What is a SEC Trading Suspension? Securities Lawyer 101
The Securities Exchange Act of 1934, as amended (the “Exchange Act”) authorizes the Securities and Exchange Commission (“SEC”) to issue a trading suspension for up to ten business days. The SEC will order a trading suspension if it determines it is necessary to protect investors. For other securities that are traded in the over-the-counter market, broker-dealers are prohibited from publishing quotes for the security until the company has provided adequate public information. Under most circumstances, the issuer must locate a sponsoring market maker to file a new Form 211 with the Financial Industry Regulatory Authority (“FINRA”).
The reality is an SEC trading suspension is the kiss of death for investors and the issuer.
SEC trading suspensions may be ordered by the Commission if it has questions about a company’s financial information or its assets or operations. The Commission may suspend trading in the company’s securities if public information about the company is inaccurate or inadequate or is not current.
SEC trading suspensions are commonly issued during penny stock promotions involving illegal investor relations activity. Recently, we have seen a flood of trading suspensions surrounding issuers making false claims related to COVID-10. A review of the suspended companies reveals a string of corporate hijackings and reverse merger transactions, many with years of inactivity before being used in pump and dump schemes. Reverse merger transactions and corporate hijackings are most often used by shell purveyors and promoters seeking avoid the disclosures required during the SEC registration statement process.
SEC may issue a trading suspensions if there is:
♦ a lack of current, accurate, or adequate information about an issuer;
♦ concern about the accuracy of publicly available information, in press releases and public filings and reports; or
♦ suspicious trading activity, including trading by insiders, potential market manipulation, and problems with clearing and settlement of transactions in the issuer’s securities.
The second category consists of issuers suspected of securities fraud. The SEC may follow the suspension with a further investigation that can result in a civil lawsuit down the road. Additionally, these types of trading suspensions are often followed by criminal charges.
A list of issuers whose stock is currently suspended, or which have been subject to an SEC suspension, may be found at the link below:
http://sec.gov/litigation/suspensions.shtml
Post Trading Suspension Trading
When an SEC trading suspension ends, a broker-dealer may not solicit investors to buy or sell the previously-suspended security until certain requirements are met, including the submission of a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) by a market maker. The market maker must represent that the issuer has satisfied all applicable requirements, including those of Rule 15c2-11. No broker-dealer may solicit or recommend that an investor buy shares in a stock that has been subject to a trading suspension unless and until FINRA has approved a Form 211 relating to the stock. Neither may any broker-dealer publish quotes for the stock.
If there are continuing regulatory concerns about the issuer, its disclosures, or other factors such as a pending regulatory investigation, a Form 211 application may not be approved. In the absence of a no-action letter from the SEC, market makers are unlikely to sponsor a formerly-suspended company. Not a single one of the 1,100 stocks that have been suspended since January 1, 2010 has returned to normal trading on the OTCMarkets platform.
Rule 15c2-11 requires broker-dealers to review and maintain certain documents and information about the issuer, including the corporation’s organization, operations, control affiliates, the nature of the securities outstanding and being traded, the issuer’s most recent balance sheet, and its profit and loss and retained earnings statements.
When a stock is suspended, after four sessions without published quotations it will be demoted to the Grey Market. Once the suspension ends, limited or “unsolicited” trading can occur in these Grey stocks. Investors may trade, but at their own risk. Typically, a brand new Grey loses 60% to 80% of its value the first day out; within a few weeks, volume declines dramatically.
Investors should be extremely cautious in considering an investment in a stock following a trading suspension. At a minimum, investors should ensure that a broker-dealer has submitted a Form 211 that has been approved so that they have current and reliable information about an issuer before investing.
For more information about the SEC investigations, see:
http://www.sec.gov/divisions/enforce/enforcementmanual.pdf
Securities lawyer, Brenda Hamilton provides legal advice to market participants about securities matters including SEC investigations and testimony. 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. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding, sponsoring market makers and Form 211, dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
