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
Popular Messaging App Kik Shuts Down, Blames SEC
The popular messaging app Kik raised over $100 million in 2017 in its Initial Coin Offering (ICO). Then, in June of 2019, the SEC sued them because they did not register the offering, as required by United States securities laws.
South Florida Securities Lawyer,Jan Atlas Charged with Fraud
Jan Atlas, a 74-year old attorney based in Ft. Lauderdale was charged on September 17, 2019, with “one count of securities fraud, in violation of Title 15, United States Code, Sections 77q(a) and 77x, in Case No. 19CR60258. The case is assigned to U.S. District Judge Beth F. Bloom in Fort Lauderdale. If convicted, Atlas faces a maximum statutory sentence of up to five years in prison and a fine up to $10,000.”
Investor Relations and Rule 506 (c) Offerings
Rule 506(c) removes 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.
Proper due diligence can also help the issuer avoid other potential securities violations. Read More
Director Bill Hinman Expands on SEC’s Approach to Crypto
According to Forbes, Bill Hinman partook in a fireside chat at Cardozo Law School this week, where he “covered a range of topics related to the regulation of digital securities.” Hinman told Cardozo that the SEC continues to examine their approach to digital securities, and how current securities law should apply to cryptocurrencies and blockchain.
What is an Annual Report on Form 10-K? Securities Lawyer 101
Form 10-K attorneys generally draft the narrative portion of the annual report for publicly traded companies. The Form 10-K report is the most comprehensive of the year. This is because Form 10-K contains the issuer’s audited financial statements. The annual report on Form 10-K details information about the issuer and its operations. The Form 10-K includes most of the information that would also be provided in a Form S-1 registration statement for a securities offering filed under the Securities Act of 1933, as amended (the “Securities Act”). Read More
Smaller Reporting Companies (SRCs) – Emerging Growth Companies
Complying with the Smaller Reporting Company Rules
Will Going Public Help Me Raise Capital? Going Public Attorneys
Securities Lawyer 101 – Going Public Blog
Going public is frequently used as a stepping stone by companies seeking to raise capital. A private or public company can raise capital in a variety of ways. Traditional sources of capital for companies include loans from financial institutions such as a bank, or from friends and family as well as receivable financing. Companies raising capital in going public transactions often do so by selling their securities prior to filing an SEC registration statement. Going public is a milestone for any company and there are both advantages and disadvantages that attach to public company status. Many companies going public do so because they believe it will increase their chances of raising capital from investors. Unlike private companies, public companies can offer investors an exit strategy for their investment using their shares. Read More
What Is Required In a Form S-1 Registration Statement?
Form S-1 registration statements are the most commonly used registration statement form. It allows issuers to register various types of offerings and the form can be used by both public and private companies engaged in going public transactions. A Form S-1 registration statement has two principal parts which require expansive SEC disclosures. Part I of the Form S-1 registration statement is the prospectus which requires that the company provide certain disclosures about its business, financial condition, and management.
Part II of Form S-1 contains information that doesn’t have to be delivered to investors. The disclosures required by a Form S-1 registration statement are set forth in Regulation S-K and include the following: Read More
SEC Adopts Rule 163B to Allow All Issuers to “Test-the-Waters”
The SEC has just adopted Securities Act Rule 163B, which will allow all issuers to “gauge market interest in a possible initial public offering or other registered securities offering through discussions with certain institutional investors prior to, or following, the filing of a registration statement.” Previously, only emerging growth companies, or EGCs, were allowed this opportunity.
