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 Group (“OTC Markets”) requires companies seeking quotation of theirsecuritieson 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 theserequirements 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
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 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
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.
Aregistration statementonForm S-1can be used to register various types of securities offerings and transactions with the SEC.Form S-1provides issuers with flexibility in the types of securities that can be registered. Hiring the right Form S-1Registration StatementLawyer 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 statementscan be used by existing public companies or companies in connection withgoing public transactions.
Regardless of whether the company is public or private,Form S-1can 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
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
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
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
Section 5 of theSecurities 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
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
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.
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
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
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
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.
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 fraudin 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
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
On January 12, 2023, the Securities and Exchange Commission (the “SEC“) filed charges against Jonathan Farber, Aarif Jamani, and Brian Keasberry for securities fraud.
According to the complaint filed by the SEC in the United States District Court Southern District of New York, the defendants engaged in a fraudulent scheme to profit from their accumulating, manipulating, and selling of County Line Energy Inc (CYLC) stock to retail investors. The defendants shared the $5 million in profits from the stock sales that resulted in their scheme.Read More
On December 21, 2023, Siddharth Jawahar, 36, a former investment advisor, was indicted by a grand jury in U.S. District Court in St. Louis on three counts of wire fraud and one count of investment adviser fraud. The indictment was sealed until Monday, when the FBI arrested Jawahar in Miami, Florida. The government is seeking to have Jawahar held in jail until trial.
According to the Indictment, Jawahar is accused of running a Ponzi scheme that cost investors tens of millions of dollars through a Texas-based investment company called Swiftarc Capital LLC. From July 2016 through roughly December 2023, Jawahar took in more than $35 million from Swiftarc investors but spent about $10 million on investments in companies. Jawahar used the money from new investors to repay older investors and to fuel an extravagant lifestyle that included flights on private planes, stays at luxury hotels and expensive outings at lavish restaurants.Read More
On Tuesday, January 2, 2024, the Financial Industry Regulatory Authority (“FINRA”) filed a proposed rule with the Securities and Exchange Commission (the “Commission”) seeking to tighten Rule 3240, which governs borrowing and lending between registered financial professionals and their customers.
According to FINRA, between 2018 and 2021, there were an average of 15 enforcement cases per year tied to customer loan violations. In all but one case, the broker was the borrower. The amounts ranged from $1,800 to $1.35 million.
Rule 3240 was last amended in 2010 when it became part of the consolidated FINRA rulebook.
FINRA is proposing to amend Rule 3240 to strengthen the general prohibition against borrowing and lending arrangements, narrow some of the existing exceptions to that general prohibition, modernize the immediate family exception, and enhance the requirements for giving notice to members and obtaining members’ approval of such arrangements.Read More
On January 3, 2024, the Securities and Exchange Commission (the “SEC”) announced that it obtained an asset freeze and other emergency relief concerning an alleged $93 million real estate investment fraud perpetrated by Miami-based developer Rishi Kapoor. The SEC also charged Location Ventures LLC, Urbin LLC, and 20 other related entities in connection with the fraud scheme.
According to the SEC’s complaint, from approximately January 2018, until at least March 2023, Kapoor and certain of the defendant entities solicited investors by, among other things, making several material misrepresentations and omissions regarding Kapoor, Location Ventures, Urbin, and their real estate developments. The false statements allegedly included misrepresenting Kapoor’s compensation; his cash contribution to the capitalization of Location Ventures; the corporate governance of Location Ventures and Urbin; the use of investor funds; and Kapoor’s background.
The SEC’s investigation uncovered that Kapoor allegedly misappropriated at least $4.3 million of investor funds and improperly commingled approximately $60 million of investor capital between Location Ventures, Urbin, and some of the other charged entities. During the same period, Kappor purchased a 2023 68.7-foot yacht for over $5.5 million, a dock at the Cocoplum Yacht Club for $695,000, leased a 2020 600LT Spider McLaren sportscar, and paid a private chef $10,000 per month.
Short selling, the practice of betting a stock will go down, not up, has been controversial since it was invented more than 400 years ago in the Netherlands. In the early 1600s, there was only one stock in Holland, or anywhere else. It was the Dutch East India Company, or VOC (Verenigde Oostindische Compagnie). Formed on March 20, 1602, it enjoyed a 21-year monopoly on trading in Asia granted by the Dutch government. Shares in the company could be purchased by any resident of the Netherlands, and then bought and sold in outdoor secondary markets. The company was extremely powerful, possessing quasi-governmental powers, but successful trading depended on many things: well-built ships, competent captains and efficient crews, good weather, peaceful trading partners, and so on. Insurance existed at the time and offered protection, but a few real disasters could cause the VOC’s stock price to plummet.
