On September 14, 2012, the Securities and Exchange (SEC) announced today that the United States District Court for the Middle District of Florida entered final judgments against Christel S. Scucci (“Scucci”), her mother Karen S. Beach (“Beach”), their companies Protégé Enterprises, LLC (“Protégé”) and Capital Edge Enterprises, LLC (“Capital Edge”), and their attorney Cameron Linton, Esq. (“Linton”). According to the SEC Charges, Linton was involved in a scheme to unlawfully acquire and sell shares of penny stock that were never registered for sale to the public, in violation of Section 5 of the Securities Act of 1933 (“Securities Act”).
Significant changes to FINRA Rule 6490 were enacted in September 2010. Though FINRA’s principal mandate is to regulate broker-dealers, historically it has always exercised some oversight of the over-the-counter markets. Part of that oversight involves processing corporate action requests from issuers of equity and debt securities not listed on national securities exchanges. In the past, these requests were always granted, even when inappropriate or submitted late. These changes to Rule 6490 have put an end to that: a nominal fee is charged for all requests, and issuers who are later to notify will be fined. In certain specific circumstances processing of notices under Rule 6490 may be denied altogether.
The actions of which FINRA must be notified are: name changes, forward stock splits, reverse stock splits, distributions of cash or securities, reinstatement of dormant public shell companies, spin-offs and other actions, and rights and subscription offerings. In the text of the new rule, FINRA notes that the SEC is concerned that “certain parties” may attempt to use corporate action requests to further fraudulent activities.
Issuers that file timely notice of a corporate action pursuant to Rule 6490 pay a fee of $200. Filing late can, however, have considerable impact on small issuers, resulting in a fee of up to $5,000 for a notification after an effective date. Read More
Rule 504 (“Rule 504”) of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) provides an exemption from the registration requirements of the federal securities laws which allows issuers to offer and sell up to $1,000,000 of their securities in any 12-month period. Rule 504 is frequently misused to create illegal free trading shares.
As discussed below, fraudsters attempt to make an “end run” around Rule 504 requirements by improperly relying upon state statutes in Delaware, Wyoming, New York and Texas which have been the subject of various SEC enforcement actions. The abuses surrounding Rule 504 are so widespread that the SEC has brought numerous enforcement actions against attorneys rendering legal opinions. Read More
On August 12, 2012, the SEC proposed amendments to Rule 506 of Regulation D of the Securities Act of 1933, as amended (“Regulation D”) that would allow issuers to use general solicitation and advertising in certain private securities offerings. The proposals were mandated by the JOBS Act, and will allow the use of general solicitation and advertising in offerings made pursuant to Rule 506, as long as all purchasers of securities in the offering are accredited investors as defined in Rule 501(a) of Regulation D of the Securities Act.About Rule 506 Offerings. Read More
On May of 2012, Francesca’s Holdings Corporation announced the termination of its Chief Financial Officer after an internal investigation concluded he had improperly communicated non-public company information over Twitter, which included a tweet that said “Board meeting. Good numbers = Happy Board” during the quiet period prior to the company’s contemplated earnings release.
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 and issuers must satisfy the criteria set by DTCC to be settled through DTC. All public companies- SEC reporters and non-reporters alike- are subject to these rules. Once they qualify, they must continue to meet DTC standards in order to maintain eligibility. Read More
On August 22, 2012, the Securities and Exchange Commission (“SEC”) adopted a final rule pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that requires companies engaged in the development of oil, natural gas, or minerals (“Resource Extraction Issuers”) to disclose information. Read More
In their SEC filings, in addition to the disclosures required by Regulation S-K and 20F, mining issuers must include the disclosures required by Industry Guide 7. All U.S mining companies that are SEC filers are required to report under its rules. Although there is widespread discontent with the guide among mining professionals, so far the SEC has been resistant to calls for change. The guide is divided into three sections. The first contains definitions. These definitions include the terms “reserve,” “proven (measured) reserves,” and “probable (indicated) reserves.” Generally, the SEC prohibits the disclosure of quantitative estimates for all mineral deposits other than proven and probable reserves unless such information is by foreign or state law. Guide 7 also defines the three stages of mining as “exploration,” “development” and “production” Read More
A shareholder of any company can own securities and transfer the ownership of those securities. Their ownership is reflected on the issuer’s shareholder list. A transfer agent’s role is to issue and cancel certificates to reflect changes in ownership of securities and to act as an intermediary for the company. A registrar’s job is to maintain the issuer’s register for each issuance, transfer or cancellation. A registrar records the name, address and tax identification or social security number of each individual and entity holder. Typically the transfer agent and registrar are the same entity. Read More
