Going Public Bootcamp – Securities Lawyer 101

The going public process involves a number of steps that vary depending on the characteristics of the private company wishing to go public, and whether it will become a Securities and Exchange Commission (“SEC”) reporting company.  A companies seeking public company status must meet certain SEC requirements before its securities can be publicly traded.  This applies to reporting and non-reporting issuers.  A going public lawyer can assist the issuer in complying with the SEC’s requirements.

Shareholder Requirements in Going Public Transactions

The first step in a going public transaction is most often obtaining the number of shareholders required by the Financial Industry Regulatory Authority (“FINRA”).  The shares issued to them must be unrestricted at the time of the filing of the Form 211 with FINRA, so that a public float will exist when the company’s stock begins trading.

Assuming the private company is not reporting to the SEC, in order for its shareholders to have shares that are unrestricted, the shareholders must have paid consideration for their stock 12 months prior to the filing of the Form 211 or must be subject to an effective registration statement.

If the private company is reporting because it filed a Form 10 or Form 8A the holding period is 6 months.

While FINRA does not specify the number of shareholders it requires in going public transactions, in most cases 35 shareholders who paid cash consideration for their securities are sufficient to obtain a ticker symbol assignment for an OTCMarkets listing.  These first investors often friends and family are commonly referred to as ”seed shareholders”.

When more shareholders are required, most often it isn’t because FINRA required more shareholders.  It is because the sponsoring market maker’s firm requires a certain number of shareholders in order to sponsor an issuer’s Form 211 application.

The Rule 506 Exemption for Seed Shareholders in Going Public Transactions

Regardless of whether the issuer is relying upon the resale provisions of Rule 144 or a registration statement to create unrestricted securities, it must have an exemption from registration in order to make the initial offer and sell its securities to seed shareholders.  The most commonly used exemption from registration is Rule 506 of Regulation D of the Securities Act.  Recent changes to Rule 506 under the JOBS Act that become effective next month allow issuers to advertise their Rule 506 offering as long as sales are only made to accredited investors.  This should make obtaining seed shareholders much easier in going public transactions.

Rule 506 does not limit the amount of money that issuers can raise and it does not limit the number of investors who can participate in an offering.  It is available to both private and public companies regardless of whether they are reporting with the SEC.  It is also available to both domestic and foreign issuers.

Accredited Investors l Rule 506 l Going Public Transactions

There are no document delivery requirements in Rule 506 offerings if offers and sales are only made to accredited investors, but all transactions are subject to the antifraud provisions of the securities laws.

Non-Accredited Investors l Rule 506 l Going Public Transactions

All non-accredited investors in Rule 506 securities offerings, either alone or with a purchaser representative, must be sophisticated; that is, they must have sufficient knowledge and experience in financial and business matters to ensure that they are capable of evaluating the merits and risks of the prospective investment.  In some instances, audited financial statements are required in Rule 506 offerings.

Companies must provide non-accredited investors disclosure documents that are generally the same as those used in registered offerings.  If a company provides information to accredited investors, it must make this information available to non-accredited investors as well.  Additionally, the company must be available to answer  prospective purchasers’ questions.

Tradability l Rule 506 Offerings l Going Public Transactions

Securities sold in Rule 506 offerings are restricted securities.  As such, the shares must be held for 12 months or subject to an effective registration statement under most circumstances.

Form D I Rule 506 Offerings

While companies using the Rule 506 exemption do not have to register their securities, they must file a “Form D” with the SEC within 15 days of the first sale of their securities.  Form D is a brief notice filing that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

Share Concentration l Going Public Transactions 

The distribution of share ownership of the unrestricted shares in a going public transaction should be fairly even. While the shareholders do not have to hold the same amount there should not be large discrepancies in ownership unless the shares are subject to a leak-out agreement.  FINRA has identified concentration of an issuer’s public float as a red flag indicator of pump and dump schemes.

Hamilton & Associates will design the appropriate going public transaction for your company using an SEC registration statement. Hamilton & Associates Securities Attorneys can guide you through the complex process of going public and assist you with the extensive disclosure required in registration statements filed with the SEC.

If you are going to offer and sell securities, or go public using an SEC registration statement you will need the assistance of an experienced securities law firm like Hamilton & Associates to help you navigate through the SEC registration statement process to ensure all required disclosures are made.

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 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 | Going Public Lawyers
Brenda Hamilton, Going Public Lawyer
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com