FINRA Sanctions 5 Firms for Failing to Reasonably Supervise Accounts
FINRA, before the New Year 2020, sanctioned five major financial firms who failing to reasonably supervise custodial accounts. These five firms were: Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The violation was of FINRA Rule 2090, known as FINRA’s “Know Your Customer” rule. This rule states “Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”
Confidential Registration Statements Q & A – Going Public Lawyers
The Jumpstart Our Business Startups Act (“JOBS Act”) allows an “emerging growth company” to submit a draft of its registration statement and exhibits to the Securities and Exchange Commission (SEC) on a confidential basis. This Q & A addresses the common questions we receive about confidential registration statement submissions.
Q. When does an emerging growth company have to file its registration statement if I want it to be a confidential submission?
A. The JOBS Act requires that emerging growth companies file the initial confidential submission of their registration statement and all amendments to the registration statement with the SEC within 21 days prior to the registration statement’s anticipated effectiveness or road shows. These prior confidential submissions should be included as exhibits to the company’s later publicly filed registration statement, if any. Read More
Diane Dalmy and Michael Woodford Charged for False Legal Opinions
On March 13, 2019, the Securities and Exchange Commission (SEC) charged attorney Diane Dalmy with fraud for “for concealing from transfer agents and brokerage firms her involvement in preparing legal opinion letters concerning the sale of certain microcap securities.” The OTC Markets had placed Diane Dalmy on their prohibited list of attorneys; the OTC Markets is the largest trading system for microcap securities in the United States. To work around this, Dalmy used another lawyer– Michael Woodford, a retired divorce attorney, to sign legal opinion letters that she handed off to him. Of course, Michael Woodford did not due any due diligence himself in order to give a proper legal opinion, and would just sign whatever document was put in front of him. He then provided the opinion letters to transfer agents and brokerage firms. He would go on to be charged for his role as well in June 2019.
Guy Scott Griffithe & Robert Russell Charged by SEC in Cannabis Company Scheme
A California man, Guy Scott Griffithe, and a Washington state man, Robert William Russell, were charged on Tuesday, January 21, 2020, by the Securities and Exchange Commission (SEC) for defrauding investors by selling them shares of one company, which they said would go towards operating another, when in fact the funds were being used for personal expenses. In other words, they were selling fake shares of a company.
The companies in question are Renewable Technologies Solution, Inc., an entity controlled by Guy Griffithe, and SMRB LLC, a Washington company owned by Robert Russell. SMRB LLC holds a license to grow marijuana under Washington’s recreational marijuana laws. These licenses can often be hard to get, which can make a company valuable if it has one. Griffithe and Russell ended up raising almost $5 million of the fraudulent shares of the cannabis company. Read More
SEC Obtains Emergency Asset Freeze Against Kenneth Courtright and TGC
On Wednesday, January 15, 2020, the Chicago Sun Times reported “A federal judge has frozen the assets of Kenneth Courtright, an Illinois man and the company he ran under the name “The Income Store” after the U.S. Securities and Exchange Commission (SEC) accused him of a “Ponzi-like scheme” that raised $75 million.” This man is named Kenneth Courtright. He founded the company and is the current chairman. Courtright was using the money from his company to overpay his mortgage and pay tuition for his kids’ private school. The Income Store is officially known as Todays Growth Consultant, Inc. (TGC).
How Does Offering Integration Impact Reg A Offerings?
Offering integration can become a problem for some issuers conducting Regulation A+ (also known as Reg A) offerings. The Reg A offering integration rules prevent companies from improperly avoiding SEC registration by dividing a single securities offering into multiple securities offerings to take advantage of Securities Act exemptions that would not be available for the combined offering.
A Reg A + offering will not be integrated with any preceding securities offers or sales. Additionally, securities offers or sales that take place after a Regulation A+ offering will not be integrated with other securities offerings that: Read More
Regulation D Rule 504 Securities Offering Requirements and Disclosures
Rule 504 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) allows an issuer to raise capital of up to $5,000,000 in a 12-month. Rule 504 allows sales to both accredited and non-accredited investors. As discussed below, unlike Rule 506(b) when sales are made to non-accredited investors in reliance upon Rule 504, there are no specified disclosure requirements. Additionally, the issuer is not required to file with the Securities & Exchange Commission (“SEC”) until 15 days after the first sale of securities in the offering.
