Short sale conspiracy theorists will be pleased to learn that on March 25, 2015, The Financial Industry Regulatory Authority (FINRA) announced sanctions of $916,000 against Short Seller, First New York Securities L.L.C. for short selling ahead 14 public offerings of securities, of which it was participating, in violation of Rule 105 of Regulation M. First New York Securities was also sanction for related supervisory violations. FINRA ordered First New York to pay disgorgement of more than $516,000, plus interest, and fined the firm $400,000. Additionally, the firm is prohibited from participating in secondary or follow-on offerings for six months.

Rule 105 of Regulation M under the Securities Exchange Act of 1934 generally prohibits buying securities in secondary offerings when the purchaser sold short the security that is the subject of the offering during a specific restricted period – typically five business days – before the secondary offering is priced. Read More

The Securities and Exchange Commission (SEC) Division of Enforcement is pursuing unregistered broker-dealer activity which runs rampant in the penny stock markets.  With a reduction of the number of small broker-dealers, there have been limited sources of capital available to small business issuers. As such, many have turned to finders and intermediaries. Recent enforcement actions demonstrate there are serious consequences for those who engage in unregistered broker-dealer activity. We expect the regulatory focus on unregistered broker-dealer activity to increase with the use of general solicitation and general advertising in Accredited Crowdfunding Offerings under Rule 506(c) offerings and Regulation A+.  Read More

The Securities and Exchange Commission (SEC) announced the temporary trading suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”), of trading in the securities of Winsonic Digital Media Group, Ltd. (WDMB), commencing at 9:30 a.m. EDT on March 24, 2015 and terminating at 11:59 p.m. EDT on April 7, 2015.

The SEC temporarily suspended trading in WDMG due to a lack of current and accurate information concerning WDMB’s securities because it has not filed any periodic reports since the period ending September 30, 2008, or any reports since June 2011.

The SEC cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company. Read More

Recently, the FINRA Investor Education Foundation issued a new research report about the impact of financial fraud on its victims. FINRA’s report revealed that nearly two thirds of self-reported financial fraud victims experienced at least one non-financial cost of fraud to a serious degree—including severe stress, anxiety, difficulty sleeping, and depression. FINRA Foundation’s research examines the broader psychological and emotional impact of securities and other forms of financial fraud.

“Financial Fraud’s effects linger and cause distress well after the scam is over. For the first time, we have data on the deep toll that fraud exerts on its victims, and the results are sobering. This new research underscores the importance of the FINRA Foundation’s work with an array of national, state and local partners to help Americans avoid fraud, and assist consumers who have been defrauded,” said FINRA Foundation President Gerri Walsh. Read More

When a company is involved in bankruptcy proceedings, the letter “Q” is added to the end of the company’s stock ticker/trading symbol.

More often than not, bankruptcy is the kiss of death for a public company.

In most cases, when a company emerges from bankruptcy, the bankruptcy reorganization plan will involve reverse stock splits or other acts which dilute or cancel the existing common shares and the old shares will be worthless. Given that risk, before investing in the shares of a bankrupt company, investors should read the company’s proposed plan of reorganization.  Read More

When a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”), they are required to file a Schedule 13D with the SEC.

Once a company completes its going public transaction and the staff of the Securities and Exchange Commission (SEC) declares its Form registration statement effective under the Securities Act of 1933, as amended (Securities Act), the  company will become subject to the SEC’s periodic reporting requirements.  Companies can also become subject to the SEC’s reporting requirements by filing a registration statement under the Securities Exchange Act of 1934, as amended such as a Form 10 for Form 8-A.

These requirements stipulate that the company must file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on an ongoing basis.  Holders of 5% or more of a company that registers a class of securities under the Exchange Act become obligated to file certain beneficial ownership reports including Schedule 13D. Read More

On March 13, 2015, the Securities and Exchange Commission (SEC) provided guidance addressing waivers of disqualification for bad actors under Regulation A and Rules 505 and 506 of Regulation D of the Securities Act of 1933, as amended. A waiver of disqualification under these provisions may be granted by the SEC’s Division of Corporation Finance if it determines after a review of all the facts and circumstances that the applicant has met its burden of showing good cause that it is not necessary under the circumstances that the exemptions from the bad actor provisions be denied. Read More

On March 13, 2015, the Securities and Exchange Commission (SEC) charged eight officers, directors, or major shareholders of public companies in connection with going private transactions. According to the SEC, the defendants failed to update their stock ownership disclosures to reflect material changes, including steps to take the companies private. Each of the respondents, without admitting or denying the SEC’s allegations, agreed to settle the proceedings by paying a financial penalty.

