, assets and sources of revenue;

●  Description of the company’s facilities including the location, square footage and whether owned or leased;

●  Identification of officers, directors and holders of more than 5% of the company’s securities;

●  Certificate of Incorporation and bylaws including any amendments;

●  Current transfer agent generated shareholder list, indicating name and address of each shareholder, the number of shares owned, date of share ownership, and whether the shares are restricted, control, or free trading;

●  Description of the company’s free-trading shareholder base, including a description of exemptions from registration under the Securities Act;

●  Agreements creating restrictions, liens or encumbrances on, or relating to, the transfer or voting of shares;

●  Agreements evidencing stock rights, warrants or options;

●  All stock purchase or asset purchase agreements for last five (5) years;

●  Whether the company has entered into any discussions or negotiations concerning a potential merger or acquisition candidate;

● Merger and/or consolidation agreements;

● Partnership and/or joint venture agreements;

● Unaudited financial statements for the last 2 fiscal years and interim periods;

● Details of all private offerings including who solicited investors, how they were known to the solicitor, and how many individuals were solicited, and whom did not purchase;

● One full copy of the subscription agreement executed by each investor and copies of all checks from the subscribers or other proof of payment;

● Copies of Form D filed with the SEC;

● Description of all relationships among and between every shareholder and the issuer, its officers and directors, and other shareholders;

● A statement indicating whether any person or entity has control, written or otherwise, of the sale, transfer, disposition, voting or any other aspect of the shares listed on the shareholders list other than the shareholder;

● Whether any officer or director of the issuer had any regulatory action taken against him/her by the SEC, NASDAQ, NYSE or other securities-related regulatory agency and whether any officer or director of the issuer has been convicted of any felony charges within the last 5 years;

● A detailed business plan, which includes a detailed chronological account of each and every step the issuer has taken in furtherance of its stated objective since inception;

● A description of the steps the Company plans to take during the next year in furtherance of its business plan, including the activities in which the Company plans to engage, the names of the persons who will conduct these activities, and the expected dates of these activities;

● A description of any future financing plan;

● Any material agreements or letters of intent entered into by the Company;

● Schedule of all material patents, trademarks, trade names, service marks, and copyrights; and

 ● Opinion from company‘s securities lawyer as to tradability of the free trading shares.

Going Public and Rule 144 of the Securities Act

Private companies that go public using 15c2-11 rely on the availability of the safe harbor of Rule 144 of the Securities Act of 1933 (the “Securities Act”) to create their free trading shareholder base. Rule 144 is not available for private companies that have ever, at any time, been a shell company, or “blank check company.”  If a private company was once a shell company it must file a registration statement with the SEC in order to go public without a reverse merger. Generally, for shareholders of private companies that have never been shells, Rule 144 is available 12 months after the payment of consideration so long as the shareholder is not an affiliate of the company.

SEC Rule 15c2-11 and FINRA Rules Applicable to the Going Public Transaction

SEC Rule 15c2-11 requires that current public information be made available to investors. This information is initially provided on Form 211 and the 15c2-11 application with FINRA.  FINRA and SEC Rule 15c2-11 require that market makers review basic issuer information prior to publishing quotations of an issuer’s securities. FINRA also requires that market makers have a reasonable basis for believing that the information provided by the company is accurate and from reliable sources.

Going Public l OTCMarkets Pink Sheets

The OTCMarkets Group operates an electronic inter-dealer quotation system called OTC Link, that broker-dealers use to trade securities not listed on a national securities-related exchange. OTCMarkets ranks issuers in tiers; each issuer’s rank depends upon the amount of disclosure provided. Issuers using SEC Rule 15c2-11 qualify for the “OTCPink Current Information” tier. The Pink Current Information tier is available to issuers who do not file reports with the SEC, but voluntarily provide specific disclosures required by OTCMarkets through its website located at http://www.otcmarkets.com.  OTCMarkets has established specific disclosure requirements for the Pink Current Information tier and requires that issuers use forms created by OTCMarkets to provide much of the required disclosure. The disclosures are similar to those found in the Form 211 and Information and Disclosure Statements. The forms can be viewed at www.otcmarkets.com .

Qualifying for OTCMarkets’ Pink Current Information tier is a straight forward and relatively inexpensive way for small companies to go public, and to enjoy the benefits that status provides.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855