Securities Law and Going Public Blog

Xeriant, Inc. Fights Toxic Funder Auctus Fund in Appellate Court

Since 2017, the SEC has been bringing enforcement actions intended to curb the excesses of lenders who deal in convertible securities like promissory notes, preferred stock, warrants, debentures, and more. While the word “lenders” seems anodyne or even beneficial, these individuals and the businesses they run have come to be known to issuers and investors as “toxic lenders” or “toxic funders.” The SEC calls them “unregistered dealers,” as defined in its own Guide to Broker-Dealer Registration. Most of the companies that agree to the financings they offer are OTC or Nasdaq CM issuers.

The Commission’s actions against unregistered dealers began in November 2017, with a suit brought against Ibrahim Almagarby and his Microcap Equity Group LLC. Unlike most of his fellow lenders, Almagarby didn’t initially deal with the companies whose convertible securities he was converting and selling into the market. He instead bought “aged debt” purchased from unaffiliated third parties. Aged debt is old enough to be exempt from the registration requirements of the Securities Act of 1933 under Rule 144. As the eventual appellate opinion explained, “[m]any of the instruments he purchased did not have an existing conversion feature. So Almagarby negotiated directly with the issuers to obtain agreements that allowed him to exchange existing, non-convertible debt for convertible instruments.” Read More

Meta Materials Executives, John Brda and George Palikaras, charged with Market Manipulation, Fraud and Other Violations

Thanks to an SEC Complaint filed today, MMTLP shareholders finally have the undisputable evidence needed to point their previously misguided blame for their massive losses at the proper culprits. For months after the Financial Industry Regulatory Authority (“FINRA“) halted trading of MMTLP shares following trading on December 8, 2022, to avoid settling issues for the scheduled preferred stock dividend set to take place on December 12, 2022, MMTLP shareholders have aimed their anger toward FINRA, blaming the organization that operates to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly for spoiling their credulous short squeeze.

In reality, according to evidence collected and shared by the Securities and Exchange Commission (the “SEC“) in its complaint filed today, the rumors about the short squeeze were, in fact, started by the former CEOs of Meta Materials Inc., John Brda (“Brda”) and George Palikaras (“Palikaras”), as part of a sophisticated market manipulation scheme that they had planned months in advance. Read More

What are the SEC Reporting Requirements After My Form S-1 is Effective?

Once the SEC staff declares your company’s Securities Act registration statement on Form S-1 effective, the company becomes subject to the SEC’s reporting requirements under the Securities Exchange Act of 1934. These rules require your company to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC on an ongoing basis.

If your company qualifies as a “smaller reporting company” or an “emerging growth company,” it will be eligible to follow scaled SEC reporting requirements for its reports. Read More

SEC Regulation D Rule 506(b) and Regulation D Rule 506(c)

On March 4, 2020, the SEC issued an order providing conditional regulatory relief and assistance to reporting companies impacted by 2019 novel coronavirus disease (COVID-19). On March 25, 2020, the SEC extended an earlier March 4, order providing companies an additional 45 days to comply with their SEC reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for filings and reports with deadlines between March 1, 2020 and July 1, 2020, if:

Each offer and sale of a security must be (a) registered with the Securities and Exchange Commission (SEC); or (b) subject to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”). Both private and publicly traded companies raise money by registering their shares on Form S-1 or another registration statement under the Securities Act. Companies can also raise money by conducting an offering under an exemption from registration with the SEC. Rules 506(b) and Rule 506(c) of Regulation D are the most commonly used exemptions from SEC registration. Using Rule 506(b) or 506(c), the issue can establish the shareholder base needed for going public. Issuers must still comply with blue sky laws and the SEC’s anti-fraud provisions when conducting a Regulation D offering.

The following chart summarizes the key metrics for the exemptions from registration under SEC Regulation D Rule 506(b) and Regulation D Rule 506(c). Rule 506(b) and Rule 506(c) offerings each have unique requirements which must be strictly complied with. For example, while Rule 506(c) allows general solicitation and advertising, the rule requires that the issuer verify the accredited investor status of each purchaser. To assist with the process of verification, Rule 506(c) accredited investor verification providers have been established.

Related Articles:

506c-offering-attorneys/Section 4(a)(2) and Rule 506(b) Exempt Offerings
Rule 506(c) Offerings
Private Placement Memorandum – Regulation D
Regulation D – the Bad Actor Rule
Regulation A White Paper
Blue Sky Laws – Regulation A Offerings
Regulation Crowdfunding
Rule 504

To speak with a Securities Attorney about raising capital for your company using SEC Regulation D Rule 506(b) or Regulation D Rule 506(c), please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].

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 Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com

Going Public Using an S-1

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”). Read More

Court denies James L. Koutoulas’ petition to quash SEC subpoena

On May 23, 2024, the U.S. District Court for the Southern District of Florida granted the Securities and Exchange Commission’s (the “SEC“) application to enforce a subpoena for the production of documents to James L. Koutoulas (“Koutoulas ”) and denied Koutoulas’s petition to quash that subpoena.

If a person or entity refuses to comply with a subpoena issued by SEC enforcement staff pursuant to a formal order of investigation, the Commission may file a subpoena enforcement action in federal district court seeking an order compelling compliance.