The charges involve outdated disclosures in reports filed by “beneficial owners” who hold more than 5 percent of a company’s stock. Federal securities laws require beneficial owners to promptly file an amendment when there is a material change in the facts previously reported by them on Schedule 13D, commonly referred to as a “beneficial ownership report.” The disclosure requirements include plans or proposals that would result in certain transactions, such as a going private transaction. Read More

Posted By Brenda Hamilton, Securities Lawyer

Companies may use an exemption under Regulation D to offer and sell securities without having to register the offering with the Securities and Exchange Commission (“SEC”).  When relying on such an exemption, companies must file what’s known as a “Form D” after they first sell their securities.  Form D is a brief notice that includes basic information about the company and the offering, such as the names and addresses of the company’s executive officers, the size of the offering and the date of first sale.  Read More

On March 4, 2015, the Securities and Exchange Commission (SEC) announced it had charged HD Vest Investment Securities with violating key customer protection rules after failing to adequately supervise registered representatives who misappropriated customer funds.

HD Vest Investment Securities agreed to settle the charges by paying a financial penalty and retaining an independent compliance consultant to improve its supervisory controls.

According to the SEC’s order instituting a settled administrative proceeding, HD Vest has more than 4,500 registered representatives typically working as independent contractors who also operate tax businesses outside of their securities businesses.  HD Vest failed to have proper policies and procedures in place to monitor its representatives’ outside business activities, and as a result some representatives used their outside businesses to defraud brokerage customers in such ways as transferring or depositing customer brokerage funds into their outside business accounts. Read More

Posted by Brenda Hamilton Securities Lawyer

On March 6, 2014, the Securities and Exchange Commission (SEC) announced it had added Billy Joe Adcox, Jr. of Ruston, Louisiana to a civil injunctive action in the United States District Court for the Western District of Louisiana, alleging that Adcox, Scott Zeringue and Jesse Roberts, III engaged in insider trading in the securities of The Shaw Group, Inc. (“Shaw”) ahead of a public announcement that Shaw was going to be acquired by Chicago Bridge & Iron Company N.V. (“CBI”).

The SEC alleges that Adcox was tipped by his long-time friend, Jesse Roberts, III, also of Ruston, Louisiana. According to the SEC’s insider trading complaint, Adcox knew Roberts got the confidential information about the impending merger from Roberts’ brother-in-law, Zeringue, a Shaw insider. Adcox and his relative allegedly bought Shaw stock based on the tip and, about two weeks later, sold the stock for a profit of over $111,000. Adcox’s relative also tipped a third unnamed individual, who made about $43,000. Read More

The Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission require that broker-dealers perform adequate due diligence before letting a registered representative recommend private placements made pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). FINRA listed due diligence of private placements as a concern in its 2015 Regulatory and Examination Priorities). FINRA’s recent case against LaSalle St. Securities LLC (“LaSalle”) demonstrates that this due diligence obligation is mandatory even for private placement offerings made to accredited investors.

FINRA found certain deficiencies that occurred at various times during a four-year period in connection with the offerings of four issuers. The findings stated that with respect to private placement offerings, LaSalle Securities failed to exercise adequate due diligence before allowing a registered representative to recommend the offering to four accredited investors and distributed a private-placement memorandum to potential investors that did not include certain material facts and relied on a flawed methodology for projecting return on investment. Read More

Companies become subject to the SEC’s periodic reporting requirements a number of ways including by filing a registration under the Securities Act of 1933, as amended or pursuant to the  Securities Exchange Act of 1934. The SEC periodic reporting rules require that publicly traded companies disclose a wealth of information to the public. Periodic reporting also requires that these reports be written in plain English.  Understanding these reports helps investors make informed decisions regarding whether to buy, sell or hold a company’s securities.

Periodic reports provide issuers with the opportunity to provide shareholders with transparency by telling their story. Companies that provide materially false or misleading statements, or omit material information that is necessary to render a report not misleading in their periodic reports  are subject to liabilities arising under federal and state securities laws. Investors can obtain a company’s Form 10-K, Form 10-Q and Form 8-K filings on the SEC’s EDGAR database. Read More

Institutional Investment Managers that exercise investment discretion of $100 million or more in Section 13(f) securities holdings, which include holdings in exchange-traded securities, shares of closed–end investment companies and certain convertible debt securities, must publicly disclose their holdings on Form 13F each quarter.

