Hamilton & Associates Law Group, P.A.
Securities Lawyers | Corporate Finance
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The Securities and Exchange Commission announced on July 24, 2018 that New York entrepreneur William Z. (Billy) McFarland, two companies he founded, a former senior executive, and a former contractor agreed to settle charges arising out of an extensive, multi-year offering fraud that raised at least $27.4 million from over 100 investors.
The SEC’s complaint alleges that McFarland fraudulently induced investments into his companies Fyre Media, Inc., Fyre Festival LLC, and Magnises, Inc., including in connection with McFarland’s failed venture to host a “once-in-a-lifetime” music festival in the Bahamas. Read More
Going public is a big step for any company. The process of “going public” is complex and at times precarious. While going public offers many benefits it also comes with risks and quantities of regulations with which issuers must become familiar. Despite the risks even in a down economy, the U.S. markets remain an attractive source of capital for issuers. Going public is an intricate process, and it is important to have an experienced going public attorney to help your company navigate through the process and deal with the Securities & Exchange Commission the (“SEC”), Financial Regulatory Authority (“FINRA”) & Depository Trust Company (“DTC”).
Upon completion of a going public transaction, most companies are subject to the regulations that apply to public companies, including those of the Securities Act of 1933, as amended (the “Securities Act”) and Securities Exchange Act of 1934, as amended (the “Exchange Act”). A going public securities attorney can guide the company through these regulations. Read More
According to the SEC’s complaint, Howard Appel orchestrated multiple schemes to manipulate the market for trading in shares of Virtual Piggy Inc., (VPIG), Red Mountain Resources Inc. (RDMP), and Rio Bravo Oil Inc. (RIOB), and concealed his activity by using overseas associates and nominee brokerage accounts. The SEC’s complaint alleges that Howard Appel secretly acquired ownership or control over sufficient shares of the companies so that he and his associates could manipulate their stocks through coordinated trading activity. As alleged in the complaint, Howard Appel kept tight control over the trading and engaged in matched trading with his associates. In one instance, Howard Appel allegedly sought to coordinate artificial bidding activity to prevent the price of RDMP from dropping, emailing instructions to his associates: “Have ur guy for 12500 at .87 and another 7500 at .85 in case we get hit by selling today. (My guy above that bidding .87).” In another example in the complaint, Howard Appel sold 200,000 shares of RIOB to accounts controlled by one of his associates overseas in a series of matched trades that accounted for 80 percent of the reported volume on RIOB’s second day of trading. Read More
SEC Detects Silicon Valley Executive’s Insider Trading
On July 24, 2018, the Securities and Exchange Commission (SEC) announced that Yao Li, a senior executive at a Silicon Valley fiber optics company agreed to settle charges that he made nearly $200,000 in illicit profits by trading on inside information in advance of three disappointing earnings announcements by the company. The case stems from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns such as improbably successful trading in advance of earnings announcements over time. Enhanced detection capabilities enabled SEC enforcement staff to identify the unusual trading activity.
The SEC’s order finds that Yao Li, as Vice President of Technology at Alliance Fiber Optic Products, Inc. (AFOP), learned during regular meetings with AFOP’s senior executives that the company was likely going to miss its revenue guidance in three different quarters during 2014 and 2015. According to the SEC’s order, Li traded on this inside information by short selling AFOP shares for profits as well as selling AFOP shares he already owned to avoid losses before these announcements. Read More
On July 26, 2018, the Securities & Exchange Commission (“SEC”) filed a civil injunctive action against John A. Paulsen, a former managing director and fixed income research analyst at a registered broker-dealer, for aiding and abetting a pay-to-play scheme involving the New York State Common Retirement Fund. As alleged in the SEC’s complaint, from early 2014 until February 2016, Navnoor S. Kang was the Fund’s Director of Fixed Income, with investment responsibility for approximately $50 billion of the Fund’s assets. According to the SEC’s complaint, Kang used his position at the Fund to solicit and receive improper entertainment from Paulsen and Deborah D. Kelley, a registered representative at the broker-dealer. In exchange, Kang directed millions of dollars in state business to the broker-dealer, generating sizable commissions.
