OTC Markets 101 l Going Public Attorneys

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

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:

Form S-1 Registration Statement Attorneys – Going Public Lawyers

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, which 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.

A registration statement on Form S-1 can be used to register various types of securities offerings and transactions with the SEC. Form S-1 provides issuers with flexibility in the types of securities that can be registered. Hiring the right Form S-1 Registration Statement Lawyer can help the company structure its transaction in the most effective manner. Form S-1 is used more often by issuers than any other type of registration statement form and as a result, it provides flexibility. Form S-1 registration statements can be used by existing public companies or companies in connection with going public transactions.

Regardless of whether the company is public or private, Form S-1 can be used to register various types of transactions. This blog post addresses the most common questions we receive about going public using Form S-1 and the SEC registration statement process. Read More

Toxic Funders: Unregistered Dealers, Short Sellers, or Both?

We’ve often written about “toxic” promissory notes or preferred stock and the unregistered dealers who purchase them. These dealers are not the broker-dealers ordinary retail investors have accounts with. They are individuals with companies of their own that they use to provide financing to mostly microcap companies desperate for cash. In the long run, these financings almost always prove deadly for the issuers because of the way they are structured.

Initially, the company turns to a “toxic funder” or “dilution funder” for money. The company may even be solicited by a boiler room set up by one or more of these people. Like payday loan sharks, they seek out vulnerable CEOs whose companies aren’t gaining the traction they need to survive and offer them deals.

The deals are not good for the company or for the investors it already has. The funder will sometimes have done research in advance. If not, he’ll ask company management how much money is needed, and then he’ll draw up a stock purchase agreement or securities purchase agreement. He won’t be buying actual stock; instead, he’ll purchase a promissory note, preferred stock, or even a debenture. Whatever the instrument, it will be convertible to the issuer’s common stock. The terms of conversion will be explained in the securities purchase agreement and in the note itself. Read More

2024 Form 10K and 10-K Deadlines Chart

Periodic Report	Large Accelerated Filers	Accelerated Filers	Non-Accelerated Filers
Form 10-K for Fiscal Year Ended December 31, 2023	February 29, 2024	March 15, 2024	April 1, 2024
Form 10-Q for Fiscal Quarter Ended March 31, 2024	May 10, 2024	May 10, 2024	May 15, 2024
Form 10-Q for Fiscal Quarter Ended June 30, 2024	August 9, 2024	August 9, 2024	August 14, 2024
Form 10-Q for Fiscal Quarter Ended June 30, 2024	November 12, 2024	November 12, 2024	November 14, 2024

Ibrahim Almagarby Loses Unregistered Dealer Appeal

On February 14, 2024, the United States Court of Appeals for the Southern District of Florida made its ruling in the case of the Securities and Exchange Commission versus Ibrahim Almagarby and Microcap Equity Group, LLC, ruling in favor of the Commission that Almagarby was an unregistered “dealer” under the Exchange Act.

Almagarby was appealing a lower district court ruling in favor of the Commission from September 29, 2021, which ordered Almagarby to disgorge $885,126.30 in total net profits and $182,150.69 in prejudgment interest for a total of $1,067,276.99. The district court also permanently enjoined Almagarby from selling unregistered securities and from any future participation in penny-stock offerings. Read More

SEC Obtains Final Judgment against Jeffrey Auerbach for Role in Bribery Scheme

On February 5, 2024, the Securities and Exchange Commission (the “Commission”) obtained a final judgment against defendant Jeffrey Auerbach, whom the SEC previously charged for his role in a fraudulent scheme to bribe a stockbroker to buy a company’s stock in his customers’ accounts without the customers’ knowledge.

The SEC’s complaint was filed on October 4, 2019, in the federal district court in the Eastern District of New York.