An “Institutional Investment Manager” is an entity that either invests in, or buys and sells, securities for its own account. As such, banks, insurance companies, and broker/dealers, corporations and pension funds that manage their own investment portfolios are subject to the rule if they invest in, or buy and sell securities for their own account. Read More

Posted By Brenda Hamilton, Securities Lawyer

The Depository Trust and Clearing Corporation (“DTCC”), through its subsidiaries, provides clearing, settlement and information services for securities. DTCC’s subsidiary, the Depository Trust Company (“DTC”) was created to improve efficiencies and reduce risk in the clearance and settlement of securities transactions. Not all securities are eligible to be settled through DTC.  DTC Eligibility has become an often unexpected burden for companies in going public transactions.

Issuers must satisfy the criteria set by DTCC to be settled through DTC. All companies must satisfy this criteria in order to be DTC eligible, including both Securities and Exchange Commission (“SEC”) reporting and non-reporting issuers. This Securities Lawyer 101 Series discusses the most common questions we receive about DTC eligibility in going public transactions. Read More

Posted by Brenda Hamilton, Securities Lawyer

A few weeks ago, we wrote about U.S. v Ross Mandell, a complicated case involving securities fraud, conspiracy to commit securities fraud, wire fraud, and mail fraud. The action was tried in Federal Court in the Southern District of New York.  It ended in May 2012, when final judgments of conviction were entered against Mandell and a co-defendant, Adam Harrington. Mandell and Harrington filed a brief with the Second Circuit Court of Appeals in September 2012.

The appellate panel delivered its decision on May 14, 2014 ruling against Mandell and Harrington and upholding the lower court’s decision. The pair, believing justice had not been served, made use of the only option left to them, filing a writ of certiorari with the Supreme Court.  A writ of certiorari seeks judicial review of a case that has already been heard and, in this instance, already appealed.  Read More

Rule 144 (“SEC Rule 144”) under the Securities Act of 1933 (“Securities Act”) provides a safe harbor from the registration statement provisions of the Securities Act for resale of restricted and  control securities by persons other than the issuer if all conditions of the rule are complied with.

Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.”  If the requirements of Rule 144 are met for securities not covered by a registration statement, the seller will not be deemed an underwriter and will be entitled to rely upon the safe harbor of Rule 144 to resell their restricted stock.

Read More

Posted by Brenda Hamilton, Securities and Going Public Lawyer

Michigan recently made a move to assist Michigan small businesses with their investment  crowdfunding endeavors. Michigan became the first state to establish an intrastate market where broker-dealers can sell securities of Michigan-based companies using crowdfunding.  The signing of House Bill 5273 by Michigan’s preexisting intrastate exemption from securities registration known as the Michigan Invests Locally Exemption (“MILE Act”), allows Michigan businesses to raise capital using the Internet and/or though general solicitation by selling the exempt securities within a newly-created alternative intrastate market. Read More

Posted by Brenda Hamilton, Securities and Going Public Lawyer

Broker-dealers are subject to regulation by the SEC, FINRA and any other Self-Regulatory Organizations (“SRO”) such as stock exchanges, as well as the states in which they do business. The Securities Exchange Act of 1934 (“Exchange Act”) requires that any broker-dealer effecting securities transactions by means of interstate commerce be registered. State laws also regulate broker-dealer activity within their jurisdictions. Unless an exemption from registration is available, state laws require registration of any broker-dealer doing business from or with persons in their state, as well as the broker-dealer’s employees doing business within the state. Read More

Posted by Brenda Hamilton, Securities and Going Public Lawyer

Recently, the North American Securities Administrators Association (“NASAA”) published a notice of request for comment on a proposed uniform State Model Rule (“State Model Rule”) that would exempt merger and acquisition brokers (“M&A Brokers”) from state securities registration if certain conditions were met.  Comments on the State Model Rule were required to be submitted to NASAA by February 16, 2015.

NASAA’s proposed State Model Rule has some similarities to a January 2014, SEC No-Action letter  that addressed M&A Brokers and the M&A Brokers exemption contained in HR 37 passed by the House of Representatives on June 14, 2015 (H.R. 37) and it also includes meaningful differences as well.   Read More