On November 25, 2019, the Securities and Exchange Commission amended a complaint to charge four former executives of Outcome Health, a private healthcare advertising company, with fraud in raising nearly half a billion dollars by falsely portraying the company as an overwhelming success to investors, clients, and auditors.
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 Charges Rishi Shah, Shradha Agarwal, Brad Purdy, Ashik Desai,and Outcome Health
The SEC’s amended complaint alleges that Outcome Health’s former executives, CEO Rishi Shah, President Shradha Agarwal, CFO Brad Purdy, and Executive VP Ashik Desai, engaged in a fraudulent scheme to misrepresent the company’s business successes while raising hundreds of millions of dollars from unsuspecting investors. Outcome Health charges pharmaceutical company clients to display ads in doctors’ offices, and the amended complaint alleges the defendants were aware of or engaged in a scheme to bill clients and recognize revenue for ads it never ran. Read More
Knightsbridge Private Partners Accused of Selling Fake Shares of Stock
Knightsbridge Private Partners, a New York firm, has been accused of making over $2 million from October 2018 to January 2019 by selling fake shares of stock in pre-IPO companies. They offered “pre-IPO” shares of Uber, Airbnb, and Lyft, often taking advantage of the elderly. The Department of Justice is currently investigating Knightsbridge. Forbes reported that Bank of America had seized over $100,000 from the firm in relation to the alleged fraud.
Supreme Court Adds Securities Law Case against Charles Liu and Xin Wang to Merits Docket
The Supreme Court this week agreed to hear the case of Liu vs. Securities and Exchange Commission. The issue at hand is “Whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as “equitable relief” for a securities law violation even though the Supreme Court has determined that such disgorgement is a penalty.”
The Plaintiffs Charles Liu and Xin Wang raised $27 million from 50 Chinese investors. The investors were seeking to take advantage of a federal program that provides visas to immigrants who invest in businesses that create jobs in America.
SEC Invites Outsiders to Submit Proposals for Secondary Market
Seeking to improve the secondary market structure for “thinly traded securities”, the SEC has outsourced the creative process to anyone involved in this market who may have some good ideas. The SEC’s press release “invites exchanges and other market participants to submit innovative proposals designed to improve the secondary market structure for exchange listed equity securities that trade in lower volumes, commonly referred to as “thinly traded securities.”
Regulation A + l Rule 506 l Form S-1 Comparison
Rule 506 and Regulation A provide smaller companies with a flexible alternative to raising capital and going public in connection with direct public offering (DPO) and/or traditional initial public offering (IPO). Recent amendments allow companies that are subject to SEC reporting requirements to use Regulation A+ for their securities offerings. Going public is not mandatory, Regulation A+ can be used by both private companies and companies seeking public company status.
For companies going public on the OTC Markets, Regulation A+ streamlines the process of obtaining the stockholders necessary to establish an active trading market as required by the Financial Industry Regulatory Authority (“FINRA”) for the assignment of a stock trading symbol. Read More
USDA Releases Draft of Interim Final Rule on Hempmaking
On December 20, 2018, the 2018 Farm Bill was signed into law by the federal government. The 2018 Farm Bill “requires USDA to promulgate regulations and guidelines to establish and administer a program for the production of hemp in the United States.” As they write in the draft, the USDA is “issuing this interim final rule to establish the domestic hemp production program and to facilitate the production of hemp.” Further, the rule is supposed to expand production and sales of domestic hemp, benefiting both U.S. producers and consumers. Read More
Regulation A Direct Listing: Regulation A Tier 2 Requirements
An increasing number of small companies seeking public company status are using Tier 2 of Regulation A in their going public transaction. This process is sometimes referred to as a Regulation A direct listing. Regulation A provides many benefits for small companies seeking to raise capital without the costs and expansive disclosures required in direct public offerings (DPO) and initial public offerings (IPO) using traditional Form S-1 or other registration statements under the Securities Act of 1933.
Direct public offerings using Regulation A+ allow resales including by the Company’s management of the Company’s shares to purchasers without the efforts of an underwriter. Going public using Regulation A+ with a direct public offering also eliminates costs and myriad of risks and uncertainties of a reverse merger transaction.
Recent Court Dissent Shows Progress for Marijuana Companies
Currently, although many states have legalized marijuana, it is still illegal to sell the drug under federal law. Because of this, under tax code Section 280E, cannabis companies are not allowed to make any deductions in their filings with the IRS.
IRC Section 280E provides:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Does Regulation A+ Allow Testing the Waters?