According to the SEC’s filing, the SEC is investigating whether Koutoulas or the entities he controlled violated the federal securities laws in connection with the offer and sale of the “Let’s Go Brandon” Coin (“LGBCoin”). As part of the investigation, the SEC issued an administrative subpoena to Koutoulas seeking documents and communications relevant to determining whether LGBCoin was offered and sold as a security. Read More

Why use a Direct Public Offering (DPO) to Go Public on the OTC Markets

An Initial Public Offering or IPO is used by issuers seeking to go public using an underwriter. IPOs are typically conducted by issuers listing on the NYSE Stock Exchange (“NYSE”) or NASDAQ Stock Markets (“NASDAQ”). Issuers most often use a Direct Public Offering or DPO in a going public transaction seeking quotation on the OTC Markets. Direct Public Offerings provide a means for a company to go public and sell its shares directly to investors without the use of an underwriter. Even after a Direct Public Offering, the issuer can plan to use the services of an underwriter in the future and/or uplist to NASDAQ or the NYSE.

With a Direct Public Offering, the company files a Form S-1 registration statement with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), if it is a domestic issuer. If the company is a foreign issuer, it can use SEC Form S-1 or Form F-1 for its registration statement.

Both Form S-1 and Form F-1 registration statements offer flexibility, and each can be used to register securities on its own behalf in an initial public offering, to register securities on behalf of its selling security holders in a secondary offering, or register securities on both its own behalf and for selling security holders.

A significant advantage of a Direct Public Offering using a registration statement on Form S-1 or Form F-1 is that the issuer can avoid many of the risks and expenses associated with reverse merger transactions. These can include undisclosed liabilities, sketchy corporate records, DTC Chills, and SEC trading suspensions. Both the NASDAQ and NYSE impose one-year waiting periods for companies after engaging in a reverse merger transaction. Read More

11th Circuit Upholds Unregistered Dealer Justin Keener SEC Judgment

On May 29, 2024, the U.S. Court Of Appeals for the Eleventh Circuit entered its Opinion in the Securities and Exchange Commission’s (“SEC“) case against Justin Keener dba JMJ Financial (together “Keener”), upholding the United States District Court for the Southern District of Florida’s earlier ruling on all points. Read More

Tips For Going Public With A Direct Public Offering

More and more issuers going public opt for a direct public offering. Unlike an Initial Public Offering (IPO), in a direct public offering, the issuer sells shares of its stock directly to investors rather than through an underwriter. Going public transactions using a direct public offering eliminates the costs and risks associated with a reverse merger transaction. Once public, the issuer is more easily able to raise capital in a secondary securities offering. Private companies conducting a direct public offering should consider the pointers below to ensure a successful and cost-effective going public transaction.

The direct public offering process provides options for multiple structures, each with its own unique benefits and requirements. The decision about the appropriate going public structure often involves complex legal issues that vary depending upon the needs of the particular company involved. Read More

SEC Obtains $5.9 Million Judgment Against John Fierro in Unregistered Penny Stock Dealer Case

On May 21, 2024, Judge Georgette Castner of the United States District Court for the District of New Jersey entered a final judgment against John D. Fierro and JDF Capital, Inc. The SEC’s complaint alleged that the Defendants failed to register as securities dealers with the SEC or to associate with a registered dealer when they bought and sold billions of newly issued shares of penny stock from at least January 2015 through November 2017.

The Defendants obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Defendants avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.

The court previously granted summary judgment to the Commission. On June 29, 2023, the court found that Fierro and JDF Capital engaged in a regular business of buying and selling securities for their own account and that their failure to register as dealers violated the dealer registration requirements of Section 15(a) of the Securities Exchange Act of 1934.

In its final judgment, the court ordered Fierro and JDF Capital to pay a joint-and-several disgorgement of $4,053,148, prejudgment interest of $1,326,440, and a civil penalty of $500,000, for a total judgment of $5,879,588. The court also entered a permanent injunction against the Defendants and ordered them to surrender certain stock and conversion rights under existing convertible securities for cancellation. Read More

Are You Ready? T+1 Trade Settlement Begins Next Week

On May 21, 2024, Securities and Exchange Commission Chair Gary Gensler formally announced the U.S. securities market’s switch to a T+1 standard settlement cycle. “T+1” means all trades in all U.S. markets will be settled the day after execution. The change will become effective on Tuesday, May 28. Gensler explained briefly:

For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk. It will make our market plumbing more resilient, timely, and orderly. Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021. Read More

PCAOB Imposes a $400,000 Fine and Sanctions MaloneBailey, LLP for Pervasive Quality Control Violations

Less than a month after one of the biggest auditing firms in the public markets, BF Borgers, and its owner, Benjamin Borgers, were permanently banned and fined a combined $14 million by the Securities and Exchange Commission (the “SEC”) for massive quality control issues, another large auditing firm involved in the public markets is facing fines and sanctions, this time from the Public Company Accounting Oversight Board (PCAOB). On May 21, 2024, the PCAOB announced it was imposing a $400,000 fine and sanctions against MaloneBailey LLP (“MaloneBailey” or the “Firm”) for violations of PCAOB rules and quality control standards.

MaloneBailey is a public accounting firm headquartered in Houston, Texas. It is licensed to practice public accounting by the Texas State Board of Public Accountancy (License No. P05522), among other states.