SEC Chairman Jay Clayton said “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.” Read More
What is a Form 8-A Registration Statement? Securities Lawyer 101
Form 8-A is a shortened type of securities registration statement under the Securities Exchange Act of 1934, (the “Exchange Act”) that registers a class of an issuer’s securities. A Form 8-A registration statement can be used by Issuers subject to SEC reporting requirements under Sections 13 or 15(d) of the Exchange Act. Section 13 of the Exchange Act requires every issuer of a security registered under Section 12(b) or 12(g) of the Exchange Act to file periodic reports and other information with the SEC. Additionally, Issuers who have filed a registration statement under the Securities Act may use use Form 8-A instead of Form 10 for Exchange Act registration simultaneously with effectiveness of the Securities Act registration statement. Read More
Ross Mandell Seeks More Info Through FOIA
Ross Mandell was the founder of Sky Capital Holdings, Ltd., a venture capital firm and brokerage. He is currently serving a 12 year sentence for defrauding investors of over $100 million from 2001 to 2006. His case was complicated because the vast majority of his dealings was with U.K. investors, and not U.S. investors, and the applicable law was not entirely clear over whether it was “extraterritorial”. George Conway, who is the husband of the famous Kellyanne, wrote an amicus brief with the Bar of the City of New York on behalf of Mandell’s case, writing that the law did not justify charging Mandell’s U.K. actions. The court disagreed however. You can read more about this here.
Selling Stockholder Disclosures in Form S-1 Registration Statements
Form S-1 requires the registrant to provide specific selling stockholder disclosures. These selling stockholder disclosure requirements in Form S-1 are set forth in Item 507 of Regulation S-K
The First SEC-Qualified Token Offering Raises $23M
Muneeb Ali, the founder of Blockstack PBC, released a blog post this week reporting that his company has raised $23 million in public token offerings. This is significant because Blockstack PBC was the first crypto company to gain SEC approval for a public token offering. They did this through a Regulation A+ offering, which you can read more about in our previous blog posts, which cover the topic extensively.
Shell Shocked – FBI Uses Receivership Shell In Sting
The Securities and Exchange Commission (“SEC”), the U.S. Attorney for the District of Massachusetts, and the Federal Bureau of Investigation have announced charges against five individuals, who the authorities allege attempted to manipulate shares of Boston-based Amogear Inc. A review of other recent enforcement cases reflects that hijacked shells have been used repeatedly in manipulative schemes.
Court documents reflect that at least one (unnamed) receivership shell manufacturer has been indicted and provided the FBI with information that led to indictments of the 5 other Amogear defendants. The defendants in the Amogear sting were caught by the undercover FBI operation, with the assistance of the (unnamed) informant and a receivership shell. The Amogear shell corporation was formed in Nevada in 2006 as Kitcher Resources, a mining company. Two years later, Kitcher filed its last financial report with the SEC. Read More
SEC Questions Starbucks’ Accounting Policies
Starbucks’ stock fell today after news broke that the Securities and Exchange Commission sent a letter questioning the way that Starbucks recognizes its revenue. New accounting guidelines were implemented at the end of 2018 that is affecting many public companies. In Starbucks’ case, the SEC wanted clarification as to the reporting of a number of different deals that the company has made. One such deal was a nearly $7 billion agreement with Nestle that would allow them to sell Starbucks products in grocery stores. Another issue was with breakage, which is revenue that comes from unused gift cards or prepaid services.
“When there are issues around revenue recognition, the SEC takes it very seriously because it’s an area that management can manipulate,” said Derryck Coleman, research manager at Audit Analytics. The Wall Street Journal also reported that as of the end of June, 50 other companies have also received letters from the SEC questioning their accounting methods. The SEC explained that companies need to be thorough enough in their reports to ensure that investors are aware of where revenues are coming from, and what the true financial state of the company looks like. Read More
Form 8-A and Form 10 Registration Statements – Securities Lawyer 101
Form 10 and Form 8-A After Securities Act Registration
Once a company completes the filing of its Form S-1 registration statement or Form 1-A offering circular under the Securities Act of 1933, as amended (the “Securities Act”) for an initial public offering (IPO) or direct public offering (DPO), it can file a registration statement under the Securities Exchange Act of 1934 (“Exchange Act”). Long form registration on Form 10 or short form registration on Form 8-A are used to register a class of securities pursuant to Section 12(g) of the Exchange Act.
Form 10 and 8-A can be used to register both debt and equity securities. Upon effectiveness, the issuer becomes subject to SEC reporting requirements. This is different from a Securities Act registration, in which a company registers a certain number of a class of securities (debt or equity) for a particular public distribution. Read More
Leading Vaping Company Juul Warned About its Practices
According to CNBC, the FDA has slammed vaping company Juul for illegal marketing practices and is threatening fines and seizures against the company. Juul has been claiming that its vapes/e-cigarettes are healthy alternatives to cigarettes, but it turns out that might not be the case.
