Going Public With Rule 506(b) – The Friends and Family Round
Seed Capital and the Friends and Family Round
Many small companies seeking to raise funds for their business raise initial seed capital from friends and family. Even when raising funds in a friends and family round, federal securities laws are applicable.
Do the Securities Laws Apply to the Friends and Family Round?
Generally, under federal securities laws in order to raise capital from investors even in a friends and family round, you must register the securities with the U.S. Securities & Exchange Commission (“SEC”). There are several forms of SEC registration statements available to public or private companies, with the most common being Form S-1 for domestic issuers and Form F-1 for foreign private issuers. Because the SEC registration statement can be time consuming and burdensome, many companies seek to rely upon an exemption from SEC registration to raise their seed capital.
SEC Awards Whistleblowers For Reporting Securities Fraud
On January 22, 2020, the Securities and Exchange Commission (“SEC”) announced two whistleblower awards in connection with two separate SEC enforcement actions. Both whistleblowers provided significant information that helped the SEC shut down two separate fraudulent schemes involving retail investors. In the first action, the whistleblower alerted the agency to a fraudulent scheme. The whistleblower received a SEC bounty of more than $277,000. In the second action, the whistleblower, a harmed investor, provided critical information that enabled the SEC staff to recover assets that were later returned to victims. The whistleblower received a SEC bounty of $45,000.
MetLife Settles SEC Charges with $10 Million Payment
Due to longstanding internal control failures, MetLife has agreed to pay $10 million to settle the charge that was brought forward by the Securities and Exchange Commission (SEC). According to Reuters, which reported on the news, “The settlement follows a probe by the SEC into the company’s failure to pay some workers’ pensions, which MetLife disclosed in December 2017. The agency found MetLife violated key provisions of the federal securities laws relating to two errors in how it accounted for reserves associated with its annuities businesses, it said in Wednesday’s statement.” Read More
SEC Charges Broker-Dealers With Illicitly Profiting in Partial Tender Offer
Bluefin Trading LLC and Critical Trading LLC were charged by the Securities and Exchange Commission (SEC) on December 18, 2019, for violating what is known as the “short tender rule” and “enriching themselves at the expense of other participants in a partial tender offer.” Both of these trading companies are based in New York, New York. The partial tender offer in question regards the common stock of Lockheed Martin Corp., which is known for making weapons.
Form S-3 Registration Statement Eligibility and Requirements
Form S-3 is a short-form registration statement that consists primarily of information about the specific transaction. Only certain eligible issuers can register a securities offering on Form S-3 after their going public transaction. Not all public companies can register securities on Form S-3 even if the issuer is subject to SEC reporting requirements.
Much of the information required by Regulation S-K can be incorporated by reference from the issuer’s current and future periodic reports and proxy statements filed with the Securities and Exchange Commission (“SEC”). Because the Form S-3 allows the incorporation by reference of future filings made by the issuer, the registration statement is automatically updated every time the issuer files a new Exchange Act report or other filing incorporated by reference. An issuer is eligible to use Form S-3 to offer securities on its own behalf for cash on an unlimited basis if the aggregate market value of its voting and non-voting common equity held by non-affiliates is at least $75 million. Read More
Blockchain of Things Inc. (BCOT) Charged by SEC for Unregistered ICO
Blockchain technology company Blockchain of Things Inc. (BCOT) settled charges brought against them by the Securities and Exchange Commission (SEC) on December 18, 2019, for conducting an unregistered initial coin offering (ICO). The New York-based startup Blockchain of Things conducted its ICO, in December of 2017, which was after the SEC had released its DAO Report Investigation, which reported that ICOs can in fact be securities offerings.
This is the latest in the string of many cases that the SEC has been bringing against unregistered token offerings. As cryptoiq.co puts it, “Blockchain of Things (BCOT) is the latest ICO to get obliterated by the SEC.” The SEC has shown that it is serious about ensuring cryptocurrencies are not used as a runaround of United States securities laws.