Which Companies Can Rely on Rule 504?
Rule 504 is only available to companies that are not subject to SEC reporting requirements under the Securities Exchange Act. Additionally, Rule 504 cannot be used by investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; or companies that are disqualified under Rule 504’s “bad actor” disqualification provisions. Read More
SEC Charges Boaz Manor and Blockchain Terminal with Fraudulent ICO
The New York Post reported on Friday, January 17, 2020, “A convicted hedge-fund swindler assumed a fake name and donned a disguise to lure investors into a $30 million cryptocurrency fraud in New York that spanned two years.” This man was Boaz Manor, who was arrested in 2010 in Canada for misappropriating $100 million from his hedge fund. He was sentenced to 4 years in prison, but was released early in 2012. He was also banned for life from the securities industry. Then, in 2015, he had the bright idea of pretending to be somebody else to get back into the industry. To do this, the Post reports “Manor darkened his blond hair and grew a beard. After trying on aliases like “Jay Mills” and “Jay Belzberg,” Manor appears to have settled on the name “Shaun MacDonald.”” Theblockcrypto.com first uncovered and reported MacDonald’s scheme in December of 2018, with great reporting and interesting details.
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Regulation A Testing the Waters – Securities Lawyer 101
When dealing with potential investors, Regulation A Issuers may test the waters when implementing solicitation materials before AND after the Form 1-A offering statement is filed with the Securities and Exchange Commission (“SEC”) subject to issuer compliance within the rules on filing and disclaimers.
Testing the waters with Regulation A means you can now advertise ANYWHERE you think you’ll attract potential investors. Take social media for example… You could put together a formal ad campaign that costs tens of thousands of dollars. Or, you can simply do it yourself on Twitter or Facebook. Keep in mind, you’re getting non-binding indications of interest when testing the waters in a Regulation A Offering. Meaning, you can’t hold people to their indication of interest that they will actually invest in your brand. However, it does present the opportunity —before you look to your own pocket to see if there’s adequate interest when it comes to filing the actual offer as well as preparing and qualifying the offering statement. Read More
OTC Markets Policies on Section 17(b) and Stock Promotion
The SEC and Section 17(b) Stock Promotion
In the over-the-counter equities market, paid stock promotion has long been of concern to the Securities and Exchange Commission (“SEC”) and to responsible market participants. Recently the OTC Markets has taken an interest in the rules that apply to investor activities and promotion of the issuers on their platform. Stock Promotion isn’t just a way of attracting attention to a company and its stock; it can also be a form of illegal stock manipulation. That is because nearly all stock promotions are financed by individuals or entities that hold large securities positions acquired at negligible cost or at a considerable discount to market price, who want to sell their shares for a hefty profit. Those people may be former insiders, current insiders concealing the amount of their ownership, stock promoters paid in shares or toxic funders who lent money to the issuer in exchange for convertible notes.
The schemes in which they participate are called pump and dump operations. Stock promoters use various means at their disposal—email blasts, phony “research reports” posted on a variety of websites, social media chatter talking up the “hidden gem” in question, and, even today, boiler rooms whose staff cold calls likely prospects—to send a stock skyward. Read More
Form S-1 Registration Statement Requirements – Going Public
Form S-1 registration statements is the most commonly used registration statement form. Form S-1 permits issuers to register various types of offerings and the form can be used by both public and private companies engaged in going public transactions. A Form S-1 registration statement has two principal parts which require expansive line item SEC disclosures. Part I of the Form S-1 registration statement is the prospectus which requires that the company provide certain disclosures about its business, financial condition, and management. Read More
SEC Proposes to Modernize Auditor Independence Rules
On December 30, 2019, just before the start of the new year, the Securities and Exchange Commission (SEC) “announced that it is proposing amendments to codify certain staff consultations and modernize certain aspects of its auditor independence framework.” These proposals would update certain aspects of the almost twenty-year-old auditor independence rule set to more effectively structure the independence rules and analysis so that relationships and services that would threaten an auditor’s objectivity and impartiality do not result in non-substantive rule breaches or force a commitment of too much time to an audit committee review of non-substantive matters.