According to the Complaint, from approximately July 2014 through October 2015 (the “Relevant Period”), Auerbach, a former registered representative (i.e., a stockbroker) and purported investor-relations professional; Jarid Mitchell, a purported investor-relations professional recently imprisoned for a previous securities fraud conviction; Richard Brown, a then-registered stockbroker; and Gino M. Pereira, the then-CEO of Nxt-ID, Inc. (“NXTD”), a “security technology” company and public issuer with common stock traded on the Nasdaq Capital Market, defrauded investors by knowingly or recklessly engaging in a stockbroker bribery scheme. NXTD now trades as LogicMark, Inc. (LGMK). Read More

Rule 144 Legal Opinions and Legend Removal Q&A

Section 5 of the Securities Act of 1933, as amended, (the “Securities Act”) requires the offer and sale of securities to be registered under the Securities Act, unless the security or transaction qualifies for an exemption from registration. Rule 144 of the Securities Act provides a safe harbor that permits holders of “restricted securities” to resell their securities in the public market if specific conditions are met. To resell restricted securities, the Company’s transfer agent will require a legal opinion as to the tradability of the shares. The legal opinion will discuss the resell exemption relied upon for the resale of the shares. Most often, this will be Rule 144.

This blog post discusses the most common questions we receive about Rule 144’s Safe Harbor. Read More

SEC Consent Judgments: Speak Now, or Forever Hold Your Peace

Most investors are likely unaware that they can petition the SEC for new rules or changes to old ones. They can even ask that rules be entirely repealed. All that’s needed is to send a proposal to the secretary of the SEC—now Vanessa Countryman—and wait for results. Petitioners come from wildly different backgrounds. Most are lawyers (often representing individuals or entities that have been sued by the Commission) or people who more broadly object to rules they believe to be unfair or even unconstitutional. For ordinary investors, objections to the “pattern day trading” rule, which is administered by FINRA, not the SEC, have long been popular—and even students occasionally weigh in. See the petition of Atticus Wong, a high school student in California, who wrote in connection with a class project about civic engagement.

The SEC explains the submission process simply:

Petitions must contain the text or substance of any proposed rule or amendment or specify the rule or portion of a rule requested to be repealed. Persons submitting petitions must also include a statement of their interest and/or reasons for requesting Commission action.

All petitions will be forwarded to the appropriate division or office of the Commission for consideration and recommendation. Following submission of the staff’s recommendation to the Commission, petitioners will be notified of any action taken by the Commission.

The agency will then post the petition on the appropriate page on its website, which is likely the last the petitioner will ever hear of it. Apparently, the Commission is not obliged to give serious consideration to any of the petitions it receives. When it responds at all, it usually does so only after years of delay, and the petitions graced by its acknowledgment are almost always denied. Read More

SEC Rules Affecting Rule 144 Legal Opinions and Shell Companies

The Securities and Exchange Commission (“SEC”) has published releases relating to Shell Companies that affect the use of Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), by shareholders of Shell Companies. In addition, the rules limit registration of securities on Form S-8 of the Securities Act and affect disclosures required in Form 8-K under the Securities Exchange Act of 1934, (the “Exchange Act”).

What is a Shell Company?

Securities Act Rule 405 and Exchange Act Rule 12b-2 define a Shell Company as a company, other than an asset-backed issuer, with no or nominal operations; and either:

no or nominal assets;
assets consisting of cash and cash equivalents; or
assets consisting of any amount of cash and cash equivalents and nominal other assets.

SPAC Settles SEC Fraud and Conflict of Interest Charges

On January 25, 2024, the Securities and Exchange Commission announced that Northern Star Investment Corp. II, a special purpose acquisition company (SPAC), agreed to settle charges that it made misleading statements in forms filed with the SEC as part of its initial public offering (IPO).

According to the SEC’s order, Northern Star represented in its SEC filings that neither the company, nor anyone acting on its behalf, had initiated any substantive discussions with any potential target companies prior to the IPO. However, the SEC’s order finds that Northern Star had engaged in discussions with a target company and that company’s controlling shareholder in connection with a potential SPAC business combination dating back to December 2020 and continuing for several weeks. Furthermore, according to the SEC’s order, after announcing a merger agreement with the target company, Northern Star did not adequately disclose conflicts of interest related to its interactions with the target company in its Form S-4 filings. Read More

SEC Charges Founder of $1.7 Billion “HyperFund” Crypto Pyramid Scheme Xue Lee (aka Sam Lee) and Top Promoter Brenda Chunga (aka Bitcoin Beautee) with Fraud

On January 29, 2024, the Securities and Exchange Commission (the “SEC“) charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.

