Exchange Act Reporting After SEC Effectiveness of a Registered Direct Public Offering
Upon completion of a registered direct public offering, the Exchange Act imposes periodic reporting obligations. If the issuer is a domestic issuer subject to SEC reporting requirements then it must file an Annual Report on Form 10-K, 10-Q’s for the three quarters following its fiscal year end and current reports on Form 8-K upon the occurrence of certain material events including bankruptcy, and fundamental changes, changes in accounting, changes in the control and departure of officers, and non-reliance on prior financial statements or audit reports. For those issuers who register a class of securities under the Exchange Act, additional reporting obligations apply. These include the SEC’s proxy rules that require disclosures be made on Schedules 14A or 14C and certain procedures for the solicitation of shareholder votes. Additionally, shareholders and management must file beneficial ownership reports of their trading activities in the company’s securities. Read More
Tips For Rule 506(c) Compliance – Direct Crowdfunding Offerings
Rule 506(c) of Regulation D under the Securities Act of 1933, as amended, allows a company to use general solicitation and advertising to raise an unlimited amount of money from accredited investors. Companies can raise the funds themselves or use an intermediary such as an accredited crowdfunding platform. Some companies may choose to crowdfund their own offering without the use of an intermediary by making their own general solicitation and advertising through their corporate website, social media or online advertising or other methods. But there is a catch companies must follow accredited investor verification procedures to ensure that all purchasers qualify for that status. The SEC has suggested several methods for accredited investor verification which can be found at this here. Companies can raise the funds themselves or use broker-dealer or an intermediary such as an accredited crowdfunding platform. Read More
On March 25, 2020, the Securities and Exchange Commission (the “SEC”) issued an order (the “SEC Order”) providing extensions to SEC reporting requirements deadlines for issuers affected by COVID‑19, further extending the deadlines set forth in a March 4, 2020 order. The prior order only granted extensions for SEC periodic reports and filings due on or before April 30, 2020. The new SEC Order grants extensions to issuers that would have been required to submit SEC periodic reports and filings between March 1 and July 1, 2020.
The SEC Order includes the following periodic reports and filings:
- Annual Reports on Form 10-K,
- Quarterly Reports on Form 10-Q,
- Current Reports on Form 8-K, and
- Preliminary and Definitive Proxy Statements.
SECTION 4(A)6 OF THE SECURITIES ACT
Section 4(a)(6) of the Securities Act of 1933, as amended (the “Securities Act” is also known as Regulation CF. These rules have made it easier for companies to raise money from a wider range of investors than ever before. Traditional crowdfunding models may or may not involve the offer and sale of a security, but if so, the issuer must comply with federal and state securities laws, which we discuss in this section. Like offerings under Tier 2 of Regulation A and Rule 506(c), one notable benefit of Regulation CF is that state blue-sky laws are preempted.
Regulation CF provides an exemption from the registration requirements of the Securities Act for certain crowdfunding transactions. To qualify for this exemption, the transactions must meet specific requirements, including limits on the dollar amount of the securities that may be sold by an issuer and the dollar amount that may be invested by an individual in a 12-month period. It also must be conducted through a registered intermediary that complies with specified requirements. These intermediaries are called “funding portals.” Title III also provides limitations on who may rely on the exemption and establishes specific liability provisions for material misstatements or omissions in connection with Section 4(a)(6)-exempt transactions. Read More
Regulation A, also known as Regulation A+, provides investors with more investment choices and issuers with more capital raising options during their going public transactions. The rules adopting Regulation A+ are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act. The Regulation A exemption provides for two distinct offering exemptions. Tier 1 provides an exemption from SEC registration for offerings of up to $20 million. Tier 2 exempts offerings up to $50 million. One of the most notable differences between the two Regulation A+ tiers is that issuers that conduct a Tier 2 offering will become subject to ongoing Regulation A reporting obligations, though such obligations are significantly less burdensome than those that apply to SEC reporting issuers filing Form S-1 Registration Statements.
Regulation A can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. The exemption simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital. Read More
The SEC recently granted issuers using Regulation A and Regulation Crowdfunding known as Regulation CF have been granted extensions to their SEC reporting obligations. Last month, the SEC published new temporary final rules extending the due dates for certain ongoing SEC reporting requirements imposed by Regulation Crowdfunding also known as Regulation CF and Regulation A under the Securities Act of 1933 (the “Securities Act”). The SEC’s rules were created due to potential disruptions of COVID-19 which could prevent issuers and other filers from complying with their SEC filing deadlines.
