FINRA Issues Risk Alert For Rule 506 Private Placements
Securities Lawyer 101 Blog
On September 17, 2013, The Financial Industry Regulatory Authority (“FINRA”) issued an investor alert concerning Rule 506 private placement offerings to caution investors about the risks involved in private placement offerings. FINRA cautions investors that Rule 506 private placements are risky and illiquid investments that can tie up their money for a long time.
A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (the “SEC”) and is not offered to the public at large. Rule 506(c) which becomes effective next Read More
SEC Issues Trading Suspension of the Securities of PacWest Equities
Securities Lawyer 101 Blog
On September 17, 2013, the Securities and Exchange Commission (“SEC”) issued a trading suspension of the common shares of PacWest Equities (“PWEI”), a company whose shares were quoted on the OTC Markets with an OTC Pink Current tier. The SEC trading suspension is for a ten day period.
The SEC action was brought because “questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the company’s business operations and assets.” Read More
What is Depository Trust Company?
Securities Lawyer 101 Blog
Q. What is The Depository Trust Company (DTC)?
A. It is the only stock depository in the United States.
Q. How do public companies obtain DTC eligibility?
A. Issuers must satisfy specific criteria established by DTC to receive initial DTC eligibility after their going public transaction is complete, and to remain DTC eligible. Even after the securities become DTC eligible, DTC may limit or terminate its services.
Q. How does DTC limit its services? Read More
Going Private Attorneys – Securities Lawyer 101
The Sarbanes-Oxley Act, the declining U.S. economy and increasing legal, auditing and other compliance costs reduced the number of issuers electing to become Securities & Exchange Commission (“SEC”) reporting issuers, particularly in the micro-cap markets. With new Rule 506(c) pursuant to the JOBS Act allowing general solicitation and advertising in private placements, many issuers are evaluating whether any benefits of public company status remain.
In some instances, issuers are seeking to voluntarily de-register with the SEC – commonly referred to as “going dark” or “going private”. The once perceived benefits of being an SEC reporting publicly traded company are dwindling as many micro-cap issuers are able to use general solicitation and advertising for their private placements. The less money the issuer has, the more difficult it becomes to maintain an SEC reporting company status since the issuer spends more of its financial, personnel, and outside resources to maintain its SEC reporting status; resources of which may have served (or will be served) better to improve and expand the issuer’s business. Read More
How Can I Go Public Via a Slow PO?
Securities Lawyer 101 Blog
Many owners of small businesses give thought to going public, but wonder if the risks and the expense may outweigh the rewards. They’ve heard that traditional Initial Public Offerings (“IPOs”) using registration statements are complicated and costly, and that Securities and Exchange Commission (“SEC”) reporting obligations can be significant. It has become almost impossible for a small private company to locate an underwriter for an IPO. As a result, many private companies seeking to go public conduct direct public offerings by filing a registration statement with the SEC to sell shares themselves.
There are alternatives to embarking upon a full-fledged IPO or DPO, and even alternatives to assuming public status as an SEC-reporting entity upon completition of a going public transaction. If it wishes, a company can move up the ladder in stages, assuming more visibility and more responsibility as it feels prepared to do so.
Cromwell Couslon Speaks
A few months ago, OTCMarkets founder Cromwell Coulson gave testimony at a House of Representatives subcommittee hearing entitled “Reducing Barriers to Capital Formation.” Among other things, Coulson enumerated reasons for going public and explained how the going public process can be made easier for microcaps through the use of what he calls the “Slow PO.”
Coulson listed the following benefits of going public:
Visibility – A company that goes public has a higher profile than a private company. The media are more likely to pay attention to a public company because information about it is readily available and easy to find. It also “creates a connection with investors, employees, strategic partners and customers that is invaluable to a growing organization.”
Liquidity – When a company’s shares are publicly traded, they have a realizable value, and can also be used as collateral, which is advantageous to investors. Property is more valuable if it is transferable.
Valuation – Private businesses are difficult to value. As Coulson puts it, “By making shares publicly traded, in a continuous market accessible through any broker, companies create a huge wealth effect as their investors have a readily transferable asset that can be deposited in brokerage accounts.” Public trading also gives a company an accurate indication of its own value, as the market determines pricing by reacting to news and other disclosures.
