Regulation A+ Is Amended – Securities & Going Public Attorneys

Regulation A+ Expanded. Regulation A+ increases

Three years after becoming effective, Regulation A+ is being expanded. Last month, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law and included notable legislation expanding Regulation A+. The Act directs the Securities and Exchange Commission (“SEC”) to amend Regulation A+ to allow companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 to use the exemption. The Act encourages capital formation by expanding the scope of eligible issuers who can use the Regulation A+ exemption from registration to fund their businesses.

In addition, the Act also directs the SEC to deem that the periodic reports required under Section 13 for reporting companies satisfy the SEC reporting requirements for Tier 2 offerings under Regulation A+.

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Regulation A+ Testing the Waters – Regulation A Going Public Attorneys

Issuers utilizing Regulation A+ are permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.  Using Regulation A+, you can advertise everywhere you want, including all over social media in places where you think you’ll find potential investors.  You can put together a formal ad campaign costing tens of thousands of dollars or just do it yourself.  Of course, all you get are non-binding indications of interest so you can’t hold people to their indication of interest in investing in your company.  However, it gives you the opportunity before spending hundreds of thousands of dollars on the actual filing itself to see if there’s sufficient interest to spend the money to move forward with preparing and qualifying the offering. Testing the waters materials used before the Regulation A+ filing be filed as an exhibit with the first filing on Form 1-A.  Although the SEC does not pre-review pre-filing advertising, you are cautioned to be very careful what you say in the offering materials.  Solicitation materials are subject to the antifraud and other civil liability provisions of the federal securities laws and you can be sued for what you say in the advertising materials even if you don’t include the information in the 1-A Offering Circular itself. Our general advice is the if you don’t think the SEC will like it in the Form 1-A filing, or investors may sue you for making the statements, don’t use it in advertising materials. 

Issuers utilizing Regulation A+ are permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.  Using Regulation A+, you can advertise everywhere you want, including all over social media in places where you think you’ll find potential investors.  You can put together a formal ad campaign costing tens of thousands of dollars or just do it yourself.  Of course, all you get are non-binding indications of interest so you can’t hold people to their indication of interest in investing in your company.  However, it gives you the opportunity before spending hundreds of thousands of dollars on the actual filing itself, to see if there’s sufficient interest to spend the money to move forward with preparing and qualifying the offering. Read More

Regulation A+ Q&A

Regulation A+ expands existing Regulation A. Existing Regulation A provides an existing exemption from registration for smaller issuers of securities. Regulation A+ offerings can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction allowing the issuer to avoid the risks of reverse merger transactions. Regulation A+ simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital. This blog post addresses the most common questions we receive about Regulation A+.

Can All Companies Use Regulation A+?

No. Regulation A+ offerings can only be conducted by companies that are domiciled in and have their principal place of business in the United States or Canada. As such, foreign issuers may not conduct Regulation A+ offerings and must locate an alternative exemption for their unregistered offering.

What Securities Can Be Registered on Form 1-A Under Regulation A+?

Regulation A+ is limited to shares, warrants and convertible equity securities.

How Much Can I Raise with Regulation A+?

Tier 1 of Regulation A+ is available for offerings of securities of up to $20 million in a 12- month period, with no more than $6 million in offers by selling security- holders that are affiliates of the issuer. Tier 2 is available, for offerings of securities of up to $50 million in a 12-month period, with no more than $15 million in offers by selling security-holders that are affiliates of the issuer. Read More

Investment Banker in Insider Trading Scheme

According to the SEC, Woojae “Steve” Jung, an investment banker at Goldman Sachs, used confidential client information to trade in the securities of 12 different companies prior to the announcement of market-changing events. He used his access to highly confidential information, to place illegitimate and highly profitable trades in advance of deal negotiations in which the bank was providing investment banking services. He placed illegal trades and generate profits of approximately $140,000.

On May 31, 2018, The Securities and Exchange Commission (“SEC”) charged an employee of a well-known bank with frequently using his access to highly confidential information in order to place illegitimate and highly profitable trades in advance of deal negotiations in which the bank was providing investment banking services. Read More

Steven Pagartanis Charged for Defrauding Customers

On May 30, 2018, the Securities and Exchange Commission (“SEC”) charged a former Long Island registered representative with defrauding long-standing brokerage customers in an $8 million investment scam. According to the SEC, Steven Pagartanis, who was an associate with a broker-dealer in Long Island, NY, defrauded investor and retiree customers, that he would invest their funds in either a public or private land development company.   The SEC’s complaint, charges Pagartanis with violating the anti-fraud provisions of the federal securities laws.