According to the Disciplinary Order issued by the PCAOB, from 2018 to 2021, PCAOB inspection staff conducted three inspections of MaloneBailey. During each of these inspections, the PCAOB notified the firm of significant audit deficiencies that raised concerns about the firm’s engagement performance. Despite the firm’s awareness of these deficiencies and concerns, it failed to make effective changes to improve its system of quality control. Read More

SEC Issues BF Borgers Exemptive Order For SEC Reporting Companies

On May 20, 2024, the Securities and Exchange Commission (“SEC”) provided exemptive relief to certain SEC reporting companies affected by the SEC’s permanent suspension of BF Borgers CPA PC and its owner, Benjamin F. Borgers (together, “BF Borgers”), from appearing and practicing before the SEC as an accountant. It is expected that public companies that previously retained BF Borgers will need to engage a new, qualified, independent, PCAOB-registered public accountant to audit or review the financial information included in their SEC filings to comply with SEC Reporting Requirements. Read More

CAT’s Cradle – Ongoing Problems with the SEC’s Consolidated Audit Trail

In July 2012, the SEC adopted a new Rule 613 under Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (“Exchange Act”). It would require national securities exchanges and national Self-Regulatory Organizations (“SROs’) “to act jointly in developing a national market system (‘NMS’) plan to develop, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities.” While the Financial Industry Regulatory Authority (“FINRA”) and the SROs did have their own audit trail systems, they were “limited in their scope in varying ways.” The answer was to create a new, truly comprehensive system:

A consolidated audit trail would significantly aid in SRO efforts to detect and deter fraudulent and manipulative acts and practices in the marketplace, and generally to regulate their markets and members. In addition, such an audit trail would benefit the Commission in its market analysis efforts, such as investigating and preparing market reconstructions and understanding causes of unusual market activity. Read More

Trump Media’s auditing firm, BF Borgers, busted for “massive fraud”

On May 3, 2024, the Securities and Exchange Commission announced an enforcement action against auditing firm BF Borgers CPA PC and its principal, Benjamin F. Borgers. The regulator charged the firm with “deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.” Moreover, Borgers assured its many clients that their work was compliant with PCAOB standards when that was not the case, and went so far as to fabricate documentation to make it look as if PCAOB standards had been met.

Gurbir S. Grewal, director of the SEC’s Division of Enforcement, called the matter “one of the largest wholesale failures by gatekeepers in our financial markets,” adding that:

As a result of their fraudulent conduct, they not only put investors and markets at risk by causing public companies to incorporate non-compliant audits and reviews into more than 1,500 filings with the Commission but also undermined trust and confidence in our markets. Because investors rely on the audited financial statements of public companies when making their investment decisions, the accountants and accounting firms that audit those statements play a critical role in our financial markets. Borgers and his firm completely abandoned that role, but thanks to the painstaking work of the SEC staff, Borgers and his sham audit mill have been permanently shut down.

Benjamin Borgers and the firm agreed to settle the charges. BF Borgers will pay a $12 million civil penalty and Benjamin Borgers will pay a $2 million civil penalty. Both are immediately suspended from appearing or practicing before the Commission. Read More

SEC permanently bans BF Borgers and its owner Benjamin Borgers and fines them a combined $14 million for accounting fraud

On May 3, 2024, the Securities and Exchange Commission (the “SEC“) charged audit firm BF Borgers and Its owner, Benjamin F. Borgers (together, “Respondents”), with Massive Fraud affecting more than 1,500 SEC filings. The SEC found that Borgers committed deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.

The SEC also charged the Respondents with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards.

According to the Order against the Respondents, from January 2021 through June 2023, BF Borgers had 350 clients who were required under the SEC’s rules and regulations to have their financial statements audited and/or reviewed by a PCAOB-registered accounting firm in accordance with PCAOB standards and to incorporate those financial statements into filings made with the SEC. Read More

SEC Nails BF Borgers and Ben Borgers – Issuers Must Obtain New Auditors

On May 3, 2024, the Securities and Exchange Commission provided a statement for issuers impacted by its enforcement action against BF Bofgers CPA PC. According to the SEC Action against BF Borgers, approximately 500 issuers used the services of BF Borgers for their audits between January 2021 through June 2023.

On May 3, 2024, the SEC entered an order instituting settled administrative and cease-and-desist proceedings [2] against BF Borgers CPA PC and its sole audit partner Benjamin F. Borgers CPA (individually and together, “BF Borgers”), finding that, among other things, BF Borgers:

deliberately and systematically failed to conduct audits and quarterly reviews in accordance with applicable Public Company Accounting Oversight Board (“PCAOB”) standards;
fraudulently issued audit reports that falsely represented that audits had been performed in accordance with PCAOB standards; and
caused audit clients to violate certain provisions of the Exchange Act and rules thereunder, including Exchange Act Sections 13(a) and 15(d).

The Order denies BF Borgers the privilege of appearing or practicing before the Commission as an accountant. As a result, BF Borgers may not participate in or perform the audit or review of financial information included in Commission filings, issue audit reports included in Commission filings, provide consents with respect to audit reports, or otherwise appear or practice before the Commission.

A significant number of issuers will be impacted by the Order against Borgers. The SEC statement was issued to assist issuers in complying with their disclosure and reporting obligations in light of the Order involving BF Borgers. We encourage all issuers that have previously engaged BF Borgers as their independent auditor to consider the findings and sanctions discussed in the Order, taking into account their disclosure obligations under the federal securities laws. Read More

SEC Charges Convertible Note Dealer Tri-Bridge Ventures, LLC and John Francis Forsythe, III for Failure to Register

On April 29, 2024, the Securities and Exchange Commission (the “SEC“) charged John Francis Forsythe, III (“Forsythe”), a resident of New Jersey, and Tri-Bridge Ventures, LLC (“Tri-Bridge”), an entity he owns and controls, with failing to register with the SEC as securities dealers. As part of their business, Forsythe and Tri-Bridge allegedly engaged in convertible note financing and sold billions of shares of penny stock converted from such notes, generating millions of dollars in gross sales.