Short selling was invented by Isaac le Maire. He’d been one of the founders of the VOC in 1602 and served as a director for three years. In 1605, he was sacked amid accusations of fraud and embezzlement. He wasn’t imprisoned but was forced to sign a non-compete agreement, pledging not to become involved with companies of any nationality that traded beyond the Cape of Good Hope or the Strait of Magellan. He was cut off from involvement in the Asia trade, the business he loved and knew best. Read More
On December 18, 2023, the Securities and Exchange Commission (the “SEC“) announced charges against Mmobuosi Odogwu Banye, a/k/a Dozy Mmobuosi, and three affiliated U.S.-based entities of which he is the CEO– Nasdaq-listed Tingo Group Inc., OTC-traded Agri-Fintech Holdings Inc. (fka Tingo Inc.), and Tingo International Holdings Inc.–in connection with an alleged multi-year scheme to inflate the financial performance metrics of these companies and key operating subsidiaries to defraud investors worldwide. The SEC is seeking emergency relief to prevent the defendants’ continued dissemination of materially false information to investors and to protect corporate and investor assets.
The SEC’s complaint, filed on December 18, 2023, alleges that, since at least 2019, Mmobuosi spearheaded a scheme to fabricate financial statements and other documents of the three entities and their Nigerian operating subsidiaries, Tingo Mobile Limited and Tingo Foods PLC. The complaint further alleges that Mmobuosi made and caused the entities to make material misrepresentations about their business operations and financial success in press releases, periodic SEC filings, and other public statements. For instance, Tingo Group’s fiscal year 2022 Form 10-K filed in March 2023 reported a cash and cash equivalent balance of $461.7 million in its subsidiary Tingo Mobile’s Nigerian bank accounts.
In reality, those same bank accounts allegedly had a combined balance of less than $50 as of the end of fiscal year 2022. According to the SEC’s complaint, the defendants also fabricated the customer relationships that formed the basis of their purported businesses. The complaint alleges that Mmobuosi and the entities he controls have fraudulently obtained hundreds of millions in money or property through these schemes and that Mmobuosi has siphoned off funds for his personal benefit, including purchases of luxury cars and travel on private jets, as well as an unsuccessful attempt to acquire an English Football Club Premier League team, among other things.Read More
As a result, M&A brokers have the benefit of a federal exemption from SEC registration as a securities broker so long as a shell company is not involved in the transaction. The M&A exemption became effective in March of 2023.Read More
On December 6, 2023, a three-count indictment was unsealed in federal court in Brooklyn charging Raymond John Pirrello, Jr., also known as “Ray John,” with securities fraud conspiracy, wire fraud conspiracy and securities fraud relating to a scheme to defraud investors and prospective investors in securities offered by Late Stage Management, LLC through several sales offices, including Prior2IPO which he controlled.
The Indictment accuses Pirrello Jr, together with others, of engaging in a scheme to defraud investors and prospective investors in securities offered by Late Stage, between March 2016 and March 2023, through material misrepresentations and omissions related to, among other things, the existence and amount of fees paid by investors in stock offered by Late Stage and the methodology of setting prices for shares of stock offered by Late Stage.Read More
On December 4, 2023, Swiss private bank Banque Pictet et Cie SA admitted to conspiring with U.S. taxpayers and others to hide more than $5.6 billion in 1,637 secret bank accounts in Switzerland and elsewhere and to conceal the income generated in those accounts from the IRS.
As part of the resolution, Banque Pictet entered into a deferred prosecution agreement and agreed to pay approximately $122.9 million to the U.S. Treasury. The case has been assigned to U.S. District Judge Edgardo Ramos for the Southern District of New York.Read More
In the past three years, some important changes have occurred to how “penny stocks” or “microcaps” trade and are regulated. By the early 2000s, they’d moved from the obscurity of the National Quotation Bureau’s Pink Sheets to a new trading platform, Cromwell Coulson’s Pink Link.
The accompanying website, initially called Pink Sheets, made quotations much easier for interested traders to access and, as time passed, also offered the kind of detailed information about many non-reporting issuers that had never been available in the past. The Pink Sheets also published quotes and SEC filings for the so-called “OTCBB” issuers that did report to the regulator. Pink Sheets’ efforts were so successful that little more than a decade later, the OTCBB, which had been operated by the Financial Industry Regulatory Authority, went out of business.
As the second decade of the new century began, Pink Sheets had been renamed “OTC Markets Group,” and “Pink Link” was called “OTC Link.” Coulson’s business had grown and was by then a public company itself, trading in its own marketplace. Penny stocks were enormously popular with the increasingly large number of people who managed their investments on the Internet, and online brokerages like E*TRADE, TD Ameritrade, and Fidelity commanded a growing share of the securities markets. Read More
OTC Markets 101 – The Basics of Listing – OTCQB
Posted onOTC 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