The SEC alleges that Paulsen and Kelley planned a ski trip for the purpose of entertaining Kang and his girlfriend. The complaint alleges that Kang told Paulsen and Kelley that the Fund had very strict rules that prohibited him from accepting anything from Paulsen. Yet, according to the complaint, Paulsen and Kelley spent thousands of dollars entertaining Kang and his girlfriend. Read More
Last month, the Securities & Exchange Commission (SEC) adopted amendments to its definition of a “Smaller Reporting Company” which increases the number of companies that are allowed to provide reduced disclosures to comply with their SEC Reporting Requirements. The effective date of the amendments is September 10, 2018. As a result of the amendments, the definition of a Smaller Reporting Company for purposes of compliance with SEC Reporting Requirements has been expanded as discussed below.
Public Float Test – Initial Quotation
A public company with less than $250 million in their public float now qualifies as Smaller Reporting Company as compared to the $75 million threshold under the prior definition.
Revenue Test – Initial Quotation
A public company with less than $100 million in annual revenues now qualifies as Smaller Reporting Company, if the company also has either no public float; or a public float of less than $700 million. The revenue test in the prior definition of a smaller reporting companies required the issuer to have less than $50 million of annual revenues and no public float. Read More
Public companies with shares traded on OTC Markets OTC Link® ATS are organized into three unique market places. In part, the trading market depends upon whether the issuer is required to comply with the SEC Reporting Requirements. The OTC Markets provides venues for both domestic and foreign issuers and provides a unique platform for foreign issuers seeking to dual listing their securities. The OTCQX Best Market is for established, global, and growth companies. OTC Markets OTCQX companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, and have a professional third-party sponsor. The OTCQB Venture Market is for entrepreneurial and development stage companies that are not yet able to qualify for OTCQX. OTCQB companies must be current in their SEC reporting requirements and must undergo an annual verification and management certification process.
The OTC Markets OTC Pink Open Market is for broker-dealers to trade all types of securities without requiring company involvement.
In contrast to securities listed on U.S. stock exchanges, securities on the OTCQX, OTCQB and Pink markets may trade without filing a registration statement with the SEC if they meet certain disclosure and other requirements.
Using a Form S-1 Registration Statement to Go Public
Private companies that go public commonly use a registration statement (“Registration Statement”) on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”) to go public. When a Form S-1 Registration Statement is used to go public, the company will submit the Registration Statement to the Securities & Exchange Commission (the “SEC”), registering securities it plans to sell or securities held by its shareholders (“Selling Shareholders”).
SEC Comments on Form S-1 Registration Statements
Smaller Reporting Companies that go public using Form S-1 should anticipate SEC comments to the Registration Statement from the SEC. The SEC reviews and may comment on the disclosures in the Form S-1 Registration Statement. Upon confirmation that the SEC is satisfied that the issuer’s disclosures satisfy the requirements of the securities laws, the SEC will declare the Registration Statement effective and the securities may be sold. Read More
Posted by Brenda Hamilton, Securities Attorney
Regulation A also known as 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. One key benefit of Regulation A+ is that companies using Regulation A+ can comply with scaled down SEC reporting obligations. Another notable benefit is that Regulation A allows issuers to conduct continuous or delayed offerings under pursuant to Rule 251(d)(3). Continuous or delayed offerings are also known as shelf offerings. Shelf offerings are often used in going public transactions to register shares held by selling stockholders. This helps the issuer and its sponsoring market maker satisfy FINRA’s shareholder requirements for a ticker symbol assignment.
Rule 251(d)(3) allows Regulation A shelf securities offerings for:
Companies going public with Form S-1 have several options in how to structure their transaction when registering securities with the Securities and Exchange Commission (“SEC”). Form S-1 enables issuers to raise capital using the registration statement or register shares on behalf of existing shareholders. If the issuer seeks to raise capital using the S-1’s registration statement expansive disclosure is required of the intended use of proceeds.
Item 504 or Regulation S-K establishes the requirements for disclosure of Form S-1 proceeds in the registration statement. Read More
The Securities Act of 1933 (the “Securities Act”) provides for a private offering or private placement exemption from federal securities registration which is increasingly being used by companies seeking to raise capital during market downturns and in times of market uncertainty.
While the term “private offering” leaves much to the imagination, the Securities Act provides substantial guidance about the circumstances in which an offering will be deemed a private placement.
Form S-1 is the most commonly used registration statement statement filing with the Securities and Exchange Commission (“SEC”). This blog post addresses the summary information section of Form S-1. The requirements of the section are located in Items 501 and 502 of Regulation S-K. The goal of the summary section of Form S-1 is to highlight selected information that is presented in greater detail elsewhere in the registration statement.