The SEC’s complaint, filed in the U.S. District Court for the District of New Jersey, alleges that, from at least February 2017 through at least November 2022, Forsythe and Tri-Bridge engaged in the business of entering into convertible notes with penny stock issuers or purchasing convertible notes or shares already converted from such notes from unaffiliated third parties, converting the notes into shares of stock at large discounts from market prices, and selling those newly issued shares into the public market at a significant profit. Forsythe and Tri-Bridge allegedly obtained convertible notes or shares already converted from such notes with respect to at least 31 separate issuers.

From approximately May 2019 to November 2022, with respect to at least 25 of those issuers, Forsythe and Tri-Bridge sold at least 10 billion shares of penny stock into the market, generating more than $18 million in gross sales (See Exhibit of Tri-Bridge Convertible Note Business). During their misconduct, Forsythe and Tri-Bridge were not registered with the Commission, and Forsythe was not associated with a registered broker-dealer. Read More

SEC obtains final judgment against relief defendant in George Stubos case

On April 15, 2024, the U.S. District Court for the Southern District of New York entered a final judgment against relief defendant Dori-Ann Stubos, ordering her to pay more than $2.3 million in disgorgement and prejudgment interest. In June 2022, the Securities and Exchange Commission (the “Commission”) charged George Stubos for engaging in a deceptive scheme involving several microcap companies. Dori-Ann Stubos, George Stubos’ wife, allegedly received illicit proceeds from George Stubos’ fraudulent scheme for no legitimate purpose or consideration, including for the purchase of a house in California in the name of Dori-Ann Stubos.

The court previously entered a final judgment against George Stubos by consent. George Stubos’ judgment ordered him, among other relief, to pay disgorgement of $5,367,926 and prejudgment interest of $806,108. This concludes the litigation in this matter. Read More

What are SEC Periodic Reporting Requirements? Securities Lawyer 101

Companies become subject to the SEC’s periodic reporting requirements in several 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’s 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 serve as a platform for issuers to provide shareholders with transparency by sharing their stories. However, it’s important to note that companies that provide materially false or misleading statements or omit material information necessary to render a report not misleading in their periodic reports can face serious liabilities under federal and state securities laws. Investors can access a company’s Form 10-K, Form 10-Q and Form 8-K filings on the SEC’s EDGAR database to ensure they are well-informed. Read More

Reg A+ Securities Offerings and FAST Act

Prospective For Underwriters & Broker-Dealers: Due Diligence Considerations

Unlike traditional Initial Public Offerings (“IPOs”), there is no potential liability for issuers under Section 11 of the Securities Act in connection with Regulation A+ offerings. Sellers in Regulation A+ offerings are potentially liable under Section 12(a)(2) of the Securities Act for materially misleading statements in the offering circular or in oral communications. Accordingly, the potential Securities Act liability of issuers under a Regulation A+ offering is less than in connection with a Rule 506 offering but greater than in connection with an IPO.

As such, underwriters and broker-dealers participating in a Regulation A+ offering should require a level of due diligence and disclosure comparable to that of offerings registered with the Securities & Exchange Commission (“SEC”).

Tier I and Tier II offerings will be subject to review by the Financial Industry Regulatory Authority (“FINRA”) if broker-dealers participate in the Regulation A+ offering. Read More

Form S-1 Registration Statements – What Companies Need To Know About Form S-1 & Going Public

Form S-1 Benefits & Going Public

When a company sells shares, the shares must be covered by an effective registration statement or exempt from the Securities & Exchange Commission’s registration statement requirements.

Form S-1 is the most commonly used registration statement form. The form offers flexibility to issuers allowing issuers to structure their securities offerings in a variety of ways, depending upon their particular needs.

All companies qualify to use Form S-1 regardless of their size, line of business and type of security being registered.

Even after The Jumpstart Our Business Startups Act (“JOBS Act”), Form S-1 is the most commonly used method of raising capital and going public. The form can be used to register shares for seed stockholders or larger accredited investors. Form S-1 provides transparency to investors and is a cost and time-effective solution for companies seeking to raise capital and go public. Read More

Investor Relations 101 – The Securities Laws & Stock Promotion

What Is Investor Relations?

Investor relations or stock promotion involves disseminating information about a public company to increase its stock price and/or trading volume. The person who publishes this information is sometimes referred to as a “Stock Promoter”, “Investor Relations Provider” or “Stock Tout”.

How Do Investor Relations Firms Promote A Stock?

Stock Promoters use many techniques, including newsletters, email advertisements, internet postings, direct mail newsletters, stock websites and message boards, press releases and phone rooms to generate interest in the securities they are hired to promote. Read More

SEC Obtains Final Judgment Against Kevin Dills – Joseph Padilla Sentenced in Criminal Case

On March 19, 2024, the U.S. District Court for the District of Massachusetts entered final judgments against California resident Kevin C. Dills and two entities that Dills controlled, Bright Star International, Inc. and Life Sciences Journeys, Inc. In June 2023, the SEC charged Dills and Joseph A. Padilla for their roles in a fraudulent stock-selling scheme.