The SEC alleges, Steven Pagartanis, who was an associate with a registered broker-dealer in Long Island, NY, he falsely told investor and retiree customers that he would invest their funds in either a public or private land development company.  He assured that the funds would be safe and promised guaranteed monthly interest payments on the investments.  Pagartanis’s directed his customers to write checks payable to an entity that Pagartanis secretly controlled.  As a result, the customers invested approximately $8 million to Pagaratanis. Pagartanis used the funds to pay personal expenses and make the promised “interest” payments to his customers.  To defraud customers,  Pagartanis created fake account statements reflecting ownership interests in the land development companies. The scheme became public earlier this year when Pagartanis quit making the phony interest payments to customers. Read More

Form S-1 Filing Requirements, Filing Form S-1, S-1 Offering, S-1 …

Private companies often file a registration statement on SEC Form S-1 in connection with their going public transaction.  The most commonly used registration statement form is Form S-1. All companies qualify to register securities on a Form S-1 registration statement. Private companies going public should be aware of the expansive disclosure required in registration statements filed with the SEC prior to making the decision to go public. A registration statement on Form S-1 has two principal parts which require expansive disclosures.  Part I of the registration statement is the prospectus, which requires that the company provide certain disclosures about its business operations, financial condition, and management. Part II contains information that doesn’t have to be delivered to investors.

Private companies often file a registration statement on SEC Form S-1 in connection with their going public transaction.  The most commonly used registration statement form is Form S-1.
All companies qualify to register securities on a Form S-1 registration statement. Private companies going public should be aware of the expansive disclosure required in registration statements filed with the SEC prior to making the decision to go public. A registration statement on Form S-1 has two principal parts which require expansive disclosures.  Part I of the registration statement is the prospectus, which requires that the company provide certain disclosures about its business operations, financial condition, and management. Part II contains information that doesn’t have to be delivered to investors. Read More

Constellation Healthcare Technologies Executives Charged with Fraud

On May 16th, 2018, the Securities and Exchange Commission (“SEC”) charged three former executives for Constellation Healthcare Technologies Inc. (Constellation), a Houston- based company, who falsified financial and other information they provided to a private firm while negotiating the private firm’s acquisition of a majority stake in Constellation. A little more than a year after the January acquisition, Constellation filed for bankruptcy in March.

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Chardan Capital Charged by SEC

On May 16, 2018, the Securities and Exchange Commission (“SEC”) charged Chardan Capital Markets LLC (Chardan Capital) and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS), a New York City based brokerage firm, alleging the report of suspicious sales of 12.5 billions in penny stock shares.On May 16, 2018, the Securities and Exchange Commission (“SEC”) charged Chardan Capital Markets LLC (Chardan Capital) and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS), a New York City based brokerage firm, alleging the report of suspicious sales of 12.5 billions in penny stock shares.

According to the SEC, from October 2013 to June 2014, Chardan, an introducing broker, liquidated more than 12.5 billion penny stock shares for seven of its customers and ICBCFS cleared the transactions.  Chardan failed to file any SARs even though the transactions raised red flags, including similar trading patterns and sales in issuers who lacked revenues and products.  The SEC found that ICBCFS similarly failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers. As noted in the complaint, guidance for preparing SARs from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) clearly states that “[e]xplaining why the transaction is suspicious is critical.” To help detect potential securities law and anti-money laundering practices, broker-dealers are required to file Suspicious Activity Reports (SARs) that describe suspicious transactions that take place through their firms. Read More

SEC Charges Gregory Bercowy with Market Manipulation Scheme

John Bocchino - FINRAOn April 4, 2018, the Securities and Exchange Commission today charged Gregory Bercowy with a fraudulent scheme to manipulate the stock price of Aureus, Inc., a penny stock company incorporated in Nevada.

The SEC alleges that between August 4 and August 15, 2016, Gregory Bercowy, who is associated with a state-registered investment adviser, sold shares of certain Fortune 500 companies, including Abbott and Apple, in his relative’s brokerage account in order to buy over three million shares of Aureus at a total cost of more than $2.8 million. According to the SEC’s complaint, while Gregory Bercowy was accumulating these shares of Aureus, he entered (and later cancelled) a large number of orders to buy Aureus shares at prices higher than the then-current price of the stock. The orders allegedly were intended solely to maintain or boost the stock’s price. The price per share of Aureus securities increased from $0.52 on August 4, 2016, to $1.62 on August 16, 2016. According to the SEC’s complaint, Gregory Bercowy stated in recorded phone calls with a representative of a brokerage firm that he and others were trying to boost Aureus’s stock price. Read More

SEC Charges Andrew Kandelapas in Penny Stock Fraud Scheme

Anthony Portelli - SEC ChargesOn April 13, 2018, the Securities and Exchange Commission charged Andrew Kandelapas with making false and misleading statements in the company’s SEC filings and press releases and with manipulating the company’s stock.

The SEC’s complaint against Andrew Kandalepas, the CEO of Wellness Center USA, Inc. (Wellness), filed in the U.S. District Court for the Northern District of Illinois, alleges that Andrew Kandelapas took $450,000 in unauthorized withdrawals from the company and then concealed his actions by causing Wellness to characterize his withdrawals as salary, prepayments, or loans in false and misleading Forms 10-K and 10-Q. The complaint further alleges that Andrew Kandelapas caused the company to issue false and misleading press releases touting non-existent sales of medical devices by a Wellness subsidiary.

According to the complaint, Andrew Kandelapas also manipulated the market for Wellness stock through secret trading in a friend’s brokerage account and pocketed more than $130,000 from his secret trading. According to the complaint, Andrew Kandelapas coordinated trading with Matthew Mushlin, who Andrew Kandelapas hired as an unregistered broker to solicit investments in Wellness through private placement agreements.

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