Issuers utilizing Regulation A+ are permitted to “test the waters” with potential purchaser and use solicitation materials both before and after the offering statement is filed, subject to compliance with SEC rules on filing and disclaimers. Using Regulation A+, issuers can advertise the offering opportunity to solicit interests before spending hundreds of thousands of dollars on the actual filing itself, to see if there’s sufficient interest to spend the money to move forward with qualifying a Regulation A Offering.
Testing the waters materials used prior to the filing of the Form 1-A must be filed as an exhibit with the initial filing on Form 1-A. Although the SEC does not pre-review pre-filing advertising, issuer should exercise caution with what they say in offering materials. Solicitation materials are subject to the anti-fraud and other civil liability provisions of the federal securities laws and issuers can be sued for statements in the advertising materials, even if they don’t include the information in the 1-A Offering Circular itself. Read More
Finra Investigates BNP Paribas
On October 24, 2019, the Financial Industry Regulatory Authority (FINRA) announced a settled enforcement action involving BNP Paribas Securities Corp. and BNP Paribas Prime Brokerage, Inc. A lengthy FINRA investigation found that although the firms did a brisk business in penny stocks between February 2013 and March 2017, their anti-money laundering (AML) procedures were woefully lacking, which resulted in a failure to report hundreds of millions of dollars worth of potentially suspicious transactions. BNP agreed to pay a fine of $15 million, and to certify within 90 days that its procedures are “reasonably designed to achieve compliance…”
BNP the parent company may seem at first glance an unlikely player in the penny playground. A French bank with roots in Belgium, its current incarnation resulted from the 2002 merger of Banque Nationale de Paris (BNP) and Banque de Paris et des Pays-Bas S.A. (“Paribas” is derived from “Pays-Bas,” which means the “low countries,” Belgium and the Netherlands.) Today, it’s one of France’s three top international banks, along with Société Générale and Crédit Agricole. Like all multinational financial institutions, BNP has a great many affiliates and subsidiaries, as the Broker Check entry for BNP Securities demonstrates. It appears its own size, and the complexity of its parent’s organization, contributed to the problems FINRA identified.
What is Corporate Hijacking?
Corporate hijackings, also known as corporate identity theft, of public shell companies has been around for more than a decade. Corporate hijackings often involve fraudulent state custodianship and/or receivership proceedings disguised to appear legitimate. It is a growing method used by fraudsters to acquire control of publicly traded shell companies to use in reverse merger transactions involving private companies seeking to go public. Recent SEC cases against hijackers have unraveled a myriad of hijacking schemes varying in sophistication. It is relatively easy to locate information about a public company using EDGAR, OTC Markets filings, Secretary of State websites and corporate filings, company websites, and business and other directories. Using these sources to locate public shell companies for reverse merger transactions, fraudsters are able to determine a public company’s corporate status. Read More
Does Offering Integration Apply in a Regulation A Offering?
The Regulation A + offering integration rules prevent companies from improperly avoiding the SEC’s registration statement requirements by dividing a single securities offering into multiple securities offerings to take advantage of exemptions that would not be available for the combined offerings. Regulation A+ contains integration safe harbor provisions. Under Rule 251(c), a Regulation A+ offerings will not be integrated with prior offers or sales of securities. Subsequent offers and sales of securities in Regulation A+ offerings will not be integrated with other securities offerings that are: Read More
Regulation A+ For Publicly Traded Reporting Companies
Benefits of Regulation A+ Amendments
On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A informally referred to as Regulation A+. The amendment allows companies that are subject to SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), to conduct securities offerings using Regulation A+. The amendments to Regulation A were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which became law in May 2018.
As discussed in more detail below, the amendments offer benefits to smaller reporting companies not listed on the New York Stock Exchange (“NYSE”) or NASDAQ and companies subject to SEC reporting requirements that do not qualify to, use Form S-3 or F-3 shelf registration statements. Read More
SEC Halts Alleged $1.7 Billion Unregistered Token Offering
Beginning in January 2018, Telegram Group Inc. and its wholly-owned subsidiary TON issuer began raising capital to finance their business. This included development of their own blockchain and mobile messaging application. According to the SEC, “Defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets.”
Nasdaq’s Regulation A Seasoning Requirement
Posted by Brenda Hamilton
Nasdaq’s Regulation A Proposal
The Nasdaq Stock Market LLC (“Nasdaq”) proposed a rule that would impose listing requirements for Regulation A companies pursuant to pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder, to adopt a new initial listing requirement for any company applying to list on Nasdaq in connection with an offering under Regulation A of the Securities Act of 1933 (“Securities Act”).