SEC Proposes to Update Accredited Investor Definition to Increase Access
On December 18, 2019, the Securities and Exchange Commission made an announcement that could be a very big deal for many companies that want to go public to raise money. This announcement was a proposal that shows that the SEC is hoping to update the definition of “accredited investor” so that more people will qualify as an accredited investor, thus giving the public greater access to investments, and companies greater access to potential sources of cash flow.
SEC Chairman Jay Clayton said: “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
Confidential Submission of Draft SEC Registration Statements
Draft registration statements may be submitted to the SEC if certain conditions are present. The Jumpstart Our Business Startups Act (the “JOBS Act”) allows an “emerging growth company” to submit a draft of its registration statement filed pursuant to the Securities Act of 1933, as amended and exhibits to the Securities and Exchange Commission (the “SEC”) on a confidential basis. The most commonly used registration statement under the Securities Act is Form S-1. This blog posts addresses the common questions we receive about confidential registration statement submissions on Form S-1.
Q. When does an emerging growth company have to file its Form S-1 registration statement if I want it to be a confidential submission?
A. The JOBS Act requires that emerging growth companies file the initial confidential submission of their Form S-1 registration statement and all amendments to the registration statement with the SEC within 21 days prior to the registration statement’s anticipated effectiveness or road shows. Read More
Ulrick Debo and Kenneth Ciapala Charged By DOJ and SEC
The Boston and New York SEC and DOJ Charge Ulrik Debo and Kenneth Ciapal and Others
The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ} charged Ulrik Debo, Kenneth Ciapala, Kenneth Ciapala, and a number of associates on January 2 and 3, 2020. Unusually, two different SEC regional offices took part in the investigations, and produced two separate complaints.
One complaint, filed by the Boston Regional Office, charges Steve Bajic, Rajesh Taneja, Ciapala, Anthony Killarney, Christopher Lee McKnight, Andrew Dale Wise, and a number of nominee companies controlled by them with enabling public company control persons fraudulently to sell stock to retail investors in the U.S. over-the-counter securities market. A second complaint, filed by the New York Regional Office in the Southern District of New York, targets Ciapala and his company Blacklight SA, which has its headquarters in Switzerland. Read More
SEC Proposes Disclosure Rules for Resource Extraction Issuers
The Securities and Exchange Commission (SEC) on December 18, 2019, voted to “propose rules that would require resource extraction issuers to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas, or minerals.” Similar rules had previously been implemented by the agency U.S. District Court for the District Columbia and then disapproved by a joint resolution of Congress in 2016. Likely due to the importance of disclosures in the resource extraction industry, the SEC continued to attempt to navigate the legal necessities and implement rules that would be allowed by the Courts and Congress. You can read more about the new rules below:
Regulation A+ Q & A – Regulation A+ Going Public Lawyers
Regulation A Lawyers Explain Regulation A With Q&A
Regulation A provides an existing exemption from registration with the Securities and Exchange Commission (“SEC”) for smaller issuers of securities. Regulation A+ offerings can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction allowing the issuer to avoid the risks of reverse merger transactions. Regulation A simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital.
The process of “going public” with Regulation A is complex and can be structured a number of ways. While going public offers many benefits it also comes with risks and quantities of regulations with which issuers must become familiar. Despite the risks even in a down economy, the U.S. markets remain an attractive source of capital for both domestic and foreign issuers. It is important for issuers to have an experienced securities attorney to help navigate through the process and deal with the SEC, Financial Regulatory Authority (“FINRA”) & Depository Trust Company (“DTC”). Upon completion of a going public transaction, a non-reporting company is subject to the regulations that apply to companies using Tier 2 of Regulation A, including those of the Securities Act of 1933, as amended (“Securities Act”) and Securities Exchange Act of 1934, as amended (“Exchange Act”). Read More
SEC Improves Framework for Cross-border Security-based Swaps
On December 18, 2019 the SEC introduced new rules and guidance for security-based swaps that transcend borders. Many interested parties trade across borders and maintain different international locales. For more information, you can read the Fact Sheet released by the SEC below:
FACT SHEET
Final Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements
Dec. 18, 2019
Background
The Commission has adopted rule amendments and provided guidance to address the cross-border application of certain security-based swap requirements under the Securities Exchange Act of 1934 (“Exchange Act”) that were added by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Read More
Amazon Bans Sale of CBD; Still Shipped Legally by USPS
As we write about often on our blog, the regulatory state of CBD is in flux, and owners of CBD companies should be aware of the challenges that they have to face in the current market. The world’s largest marketplace, Amazon.com, following the FDA’s finding that CBD cannot be ruled safe, has banned the sale of CBD products from their website. On the positive side, several months ago, the USPS decided that it would be legal for businesses to ship CBD and hemp products through its service, a position which has remained unchanged.