An issuer may only rely on the SEC’ extended due dates if its failure to comply with the original due date relates to circumstances arising from COVID-19. The SEC’s new temporary rule does not relieve issuers from their obligation to evaluate and comply with their obligations to make true and complete disclosures to investors under federal securities laws. Read More
“Accredited Crowdfunding” under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended allows an issuer to use general solicitation in connection with its private placement of securities. Rule 506(c) requires the issuer to take reasonable steps to verify that all of the investors in its private placement are accredited investors. This verification requirement is in addition to the requirement that sales only be made to accredited investors.
Since Rule 506(c) was adopted and Accredited Crowdfunding has grown in popularity, third party service providers have popped up offering accredited-investor verification services. In order for verification to be comply with the Securities and Exchange Commission’s requirements, a third party service provider must review sensitive financial information about the investor’s financial condition. This review and the lack of regulation concerning third party verification providers has raised significant concerns among market participants. The accredited investor third-party verification segment is still relatively new and there are few if any, barriers to entry. It is no surprise to find that there are numerous third-party verification providers readily available through the internet who tout their services but fail to provide meaningful background information. Read More
Crowdfunding Offerings in the Time of Coronavirus
In the past few months, the COVID-19 outbreak has caused quarantines and closures, and has restricted the movement of people and goods between countries and within the United States. It has devastated certain industries and economies at home and abroad. Uncertainty about the duration of the crisis has roiled the financial markets, leading to worries about a global recession to come. Large businesses like Boeing will survive, as in 2008, because they’re “too big to fail,” but the small businesses that are the real backbone of the U.S. economy may face hardship. Some—the lucky ones—will need to raise capital to respond to increased demand for their crisis-related products; others will need additional cash to keep their businesses viable during the pandemic.
U.S. small businesses are left unsure whether they’ll survive without an injection of cash. While government relief is in the works, many businesses won’t qualify, or the resources available to them will not be enough to address their needs. But some industries will not be impacted, and may even experience growth during the coronavirus crisis. Companies in these industries that need capital to meet rising demand should consider crowdfunding a securities offering as an option. Read More
A short sale transaction can be part of a legitimate trading strategy. It is often endorsed for its beneficial effects on the securities markets, which include increasing liquidity. Short selling is also criticized. Short sellers profit by identifying companies that are weak or overvalued, and companies whose shares have been manipulated to rise to artificially high share prices. The most widely misunderstood aspect of short selling is under what circumstances it becomes illegal. This post addresses the most common questions we receive about Short Sales. Read More
The SEC Addresses COVID-19 Disclosure Requirements
Earlier this month, the Securities and Exchange Commission (the “SEC”) addressed COVID-19 disclosure requirements in a release reminding companies subject to the SEC’s reporting requirements of their disclosure obligations regarding their assessment of, and plans for addressing, material risks to their business and operations. Issuers are encouraged to keep investors and the markets informed about how they’re affected by the current crisis, and how they plan to deal with it. The SEC also granted extensions to deadlines for certain filings and reports including Form 10-K, Form 20-F and Form 10-Q by issuers impacted by COVID-19.
Companies engaged in fund raising should consider the impact of COVID-19 Disclosure Requirements in their offering materials. All issuers should consider COVID-19 disclosure requirements in their SEC filings and reports, and in communications to shareholders as well. Because the extent and severity of the COVID-19 outbreak is not yet known and is rapidly evolving, public companies must monitor and consider on an ongoing basis their SEC and investor disclosures, in light of the latest developments, and their potential impact on business and operations. Read More
The Coronavirus Preparedness and Response Supplemental Appropriations Act (the “Act”), passed with near unanimous support in both the House and Senate and was signed into law on March 6, 2020. The Act provides $20 million for the Small Business Administration (“SBA”) disaster loans program to support SBA’s administration of loans to entities financially impacted as a result of COVID-19 (coronavirus). Individual businesses may apply for up to $2 million of working capital loans.