Capital – Public companies can raise capital far more easily than private companies, by floating initial or secondary public offerings, or by conducting private placements. Investors will be eager to participate because they know they can find buyers for their shares if and when they decide to sell.
Trust – Publicly traded companies make disclosure of financial and other material information. Coulson believes that the trust this engenders makes them “more sustainable and enduring than private companies.”
For businesses that want to enter the market by stages, Coulson proposes an alternative public offering that he calls the “Slow PO.” He suggests that a company can begin on the Pink Sheets, without reporting to the SEC, then subsequently become an SEC-filer, and finally, if it wishes, move to a national exchange if it meets listing requirements.
He points out that the Nasdaq went public though a Slow PO. In 2000, it made a private placement offering to NASD members. When the Rule 144 holding period expired, it filed a Form 211 to gain compliance with Rule 15c2-11 and began trading on the Pinks. Three years later, it did a secondary offering and uplisted to its own exchange. OTCMarkets went through the same process, initially trading as a Pink, and then qualifying for its own OTCQX marketplace, its highest tier.
As any qualified securities attorney knows, this process is available to any private company, even the smallest. All that’s needed is to begin with a Regulation D private placement, in which shares are sold to friends, family, and other interested participants willing to wait a year to trade. When the holding period is over, the company finds a sponsoring market maker willing to file a Form 211. Once the 211 has passed the Financial Industry Regulatory Authority’s (“FINRA’s”) comment process, the company can apply to FINRA for a ticker symbol and begin trading as a Pink. It can choose among several OTCMarket tiers, depending on the level of disclosure it is prepared to make.
As the company grows and gains confidence, it is free to become an SEC reporter, with the prestige attaching to that status, by filing an initial registration statement—usually a Form S-1—with the agency. If its success continues and it satisfies requirements, it may eventually decide to list on an exchange such as the NYSE MKT (formerly AMEX) or the Nasdaq.
By using this approach, a young company can avoid biting off more than it can chew, taking each step when it feels ready to do so without overreaching.
It’s one way of accomplishing the objective of going public; one that Coulson heartily recommends. Of course, if the company would rather not wait a year before making its public debut, it can proceed directly from a Regulation D private placement to the filing of an S-1 registration statement. If all goes well, the S-1 will be deemed effective, and the private placement stock registered and ready for trading, in the space of three or four months.
The choice is the company’s, but should be made with the help of an experienced securities attorney. Going public is a big step, and it needs to be done properly, no matter what method is selected.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. 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 | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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www.SecuritiesLawyer101.com
Conducting An EB-5 Offering Under Rule 506 of Regulation D
The EB-5 offering program was created by the U.S. Congress as part of the Immigration Act of 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. Using an EB-5 offering foreign investors can obtain EB-5 visas designated by the U.S. Citizenship and Immigration Services (USCIS) to gain lawful residency in the U.S. for themselves and their immediate family in exchange for a capital investment. The capital investment must be at least $500,000 in a qualified U.S. business enterprise. When securities are offered to foreign investors pursuant to the EB-5 program, Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”) is typically the securities exemption relied upon by the U.S. business enterprise. Read More
Mary Jane’s Last Dance l FINRA Marijuana Scam Alert
Both the SEC and FINRA have published risk alerts for investors, “medical marijuana is legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers”. FINRA cautioned investors of the growing number of pump-and-dump schemes involving penny stocks that purport to be in the high profile medical marijuana business. Read More
Why Do I Have To Hire a Transfer Agent When Going Public? – Going Public Lawyers
Transfer agents play a key role in the going public process. Transfer agents are the record keeper for a company’s securities. Share ownership is reflected on the issuer’s shareholder list. Transfer agents issue and cancel certificates to reflect changes in ownership of securities.Transfer agents also function act as an intermediary for the company. In going public transactions, transfer agents provide a shareholder list which the Financial Industry Regulatory Authority (“FINRA”) reviews prior to the issuance of a company’s ticker symbols in going public transactions. Read More
SEC Charges Indiana Man In Ponzi Scheme
Marcum, of Noblesville, Indiana, is the principal of Guaranty Reserves Trust, and was once a broker. He’s also been an investment adviser registered with the SEC. In 2010, he began presenting himself to potential marks as an “experienced money manager” worth $300 million. He told one investor that he’d done so well for himself that he wanted to “give back.” He persuaded these people to give him money in exchange for promissory notes that he characterized as “asset-backed” and “secured.” They were co-signed by the investors and Marcum, and deposited in the investors’ IRA accounts. Read More
SEC Charges Free Rider Ronald Feldstein With Fraud
On September 3, 2013, the Securities and Exchange Commission (“SEC”) filed a fraud complaint in Federal District Court for the Southern District of New York charging Ronald Feldstein and two entities controlled by him, Mara Capital Management and Vita Health of America, with a “free-riding” fraud scheme on the one hand, and with bilking investors out of more than $450,000 on the other.