Practical Considerations in Regulation A+ Offerings
WHAT YOU NEED TO KNOW ABOUT REGULATION A OFFERINGS
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. These changes have had a notable impact on companies raising capital and going public particularly companies quoted by the OTC Markets. As amended Regulation A provides unique benefits not present in traditional securities offerings registered with the SEC on Form S-1 or Form F-1.
OVERVIEW OF REGULATION A
Regulation A consists of two exemptions, each with its own unique requirements. 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 $50 million in a 12-month period. An issuer of $20 million or less of securities in its offering can elect to proceed under either Tier 1 or Tier 2. The requirements of Regulation A+ Tier 1 and Tier 2 are summarized in the chart below. Read More
SEC Adopts New Rules 15Fi-3, 15Fi-4, and 15Fi-5
On Wednesday, December 18, 2019, the SEC adopted new rules 15Fi-3, 15Fi-4, and 15Fi-5, which they describe as risk mitigation techniques for uncleared security-based swaps.
These rules “establish requirements for registered security-based swap dealers and major security-based swap participants (“SBS Entities”) to:
- Periodically reconcile outstanding security-based swaps with counterparties,
- Engage in certain forms of portfolio compression exercises, as appropriate, and
- Execute written trading relationship documentation with each of their counterparties prior to, or contemporaneously with, executing a security-based swap transaction.”
Form S-1 Registration, Filing and Requirements, Form S-1 and Going Public Lawyers
Private companies going public should consider Form S-1 filing requirements when contemplating their securities offering. Private companies seeking to raise capital often file a registration statement on SEC Form S-1 to meet certain requirements of the Financial Industry Regulatory Authority when going public. Upon filing, a Form S-1 is reviewed by the Securities and Exchange Commission, who may render SEC Comments. Once a Form S-1 is declared effective by the SEC, the company becomes subject to SEC reporting requirements.
All companies qualify to use and must comply with Form S-1 registration statement requirements. Unlike a Form 10 registration statement which registers a class of securities, Form S-1 registers specific securities offerings or transactions and it does not become effective until all SEC comments have been resolved. Read More
Silicon Valley IT Administrator Charged in Insider Trading Ring
Janardhan Nellore, a 42 year old IT administrator, has been charged with using confidential earnings information, along with his friends, to trade on a Silicon Valley cloud-computing company that he was working for. The scheme netted him and his friends over $7 million. The company that he was working at is called Palo Alto Networks Inc. This company trades on the New York Stock Exchange and is worth billions of dollars. According to the SEC, Nellore used his “IT credentials and work contacts to obtain highly confidential information about his employer’s quarterly earnings and financial performance. As alleged in the complaint, until he was terminated earlier this year, Nellore traded Palo Alto Networks securities based on the confidential information or tipped his friends, Sivannarayana Barama, Ganapathi Kunadharaju, Saber Hussain, and Prasad Malempati, who also traded.” As Shaun Nichols comically puts it in his article on The Register, “IT isn’t supposed to stand for Insider Trading”.
Accredited Investors and, Regulation D Rule 506(c) – Going Public Attorneys
Rule 506(c) of Regulation D under the Securities Act of 1933, as amended, allows a company to use general solicitation and advertising to raise an unlimited amount of money from accredited investors. Companies can raise the funds themselves or use an intermediary such as an accredited crowdfunding platform. Some companies may choose to crowdfund their own offering without the use of an intermediary by making their own general solicitation and advertising through their corporate website, social media or online advertising or other methods. But there is a catch companies must follow accredited investor verification procedures to ensure that all purchasers qualify for that status. The SEC has suggested several methods for accredited investor verification which can be found at this here.
