Does FINRA Rule 6490 Impact Going Public Transactions?

FINRA Rule 6490, has evolved since it was enacted years ago. For some time, FINRA has required that issuers provide expansive disclosures and supporting documentation not only for the corporate change subject to the notice but for the company’s entire corporate history from inception.  This often creates a substantial obstacle for issuers involved in going public transactions.  

FINRA Rule 6490 procedures are required of both companies subject to SEC reporting requirements and  and non-reporting issuers if they undertake corporate actions. Compliance with Rule 6490’s requirements is a minor task for companies going public by filing a registration statement with the SEC.

DTC Easy Street

Companies filing Form S-1 and other registration statements rarely have difficulties obtaining DTC eligibility. The public filings of companies who register with the SEC contain most of the supporting documentation required by Rule 6490. It is no surprise that compliance with the requirements of FINRA Rule 6490 is less burdensome for companies going public using a registration statement because these companies have fewer corporate changes in their company history than companies engaging in reverse mergers. This is especially true for reverse merger issuers who undergo multiple changes of control and periods of inactivity.

The Problem with Reverse Mergers & Disclosure under Rule 6490  

For companies that engage in reverse mergers as part of their going public transaction, compliance with Rule 6490’s requirements can be impossible particularly when custodianship or receivership actions have been used by shell brokers to create public shells after years of inactivity. These companies may have multiple corporate actions related to prior changes of control and often have sketchy corporate histories. Some have even been hijacked through custodianship or receivership actions. In these circumstances, documents may be unavailable or if provided to FINRA, it could potentially result in FINRA referring the matter to the SEC’s Division of Enforcement.

These companies are almost always plagued with incomplete or fraudulent corporate records which make it extremely difficult for the post-reverse merger company to comply with FINRA Rule 6490. As a result, these companies may never get FINRA to process the contemplated corporate action.

Timing of Notice under FINRA Rule 6490 & Application of DTC Requirements

Rule 6490 requires issuers to provide notice to FINRA at least 10 business days prior to the record date of the intended corporate action. Rule 6490 requires FINRA processing prior to certain corporate actions becoming effective. In addition, FINRA may also request additional documents, conduct detailed and selective reviews of the issuer submissions and cause the issuer to delay the announcement of its corporate action.

Rule 6490 Disclosures

Issuers undertaking corporate actions must notify FINRA by completing the Electronic Issuer Company-Related Action Notification Form found on FINRA’s website.

Issuers must provide a cover letter disclosing the full corporate history for the issuer itemizing all material facts including every corporate change that has occurred from inception to present day.

FINRA requires disclosure of the following:

♦ Share Exchange/Purchase Agreements;

♦ Reverse Merger Transactions;

♦ Holding Corporation Reorganizations;

♦ Dormant Shell Revivals including custodianship and receivership actions;

♦ Changes of Corporate Control; and

♦ Reinstatement of the state of incorporation.

Documents Required by FINRA Rule 6490

Issuers should be prepared to provide the following documentation to FINRA in connection with their corporate actions:

♦ Stamped filed certificate of amendment;

♦ Notarized and executed Board of Directors resolution authorizing the corporate action subject to the notice;

♦ Notarized and executed shareholder approval authorizing the corporate action; New CUSIP number or confirmation that CUSIP will not change as a result of the corporate action; and

♦ The appointment(s) of the officer(s) listed on the Issuer Notification Form; along with executed resolutions appointing the current officers or filings previously made to the SEC, such as on Form 8-K.

Triggers for Review under FINRA RULE 6490

A FINRA review will be triggered if any of the five factors set forth in Rule 6490 are thought to be present:

♦ FINRA believes the forms are incomplete, inaccurate or filed without the appropriate corporate authority;

♦ The issuer is not current in its reporting obligations with the Securities and Exchange Commission;

♦ Persons involved in or related to the corporate action are the subject of pending or settled regulatory action or are under investigation by a regulatory body or are the subject of a pending criminal action related to fraud or securities law violations;

♦ Persons related to the corporate action are likely involved in fraudulent activities involving securities or may pose a threat to investors;

♦ There is significant uncertainty in the settlement and clearance process for the issuer’s securities.

Failure to Comply with FINRA Rule 6490

The corporate actions of issuers who do not comply with FINRA Rule 6490 will not be processed by FINRA and they will be charged fines for their non-compliance:

♦ Timely Rule 10b-17 Notification 10 business days before the Action – filing fee $200

♦ Late filing, but filing at least 5 calendar days before the Action – $1,000

♦ Late filing, but filing at least 1 business day before the Action – $2,000

♦ Filing on or after the Action date – $5,000.

After FINRA clearance of corporate actions under Rule 6490, issuers should expect a full review by Depository Trust Company (“DTC”) and be prepared to provide an opinion from their securities attorney as to the tradability of shares held in the name of CEDE & Co. It is during this review that many reverse merger issuers find themselves losing DTC eligibility; their securities could be added to the DTC Chill list.

Any company contemplating going public using a reverse merger must consider the potential impact Rule 6490 could have on its future corporate actions. Rule 6490 provides one more compelling reason why private companies seeking to go public should do so using a registration statement instead of a reverse merger.

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. 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
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com