Securities Lawyers Gone Wild Series
In May 2012, Kelly Rogers, a Texas attorney specializing in oil and gas, was indicted by the state for stealing $2.8 million from people he persuaded to invest in a company called Falcon Energy. He was charged with money laundering, theft of property, and securities fraud. This was not Kelly Rogers’ first rodeo. He was earlier sued for fraud in connection with a Louisiana gas and oil scam; in 2007 he was sanctioned by the SEC for his role in a Ponzi scheme involving high-yield bank debentures that would supposedly yield 25% a month interest. At that time, Rogers was a managing member of a company called Level Par Investments, which was also a target of the SEC enforcement action. Ironically, his fellow managers forced him to resign for stealing money from them as well as from investors. Read More
Over a year ago, the Securities and Exchange Commission (“SEC”) in an initiative known as Operation Shell-Expel, the Securities and Exchange Commission (“SEC”) suspended the trading in 379 shell companies in an effort to prevent the companies from being hijacked by fraudsters and used in reverse mergers scams. Over the last few weeks, the SEC has suspended an additional 75 issuers. The trading suspensions sent brief shock waves through reverse merger Pennyland. Read More
On May 14, 2012, the Securities and Exchange Commission issued trading suspensions of 379 dormant companies. The SEC’s press release explained that the suspensions were necessary to prevent the dormant companies from being hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes.
This move is a highly publicized comprehensive enforcement action ever taken by the agency in a single day. Observers who check the SEC litigation pages each morning were left open-mouthed at the sight of a very long list of targeted companies. They ranged from former exchange-listed issues like Cray Computers, Fruehauf Trailer, and Smith Corona-all once household names-to obscure penny stock scams like Firamada Inc., and Stratcomm Media.
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), which is intended to help smaller and emerging growth companies access the U.S. capital markets. The JOBS Act amends, and adds new sections to, the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), as well as to the Sarbanes-Oxley Act of 2002.
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. Title I of the JOBS Act, which became effective as soon as it was signed into law, amends the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) and creates the Emerging Growth Company as a new category of issuer under federal securities laws. Read More
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), into law. The JOBS Act is comprised of a number of smaller bills that reduce the regulatory burdens confronting emerging companies in private and public financings. The JOBS Act creates sweeping changes to the Securities Act of 1933, as amended (Securities Act), the Securities Exchange Act of 1934, as amended (Exchange Act), and other laws and regulations. Read More
On September 24, 2009, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Middle District of Florida alleging that International Power Group (“IPWG”) had issued shares of common stock in violation of the registration requirements of Section 5 of the Securities Act of 1933. In the Matter of IPWG, the Securities and Exchange Commission (“SEC”) reviewed actions taken by Depository Trust Company (“DTC”), and determined that DTC Fairness Procedures were not provided to IPWG and its actions were subject to SEC review.
The SEC alleged that the recipients of the illegally issued shares sold them publicly when no exemption from registration was available. On September 30, 2009, DTC issued a notice to its participants notifying them that DTC suspended IPWG’s common stock as an “Eligible Security” and as such, IPWG’s stock could no longer be traded electronically. According to the SEC no DTC Fairness Procedures were provided. Read More
Regulation D under the Securities Act of 1933,
as amended (the “Securities Act”), sets forth a safe harbor from the registration requirements of the Securities Act for certain private placements of securities. In connection with these exemptions, offerings made in reliance upon Regulation D, Rule 504, 505 and 506 can be made to up to 35 non-accredited investors and an unlimited number of “accredited” investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) amended the definition of an “accredited” investor to exclude the value of an investor’s primary residence when determining whether the net worth of that person (or joint net worth with his or her spouse) exceeds the $1 million net worth test. The amended rule, established by Dodd Frank became effective on February 27, 2012. Read More
Traditionally, private companies go public by registering an offering under the Securities Act of 1933, as amended (the “Securities Act”). Another way for private companies to go public is through a Reverse Merger (“Reverse Merger”) with a publicly traded company. In a Reverse Merger, a private operating company or its business operations are acquired by, or merge into a publicly traded company, often inactive with negligible operations and assets. Read More
Private companies going public with a registration statement (“Registration Statement”) under the Securities Act of 1933, as amended (the Securities Act”). When a Registration Statement is used, the company files it with the SEC, typically on Form S-1 registering securities it plans to sell or securities held by its shareholders (“Selling Shareholders”). 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.