Senator Elizabeth Warren Hopes to Crack Down on Shell Companies
Elizabeth Warren is currently running for President as a candidate for the Democratic Party. She is also currently a United States Senator from Massachusetts. She was formerly a Professor at Harvard Law School. She was recently a front-runner to win the Democratic primaries, but has seen a weakening of her polling position in the past few weeks. In a poll released this week by Emerson, she was a distant third place at 12%, behind Joe Biden’s 32% and Bernie Sanders’s 25%. That being said, she still has a decent chance, and has made her voice heard regarding her views on Wall Street and her desire to crack down on shady practices by the financial industry.
Telefonaktiebolaget LM Ericsson Charged with FCPA Violations
Swedish multinational corporation Telefonaktiebolaget LM Ericsson, better known as simply “Ericsson”, was charged by the Securities and Exchange Commission (SEC) “with engaging in a large-scale bribery scheme involving the use of sham consultants to secretly funnel money to government officials in multiple countries. The bribes netted Ericsson hundreds of millions in profits.” This scheme was perpetrated in five different countries over the course of almost twenty years as an attempt to create a stronghold for Ericsson’s business. Both the SEC and Department of Justice were involved in the case, as there were also criminal implications for the company and its executives.
Nanotech Engineering, Michael James Sweaney, David Sweaney, and Jeffery Gange Charged by SEC
Nanotech Engineering Inc., a solar panel company based in California, has allegedly defrauded over 100 investors, and the SEC has obtained a temporary restraining order and asset freeze against the company and its three executives, Chief Financial Officer Michael James Sweaney, Chief Executive Officer David Sweaney, and Chief Operating Officer Jeffery Gange. CFO Michael James Sweaney (also known as Michael Hatton), CEO David Sweaney, and COO Jeffery Gange, “have been engaged in an ongoing fraudulent offering of Nanotech’s securities. While raising capital purportedly to fund Nanotech’s development of solar panels using nanotechnology, the defendants allegedly diverted more than $2.4 million of investor funds for personal expenses, including luxury vehicles, a yacht named the Bella Vita, and cosmetic surgery. The complaint also alleges that the defendants are actively concealing from investors Michael Sweaney’s prior felony securities fraud conviction.”
Tim Leissner Banned for Life by SEC Due to FCPA Violations
Tim Leissner, former head of Asian Investment with Goldman Sachs, has been permanently banned from the securities industry by the Securities and Exchange Commission (SEC) due to a scandal involving bribery and the Malaysian state fund 1MDB. According to the SEC’s Press Release, Leissner “obtained millions of dollars by paying unlawful bribes to various government officials to secure lucrative contracts for Goldman Sachs”. These allegations were a violation of the Foreign Corrupt Practices Act (FCPA) and it earned him the penalty of being barred for life from the securities industry.
What Is a Secondary Registration Statement?
Going public transactions can be structured a variety of ways. Many going public transactions involve the filing of a secondary registration statement with the Securities and Exchange Commission (“SEC”) registering shares held by existing stockholders so that the issuer can meet FINRA’s requirements. This type of offering registering shares on behalf of existing shareholders is known as a secondary offering or secondary registration statement. In a secondary registration statement, the issuer does not receive any proceeds from the sale of the securities subject to the registration statement and such proceeds are received by the selling stockholders. Read More
William Smith and Palm Beach Atlantic Financial Group Charged by SEC
On December 11, 2019, Palm Beach Atlantic Financial Group, LLC and its managing member and sole owner, William A. Smith, were charged by the Securities and Exchange Commission (SEC) “with engaging in the fraudulent offer and sale of over $1 million of securities, ostensibly to obtain capital for the purchase, remodeling, and operation of real estate properties.” Palm Beach Atlantic Financial Group’s website is no longer up and running (pbafinancialgroup.com), but you can view their LinkedIn page here. As the name suggests, they were active in South Florida, but they had dealings in several other states as well.