Acting FDA Commissioner Ned Sharpless, M.D. said in a statement posted on the FDA’s website, “Regardless of where products like e-cigarettes fall on the continuum of tobacco product risk, the law is clear that, before marketing tobacco products for reduced risk, companies must demonstrate with scientific evidence that their specific product does in fact pose less risk or is less harmful. JUUL has ignored the law, and very concerningly, has made some of these statements in school to our nation’s youth.” Further, according to CNN, “In November, the FDA revealed that vaping had increased nearly 80% among high schoolers and 50% among middle schoolers since a year earlier. Public health experts have said that Juul has largely propelled the rise, commanding about 75% of the e-cigarette market in the United States.” Read More
Infamous Former Pharma CEO Martin Shkreli Sues Investor from Prison
Martin Shkreli, who gained infamy in 2015 for buying the drug Daraprim, an antiparasite that costs pennies to make, and raising its price to $750 per pill, then later doing all sorts of crazy things, is back at it again, this time from prison.
According to CNBC, Shkreli “filed suit in federal court in Brooklyn against a Florida man, accusing him of fraudulently inducing Shkreli into signing a promissory note that has left him owing $420,000 to the man’s father.” Shkreli claims that the man unfairly pressured him into signing the note, and that the note’s usurious interest makes it invalid under New York law. But as Debra Guzov, the attorney for the defendant George Yaffe points out, Shkreli’s claim is “ironic,” because “the note in question was prepared by Martin Shkreli, so he’s complaining about a document that he actually drafted.” Read More
Public Company SEC Reporting Requirements – Form S-1 Disclosures
Once the SEC staff declares your company’s Securities Act registration statement on Form S-1 effective, the public company becomes subject to the SEC’s reporting requirements under the Securities Exchange Act of 1934. Public company reporting reporting requirements after a Form S-1 is effective require consideration before going public. Public company reporting requirements include aannual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC on an ongoing basis.
If a public company qualifies as a “smaller reporting company” or an “emerging growth company,” it will be eligible to follow scaled down SEC reporting requirements for its reports.
Once a public company begins compliance with SEC reporting requirements, it will be required to continue reporting unless it satisfies one of the following “thresholds,” in which case its filing obligations are suspended: Read More
When Private Placements Go Public – Rule 506-c Attorneys
Rule 506 of Regulation D of the Securities Act of 1933 (the “Securities Act”) provides for a private placement exemption from federal securities registration which is increasingly being used by companies seeking to raise capital prior to going public. While the term “private offering” leaves much to the imagination, the Securities Act provides substantial guidance about the circumstances in which an offering will be deemed a private placement.
Most private placements are made pursuant to Regulation D of the Securities Act. Rule 506 provides two distinct offering exemptions each with unique requirements. Companies are not required to advertise, and if that is their choice, they may use the prior Rule 506 which is now Rule 506(b), which does not allow solicitation of any kind. If they wish to advertise, they must comply with Rule 506(c) which permits general solicitation advertising, but excludes non-accredited investors from participation in the offering. In addition to Rule 506(c) offerings, issuers must take reasonable steps to verify whether purchasers are accredited investors. As explained below, the SEC has suggested several methods that companies may use to verify accredited investor status.
Accredited Investor Status Under Rule 506(c) l Securities Lawyer 101
Rule 506 is the most commonly used exemption of the Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). Issuers conducting Rule 506 Offerings, issuers may use general solicitation and advertising in their securities offerings so long as certain requirements are met including that the issuer take reasonable steps to confirm that each investor is an accredited investor as defined by Rule 506 of Regulation D. Rule 506(c) includes “disqualifying events” for “covered persons” which prevent the issuer from relying on the Rule 506 exemption. This post summarizes how issuers can determine accredited investor status in Rule 506(c) offerings.
Overview of Rule 506(c)
Rule 506(c) allows an issuer to use general solicitation and advertising to sell its securities if the issuer must take reasonable steps to verify that investors are accredited investors.
