Regulation A + l Rule 506 l Form S-1 Comparison 2019

Regulation A+ provides smaller companies with a flexible alternative to raising capital and going public in connection with direct public offering (DPO) and/or traditional initial public offering (IPO). Recent amendments allow companies that are subject to SEC reporting requirements to use Regulation A. + for their securities offerings. Going public is not mandatory, Regulation A+ can be used by both private companies and companies seeking public company status.

Regulation A+ provides smaller companies with a flexible alternative to raising capital and going public in connection with direct public offering (DPO) and/or traditional initial public offering (IPO).  Recent amendments allow companies that are subject to SEC reporting requirements to use Regulation A+ for their securities offerings. Going public is not mandatory, Regulation A+ can be used by both private companies and companies seeking public company status.

For companies going public on the OTC Markets, Regulation A+ streamlines the process of obtaining the stockholders  necessary to establish an active trading market as required by the Financial Industry Regulatory Authority (“FINRA”) for the assignment of a stock trading symbol. Read More

USDA Releases Draft of Interim Final Rule on Hempmaking

usda rule marijuana hemp

On December 20, 2018, the 2018 Farm Bill was signed into law by the federal government. The 2018 Farm Bill “requires USDA to promulgate regulations and guidelines to establish and administer a program for the production of hemp in the United States.” As they write in the draft, the USDA is “issuing this interim final rule to establish the domestic hemp production program and to facilitate the production of hemp.” Further, the rule is supposed to expand production and sales of domestic hemp, benefiting both U.S. producers and consumers. Read More

Regulation A Direct Listing: Tier 2 Status A+

regulation a direct listing

An increasing number of small companies seeking public company status are using Tier 2 of Regulation A also known as Regulation A+  to go public.  This is also known as a Regulation A direct listing. Regulation A provides many benefits for small companies seeking to raise capital without the costs and expansive disclosures required in direct public offerings (DPO) and initial public offerings (IPO) using traditional Form S-1 or other registration statements under the Securities Act of 1933.

Direct public offerings using Regulation A+ allow resales including by the Company’s management of the Company’s shares to purchasers without the efforts of an underwriter. Going public using Regulation A+ with a direct public offering also eliminates costs and myriad of risks and uncertainties of a reverse merger transaction.

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Recent Court Dissent Shows Progress for Marijuana Companies

court case marijuana progress

Currently, although many states have legalized marijuana, it is still illegal to sell the drug under federal law. Because of this, under tax code Section 280E, cannabis companies are not allowed to make any deductions in their filings with the IRS.

IRC Section 280E provides:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

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Does Regulation A+ Allow Testing the Waters?

Issuers utilizing Regulation A+ are permitted to “test the waters” with potential purchaser and use solicitation materials both before and after the offering statement is filed, subject to compliance with SEC rules on filing and disclaimers. Using Regulation A+, issuers can advertise the offering opportunity to solicit interests before spending hundreds of thousands of dollars on the actual filing itself, to see if there’s sufficient interest to spend the money to move forward with qualifying a Regulation A Offering

Issuers utilizing Regulation A+ are permitted to “test the waters” with potential purchaser and use solicitation materials both before and after the offering statement is filed, subject to compliance with SEC rules on filing and disclaimers.  Using Regulation A+, issuers can advertise the offering opportunity to solicit interests before spending hundreds of thousands of dollars on the actual filing itself, to see if there’s sufficient interest to spend the money to move forward with qualifying a Regulation A Offering.

Testing the waters materials used prior to the filing of the Form 1-A must be filed as an exhibit with the initial filing on Form 1-A.  Although the SEC does not pre-review pre-filing advertising, issuer should exercise caution with what they say in offering materials.  Solicitation materials are subject to the anti-fraud and other civil liability provisions of the federal securities laws and issuers can be sued for statements in the advertising materials, even if they don’t include the information in the 1-A Offering Circular itself. Read More

Do Blue Sky Laws Apply to Regulation A Resales and Secondary Trading?

A sometimes overlooked aspect of Regulation A+ is the impact of state blue sky laws on liquidity and resales also known as secondary sales. State blue sky laws are applicable to resales by purchasers in Regulation A Offerings and vary from state to state. From a practical perspective, a company raising capital should consider liquidity for investors and the rules that apply to secondary trading.A sometimes overlooked aspect of Regulation A+ is the impact of state blue sky laws on liquidity and resales also known as secondary sales. State blue sky laws are applicable to resales by purchasers in Regulation A Offerings and vary from state to state. From a practical perspective, a company raising capital should consider liquidity for investors and the rules that apply to secondary trading.