According to the SEC’s complaint, from June 2020 through early 2022, Lee and Chunga promoted HyperFund “membership” packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company. As the complaint alleges, however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors. In 2022, the HyperFund scheme (which rebranded twice during its lifespan – from HyperFund to HyperVerse, then to HyperNation) collapsed and investors were no longer able to make withdrawals. Read More

SEC Charges Aryeh Goldstein, Adar Bays, LLC, and Adar Alef, LLC for Failure to Register; Defendants Agree to Pay $1.25 Million to Settle

On January 23, 2024, the Securities and Exchange Commission (the “SEC”) announced the filing of an enforcement action against Aryeh Goldstein, a resident of Florida and New York, and two entities he controls, Adar Bays, LLC, located in Florida, and Adar Alef, LLC, doing business in Florida and New York, for failing to register as securities dealers in connection with their convertible note financing business that involved obtaining and selling securities of over 100 microcap companies.

The parties have agreed to settle the charges. Among other relief, Goldstein and his entities agreed to pay $1.25 million in monetary relief and to surrender or cancel all remaining shares of public companies allegedly obtained from their unregistered dealer activity. Read More

Frederick L. Sharp, Luis Carrillo, Courtney M. Kelln, Mike K.G. Veldhuis, and Paul Sexton Indicted for Long-Running Pump-and-Dump Schemes

Four Canadian nationals and one former California attorney, who is believed to be residing in Mexico, were indicted on Jan. 9, 2024 in connection with long-running international securities fraud schemes in which they sold millions of shares in multiple microcap—or “penny”—stock companies during pump-and-dumps, generating at least tens of millions of dollars in illicit proceeds.

The indictment charged Frederick L. Sharp, 71, and Courtney M. Kelln, 43, both of British Columbia, with two counts each of securities fraud and conspiracy to commit securities fraud. The indictment further charged Luis Carrillo, 50, previously of California, and Mike K.G. Veldhuis, 43, and Paul Sexton, 55, both of British Columbia, with one count each of securities fraud and conspiracy to commit securities fraud.

Sharp, Carrillo, Veldhuis and Kelln were previously charged in a criminal complaint.

Also among the named co-conspirators was Roger Knox, who founded and ran the Swiss asset management firm Wintercap SA and who was sentenced for securities fraud and conspiracy to commit securities fraud in October 2023, and Richard Targett-Adams, who resided in France and worked for Knox. Targett-Adams was responsible for several back-office tasks for Wintercap. Read More

Aditya Raj Sharma Indicted for $10 million Investment Fraud

On January 12, 2024, the U.S. Attorney’s Office for the District of Minnesota announced Aditya Raj Sharma of Maple Grove, Minnesota, had been indicted for defrauding investors and financial institutions out of more than $10 million.

According to court documents, Aditya Raj Sharma, 50, was the founder, CEO, and president of Crosscode Inc., a cloud-based software development company headquartered first in Maple Grove and later in Foster City, California. From Crosscode’s founding in 2015 through at least May 2019, Sharma was the primary operator of the company, its controlling shareholder, and, at times, its only employee and shareholder.

According to court documents, from 2017 through at least 2019, Sharma knowingly and intentionally devised and executed a scheme to defraud investors, financial institutions, and lending and finance companies. Sharma manipulated and falsely inflated Crosscode’s financial records to induce private investors and financial entities to extend capital to his company in order to avoid or delay financial hardship for Crosscode, which was mired in debt with virtually no incoming revenue or cash-on-hand.

According to court documents, Sharma fraudulently applied for hundreds of thousands in funding from multiple lenders and finance companies as part of his multi-year scheme. In total, Sharma induced at least one financial institution to provide him with a $950,000 line of credit and further induced at least 150 investors, including Minnesotans, to provide approximately $9.25 million to Crosscode. Read More

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