Form S-1 – Plan Of Distribution – Going Public Lawyers
Form S-1 requires companies to provide a Plan of Distribution as required by Item 508 of Regulation S-K. Item 508 requires a company to describe how it will offer its securities to the public. When a company indicates that its officers or directors, or any person(s) other than an underwriter, will sell its securities in what is called a Selling Stockholder or Resale Registration Statement, the SEC asks you to name those persons and describe the process through which these selling stockholders will offer and sell the company’s securities when going public.
One aspect of the disclosure in this section is that the SEC makes the issuer set a price on the stock that your selling stockholders will be selling. For example, “The selling stockholders will offer their shares at $___ (insert specific fixed price) per share until our shares are quoted on the OTC Markets, and thereafter at prevailing market prices or privately negotiated prices. We will not receive proceeds from the sale of shares from the selling stockholders.”
However, this does not mean that the selling stockholders must always sell their shares at this fixed price. They must sell at the fixed price stated in the registration statement until the company has its stock ticker symbol, which is usually a few weeks to a month after the SEC clears the Form S-1. After that, the selling stockholders may sell at whatever price they want into the public markets or private transactions. The requirements are the same for both initial public offerings and direct public offerings where selling stockholder shares are registered.
Generally the price used will be the opening price of your stock when it starts trading after its Form 211 is filed. This fixed price is negotiated with the sponsoring market maker the company files its Form 211 with FINRA.
When companies state that their securities were, or will be “listed” on the OTC Markets, the SEC reminds them that those securities are not “listed”; rather, they are “quoted” on the OTC Markets. The OTC Market is not a national securities exchange under the federal securities laws, and so the reference to “listing” may be confusing to potential investors.
If your company is doing a Direct Public Offering, or DPO, and the company is selling its stock to raise money, the shares are sold by your officers and directors. To avoid broker/dealer registration, you must comply with the SEC’s special rule which allows you and other officers, directors and employees of your company to sell your securities without registering as a broker/dealer.
Under this rule, you and other officers, directors and employees of your company, called “associated persons” of the issuer by the SEC, can sell your company’s securities without registering as a broker/dealer if such person:
- Is not subject to a statutory disqualification such as participation in securities activities for which he/she was sanctioned or found guilty;
- Is not compensated in connection with his/her participation by the payment of commissions or other remuneration, based either directly or indirectly on transactions in securities; and
- The associated person meets all of the following conditions:
- The associated person primarily performs, or is intended primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with transactions in securities; and
- The associated person was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months; and
- The associated person does not participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance this rule.
- The associated person restricts his/her participation to any one or more of the following activities:
- Preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the associated person of a potential purchaser; provided, however, that the content of such communication is approved by a partner, officer or director of the issuer;
- Responding to inquiries of a potential purchaser in a communication initiated by the potential purchaser; provided, however, that the content of such responses are limited to information contained in a registration statement filed under the 1933 Selling Stock Act or other offering document; or
- Performing ministerial and clerical work involved in effecting any transaction.
Remember, to meet the requirements of this special SEC rule, neither you nor any of your officers, directors or employees participating in an offering of your company’s securities may be paid a commission or any other form of special compensation for raising money.
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 advice on any specific matter, nor does this message create an attorney-client relationship. 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