There are 30.2 million small businesses in the United States, and they employ 47.5 percent of the nation’s workforce. The top three industries for small business employment are healthcare and social assistance, accommodation and food services, and retail trade. All of these sectors will be affected by the intensification of the coronavirus crisis. The last two have already been hit hard, as many states have ordered the closing of all “non-essential” businesses. Only groceries, gas stations, healthcare providers, drugstores, banks, and restaurants offering takeout or delivery services can remain open. Read More
Accredited Investor Verification – Accredited Crowdfunding Under Rule 506(c)
Accredited investor verification is a critical part of the Rule 506(c) also known as the Accredited Crowdfunding exemption. Rule 506(c) of Regulation D of the Securities Act of 1933, as amended allows issuers to engage in general solicitation and advertising of their exempt offering if specific requirements are met. One such requirement is that the issuers comply with accredited investor verification procedures because sales under the rule can only be made to purchasers who are “accredited investors“. Even one sale to a non-accredited investor in a Rule 506(c) offering will prevent the issuer from relying upon the exemption.
Rule 506(c) Generally
Both public and private companies can rely upon Rule 506(c) for their securities offerings. The exemption is commonly used in going public transactions to raise initial capital and obtain a shareholder base. Rule 506(c) allows issuers to raise an unlimited amount of capital and there are no limitations on the number of non-accredited investors who can invest. Issuers may only advertise their Rule 506(c) offering if they verify that sales are made only to accredited investors. One method of doing this is by hiring a third party accredited investor verification provider. Read More
When a manipulated stock’s price declines, it has become common practice for penny stock issuers and their disciples to scream foul play and claim their company is the victim of a naked short seller working with nefarious clearing firms to send their stock price downward. These same issuers also complain vociferously about the Securities and Exchange Commission (“SEC”) failure to pursue illegal short sale activities.
It has become common practice for issuers and some stock promoters or stock touts hired to increase an issuer’s stock price, to point to the Threshold Security List as evidence of illegal short sale activity that supposedly explains their declining stock prices. The internet is flooded with misinformation about what the Threshold Security List reveals about a security. Read More
Form 10 is a type of registration statement used to register a class of securities under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). Both public and private companies can register a class of securities on Form 10. Form 10 is also used by shell purveyors to create inventory for reverse merger transactions that take a company from private to public company status. These shells are subject to SEC reporting requirements. This blog post addresses the most common questions we receive about Form 10 registration statement during the going public process.
A. Companies with more than $10 million of total assets and over the applicable minimum number of holders of their equity securities must register that class of equity securities under the Exchange Act. For companies that are banks or bank holding companies, there must be more than 2,000 holders of record of the class of equity securities. For companies that are not banks or bank holding companies, there must be either more than 2,000 holders of record of the class of equity securities or more than 500 record holders of the class of equity securities that aren’t accredited investors. If a company meets these thresholds it will be required to register a class of securities under the Exchange Act even if it does not seek to list on the NYSE or NASDAQ. Read More
If a company files a registration statement on Form 10 under Section 12 of the Exchange Act, it becomes an SEC reporting company and the company becomes subject to the same annual, quarterly, and current reporting obligations that result from Securities Act registration.
Additionally, the company’s shareholders and management become subject to various requirements discussed below upon effectiveness of the company’s Form 10 registration statement. A company whose Form 10 has been declared effective must comply not only with the SEC’s periodic reporting requirements, it must also comply with the SEC’s proxy rules whenever its management submits proposals to shareholders that will be subject to a shareholder vote, usually at a shareholders’ meeting. As explained below, Form 10 is often used in connection with going public transactions. Read More
The JOBS Act includes provisions to allow crowdfunding intermediaries known as “Crowdfunding Portals”, or “Crowdfunding Platforms” to assist companies with raising capital using the internet. Crowdfunding Portals will serve as attractive capital raising centers for private companies seeking to go public in need of seed capital. Crowdfunding Portals are not subject to the extensive registration requirements applicable to brokers, but they must register with FINRA and applicable Self Regulatory Organizations (“SRO”).
SEC and FINRA Regulation of Crowdfunding Portals and Intermediaries
Restrictions on Crowdfunding Portals include prohibitions from offering investment advice, soliciting transactions in securities offered or sold, compensating any employees or agents for soliciting transactions, holding, managing or collecting investor funds or securities, and engaging in activities prohibited by the SEC. Crowdfunding Portals must be either registered brokers or SEC approved Crowdfunding Portals. FINRA can enforce and examine rules specifically written for Crowdfunding Portals.