The S-1 summary does not contain all of the information required under the specific headings addressed. As such, the Form S-1 summary section should reference the sections summarized. The section includes summaries of Business, Securities, Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and other material information. Read More
The Regulation A offering integration rules prevent companies from improperly avoiding 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. Regulation A also known as Regulation A contains integration safe harbor provisions. Under Rule 251(c), a Regulation A offering will not be integrated with prior offers or sales of securities. Subsequent offers or sales in Regulation A+ offerings will not be integrated with other securities offerings that are:
Form S-1 Risk Factor Disclosures l Securities Lawyer 101
The Securities Act of 1933 is often called the “truth in securities” law. It has two basic objectives: to require that investors receive financial and other important information about securities being offered for sale, and to prohibit deceit, misrepresentation, and other fraud in the sale of securities.
When an issuer files a Form S-1 registration statement, it must provide specific Form S-1 risk factor disclosures about its business plan, its operating history and financial condition. Risk factors are a primary part of Form S-1 registration statement disclosures. Item 503 of Regulation S-K sets forth the requirements for risk factor disclosures. Read More
A registration statement on Form S-1 can be used to register various types of securities offerings with the Securities and Exchange Commission (“SEC”). Form S-1 provides issuers with flexibility in the types of securities that can be registered. Form S-1 is used more often by issuers than any other type of registration statement form. The form can be used by existing public companies or companies in connection with a going public transactions. Regardless of whether the company is public or private, Form S-1 can be used to registered various types of transactions.
These include:
A company becomes subject to SEC reporting requirements by filing a registration statement on Form 10 or Form 8-A under the Securities Exchange Act. Upon effectiveness, the company becomes subject to the SEC’s reporting requirements. These SEC reporting requirements include filing annual, quarterly, and current reports. Additionally, the company’s shareholders and management become subject to various requirements discussed below upon effectiveness of the company’s Form 10 registration statement or Form 8-A
A company whose Form 10 has been declared effective must comply not only with the SEC’s periodic reporting requirements, it must also comply with the SEC’s proxy rules whenever its management submits proposals to shareholders that will be subject to a shareholder vote, usually at a shareholders’ meeting. Read More
Private companies going public commonly use a registration statement (“Registration Statement”) on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”). When a Form S-1 Registration Statement is used, the company must file it with the Securities & Exchange Commission (the “SEC”), registering securities it plans to sell or securities held by its existing shareholders (“Selling Shareholders”).
SEC Comments on Form S-1 Registration Statements
Smaller reporting companies that go public using Form S-1 may receive comments from the SEC to the Registration Statement. The SEC reviews and comments on the disclosures provided in the Registration Statement. Upon confirmation that the SEC is satisfied that the Company has addressed to the SEC Comments and the disclosures satisfy the disclosure requirements of the securities laws, it will declare the Registration Statement effective and the securities may be sold. Read More
This blog post discusses the financial statement requirements for Form S-1 registration statements in direct public offerings. Read More
Companies going public with Form S-1 or Regulation A + have a variety of structures for their transactions. Companies can sell shares in reliance upon Rule 506 of Regulation D and file a selling shareholder registration statement with the Securities and Exchange Commission (“SEC”) to register the resale of those shares on Form S-1. A selling shareholder registration statement on Form S-1 is often combined with a capital raising transaction to provide capital to offset going public costs. Read More
Supreme Court Addresses SEC ALJ’s
On June 21, 2018 The Supreme Court handed down a ruling in Lucia et al. v. Securities and Exchange Commission; the Commission lost, 7-2. At issue was whether the SEC’s method of appointing administrative law judges (ALJs) was unconstitutional because it was not consistent with the Appointments Clause of the Constitution. Lucia and several other similar cases involving SEC ALJ’s have been making their way through the courts for the past five years or so. In early 2017, we examined the situation as it stood at that time. Read More
Form S-1 is the most commonly used registration statement form. It allows 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 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. The disclosures required by a Form S-1 registration statement are set forth in Regulation S-K and include the following: Read More
According to the SEC’s complaint, the defendants cheated more than 600 investors through sales of securities in issuers they controlled, including First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp. The complaint alleges that investors were lied to that their funds would be used for the companies and some were guaranteed dividends or double-digit returns. But, according to the complaint, the defendants spent at least $20 million to enrich themselves, paid $38.5 million in Ponzi-like payments, and transferred much of the remainder in transactions that appear unrelated to the issuers’ purported businesses. The complaint charges Perry Santillo, of Rochester, New York, Christopher Parris, also of Rochester, Paul LaRocco, of Ocala, Florida, John Piccarreto, of San Antonio, and Thomas Brenner, of Orville, Ohio, along with the three companies. Read More
A private or public company can raise capital in a variety of ways. Traditional sources of capital for companies include loans from financial institutions such as a bank, or from friends and family as well as receivable financing. Companies can also raise capital in going public transactions by selling their securities prior to filing a Form S-1 SEC registration or Regulation A+ Offering Circular. Going public is a milestone for any company and there are both advantages and disadvantages that attach to public company status. Companies going public do so because of the general perception that their new status will make it easier to raise capital.