On June 28, 2019, the SEC approved a change to Nasdaq Listing Rule 5210 to impose listing requirements for companies conducting offerings under Regulation A of the Securities Act of 1933 (the “Securities Act”). The amendment will take effect on July 28, 2019.
Regulation A+ Tier 2 Reporting Obligations – Going Public Lawyer
Regulation A, also known as Regulation A+, provides investors with more investment choices and issuers with more capital raising options during their going public transactions. The rules adopting Regulation A+ are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.
Regulation A+ expands existing Regulation A by dramatically opening new doors for capital raising for smaller companies. Regulation A+ offerings can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. The exemption simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital. The exemption provides for two distinct offering exemptions. Tier 1 provides an exemption from SEC registration for offerings of up to $20 million. Tier 2 exempts offerings up to $50 million.
One of the most notable differences between the two Regulation A+ tiers is that issuers that conduct a Tier 2 offering will become subject to ongoing SEC reporting obligations, though such obligations are significantly less burdensome than those that apply to SEC reporting issuers filing Form S-1 Registration Statements.
Presently, issuers that conduct Both Tier 1 & Tier 2 Regulation A offerings must file a Form 2-A with the SEC every six months to report sales in the offering, and submit a final Form 1-A to the SEC within 30 days after the offering is complete. Regulation A+ eliminated Form 2-A and created Form 1-Z. Read More
Rule 506(b) Offerings
Rule 506(b) Offerings – Regulation D Offerings
Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) exempts from SEC registration, transactions by an issuer not involving a public offering. Rule 506(b) of Regulation D of the Securities Act provides a “safe harbor” under Section 4(a)(2). Rule 506(b) sets forth standards that a company can use to meet the requirements of the Section 4(a)(2) exemption.
Under Rule 506(b), an issuer may raise an unlimited amount of money. Additionally, the issuer can sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors if certain disclosures are provided.
Regulation A+ 2019 Q&A – Securities Lawyer 101
Regulation A provides an exemption from registration that can be used in combination with a Rule 506 private placement, a direct public offering and/or initial public offering by a private company or company seeking to go public. Since Regulation A was amended in 2015, it has gained notable market acceptance and has undergone a few changes. Regulation A has two offering tiers: Tier 1 and Tier 2. Tier 2 has evolved into a recognized method of Going Public particularly on the OTC Markets. Regulation A simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority (“FINRA”) while allowing the issuer to raise initial capital. This blog post addresses the most common questions we receive about Regulation A+.
How much can I raise with Regulation A+?
Tier 1 is available for offerings of securities of up to $20 million in a 12- month period, with no more than $6 million in offers by selling security holders that are affiliates of the issuer. Tier 2 is available for offerings of securities of up to $50 million in a 12-month period with no more than $15 million in offers by selling security holders that are affiliates of the issuer.
What securities can I register on Form 1-A pursuant to Regulation A+?
Regulation A can be used to register shares, warrants, and convertible equity securities. Read More
The 3(a)(10) Exemption from SEC Registration
Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”) exempts the offer and sale of securities in certain exchange transactions from the registration statement requirements. In SEC Legal Bulletin 3A, the Securities and Exchange Commission (the “SEC”) provided guidance regarding the Section 3(a)(10) exemption and the resale status of securities issued pursuant to Section 3(a)(10). The Section 3(a)(10) exemption is Read More
Rule 506(c) Offerings: Everything You Need to Know
Issuers can advertise their securities offerings under Rule 506(c) of Regulation D. Upon its implementation in 2013, Rule 506(c) removed the 80-year prohibition against the general solicitation and advertising of private placements. Since the rule change, issuers have been bombarded with investor relations providers offering to assist with may advertise their Rule 506(c) offerings using a variety of venues including the internet, television, seminars, email campaigns and hard mailers. Issuers should conduct thorough due diligence before hiring any third party that purports to provide services in connection with their Rule 506(c) offerings to avoid disqualification of the exemption.
Regulation A Offerings – Blue Sky Requirements
Regulation A, also known as Regulation A +, provides an exemption from registration for sales of up to $50 million in a 12 month period. The exemption provided by Regulation A + offers numerous benefits to issuers seeking to go public or remain private. Regulation A+ provides issuers with two choices for their offerings. Tier 1 provides an exemption for an offering of up to $20 million in a 12-month period and Tier 2 provides an exemption for an offering of up to $50 million in a 12-month period. One aspect of Regulation A that should be considered is the impact of state blue sky laws on the offering as well as resales.