One requirement of Regulation CF is that the issuer cannot conduct the offering itself. The offering must only be conducted through a crowdfunding intermediary commonly referred to as a “funding portal.” Crowdfunding intermediaries must be registered with the SEC as a broker-dealer or as a funding portal and become a member of FINRA. An issuer is required to use only one intermediary to conduct an offering in reliance on Section 4(a)(6). The SEC has stated that it believes this helps foster the creation of a “crowd” and better serves the purpose of the statute. Read More
The Division of Corporation Finance of the Securities and Exchange Commission (SEC) reviews filings and provides companies going public with comments on filings to ensure that its disclosure requirements are being met. This is particularly common for a Form S-1 filing. The SEC issues comment letters for almost every type of filing under both the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC review process applies in both initial public offerings and direct public offerings.
Generally, when a company sells shares, the shares must be covered by an effective registration statement or exempt from the SEC’s registration statement requirements. Form S-1 is the most commonly used Securities Act registration statement form. Read More
Private companies going public should consider Form S-1 filing requirements when contemplating their securities offering. The most commonly used registration statement form is Form S-1. 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. Private companies going public should be aware of the expansive disclosure required in registration statements filed with the SEC prior to making the decision to go public. Companies conducting securities offerings should also be familiar with the Form S-1 quiet period.
The SEC and the federal securities laws do not define the term “quiet period,” which is also referred to as the “waiting period.” However, a quiet period extends from the time a company files a registration statement with the SEC until SEC staff declare the registration statement “effective.” During that period, the federal securities laws limit what information a company and related parties can release to the public. The failure to comply with these restrictions generally is referred to as “gun-jumping.” Read More
On January 29, 2020, the U.S. Food and Drug Administration (FDA) approved an opioid-free pain-relieving cream from Honest Globe, a plant-based wellness company specializing in alternative health care. This over-the-counter all-natural topical is infused with cannabidiol (CBD) oil, an ingredient found in cannabis, originally derived from the hemp plant.
According to Yaniv Kotler, The Brand’s Chief of Business Development, “We are ecstatic to announce that Elixicure’s Registration has been Certified by the FDA.” This authorization affords those living with chronic pain a way to manage their symptoms without the use of narcotics. They are currently the first and only CBD oil for pain relief that is FDA-approved. Even The Banned Substance Control Group approves the use of Honest Globe’s CBD oil for pain relief to athletes and competitors on all levels. Read More
FINRA Encourages Member Firms to Provide Notice of Activities in Digital Securities
Last year, FINRA took several steps to engage with its members regarding their current and planned activities relating to digital assets. These efforts included the issuance of Regulatory Notice 18-20, which encouraged firms to keep their Regulatory Coordinator informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. In 2020, FINRA continues to encourage firms to continue keeping their Regulatory Coordinators abreast of activities related to digital assets until July 31, 2020.
On January 23, 2020, the Securities and Exchange Commission (SEC) issued a cease and desist order against attorney Ben Bunker (Benjamin L. Bunker). Bunker is a 42 year old lawyer based in Las Vegas, Nevada. Bunker was working for two individuals using the company Greenway Design Group, Inc. to perpetrate a scheme where they placed Greenway shares into a brokerage account, promoted the shares so that the stock price would rise artificially and then sell the shares back into the market. Bunker’s role was to prepare false opinion letters necessary for the two individuals to obtain stock certificates, transfer them, and then later sell them to the public.
FINRA, before the New Year 2020, sanctioned five major financial firms who failing to reasonably supervise custodial accounts. These five firms were: Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The violation was of FINRA Rule 2090, known as FINRA’s “Know Your Customer” rule. This rule states “Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”
The Jumpstart Our Business Startups Act (“JOBS Act”) allows an “emerging growth company” to submit a draft of its registration statement and exhibits to the Securities and Exchange Commission (SEC) on a confidential basis. This Q & A addresses the common questions we receive about confidential registration statement submissions.
Q. When does an emerging growth company have to file its registration statement if I want it to be a confidential submission?
A. The JOBS Act requires that emerging growth companies file the initial confidential submission of their registration statement and all amendments to the registration statement with the SEC within 21 days prior to the registration statement’s anticipated effectiveness or road shows. These prior confidential submissions should be included as exhibits to the company’s later publicly filed registration statement, if any. Read More
On March 13, 2019, the Securities and Exchange Commission (SEC) charged attorney Diane Dalmy with fraud for “for concealing from transfer agents and brokerage firms her involvement in preparing legal opinion letters concerning the sale of certain microcap securities.” The OTC Markets had placed Diane Dalmy on their prohibited list of attorneys; the OTC Markets is the largest trading system for microcap securities in the United States. To work around this, Dalmy used another lawyer– Michael Woodford, a retired divorce attorney, to sign legal opinion letters that she handed off to him. Of course, Michael Woodford did not due any due diligence himself in order to give a proper legal opinion, and would just sign whatever document was put in front of him. He then provided the opinion letters to transfer agents and brokerage firms. He would go on to be charged for his role as well in June 2019.