According to the complaint, Padilla engaged in a fraudulent scheme for his own benefit and also on behalf of individuals who paid Padilla to arrange illegal stock sales. The complaint alleges that those individuals hid their identities by selling stock through offshore accounts in different names that Padilla arranged. Read More

Going Public & Exchange Act Registration For Foreign Issuers

Foreign companies going public in the United States must file a registration statement covering a class of securities pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”) if the class of securities will be listed on a United States national securities exchange such as NASDAQ. A foreign private issuer must register a class of equity securities under the Exchange Act unless the exemption provided by Exchange Act Rule 12g3-2(b) is available. If the foreign private issuer has assets in excess of $10 million and the class of securities is held of record by either (i) 2,000 persons or (ii) 500 persons who are not AIs (in both cases, of whom at least 300 are residents in the United States).

Foreign private issuers are automatically eligible to rely upon the Rule 12g3-2 exemption if they satisfy the following conditions: A foreign private issuer must not be an SEC reporting company. That is, they must not be required to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act.
The foreign private issuer must maintain a listing of its securities on a “Primary Trading Market” outside the United States. A Primary Trading Market is a foreign market that, either alone or together with another foreign market, accounted for at least 55% of the trading of the issuer’s securities on a worldwide basis during the foreign private issuer’s last fiscal year.
If trading of the securities in two foreign markets is combined to meet the 55% threshold, then trading on at least one of the foreign exchanges must be greater than the trading in the U.S. markets.

OTC Markets 101 – The Basics of Listing – OTCQB

OTC Markets Group (“OTC Markets”) requires companies seeking quotation of their securities on the OTCQB® Venture Stage Marketplace (“OTCQB”) to have an initial and ongoing $0.01 per share minimum bid price, submit an initial OTCQB application, pay annual fees, and submit annual certifications to the OTC Markets. Companies that do not meet all of these requirements are demoted to the OTC Markets Pink® Marketplace (“OTC Pink”). OTCQB companies must also be reporting with the Securities & Exchange Commission (“SEC”). OTC Markets offers companies seeking public company status new alternatives for listing while ensuring transparency for investors. Read More

Direct Public Offerings Q&A By Securities Lawyer 101

Going public transactions can be structured in numerous ways. The going public process is complicated and intricate, and it is important to have an experienced securities attorney to help your company navigate it and deal with the Securities & Exchange Commission (“SEC”), Financial Regulatory Authority (“FINRA”), and 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”). Read More

Form S-1 Registration, Filing and Requirements, Form S-1 and Going Public

Private companies going public should consider Form S-1 filing requirements when contemplating their securities offering. Private companies seeking to raise capital often file a registration statement on SEC Form S-1 to meet certain requirements of the Financial Industry Regulatory Authority when going public. Upon filing, a Form S-1 is reviewed by the Securities and Exchange Commission, who may render SEC Comments. Once a Form S-1 is declared effective by the SEC, the company becomes subject to SEC reporting requirements.

All companies qualify to use and must comply with Form S-1 registration statement requirements. Unlike a Form 10 registration statement, which registers a class of securities, Form S-1 registers specific securities offerings or transactions and it does not become effective until all SEC comments have been resolved. Read More

Form 10 Registration Statements Q & A

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 article addresses common questions we receive from clients about Form 10 registration statements. Read More

Hamilton & Associates Law Group: Regulation A White Paper

Regulation A
White Paper

1. The Regulation A Exemption

On March 25, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act by expanding Regulation A into two tiers.

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 $75 million in a 12-month period.

Tier 1 and Tier 2 of Regulation A include some of the existing provisions of Regulation A concerning issuer eligibility, offering circular disclosures, testing the waters, and “bad actor” disqualification. Regulation A+ modernizes and streamlines the Regulation A securities offering filing process. Regulation A+ includes some characteristics of registered offerings and provides flexibility for issuers in the going public and securities offering process. The exemption also provides for an ongoing reporting regime for certain issuers, increasing transparency for investors. Under Regulation A+, Tier 2 issuers are required to include audited financial statements in their offering documents and file annual, semiannual, and current reports with the SEC on an ongoing basis. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as defined in Rule 501(a) of Regulation D or be subject to certain limitations on their investment. The requirements for Tier 1 and Tier 2 offerings are described more fully in this white paper.

Since its effectiveness, Regulation A+ has gained notable market acceptance. Companies using the Regulation A+ exemption have been listed on the New York Stock Exchange (NYSE), NASDAQ stock markets and the OTC Markets.

2. Eligible Issuers and Securities Under Regulation A+

Regulation A+ is available only to companies organized in and with their principal place of business in the United States or Canada. Regulation A is not available to:

companies registered or required to be registered under the Investment Company Act of 1940 and BDCs;
development stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies (often referred to as “blank check companies”);
issuers of fractional undivided interests in oil or gas rights or similar interests in other mineral rights; issuers that are required to, but that have not filed with the SEC the ongoing reports required by the rules under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports);
issuers subject to “bad actor” disqualification under Rule 262.

Regulation A+ limits the type of securities that can be issued to the specifically enumerated list in Section 3(b)(3) of the Securities Act, which includes warrants and convertible equity and debt securities, among other equity and debt securities. Asset-backed securities are ineligible under Regulation A+.

3. Offering Limitations and Secondary Sales Under Regulation A+

Issuers can conduct a Regulation A offering using either Tier 1 or Tier 2. Tier 1 is available for offerings of up to $20 million in a 12-month period, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.