SEC: Crypto Founder Used ICO Funds for Dating and Rent
Eran Eyal was charged by the SEC this week for selling unregistered securities and improperly using the funds that he raised. Through his Initial Coin Offering (ICO), Eyal and his company UnitedData, using the name Shopin Tokens, raised $42 million. Since the rise of cryptocurrency in the past several years, there have been many instances of shady dealings by companies and its founders looking to capitalize on the huge interest and lack of regulation in the industry. We have written about numerous instances of this on our blog. Eyal lied about relationships that the company and the token had, and used some of the massive amount that he raised for personal uses, including over half a million dollars on rent, entertainment, and dating services. Eyal also hyped Shopin as having numerous big partnerships in the pipeline, and having a prominent cryptocurrency figure involved with the company.
Two Class Action Lawsuits Filed Against CBD Brands
In our previous blog post, we wrote about the FDA’s recent releases detailing how they were unwilling to label CBD as a safe dietary supplement. In response to the FDA’s decision, two class action lawsuits have been filed in California against two major CBD companies: Charlotte’s Web and Infinite Products Co. The class action suits claim that by not operating in according with federal regulations and standards, the two companies have violated California law.
FDA Warns that CBD “has the potential to harm you”
The FDA released a statement this week detailing how it has warned fifteen different companies for illegally selling products containing cannibidiol (CBD), and the agency addressed safety concerns it has regarding this newly popular ingredient. The violations include “marketing unapproved new human and animal drugs, selling CBD products as dietary supplements, and adding CBD to human, animal foods”. The FDA is also refusing to label CBD as GRAS (Generally Recognized As Safe).
FINRA Rule 6490 – FINRA Compliance and Rule 6490 Lawyers
Though FINRA’s principal mandate is to regulate broker-dealers, historically it has always exercised some oversight of the over-the-counter markets including all tiers of the OTC Markets. Part of that oversight involves processing corporate action requests from issuers of equity and debt securities not listed on national securities exchanges. Significant changes to FINRA Rule 6490 were enacted in September 2010. Prior to that time, these requests were almost always granted, even when inappropriate or submitted late. Rule 6490 put an end to that: a nominal fee is charged for all requests, and issuers who are later to notify will be fined. In certain specific circumstances processing may be denied altogether.
The actions of which FINRA must be notified are: name changes, stock splits, stock splits, distributions of cash or securities, reinstatement of dormant public shell companies, spin-offs and other actions, and rights and subscription offerings. In the text of the Rule 6490, FINRA notes that the SEC is concerned that “certain parties” may attempt to use corporate action requests to further fraudulent activities.
Rule 10b-17 of the Securities Exchange Act of 1934 (“Exchange Act”), requires issuers to provide FINRA with notice 10 days prior to the record date of a dividend or other distribution in cash or in kind. This often creates significant delays for issuers engaging in corporate actions such as a stock split, change of control or reverse merger transaction. Read More
SEC Comments – Form S-1 – Going Public Lawyers
Private companies going public should consider Form S-1 filing requirements when contemplating their securities offering. Private companies seeking to raise capital often file a registration statement on SEC Form S-1 to meet certain requirements of the Financial Industry Regulatory Authority when going public. Upon filing, a Form S-1 is reviewed by the Securities and Exchange Commission, who may render SEC Comments. Once a Form S-1 is declared effective by the SEC, the company becomes subject to SEC reporting requirements. All companies qualify to use and must comply with Form S-1 registration statement requirements. Unlike a Form 10 registration statement which registers a class of securities, Form S-1 registers specific securities offerings or transactions and it does not become effective until all SEC comments have been resolved. Private companies going public should be aware of the expansive disclosure required in registration statements filed with the SEC prior to making the decision to go public. Companies conducting securities offerings should also be familiar with the Form S-1 quiet period.
A registration statement on Form S-1 can be used to register various types of securities offerings and transactions with the SEC. Form S-1 provides issuers with flexibility in the types of securities that can be registered. Hiring the right Form S-1 Registration Statement Lawyer 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 statements can be used by existing public companies or companies in connection with a going public transactions. Regardless of whether the company is public or private, Form S-1 can be used to registered various types of transactions, including an Initial Public Offering (“IPO), Direct Public Offering (“DPO”) or a Resale Registration or Selling Stockholder Offering.
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