Going Public Bootcamp – Going Public Attorneys – 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 subject to the Securities and Exchange Commission (“SEC”) reporting  requirements. 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 Financials 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 29 shareholders who paid cash consideration for their securities are sufficient to obtain a ticker symbol assignment for an OTCMarkers 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. Is is because the sponsoring 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 propositions 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 shareholder. 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 became effective in 2012, allows 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 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 | Rule 506 | 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 anti fraud provisions of the securities laws.

Non-Accredited Investors | Rule 506 | 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 if the prospective investment. In some instances, audited financials 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 | Rule 506 Offerings | 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 | Rule 506 Offerings

Whiles 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 | 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 discrepancy 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.

For more information about going public, securities law or our other services please contact a Securities Attorney at Hamilton & Associates Law Group, P.A. 01 Plaza Real S, Suite 202 N, 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 10-K 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 NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of 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 FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India and throughout the U.S.