SEC Trading Suspensions Under the Securities Exchange Act
SEC Trading Suspensions under Exchange Act Section 12(k)
Section 12(k)(1)(A) of the Exchange Act, grants the SEC the authority to issue trading suspensions for up to 10 business days if it believes the trading suspension is in the public interest protects investors. When the SEC issues a trading suspension pursuant to Section 12(k), trading in the security is halted for the period set forth in the order which is typically the full 10 days. Once the trading suspension is over, few companies resume normal trading activity.
If issuer’s securities are listed on a national securities exchange such as the NYSE or NASDAQ, they will resume trading after the trading suspension ends. For companies quoted on the OTC Markets, resuming trading is not as easy. OTC Markets issuers must locate a market maker to submit a Form 211 in compliance with FINRA Rule 15c2-11. Few market makers are willing to assume the liability of filing a Form 211 for a company that has been suspended by the SEC. Read More
SEC Charges Jason C. Nielsen in Manipulative Trading Scheme Involving Covid-19 Claims
On June 10, 2020,the Securities and Exchange Commission (the “SEC”) charged Jason C. Nielsen, a penny stock trader in Santa Cruz, California, with conducting a fraudulent pump-and-dump scheme in the stock of a biotechnology company by making hundreds of misleading statements in an online investment forum, including a false assertion that the company had developed an “approved” COVID-19 blood test. Read More
SEC Enters Final Judgment Against Brandon Copeland, E.B. & Copeland Capital, Inc.
On June 17th, 2020, the Securities and Exchange Commission (the “SEC”) charged international insurance company AmTrust Financial Services, Inc. and its former CFO Ronald E. Pipoly Jr. with failing to disclose material facts about how the company estimated its insurance losses and reserves. They have agreed to pay a combined $10.5 million to settle the SEC’s charges. Read More
SEC Obtains Preliminary Injunction Against Paul Horton Smith, Sr., Northstar Communications, LLC, Planning Services, Inc. and eGate
On June 3, 2020, the United States District Court for the Central District of California entered a preliminary injunction and orders freezing assets and imposing other relief against California-registered investment adviser Paul Horton Smith, Sr. and his entities in connection with a Ponzi scheme targeting senior citizens. Read More
SEC Obtains Judgements Against Stiefel Laboratories and Charles Stiefel
On June 5, 2020, the Securities and Exchange Commission (the “SEC”) announced that it has obtained final judgments of $37 million against Stiefel Laboratories and Charles Stiefel. According the the SEC, Stiefel and Stiefel Labratories defrauded shareholders, who were mostly company employees, by having Stiefel Laboratories buy back their stock at severely undervalued prices.
The SEC alleged that Stiefel Laboratories and Charles Stiefel used artificially low valuations for stock buybacks and failed to disclose information that would have alerted employee shareholders their stock was worth much more than the price the company paid them. For example, according to the complaint the company failed to disclose negotiations for the sale of the company that ultimately resulted in GlaxoSmithKline PLC purchasing Stiefel Laboratories for a share price more than four times higher than the share price the company paid to employee shareholders.
Is My Toxic Lender and Dilution Funder a Dealer? – SEC Toxic Financing Actions
How Dilution Funders Operate
Everyone interested in penny stocks, either as an investor or an observer, knows that nearly all microcap issuers are in perpetual need of financing. Reputable banks are usually uninterested in lending, and government entities like the Small Business Association are slow to process applications. In the end, a great many small public companies turn to what are sometimes called toxic or dilution funders to meet their needs. In these dilution financings, the lenders’ terms contain special features that almost always result in harm to investors, and to the company itself. These funders operate by purchasing convertible promissory notes from their client companies using documents drafted by their sometimes complicit lawyers. Typically, the notes can be converted at any time into the companies’ common stock. Worse yet, when the lender converts, he receives an amount of stock fixed at a pre-negotiated discount to market that can be as large as 70 percent. The notes often contain default and penalty provisions providing lenders with the ability to receive even more shares if the stock price drops below a certain level, or upon the occurrence of certain events, such as non-compliance with SEC reporting requirements or other obligations. Read More
Regulation CF Crowdfunding and SEC Reporting After the Offering
After an issuer completes a Regulation CF crowdfunding offering, it must comply with certain ongoing reporting obligations. Unlike public company SEC reporting requirements, Regulation CF’s ongoing reporting requirements consist of only one filing annually.
Regulation CF Issuers Required to File an Annual Report on Regulation C-AR
An issuer that sold securities in a Regulation Crowdfunding offering must submit an annual report on Form C-AR to the SEC through Edgar no later than 120 days after the end of its fiscal year. Form C-AR must be also be posted on the company’s website. Form C-AR requires information similar to what is required in the Form C offering statement which we discuss here; however, the issuer is not required to obtain an audit or review of its financial statements. Read More
Rule 504 Offerings – Regulation D Attorneys
RULE 504 – LIMITED CROWDFUNDING
Securities offerings under Rule 504 of Regulation D of the Securities Act may prove useful to founders of startup and small companies. One of the most difficult times for these companies is when the company is founded. Often the founders will have limited capital with which to fund their new business. Under Rule 504, the company can raise up to $5 million in a 12 month period without filing the offering with the SEC prior to sale. One important limitation of Rule 504 is that it is not available to public companies subject to SEC reporting requirements.