The SEC’s fraud complaint alleges that between 2008 and 2011, Feldstein purported to manage two investment funds, which of course were Mara Capital and Vita Health. In reality, they were thinly-capitalized entities that he used for his own personal trading. He opened accounts with three brokerages in the names of these firms. The accounts were “delivery versus payment,” or “DVP” accounts, which was advantageous to him because no cash balance needed to be maintained in them. Read More
California Man Sentenced to 64 Months For Securities Fraud
On 22 August 2013, Douglas Hollingsworth of Santa Rosa, California was sentenced to 64 months in prison for defrauding investors of at least $4.9 million in a five-year Ponzi scheme. The U.S. Attorney’s Office for the Northern District of California had brought charges against him in 2011.
Earlier in the year, Hollingsworth pled guilty to one count of wire fraud and one count of money laundering. Between June 2007 and October 2012, he solicited money from investors, telling them that his two businesses, Read More
How Did the JOBS Act Change Form D? Going Public
Securities Lawyer 101 Blog
On July 10, 2013, the SEC adopted final rules as required by Title II of the JOBS Act, which directed the SEC to eliminate the ban on general solicitation and advertising for certain offerings conducted under Rule 506 of Regulation D, of the Securities Act of 1933, as amended (the “Securities Act”) provided the securities are sold only to accredited investors.
In connection with these amendments to Rule 506, the SEC approved amendments to Form D, adding a box check box requiring issuers to disclose if they are relying on Rule 506(c). As discussed below, the SEC also proposed significant amendments to Form D’s requirements that include penalties for non-compliance. Read More
SEC Rewards Dodd-Frank Whistleblowers
On August 30, 2013, the Securities and Exchange Commission (the “SEC”) announced that it had awarded three whistleblowers for tips and information they provided to help the SEC and Justice Department stop a sham hedge fund.
The SEC’s whistleblower program under the Dodd-Frank Act allows the SEC to reward bounties to individuals who offer high-quality, original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.
Under the SEC’s whistleblower program, whistleblowers will receive the maximum award of 30% of the monetary sanctions collected in the action. In cases where there are related criminal proceedings in which money is collected by another regulator, a provision in the whistleblower rules allows whistleblowers to then additionally apply for a bounty based off the other regulator’s collections in what qualifies as a related action. Read More
What is a Rule 506 Bad Actor Ban?
Securities Lawyer 101 Blog
Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption from registration.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. Read More
Broker Accidentally Cold Calls State Securities Regulator
On August 28, 2013, the Arkansas Securities Department published a Consent Order by the terms of which Junmo Hong, a former employee of John Thomas Financial, agreed to the revocation of his registration as a broker-dealer agent for a variety of offenses including securities fraud, recommending unsuitable investments, and placing cold calls to Arkansas residents on the National Do-Not-Call List. Read More
Anti-Fraud Provisions Apply To Public Float Schemes
When companies go public through reverse merger transactions, insiders often employ various mechanisms to obtain not only control of the public shell but also of its free trading shares. Public float schemes involving penny stocks have been around for years and have become routine features of reverse merger transactions, particularly where the services of third party escrow agents are used. A recent court decision may change the laws applied to schemes where the participants obtain control of an issuer’s public float.