Dead Stock Walking | Dormant Issuers and Reverse Merger Risks
In recent years, the SEC has issued trading suspensions and revoked the registration of numerous publicly traded companies many of which were dormant tickers at one time. These SEC enforcement proceedings were brought under Section 12(j) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 12(j) authorizes the SEC to suspend or revoke registration of an SEC reporting company if it fails to comply with its obligation to file quarterly and annual reports.This authority arises from the Exchange Act, if the SEC finds that a suspension or revocation is in the public interest or necessary for the protection of investors.
The SEC staff argues that these proceedings are necessary to discourage the investing public–by which they mean potential, not current, investors–from buying securities of companies about which there is no current information. Read More
What is Form 10 Information? Going Public Attorneys
Form 10 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”). This blog post addresses common questions we receive from clients about Form 10 registration statements. All companies can register a class of securities on Form 10 regardless of whether they are private companies or publicly traded. This blog post addresses the most common questions we receive about Form 10 registration statements.
Q. When is a company required to file a Form 10 registration statement with the SEC? Read More
Accredited Crowdfunding With Rule 506(c) – Going Public Attorneys
Private placement offerings under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (“Securities Act”) are a cost-effective and relatively quick way for private companies to raise capital before, during, and after a going public transaction. The JOBS Act created Rule 506(c) which has become known as the “Accredited Crowdfunding” exemption.
Accredited Crowdfunding under Rule 506(c) fundamentally changed the way unregistered offerings are conducted. While the Accredited Crowdfunding rules impose stringent requirements, these requirements are manageable for issuers putting effective compliance strategies into place. Accredited Crowdfunding under Rule 506 offerings are frequently used to raise capital in connection with going public transactions that involve filing a registration statement on Form S-1. Accredited Crowdfunding under Rule 506(c) has become a popular means of obtaining seed shareholders in going public transactions.
Blue Sky Laws and Secondary Trading and Resales in Regulation A Offerings
State Blue Sky laws apply to Regulation A Offerings for both the offer and sale of securities by the issuer and the resale by investors. A sometimes overlooked consideration in Regulation A+ offerings is how these State Blue Sky laws impact liquidity and resales by investors in the offering, referred to as secondary sales. Considering market liquidity for investors is important for a successful capital raise so that investors understand their exit strategy.
Generally, every offer and sale of a security must either be registered with the U.S. Securities & Exchange Commission (“SEC”) or the offer and sale must qualify for a SEC Exemption from registration. This is true for both offerings by the issuer of the securities and resales by investors who purchase the issuer’s securities. Like the federal securities laws, State Blue Sky laws provide for securities registration and exemptions from such registration. Read More
SEC Charges Recidivist Keith Springer with Defrauding Retirees
On December 19, 2019, the Securities and Exchange Commission (SEC) charged Sacramento, California-based investment adviser firm Springer Investment Management, Inc. dba Springer Financial Advisors (SFA) and owner Keith Springer with defrauding hundreds of retail clients, most of them in or close to retirement. Meanwhile, Springer was paying outside agencies to hide his fraudulent past from internet searches and instructing his employees not to disclose the information to clients or potential clients. In the past, he has been alleged with charging clients 2%, while moving their investments into a third party fund that charged 0.35%.
Is Regulation A the Same as Regulation A+ ? Securities and Crowdfunding Lawyers
1. Overview of the Regulation A+ Exemption
On March 25, 2015, the Securities and Exchange Commission (the “SEC”) created Regulation A+ by adopting final rules to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act by expanding Regulation A into two tiers. Regulation A+ has had a notable impact on companies going public. One key benefit of Regulation A+ is that companies using Regulation A+ can comply with scaled down SEC reporting requirements.
Tier 1 of Regulation A+ provides an exemption for securities offerings of up to $20 million in a 12-month period while Tier 2 provides an exemption for securities offerings of up to $50 million in a 12-month period. An issuer of $20 million or less of securities in its offering can elect to proceed under either Tier 1 or Tier 2.