A California man, Guy Scott Griffithe, and a Washington state man, Robert William Russell, were charged on Tuesday, January 21, 2020, by the Securities and Exchange Commission (SEC) for defrauding investors by selling them shares of one company, which they said would go towards operating another, when in fact the funds were being used for personal expenses. In other words, they were selling fake shares of a company.
The companies in question are Renewable Technologies Solution, Inc., an entity controlled by Guy Griffithe, and SMRB LLC, a Washington company owned by Robert Russell. SMRB LLC holds a license to grow marijuana under Washington’s recreational marijuana laws. These licenses can often be hard to get, which can make a company valuable if it has one. Griffithe and Russell ended up raising almost $5 million of the fraudulent shares of the cannabis company. Read More
On Wednesday, January 15, 2020, the Chicago Sun Times reported “A federal judge has frozen the assets of Kenneth Courtright, an Illinois man and the company he ran under the name “The Income Store” after the U.S. Securities and Exchange Commission (SEC) accused him of a “Ponzi-like scheme” that raised $75 million.” This man is named Kenneth Courtright. He founded the company and is the current chairman. Courtright was using the money from his company to overpay his mortgage and pay tuition for his kids’ private school. The Income Store is officially known as Todays Growth Consultant, Inc. (TGC).
Offering integration can become a problem for some issuers conducting Regulation A+ (also known as Reg A) offerings. The Reg A offering integration rules prevent companies from improperly avoiding SEC registration by dividing a single securities offering into multiple securities offerings to take advantage of Securities Act exemptions that would not be available for the combined offering.
A Reg A + offering will not be integrated with any preceding securities offers or sales. Additionally, securities offers or sales that take place after a Regulation A+ offering will not be integrated with other securities offerings that: Read More
Rule 504 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) allows an issuer to raise capital of up to $5,000,000 in a 12-month. Rule 504 allows sales to both accredited and non-accredited investors. As discussed below, unlike Rule 506(b) when sales are made to non-accredited investors in reliance upon Rule 504, there are no specified disclosure requirements. Additionally, the issuer is not required to file with the Securities & Exchange Commission (“SEC”) until 15 days after the first sale of securities in the offering.
Which Companies Can Rely on Rule 504?
Rule 504 is only available to companies that are not subject to SEC reporting requirements under the Securities Exchange Act. Additionally, Rule 504 cannot be used by investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; or companies that are disqualified under Rule 504’s “bad actor” disqualification provisions. Read More
The New York Post reported on Friday, January 17, 2020, “A convicted hedge-fund swindler assumed a fake name and donned a disguise to lure investors into a $30 million cryptocurrency fraud in New York that spanned two years.” This man was Boaz Manor, who was arrested in 2010 in Canada for misappropriating $100 million from his hedge fund. He was sentenced to 4 years in prison, but was released early in 2012. He was also banned for life from the securities industry. Then, in 2015, he had the bright idea of pretending to be somebody else to get back into the industry. To do this, the Post reports “Manor darkened his blond hair and grew a beard. After trying on aliases like “Jay Mills” and “Jay Belzberg,” Manor appears to have settled on the name “Shaun MacDonald.”” Theblockcrypto.com first uncovered and reported MacDonald’s scheme in December of 2018, with great reporting and interesting details.
When dealing with potential investors, Regulation A Issuers may test the waters when implementing solicitation materials before AND after the Form 1-A offering statement is filed with the Securities and Exchange Commission (“SEC”) subject to issuer compliance within the rules on filing and disclaimers.
Testing the waters with Regulation A means you can now advertise ANYWHERE you think you’ll attract potential investors. Take social media for example… You could put together a formal ad campaign that costs tens of thousands of dollars. Or, you can simply do it yourself on Twitter or Facebook. Keep in mind, you’re getting non-binding indications of interest when testing the waters in a Regulation A Offering. Meaning, you can’t hold people to their indication of interest that they will actually invest in your brand. However, it does present the opportunity —before you look to your own pocket to see if there’s adequate interest when it comes to filing the actual offer as well as preparing and qualifying the offering statement. Read More