The Escrow Agents
Public float schemes can be structured in a number of ways, and a variety of steps can be taken to conceal the fraudsters’ control. One common method is to use an escrow agent, who is typically a complicit attorney. Regardless of how the transactions are structured, the escrow agent holds and transfers all or substantially all of an issuer’s unrestricted shares to the participants without making public disclosures about the control of the public float or the persons involved. Read More
Going Public Law
A private company going public is subject to three federal securities laws, each with its own unique requirements. The three laws are the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (”Sarbanes-Oxley”). In addition to the federal securities laws, companies going public are subject to state securities regulation of their securities public and private offerings. The Securities Act sets forth the regulations that govern the offer and sale of securities by an issuer and certain shareholders. Read More
How Does a Company Bring SEC Filings Current?
The Securities Exchange Act of 1934 (the “Exchange Act”) imposes ongoing disclosure obligations that include an obligation to file periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). Sometimes reporting companies are unable to comply with their reporting obligations under the Exchange Act. In limited circumstances, when issuers are more than one year behind in their annual report filings, the SEC eases the burden on delinquent issuers by allowing them to file a single form containing the 10-K and 10-Q reports for the most recent year instead of filing all delinquent reports.
The SEC has indicated that it will relax its procedures in certain cases to accommodate issuers that, for reasons beyond their control, have failed to comply with their reporting obligations.
This policy provides numerous benefits to companies that are able to become current with the SEC by filing a single comprehensive 10-K. Read More
SEC Obtains Judgment Against Jonathan Gilchrist
On August 15, 2013, the SEC obtained a summary judgment against Jonathan Gilchrist for violation of the antifraud and registration provisions of the federal securities laws. On August 16, 2013, the court entered a final judgment imposing monetary and other relief.
In rendering summary judgment in favor of the SEC, the court determined that Gilchrist, while acting as an officer and director of Alternative Energy Technology Center, Inc., then known as Mortgage Xpress, caused the issuance of six million company unregistered shares to himself and entities under his control.
According to the SEC, Gilchrist improperly maintained that the offer and sale of the shares were exempt from registration under Rule 504 of Regulation D of the Securities Act of 1933. The shares were immediately publicly sold by Gilchrist. Read More
SEC Shuts Down John Marcum, Ponzi Scheme Targeting Retirees
On August 26, 2013, the Securities and Exchange Commission (the “SEC”) charged John K. Marcum with defrauding investors in a Ponzi scheme that targeted the retirement savings of investors.The SEC alleges that Marcum told investors he was a successful trader and asset manager in order to raise more than $6 million through promissory notes issued by his company Guaranty Reserves Trust. Marcum assisted investors in setting up up self-directed IRA accounts which enabled him to gain control over their retirement assets. Read More
DTCC Identifies Cyber-Attacks as Most Significant Risk to Financial Markets
On August 7, Depository Trust & Clearing Corporation (DTCC) released a report identifying threats to the stability of the financial markets. DTCC considers cyber-attacks that can bypass U.S. and E.U. industry security systems and laws to be the most significant danger to our markets today.
Mike Leibrock, DTCC Vice President, of Systemic Risk stated that the report is intended “to initiate robust dialogue and help market participants gain a deeper understanding of how new or evolving systemic risks might impact the safety and soundness of global financial markets, and the steps the industry needs to take”.
DTCC’s report emphasizes that the systemic risks facing the Read More
Ask Securities Lawyer 101 l Rule 504 Q & A
Q. How Much Money Can I Raise In A Rule 504 Offering?
A. The aggregate amount raised for an offering of securities under Rule 504 cannot exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this Rule 504, in reliance on any exemption under section 3(b), or in violation of section 5(a) of the Securities Act. The issuer can, however, issue as much stock as he likes for that $1 million: 10 shares or 10 billion; it makes no difference.