Regulation Tier 1 v Tier 2 – Regulation A State Blue Sky Compliance Read More
Regulation A Investor Bulletin Issued by SEC
Regulation A Not Giving Warm Fuzzies to the SEC
In April of this year, NASDAQ submitted a proposal related to the Regulation A Offering Exemption which would require any Company listing on NASDAQ in connection with an offering under Tier 2 of Regulation A of the amended Securities Act of 1933, (the “Securities Act”), to have a minimum operating history of two years at the time of approval of its initial listing application.
The proposal came after the SEC expressed concerns about issuers with less developed business plans unlike other companies seeking to list on the NASDAQ. The SEC expressed concern that investors may be exposed to greater risks of fraud from companies using Regulation A. In response to these concerns, the NASDAQ proposed the seasoning requirement for Regulation A issuers. Read More
SEC Updates PAUSE List of Firms Using Inaccurate Information
The SEC has updated its PAUSE list (Public Alert: Unregistered Soliciting Entities), “adding 23 soliciting entities, two impersonators of genuine firms, and 12 bogus regulators.” This is a great resource for investors, as it will help you to protect yourself against possible scammers. This list can be viewed here. It includes hundreds of firms, both financial and law.
Our Comment to the SEC Regarding Rule 211 (15c2-11) – Sponsoring Market Makers
Hamilton & Associates, a boutique securities law firm in Boca Raton, Florida, would like to take this opportunity to comment on the Commission’s proposed rule for the publication or submission of quotations without specified information. We applaud the Commission’s decision to amend Rule 15c2-11, last modified in 1991, to accommodate changes in the over-the-counter market and in the way OTC securities are traded in the digital age.
The Internet, now available to nearly all investors, has created new ways of accessing and storing information, and the rise of the online brokerages has made trading securities easier and less expensive than it was three decades ago. The result has been the entry of large numbers of new investors into the once-obscure OTC market. Revisions to the rule are long overdue.
SEC Proposes Rule 15c2-11 Changes – Form 15c-211 Attorneys
On September 26, 2019, the Securities and Exchange Commission (the “SEC”) announced proposed amendments to its Rule 15c2-11 of the Securities Exchange Act of 1934 (the “Exchange act”. The purpose of Rule 15c2-11 is to establish requirements that must be met by broker-dealers before they can publish quotations for securities in the over-the-counter (OTC) known as the OTC Markets. Issuers that are not compliant with Rule 15c2-11 will be relegated to the Grey Market until compliance is regained. OTC Markets companies wishing to achieve or regain compliance must do so by locating a broker-dealer willing to sponsor them.
The broker-dealer, using information supplied by the issuer, will file a Form 211 with the Financial Industry Regulatory Authority (FINRA). FINRA will process the filing; it may request clarification or additional information until it’s satisfied. Form 211 is commonly used by smaller issuers after a Form S-1 registration statement has been filed with the SEC as part of a going public transaction.
SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds
In addition to their new rule allowing companies to “test the water“, the SEC has announced another new rule regarding Exchange-Traded Funds (ETFs). The SEC says they are modernizing the regulation of ETFs “by establishing a clear and consistent framework for the vast majority of ETFs operating today.”
SEC: Facebook to Pay $100M for Misleading Investors
After the election of 2016, a lot was made of “fake news” and Facebook’s role in spreading it. Part of this large controversy involved the consulting firm Cambridge Analytica, which was run by Steve Bannon. Cambridge Analytica used the data of 87 million in violation of Facebook’s policy, and used that data to its own ends.
Cry Me A River – DTC Chills & Global Locks – Going Public Attorneys
The Depository Trust and Clearing Corporation (“DTCC”), through its subsidiaries, provides clearing, settlement and information services for securities. DTCC’s subsidiary, the Depository Trust Company (“DTC”), was created to improve efficiencies and reduce risk in the clearance and settlement of securities transactions by allowing securities transactions to be conducted electronically. Without DTC eligibility, it is almost impossible for a company to establish an active trading market for its shares. To have DTC eligibility, a company must satisfy the criteria set by DTCC to be settled through DTC. In addition, a company must satisfy the criteria established by DTC to remain DTC eligible. If they fail to do so, DTC will limit its services and issue a DTC Chill or terminate its services and issue a global lock. Read More
Non-Traditional IPO: Direct Listing Process (DLP)
A new type of IPO has gained prevalence recently, as big tech companies such as Slack and Spotify have decided to take their companies public via a Direct Listing Process (DLP), also known as a Direct Placement, or Direct Public Offering (DPO). In an Initial Public Offering, new shares are created, underwritten, and sold to the public. In a Direct Listing Process, on the other hand, no new shares are created and only existing, outstanding shares are sold with no underwriters involved.
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