If a private or public company is offering and selling securities, even if to only one person, the offer and sale of the securities must either be registered with the Securities and Exchange Commission (“SEC”) or must qualify for an exemption from the registration statements requirements of the Securities Act of 1933, as amended (the “Securities Act”). Read More
Issuers filing registration statements using a direct public offering in their going public transactions must comply with the disclosure requirements of Form S-1. These include Item 11A of Form S-1 as set forth below.
Form S-1 Item 11A Material Changes
If the registrant elects to incorporate information by reference pursuant to General Instruction VII., describe any and all material changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest Form 10-K and that have not been described in a Form 10-Q or Form 8-K filed under the Exchange Act. Read More
On May 16, 2018, the Securities and Exchange Commission (“SEC”) charged the owner of a Manhattan-based alternative investment firm with misappropriating close to $6 million in investor funds reserved to finance the construction of an international airport in Belize.
The SEC complaint alleges that from 2014 through 2017, Brent Borland, the owner of a Manhattan-based alternative investment firm, sold more than $21 million of promissory notes to at least 44 investors in eight different states, and guaranteed that the funds will be used for financing the development of an international airport in Placencia, Belize, and that the investment would be safe guarded by pledges of real estate as collateral. Borland marketed and sold the notes through two companies, Borland Capital Group LLC, which is active in “alternative investment,” and Fund I, LLC, which is said to be in the business of construction finance. In addition, Boland used millions of investor funds for personal expenses and unrelated business expenses, including mortgage and property tax payments on his family’s Florida mansion, luxury automobiles, private school tuition for his children, $36,000 for his family’s beach club membership, and almost $2.7 million to pay off personal credit card debt. Borland allegedly duped investors by pledging the same collateral to multiple investors.
On June 28, 2018, the Securities and Exchange Commission voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The SEC’s new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The rules will become effective 60 days after publication in the Federal Register. The SEC’s fact sheet on the amendments is below. Read More
The Securities and Exchange Commission (“SEC”) announced on June 12, 2018 that Merrill Lynch, Pierce, Fenner & Smith Inc. will pay more than $15 million to settle charges that its employees misled customers into overpaying for Residential Mortgage Backed Securities (RMBS). Merrill Lynch agreed to repay more than $10.5 million to its customers and to pay penalties of approximately $5.2 million.
Going public is a big step for any company. Companies can go public and become listed on National Securities Exchanges like NASDAQ or the New York Stock Exchange (“NYSE”) or they can have their shares quoted on the OTC Markets inter-dealer quotation system. Regardless of the trading or listing venue, the process of “going public” is complex and at times precarious. While going public offers many benefits it also comes with risks and lots of regulations with which issuers must become familiar. The U.S. markets remain an attractive source of capital for both domestic and foreign issuers.
Going public is a complicated and intricate procedure, and it is important to have an experienced securities attorney to help your company navigate through the process in dealing with the Securities & Exchange Commission the (“SEC”), the Financial Regulatory Authority (“FINRA”) and the Depository Trust Company (“DTC”). Upon completion of a going public transaction, companies become subject to the regulations that apply to public companies, including those of the Securities Act of 1933, as amended (the “Securities Act”) and Securities Exchange Act of 1934, as amended (the “Exchange Act”). Read More
Private companies going public commonly use a registration statement (“Registration Statement”) on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”). When a Form S-1 Registration Statement is used, the company files it with the SEC, registering securities it plans to sell or securities held by its shareholders (“Selling Shareholders”).
SEC Comments on Form S-1 Registration Statements
Smaller reporting companies going public should anticipate SEC comments to the Registration Statement. The SEC reviews and often comments on the disclosures provided in the Registration Statement. Upon confirmation that the SEC is satisfied that the disclosures satisfy the disclosure requirements of the securities laws, it will declare the Registration Statement effective and the securities may be sold. Read More