The trading of securities of issuers listed on National Securities Exchanges like the NASDAQ Stock Market and the New York Stock Exchange (“NYSE”) are exempt from State blue sky laws that govern secondary trading; however, companies on the OTC Markets must comply with state blue sky laws for both their Regulation A+ offering and resales by the purchasers in the offering.

Tier 1 v Tier 2 – Regulation A State Blue Sky Compliance

Regulation A+ includes two offering tiers, each with different characteristics and requirements. Each Regulation A+ tier is treated differently under State blue sky laws.

Tier 1 of Regulation A+ provides an exemption for securities offerings of up to $20 million in a 12-month period, while Tier 2  provides an exemption for securities offerings of up to $50 million in a 12-month period. It should be noted that an issuer offering $20 million or less of securities can elect to proceed under either Tier 1 or  Tier 2 of Regulation A+. Read More

Finra Investigates BNP Paribas

Finra Investigates BNP Paribas

On October 24, 2019, the Financial Industry Regulatory Authority (FINRA) announced a settled enforcement action involving BNP Paribas Securities Corp. and BNP Paribas Prime Brokerage, Inc.  A lengthy FINRA investigation found that although the firms did a brisk business in penny stocks between February 2013 and March 2017, their anti-money laundering (AML) procedures were woefully lacking, which resulted in a failure to report hundreds of millions of dollars worth of potentially suspicious transactions.  BNP agreed to pay a fine of $15 million, and to certify within 90 days that its procedures are “reasonably designed to achieve compliance…”

BNP the parent company may seem at first glance an unlikely player in the penny playground.  A French bank with roots in Belgium, its current incarnation resulted from the 2002 merger of Banque Nationale de Paris (BNP) and Banque de Paris et des Pays-Bas S.A.  (“Paribas” is derived from “Pays-Bas,” which means the “low countries,” Belgium and the Netherlands.)  Today, it’s one of France’s three top international banks, along with Société Générale and Crédit Agricole.  Like all multinational financial institutions, BNP has a great many affiliates and subsidiaries, as the Broker Check entry for BNP Securities demonstrates.  It appears its own size, and the complexity of its parent’s organization, contributed to the problems FINRA identified.

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Does Offering Integration Apply in a Regulation A Offering?

The Regulation A + offering integration rules prevent companies from improperly avoiding the SEC’s registration statement requirements by dividing a single securities offering into multiple securities offerings to take advantage of exemptions that would not be available for the combined offerings. Regulation A+ contains integration safe harbor provisions. Under Rule 251(c), a Regulation A+ offerings will not be integrated with prior offers or sales of securities. The Regulation A + offering integration rules prevent companies from improperly avoiding the SEC’s  registration statement requirements by dividing a single securities offering into multiple securities offerings to take advantage of exemptions that would not be available for the combined offerings. Regulation A+ contains integration safe harbor provisions. Under Rule 251(c), a Regulation A+ offerings will not be integrated with prior offers or sales of securities. Subsequent offers and sales of securities in Regulation A+ offerings will not be integrated with other securities offerings that are: Read More

Regulation A+ Now Available For Public Reporting Companies

On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A informally referred to as Regulation A+. The amendment allows companies that are subject to SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), to conduct securities offerings using Regulation A+. The amendments to Regulation A were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which became law in May 2018.Benefits of Regulation A+ Amendments

On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A informally referred to as Regulation A+. The amendment allows companies that are subject to SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), to conduct securities offerings using Regulation A+. The amendments to Regulation A were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which became law in May 2018.

As discussed in more detail below, the amendments offer benefits to smaller reporting companies not listed on the New York Stock Exchange (“NYSE”) or NASDAQ and companies subject to SEC reporting requirements that do not qualify to, use Form S-3 or F-3 shelf registration statements. Read More

SEC Halts Alleged $1.7 Billion Unregistered Token Offering

sec telegram group

Beginning in January 2018, Telegram Group Inc. and its wholly-owned subsidiary TON issuer began raising capital to finance their business. This included development of their own blockchain and mobile messaging application. According to the SEC, “Defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets.”

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