Tier 2 is available for offerings of up to $75 million in a 12-month period, including no more than $22.5 million on behalf of selling securityholders that are affiliates of the issuer. Additionally, sales by all selling securityholders in a Regulation A+ offering are limited to no more than 30% of the aggregate offering price in an issuer’s first Regulation A+ offering and any subsequent Regulation A+ offerings in the following 12-month period.

4. Investment Limitations

Regulation A+ limits the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). This limit does not, however, apply to purchases of securities that will be listed on a national securities exchange upon qualification of the Regulation A+ Offering.

5. Integration and Regulation A+ Offerings

The integration doctrine provides an analytical framework for determining whether multiple securities offerings should be treated as the same offering. This helps to determine whether registration under Section 5 of the Securities Act is required or an exemption is available for the entire offering.

Generally, the determination as to whether particular securities offerings should be integrated into a single offering is based upon specific facts and circumstances.

Regulation A+ provides that offerings conducted pursuant to Regulation A+ will not be integrated with:

prior offers or sales of securities; or
subsequent offers or sales of securities that are:
- registered under the Securities Act, except as provided in Rule 255(c);
- made pursuant to Rule 701 under the Securities Act;
- made pursuant to an employee benefit plan;
- made pursuant to Regulation S;
- made pursuant to Section 4(a)(6) of the Securities Act; or
- made more than six months after completion of the Regulation A+ offering.

6. Treatment of Regulation A under Section 12(g)

Section 12(g) of the Securities Exchange Act of 1934 requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons (or 500 persons who are not accredited investors), register such class of securities with the SEC. Regulation A+, however, conditionally exempts securities issued in a Tier 2 offering from the mandatory registration provisions of Section 12(g) for so long as the issuer remains subject to and is current in (as of its fiscal year-end) its Regulation A+ periodic reporting obligations.

In order for the conditional exemption to apply, issuers in Tier 2 offerings are required to engage the services of a transfer agent registered with the SEC pursuant to Section 17A of the Exchange Act. The final rules also provide that the conditional exemption from Section 12(g) is only available to companies that meet size-based requirements similar to those contained in the “smaller reporting company” definition under the Securities Act and Exchange Act rules. An issuer that exceeds the size-based requirements is granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all ongoing reports due during such period.

7. The Form 1-A Regulation A Offering Statement

All issuers that conduct offerings pursuant to Regulation A+ must electronically file an offering statement on Form 1-A on the SEC’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR).

The Form 1-A Offering Statement consists of three parts:

Part I: an eXtensible Markup Language (XML) based fillable form;
Part II: a text file attachment containing the body of the disclosure document and financial statements; and
Part III: text file attachments containing the signatures, exhibits index, and the exhibits to the offering statement.

A. Part I of Form 1-A

Part I of Form 1-A requires certain basic information about the issuer and the proposed offering. The notification in Part I of Form 1-A requires the following:

Item 1. Issuer Information. Item 1 requires information about the issuer’s identity, industry, number of employees, financial statements and capital structure, as well as contact information.
Item 2. Issuer Eligibility. Item 2 requires the issuer to certify that it meets various issuer eligibility criteria.
Item 3. Application of Rule 262. Item 3 requires the issuer to certify that no disqualifying events have occurred and to indicate whether related disclosure will be included in the offering circular.
Item 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings. Item 4 contains indicator boxes or buttons and text boxes eliciting information about the offering.
Item 5. Jurisdictions in Which Securities are to be Offered. Item 5 requires information about the jurisdiction in which the securities will be offered.
Item 6. Unregistered Securities Issued or Sold Within One Year. Item 6 requires disclosure about unregistered issuances or sales of securities within the last year.

B. Part II of Form 1-A

Part II of Form 1-A contains the disclosure document that the issuer will provide in connection with its Regulation A+ offering. This section is also referred to as the “offering circular.” Issuers are required to provide financial disclosure in Part II that follows the requirements of Part F/S of Form 1-A, while they have the option to prepare narrative disclosure that follows one of two different formats.

i. Offering Circular Format in Regulation A+ Offerings

The Offering Circular requires scaled-down disclosure in comparison to that required by issuers in registered offerings such as Form S-1. The Offering Circular format is meant to simplify the process by which an issuer prepares its narrative disclosure by limiting the need for issuers to look outside the form for disclosure guidance.

ii. Part I of Form S-11 Formats in Regulation A+ Offerings

Part I of Form S-1 and Part I of Form S-11 contain the narrative disclosure requirements for registration statements filed by issuers in registered offerings. In addition to the Offering Circular format, issuers may provide narrative disclosure in Part II of Form 1-A that follows the requirements of Part I of Form S-1 or, in certain circumstances, Part I of Form S-11. While Form S1 is generally available for all types of issuers and transactions, Form S-11 is only available for offerings of securities issued by (i) real estate investment trusts or (ii) issuers whose business is primarily that of acquiring and holding for investment real estate or interests in real estate or interests in other issuers whose business is primarily that of acquiring and holding real estate or interest in real estate for investment. Part I of both Form S-1 and Form S-11 generally describes narrative disclosure requirements by cross-reference to the item requirements of Regulation S-K.

iii. Financial Statements in Regulation A+ Offerings

Part II of Form 1-A requires issuers to provide financial statements that comply with the requirements of Part F/S. Part F/S requires issuers in both Tier 1 and Tier 2 offerings to file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence). For Tier 1 offerings, issuers are not required to provide audited financial statements unless the issuer has already prepared them for other purposes. Issuers in Tier 2 offerings are required to include financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB). Part F/S requires issuers in both Tier 1 and Tier 2 offerings to include financial statements in Form 1-A that are dated not more than nine months before the date of non-public submission, filing, or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.