Q. Can My Company’s Shareholders Rely Upon Rule 504 To Resell Their Securities? Read More
OTC Pink Listings l Pink Paper Series
A private company seeking to go public can obtain a stock ticker or trading symbol assignment from the Financial Industry Regulatory Authority (“FINRA”) if it meets certain requirements. This enables the company to be quoted on OTCMarkets OTC Pink Sheets. Many private companies that decide to go public are opting for the Pink Sheet option because of the increased costs and more stringent regulations associated with SEC reporting. Rule 15c2-11 (Rule 15c2-11”) of the Securities Exchange Act of 1934 (the “Exchange Act”) can be used by an issuer seeking to go public without a registration statement. Read More
SEC Issues Stop Order For Registered Offering
Securities Lawyer 101 Blog
The Securities and Exchange Commission (the “SEC”) issued an order to stop an initial public offering (IPO) by Counseling International and prevent the sale of its shares to the investing public. In issuing the stop order, the SEC determined that the company’s registration statement contained false and misleading information. According to the SEC’s Edgar database, the registration has been amended 5 times since its original filing in August of 2012. Read More
SEC Prevents Corporate Hijackings By Suspending Zombie Tickers
On June 24, 2013, the Securities and Exchange Commission (“SEC”) instituted administrative proceedings to prevent corporate hijackings. The SEC revoked the registration of Green Solutions China, Inc., Yarraman Winery, Inc. (n/k/a Global Beverages, Inc.; (GBVI)), and Yinlips Technology, Inc. pursuant to the Securities Exchange Act of 1934. All of the companies are delinquent with the periodic financial reports required by the Commission and prime targets for corporate hijackers who use bogus state court proceedings to take over shell companies. The SEC has been proactive in preventing corporate hijackings of dormant shell companies for reverse merger transactions. When the SEC seeks to revoke registration, usually it first suspends the companies it has targeted. That was not necessary in this case, because none of the three companies had ever traded. Only GBVI had been assigned a ticker symbol, but there was no initial interest from buyers, and its sponsoring market maker must have jumped ship quickly. It currently resides on the Grey Market, the graveyard of over-the-counter securities. Read More
Three Indicted In Precious Metals Scam
Manhattan District Attorney’s office has indicted Sean Robert Stropp , a/k/a “John Goldman,” a/k/a “Sean Roberts,” Karl Spicer and Ricardo Garcia, for operating a precious metals scam through a company known as PMCO Services Inc. that claimed to sell precious metals.
The scheme resulted in millions of dollars of investor losses across the U.S. and Canada. The indictments include charges of Grand Larceny, Scheme to Defraud, violations of the Martin Act, and a violation of the General Business Law for failure to register with the New York State Attorney General as commodities brokers. Read More
Penny Stock Fugitive Gregory Curry Arrested in Prachin Buri
On August 19, 2013, the Federal Bureau of Investigation circulated a new Wanted by the FBI poster to announce that Sandy Winick, indicted the week before on multiple counts of stock manipulation, wire fraud, and mail fraud, had been captured. The next day, Gregory Curry was arrested. According to the FBI, Winick and Gregory Curry operated domestically and internationally under various identities through the use of alias names. According to the FBI, Curry and Winick were participants in a $140 million penny stock fraud scheme that bilked investors in 35 countries. Read More
Penny Stock Fugitive Sandy Winick Arrested in Bangkok
On August 19, 2013, the Federal Bureau of Investigation circulated a new Wanted by the FBI poster to announce that Sandy Winick, indicted the week before on multiple counts of stock manipulation, wire fraud, and mail fraud, had been captured.
According to the FBI, Winick operated domestically and internationally under various identities through the use of alias names including John Peter Smith, Robin Cheer, Roben Cheer, Jerry Sarrano, Glen Forman, Kyle Bendford, and Stephen Thompson. Read More
Additional Charges and Convictions in Kickback Schemes
On August 13, 2013, John Jordan, former chief executive of Vida Life International Ltd., a public company that trades on the OTCMarkets OTCQB as VILF, was sentenced to 30 months in federal prison for conspiracy to commit securities fraud, wire fraud and mail fraud. The Securities and Exchange Commission (“SEC”), which conducted a parallel investigation alongside the FBI undercover operation, assisted in bringing these charges and similar ones against 10 other defendants who participated in the scheme, which involved offering kickbacks to individuals who turned out to be undercover FBI agents. Read More
Nine Individuals Indicted In Penny Stock Sting
On August 14, 2013, the U.S. Attorney’s Office for the Southern District of Florida announced that six individuals had been charged as a consequence of penny stock sting operations conducted over the course of several years, and that another four, previously charged in similar circumstances, had recently pled guilty. Simultaneously, the Securities and Exchange Commission (SEC) filed civil lawsuits against all but one of the individuals and four of the penny companies involved. Read More