SEC Files Charges in Ponzi Scheme Targeting Hispanic Community
Edward Espinal, a 44-year-old from Wayne, New Jersey, and his company, Cash Flow Partners LLC, were charged by the Securities and Exchange Commission (SEC) on December 19, 2019, for perpetrating a Ponzi Scheme that mainly targeted members of the Hispanic community. The scheme is alleged to have raised over $5 million from around 90 investors. Cash Flow Partners used online videos and advertisements to target its victims. These videos included a former telenovela star. Cash Flow also hosted seminars where it promised to help low-earning individuals obtain bank loans.
The SEC‘s complaint “alleges that from at least July 2016, Espinal and Cash Flow Partners deceived investors into believing that they were investing in a pooled fund that would purchase and renovate houses, and then flip the houses for profit. Espinal and Cash Flow Partners allegedly guaranteed investors rates of return between 1.25% and 4% per month. T Read More
Is Form 10 Registration Different than Form S-1?
Form S-1 registration statements provide issuers with flexibility in going public transactions. A registration statement on Form S-1 can be used to register specific securities for a company to sell to investors and specific shares for the company’s shareholders to resell publicly. Form S-1 can be used to register both simultaneously. Form S-1 registration statements can be used for a Direct Public Offering (“DPO”) or Initial Public Offering (“IPO”) and can be structured a variety of way depending upon the particular transaction.
Using Form S-1, the issuer or its shareholders are able to sell unrestricted securities and if structured properly, qualify for a ticker symbol assignment by the Financial Industry Regulatory Authority (“FINRA”) Read More
Raising Money For Your Business – Private Placement Memorandums
What is a Private Placement Anyway?
A Private Placement Memorandum is sometimes referred to as a confidential offering circular or an offering memorandum. Private Placement Memorandum’s are used by private companies who intend to stay private and as part of a going public transaction. Private placements are also used by existing public companies to raise capital by selling either debt or equity pursuant to an exemption from SEC registration such as that found in Rule 506 of Regulation D. Private Placement Memorandum disclosures vary depending on whether the investor is accredited or non-accredited and whether the Company is subject to the SEC’s reporting requirements. When a Company sells equity, it most often offers common shares to investors who become shareholders of the Company. In going public transactions, the shares held by these investors will often by registered on Form S-1 so that the Company meets the requirements of the Financial Industry Regulatory Authority (“FINRA”) to obtain its ticker symbol assignment.
The Securities Act of 1933 – Liability Provisions
The Securities Act of 1933, as amended (the “Securities Act”) is often referred to as the “truth in securities” law. The Securities Act requires disclosure of financial and other material information about securities that are being offered for sale to the public. The Securities Act also prohibits deceit, misrepresentation, and other types of fraud in connection with the offer and sale of securities.
All securities sold in the U.S. must be registered with the Securities & Exchange Commission (the “SEC”) or be exempt from registration. The disclosures required by the Securities Act are most often provided in a registration statement. Smaller companies might publish these disclosures in a Form 1-A Offering Circular under Regulation A. These disclosures allow investors to make informed decisions about whether to purchase a security. Read More
Going Public With Rule 506(b) – The Friends and Family Round
Seed Capital and the Friends and Family Round
Many small companies seeking to raise funds for their business raise initial seed capital from friends and family. Even when raising funds in a friends and family round, federal securities laws are applicable.
Do the Securities Laws Apply to the Friends and Family Round?
Generally, under federal securities laws in order to raise capital from investors even in a friends and family round, you must register the securities with the U.S. Securities & Exchange Commission (“SEC”). There are several forms of SEC registration statements available to public or private companies, with the most common being Form S-1 for domestic issuers and Form F-1 for foreign private issuers. Because the SEC registration statement can be time consuming and burdensome, many companies seek to rely upon an exemption from SEC registration to raise their seed capital.