C. Part III of Regulation A+ Form 1-A

Part III of Form 1-A requires issuers to file certain documents as exhibits to the offering statement. Issuers are required to file certain exhibits with the offering statement, including its underwriting agreement; charter and by-laws; instrument defining the rights of securityholders; subscription agreement; voting trust agreement; material contracts; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; “testing the waters” materials; appointment of agent for service of process; materials related to non-public submissions; and any additional exhibits the issuer may wish to file.

D. Non-Public Submission of Draft Offering Statements in Regulation A+ Offerings

Issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A+ or an effective registration statement under the Securities Act, such as Form S-1, may submit a draft offering statement for nonpublic review by the SEC. Consistent with the treatment of draft registration statements in registered offerings, a non-publicly submitted offering statement must be substantially complete upon submission in order for the staff of the SEC’s Division of Corporation Finance to begin its review. All non-public submissions of draft offering statements must be submitted electronically via EDGAR, and the initial non-public submission, all non-public amendments thereto, and correspondence submitted by or on behalf of the issuer to the SEC staff regarding such submissions must be publicly filed and available on EDGAR not less than 21 calendar days before qualification of the offering statement.

E. Qualification of Regulation A+ Offerings

Issuers may commence selling securities pursuant to Regulation A+ once the offering statement has been qualified by the SEC. The SEC’s Division of Corporation Finance has delegated authority to declare offering statements qualified by a “notice of qualification,” which is analogous to a notice of effectiveness in registered offerings on Form S-1.

8. Solicitation of Interest Materials in Regulation A+ Offerings

Issuers are permitted to “test the waters” with, or solicit interest in, a potential Regulation A+ offering from the general public either before or after the filing of the offering statement, provided that all solicitation materials include the legends required by the final rules and, after publicly filing the offering statement, are preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.

9. Ongoing Reporting in Regulation A+ Offerings

An Issuer in a Regulation A Tier 1 offering must provide information about sales in its offering and update certain issuer information by electronically filing a Form 1-Z exit report with the SEC no later than 30 calendar days after termination or completion of the offering. An Issuer in a Tier 2 offering must electronically file annual and semiannual reports, as well as current reports and, in certain circumstances, an exit report on Form 1-Z on EDGAR.

A. Annual Report on Form 1-K (Tier 2 Issuers in Regulation A+ Offerings Only)

Issuers in Tier 2 offerings are required to electronically file annual reports with the SEC on the EDGAR database on Form 1-K within 120 calendar days after the issuer’s fiscal year-end. Regulation A Form 1-K requires issuers to update certain information previously filed with the SEC pursuant to Part I of Form 1-A, as well as to provide disclosure relating to the issuer’s business operations for the preceding three fiscal years (or, if in existence for less than three years, since inception), related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors, including certain executive compensation information, management’s discussion and analysis (MD&A) of the issuer’s liquidity, capital resources, and results of operations, and two years of audited financial statements.

B. Semiannual Report on Form 1-SA (Tier 2 Issuers in Regulation A+ Offerings Only)

Issuers in Regulation A Tier 2 offerings are required to electronically file semiannual reports with the SEC on EDGAR on Form 1-SA within 90 calendar days after the end of the first six months of the issuer’s fiscal year. Form 1-SA requires issuers to provide disclosure primarily relating to the issuer’s interim financial statements and MD&A.

C. Current Report on Form 1-U (Tier 2 Regulation A+ Issuers Only)

Issuers in Tier 2 offerings are required to electronically file current reports with the SEC on EDGAR on Form 1-U within four business days of the occurrence of one (or more) of the following events:

Fundamental changes;
Bankruptcy or receivership;
Material modification to the rights of securityholders;
Changes in the issuer’s certifying accountant;
Non-reliance on previous financial statements or a related audit report or completed interim review;
Changes in control of the issuer;
Departure of the principal executive officer, principal financial officer, or principal accounting officer; and
Unregistered sales of 10% or more of outstanding equity securities.

D. Exit Report on Form 1-Z (Tier 1 and Tier 2 Regulation A+ Issuers)

In addition to Form 1-A, issuers in Regulation A Tier 1 offerings are required to electronically file Form 1-Z and other reports with the SEC on EDGAR certain summary information on terminated or completed Regulation A+ offerings in an exit report on Part I of Form 1-Z not later than 30 calendar days after termination or completion of an offering. Issuers conducting Tier 2 offerings are required to provide this information in Part I of Form 1-Z if such information was not previously provided on Form 1-K as part of their annual report at the time of filing information in response to Part II of Form 1Z.

Issuers in Regulation A Tier 2 offerings that have filed all ongoing reports and disclosures required by the SEC for the shorter of (1) the period since the issuer became subject to such reporting obligation or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z may immediately suspend their ongoing reporting obligations under Regulation A+ at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.

In these circumstances, an issuer’s obligation to continue to file ongoing reports in a Tier 2 offering under Regulation A+ would be suspended immediately upon the electronic filing of a notice with the SEC on Part II of Form 1-Z.