Under Rule 501 of Regulation D, an accredited investor is any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: Read More
SEC Charges ICO Rating with Failing to Disclose it was Paid to Tout Digital Assets
The Russian entity ICO Rating is an online presence that shares information about ICOs (initial coin offerings), which have grown alongside the rapid rise of cryptocurrency in the past few years. ICO Rating settled with the SEC for an amount exceeding $250,000 because they did not disclose that they were being paid by the very same ICO issuers that they were claiming to have “independently researched.”
In their press release, the SEC wrote “ICO Rating billed itself as “a rating agency that issues independent analytical research,” and stated that its mission is “to help the market achieve the necessary standards of quality, transparency and reliability.” However, ICO Rating failed to disclose that it was paid by certain issuers whose ICO offerings it rated.” Read More
Smooth Sailing For General Solicitation Under Rule 506(c) – Going Public Lawyers
Rule 506(c) fundamentally changes how private placements will be conducted, by allowing issuers to engage in general solicitation and advertising if they comply with the Rule’s specific requirements. The advantages offered by Rule 506(c) are significant for issuers who comply with its inflexible but adaptable requirements. In order to ensure smooth sailing and compliance with the new rule, issuers should understand certain basic requirements of the exemption.
The Checklist below sets forth the most significant items the issuer should know about Rule 506(c). Read More
What is an Exempt Direct Public Offering? Rule 506(c) Offering Attorneys
The Direct Public Offering plays an important role in the going public process. Direct Public Offerings provide flexible options for issuers and allow the issuer to structure its going public transactions a variety of ways. Rules adopted pursuant to the JOBS Act, make an exempt Direct Public Offering an appealing and uncomplicated method of raising capital.One of the most important aspects of the going public process involves deciding the terms of the offering that will be presented to investors. The terms of a company’s direct public offering could have future impacts on its business. Investors want to know they will have an exit strategy in the future. This exit strategy can be accomplished a number of ways.
What is a Direct Public Offering?
Direct Public Offerings are not complicated. They are simply securities offerings sold by a company without an underwriter. Direct Public Offerings allow companies to structure their offerings a variety of ways. Direct Public Offerings can include equity, debt, revenue share or royalty payments, memberships, and other securities. Offerings with common shares can pay dividends, offer different classes of shares, limit voting or be structured a number of ways. Debt offerings can be convertible or secured by the company’s assets, revenues or other criteria. Direct Public Offering structures are endless. Read More
Securities Offering Exemptions – SEC Concept Release
SEC Concept Release on Harmonization of Securities Offering Exemptions
In the wake of the stock market crash of 1929, the public had lost confidence in the entirely unregulated U.S. markets. Congress sought to restore it by creating a regulatory structure. The first step taken was passage of the Securities Act of 1933 (“Securities Act”), which required issuers of securities to provide accurate information about their business, the securities they sold, and the risks involved in investing in those securities. The following year, the Securities Exchange Act of 1934 (“Exchange Act”) was signed into law. The Exchange Act created the Securities and Exchange Commission (“SEC”), whose mission was and is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
Since the 1930s, the Securities Act and the Exchange Act have been amended and expanded many times, but they are still the principal laws that govern the activity of the SEC and the regulation of our capital markets. One of the agency’s chief activities is “rulemaking”: from time to time, it proposes new rules whose purpose is to accommodate developments in the marketplace, new laws, new technologies that affect how the markets operate, and more. Proposed rules are preceded by “concept releases,” which explore whether there’s a need for a new rule, and solicit comment from market participants and the general public. Read More
The Emerging Growth Company & Confidential Submission of Draft Registration Statements
In order to qualify for many of the benefits created by Title I of the JOBS Act, an issuer must qualify as an Emerging Growth Company. The JOBS Act created a new disclosure standard for Initial Public Offerings (“IPO”) by of companies that qualify as emerging growth companies. Emerging Growth Companies have reduced reporting, accounting, auditing and other corporate governance requirements. Additionally, an Emerging Growth Company whose common equity securities have not been previously sold pursuant to an effective registration statement under the Securities Act of 1933 may confidentially submit to the Commission a draft registration statement for confidential nonpublic review. Read More