When a company uses a Registration Statement in its going public or other transaction, the SEC does not comment on, nor does it have the authority to deny effectiveness of a Registration Statement based upon the private company’s business or operations, potential success or its offering.
Going Public and the S-1 Registered Offering
Private companies seeking going public can file a registration statement to register their own securities in a direct public offering or an initial public offering (“IPO”). Securities sold in a direct public offering are sold directly by the private company going public and the securities sold in an IPO are sold by an underwriter who is typically a registered broker dealer. Read More
Rule 144 requires that a “Notice of Sale” on Form 144 be filed by any person for whose account the securities are being sold if the person is an affiliate at the time of sale, or was an affiliate during the 90 days preceding the sale, and is selling more than 5,000 shares or the shares being sold have an aggregate sale price of more than $50,000.
Public Availability of the Form 144 Notice Filing
Form 144 is publicly available upon filing through the SEC’s EDGAR database. 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 both domestic and foreign issuers.
Going public is a complicated & intricate procedure, and it is important to have an experienced securities 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”). Read More
On December 21, 2011, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement the mine safety disclosure requirements of Section 1503 of the Dodd-Frank Wall Street Reform andConsumer Protection Act (Dodd-Frank). Section 1503’s disclosure requirements are currently in effect and require SEC reporting issuers that are operators of coal or other mines in the United States to make specific disclosures. Read More
To offer and sell securities in the United States, an issuer must comply with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), or must offer and sell the securities pursuant to an exemption from the registration statement requirements. A commonly used private offering exemption is Rule 506 of Regulation D. Rule 506 is a non-exclusive “safe harbor” for the statutory exemption provided by Section 4(2) of the Securities Act. The Rule 506 exemption is often used by issuers who engage in go public direct transactions and conduct underwritten and direct public offerings. Read More
Rule 144 (“SEC Rule 144”) under the Securities Act of 1933 (“Securities Act”) provides a safe harbor from the registration provisions of the Securities Act for resales 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.” Read More
Form D is used to file a notice of an exempt offering of securities with the Securities and Exchange Commission (“SEC”) for offerings made under Rule 504, 505 or 506 of Regulation D. Federal securities laws require that a Form D be filed with the SEC within 15 days after the first sale of securities in the offering. In addition to filing the Form D with the SEC, issuers must comply with state law filing requirements. Most states require issuers to file a Form D or comparable form with their state securities commission.
Form D and Form D amendments must be filed with the SEC online using EDGAR (electronic gathering, analysis and retrieval) system. In order to do so, the issuer must obtain its own filer identification number (called a “Central Index Key” or “CIK” number) and access codes. Read More
In January of 2010, the Securities and Exchange Commission (the “SEC”) announced it would strengthen its enforcement program by encouraging greater cooperation from individuals and companies in SEC investigations and enforcement actions. One of those measures included the use of Deferred Prosecution Agreements (“DPA”). On May 17, 2012, the SEC entered into its first such agreement with Tenaris S.A., a steel pipe manufacturer. Read More
Registration of securities on Form S-8 (“Form S-8”) is a short-form registration statement under the Securities Act of 1933, as amended (the “Securities Act”), providing significant benefits to small issuers. Form S-8 is available to register securities offered to employees and consultants under benefit plans under limited circumstances. Because a registration statement on Form S-8 is effective upon filing it offers benefits to SEC reporting companies, most significantly that an S-8 registration statement becomes effective upon filing and the shares registered may be issued without a restrictive legend. Read More
FINRA Rule 6490, recently enacted in September 2010, requires issuers of securities not listed on exchanges to provide timely notice to FINRA of certain corporate actions including reverse mergers. Rule 6490 corporate actions include name changes, forward stock splits, reverse stock splits, distributions of cash or securities such as dividends, stock splits and other actions, and rights and subscription offerings.
Rule 6490 codifies Rule 10b-17 of the Securities Exchange Act. The new rule will impact both SEC reporting and non-reporting issuers if they enact corporate changes including issuers who go public direct and conduct underwritten or direct public offerings and those who pursue reverse mergers with public shells. Complying with this criteria is often an unexpected legal and compliance cost for many issuers not familiar with the rule. This is particularly true for issuers who engage in reverse mergers with public shells. Read More