10. Bad Actor Disqualification in Regulation A+ Offerings

The “bad actor” disqualification provisions contained in Rule 262 of Regulation A+ disqualify securities offerings from reliance on Regulation A+ if the issuer or other relevant persons (such as underwriters, placement agents, and the directors, officers and significant shareholders of the issuer) (collectively, “covered persons”) have experienced a disqualifying event, such as being convicted of, or subject to court or administrative sanctions for, securities fraud or other violations of specified laws.

A. Covered Persons – Disqualification in Regulation A+ Offerings

Understanding the categories of persons that are covered by Rule 262 is important because issuers are required to conduct a factual inquiry to determine whether any covered person has had a disqualifying event, and the existence of such an event will generally disqualify the offering from reliance on Regulation A+.

“Covered persons” include:

the issuer, including its predecessors and affiliated issuers
directors, general partners, and managing members of the issuer
executive officers of the issuer, and other officers of the issuers that participate in the offering
20 percent beneficial owners of the issuer, calculated on the basis of voting power
promoters connected with the issuer in any capacity
persons compensated for soliciting investors, including their directors, executive officers or other officers participating in the offerings, general partners and managing members

B. Disqualifying Events in Regulation A+

Offerings Under the final rule, disqualifying events include:

Certain criminal convictions
Certain court injunctions and restraining orders
Certain final orders of certain state and federal regulators
Certain SEC disciplinary orders
Certain SEC cease-and-desist orders Suspension or expulsion from membership in a self-regulatory organization (SRO), such as FINRA, or from association with an SRO member
SEC stop orders and orders suspending the Regulation A+ exemption
U.S. Postal Service false representation orders

Many disqualifying events include a look-back period (for example, a court injunction that was issued within the last five years or a regulatory order that was issued within the last ten years). The look-back period is measured from the date of the disqualifying event—for example, the issuance of the injunction or regulatory order and not the date of the underlying conduct that led to the disqualifying event—to the date of the filing of an offering statement.

C. Reasonable Care Exception to Regulation A+ Disqualification Rules

Regulation A+ provides an exception from disqualification when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The steps an issuer should take to exercise reasonable care will vary according to particular facts and circumstances. A note to the rule states that an issuer will not be able to establish that it has exercised reasonable care unless it has made, in light of the circumstances, a factual inquiry into whether any disqualification exists.

D. Other Exceptions to Regulation A+ Disqualification

Disqualification will not arise if, before the filing of the offering statement, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing—whether in the relevant judgment, order or decree or separately to the SEC or its staff—that disqualification under Regulation A+ should not arise as a consequence of such order, judgment or decree.

Because requirements vary between states, issuers conducting Regulation A should consult counsel concerning social media and tweets concerning Regulation A Offerings.

E. Waivers for Regulation A+ Disqualification

i. Waiver for good cause shown

Regulation A provides for the ability to seek waivers from disqualification by the SEC upon a showing of good cause that it is not necessary under the circumstances that the exemption be denied. The SEC has identified several circumstances that could, depending upon the specific facts, be relevant to the evaluation of a waiver request for good cause shown. These can be viewed at: https://www.sec.gov/corpfin/divisionscorpfinguidancedisqualification-waivers.

11. State Securities Laws & Regulation A+ Offerings

A. Regulation A+ Tier 1 Offerings

In addition to qualifying a Regulation A+ offering with the SEC, issuers in Tier 1 offerings must register or qualify their offering in any state in which they seek to offer or sell securities pursuant to Regulation A+.

Issuers wishing to obtain information on state-specific registration requirements should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law requirements. Issuers may also obtain useful information on state securities law registration and qualification requirements, including the option to have Tier 1 offerings that will be conducted in multiple states reviewed pursuant to a coordinated state review program, by visiting the website of the North American Securities Administrators Association (NASAA) at www.nasaa.org.

B. Regulation A+ Tier 2 Offerings

While issuers in Tier 2 offerings are required to qualify offerings with the SEC before sales can be made pursuant to Regulation A, they are not required to register or qualify their offerings with state securities regulators under state blue sky laws. Tier 2 offerings by such issuers, however, remain subject to state law enforcement and antifraud authority.

Issuers in Regulation A Tier 2 offerings may be subject to filing fees in the states in which they intend to offer or sell securities and be required to file with such states any materials that the issuer has filed with the SEC as part of the offering.

The failure to file or pay filing fees in Regulation A offerings regarding any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction. Issuers should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law requirements.

For more information about going public and Regulation A, securities law, or our other services, please contact Hamilton & Associates Law Group, P.A. 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956 or by email at [email protected]. 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 and compliance 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 Law Group, P.A. provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the NASDAQ Stock Market, the NYSE MKT, or over-the-counter market, such as the OTC Pink, OTCQB and OTCQX. For two decades, the Firm has served private and public companies and other market participants in corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/Regulation A+, private placement offerings under Regulation D, including Rule 504 and Rule 506 and Regulation S and PIPE Transactions, as well as registration statements on Forms S-1, Form F-1, Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10K and Form 8-K, Form 6-K and SEC Schedule 14C Information and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges, including NASDAQ and the New York Stock Exchange (NYSE) and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm prepares corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements, and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as SEC, FINRA and DTC for Rule 15c2-11.

Learn more at the following links:

« 1 … 3 4 5 6 7 … 65 »

Regulation A White Paper

Subscribe to Our Blog

Categories

Subscribe to our Newsletter

Regulation A
White Paper