SEC Awards Whistleblowers For Reporting Securities Fraud
On January 22, 2020, the Securities and Exchange Commission (“SEC”) announced two whistleblower awards in connection with two separate SEC enforcement actions. Both whistleblowers provided significant information that helped the SEC shut down two separate fraudulent schemes involving retail investors. In the first action, the whistleblower alerted the agency to a fraudulent scheme. The whistleblower received a SEC bounty of more than $277,000. In the second action, the whistleblower, a harmed investor, provided critical information that enabled the SEC staff to recover assets that were later returned to victims. The whistleblower received a SEC bounty of $45,000.
MetLife Settles SEC Charges with $10 Million Payment
Due to longstanding internal control failures, MetLife has agreed to pay $10 million to settle the charge that was brought forward by the Securities and Exchange Commission (SEC). According to Reuters, which reported on the news, “The settlement follows a probe by the SEC into the company’s failure to pay some workers’ pensions, which MetLife disclosed in December 2017. The agency found MetLife violated key provisions of the federal securities laws relating to two errors in how it accounted for reserves associated with its annuities businesses, it said in Wednesday’s statement.” Read More
SEC Charges Broker-Dealers With Illicitly Profiting in Partial Tender Offer
Bluefin Trading LLC and Critical Trading LLC were charged by the Securities and Exchange Commission (SEC) on December 18, 2019, for violating what is known as the “short tender rule” and “enriching themselves at the expense of other participants in a partial tender offer.” Both of these trading companies are based in New York, New York. The partial tender offer in question regards the common stock of Lockheed Martin Corp., which is known for making weapons.
Form S-3 Registration Statement Eligibility and Requirements
Form S-3 is a short-form registration statement that consists primarily of information about the specific transaction. Only certain eligible issuers can register a securities offering on Form S-3 after their going public transaction. Not all public companies can register securities on Form S-3 even if the issuer is subject to SEC reporting requirements.
Much of the information required by Regulation S-K can be incorporated by reference from the issuer’s current and future periodic reports and proxy statements filed with the Securities and Exchange Commission (“SEC”). Because the Form S-3 allows the incorporation by reference of future filings made by the issuer, the registration statement is automatically updated every time the issuer files a new Exchange Act report or other filing incorporated by reference. An issuer is eligible to use Form S-3 to offer securities on its own behalf for cash on an unlimited basis if the aggregate market value of its voting and non-voting common equity held by non-affiliates is at least $75 million. Read More
Illinois pardons over 11,000 people for low-level marijuana offenses
As CNN reports, the Governor of Illinois has decided to issue pardons for over 11,000 citizens of the state who have been convicted of low-level marijuana offenses. This action comes simultaneously with the legalization of weed for all adults in Illinois, making it the eleventh state to do so. CNN writes, “The law is also intended to help people held back from jobs, housing and financial aid for college because of drug convictions, according to state officials.” Now that marijuana is legal, it only makes sense for the people who were punished for it in the past to get some kind of leeway or reparations.
Blockchain of Things Inc. (BCOT) Charged by SEC for Unregistered ICO
Blockchain technology company Blockchain of Things Inc. (BCOT) settled charges brought against them by the Securities and Exchange Commission (SEC) on December 18, 2019, for conducting an unregistered initial coin offering (ICO). The New York-based startup Blockchain of Things conducted its ICO, in December of 2017, which was after the SEC had released its DAO Report Investigation, which reported that ICOs can in fact be securities offerings.
This is the latest in the string of many cases that the SEC has been bringing against unregistered token offerings. As cryptoiq.co puts it, “Blockchain of Things (BCOT) is the latest ICO to get obliterated by the SEC.” The SEC has shown that it is serious about ensuring cryptocurrencies are not used as a runaround of United States securities laws.
SEC Proposes Improvements to Governance of National Market System
The Securities and Exchange Commission (SEC) wants to improve the regulation surrounding market data plans. They are seeking public comment on a proposed order that would modernize the governance of National Market System (NMS). According to Wikipedia, “The National Market System (NMS) is the national system for trading equities in the United States. The System includes all the facilities and entities which are used by broker-dealers to fulfill trade orders for securities. This includes: Major stock exchanges, such as NYSE and Nasdaq.” The SEC is hoping to improve how the NMS disseminates data from trading venues.
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