Unlike securities sold in an offering registered with the SEC on Form S-1, companies offering securities in reliance upon Rule 504 submit an SEC filing on Form D 15 days after the first sale of securities. Issuers must still comply with state blue sky requirements. Issuers conducting offerings under Rule 504 should follow the rules below to avoid disqualification of their offering exemption. Read More
SEC Provides Form S-3 Coronavirus Relief – Securities Lawyer 101
The SEC’s Division of Corporate Finance recently provided new COVID-19 related guidance in the form of Frequently Asked questions for issuers using Form S-3 registration statements. The SEC previously provided relief to issuers impacted by coronavirus which are unable to file timely because of “circumstances related to COVID-19 ( the “COVID-19 SEC Order”).
The SEC’s relief included conditional 45-day extensions to submit certain SEC reports and filings that had original deadlines between March 1 and July 1, 2020. The new SEC guidance provides relief to issuers relying on Form S-3 registration statements to register securities. For issuers who qualify, Form S-3 is the most cost- and time-efficient registration statement to prepare because it allows issuers to incorporate certain disclosures previously filed with the SEC. Read More
Public Company SEC Reporting Requirements -SEC Requirements to Go Public
A public company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports (“Public Company SEC Reporting Requirements”) with the Securities and Exchange Commission (the “SEC”). These Public Company SEC Reporting Requirements keep investors and market participants informed about important information about the issuer. Reports and filings made with the SEC can be viewed by the general public without charge on the SEC’s website.
Companies subject to Public Company SEC Reporting Requirements must file Annual Reports on Form 10-K, Quarterly Reports on Form 10Q’s and Current Reports on Form 8-K. As discussed below, certain issuers must file proxy statements and other reports and their officers, directors and certain large shareholders must file beneficial ownership reports with the SEC. Read More
What is a SEC Trading Suspension? Securities Lawyer 101
The Securities Exchange Act of 1934, as amended (the “Exchange Act”) authorizes the Securities and Exchange Commission (“SEC”) to issue a trading suspension for up to ten business days. The SEC will order a trading suspension if it determines it is necessary to protect investors. For other securities that are traded in the over-the-counter market, broker-dealers are prohibited from publishing quotes for the security until the company has provided adequate public information. Under most circumstances, the issuer must locate a sponsoring market maker to file a new Form 211 with the Financial Industry Regulatory Authority (“FINRA”).
The reality is an SEC trading suspension is the kiss of death for investors and the issuer. Read More
Expedited Regulation Crowdfunding Offering Rules For Coronavirus Impacted Issuers
SEC Provides Rules Allowing Expedited Regulation Crowdfunding Offerings
On May 4, 2020, the Securities and Exchange Commission (the “SEC”) temporary conditional relief for certain companies affected by COVID-19 that may seek to meet their funding needs using Regulation Crowdfunding aka Regulation CF. The rules are designed to expedite the crowdfunding offering process for eligible companies by providing them with relief from certain rules with respect to the timing of Regulation Crowdfunding offerings and the financial statements requirements.
To use the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and August 31, 2020. Read More
Section 4(a)(7) Resale Exemption – FAST ACT
Reselling Restricted Securities – SEC Exemption Section 4(a)(7) – FAST ACT
The Fixing America’s Surface Transportation Act (FAST Act), which was enacted on December 4, 2015, includes a resale exemption for private placements of securities. Under Section 76001 of the FAST Act, Congress codified an exemption for certain resales of restricted securities as Section 4(a)(7) of the Securities Act. The FAST Act provides that any sale made in compliance with Section 4(a)(7) will not be a distribution under Section 2(a)(11) of the Securities Act. The Section 4(a)(7) exemption is available for private resales of restricted securities to “accredited investors” where no general solicitation is used and certain information concerning the issuer and the transaction is provided to the Purchaser.
One significant benefit of Section (a)(7) is that unlike the Section 4(a)(1½) exemption, state blue sky laws are preempted. Read More
The Section 4(a)(2) Exemption – Exempt Offerings
Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) provides an exemption from the SEC’s registration statement requirements for transactions by an issuer and do not involve a public offering of securities. Section 4(a)(2) is also known as the private placement exemption and is the most widely used exemption for securities offerings in the U.S. The exemption allows an issuer to raise an unlimited amount of capital in private transactions from sophisticated investors who are able to fend for themselves. Both private and publicly traded companies can rely on the Section 4(a)(2) exemption. Shares sold in reliance upon Section 4(a)(2) are restricted securities and may not be resold by purchasers in the offering absent SEC registration or an exemption therefrom.
In SEC v. Ralston Purina Co., 346 U.S. 119 (1953), the U.S. Supreme Court confirmed the position of the SEC that offers and sales to a large number of Ralston Purina’s employees under its stock grant plan did not qualify for the exemption provided by Section 4(a)(2). The Ralston Purina decision provides important factors to consider when relying on the Section 4(a)(2) exemption from SEC registration: Read More
Rule 12b-25 Q & A – SEC Reporting Requirements
Form 12b-25 and Rule 12b-25 provide relief for issuers unable to meet SEC reporting requirements on time. Rule 12b-25 adopted by the SEC under the Securities Exchange Act of 1934, provides an extension of the SEC’s reporting due dates for certain periodic reports such as Form 20-F, Form 10-K or Form 10-Q.
What must an issuer do if it misses the filing due date for a quarterly or annual report?
Rule 12b-25 requires an issuer that is subject to SEC reporting requirements that is unable to file all or any portion of a quarterly report on Form 10-Q, an annual report on Form 10-K and certain other reports within the prescribed time period to file a Form 12b-25 (informally known as an NT 10-Q, or NT 10-K) with the SEC. Read More
What Is SEC Form 5 – SEC Reporting Requirements- Securities Lawyer 101
After a company becomes subject to SEC reporting requirements by registering a class of equity securities under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), insiders are required to submit certain reports and filings with the SEC. Section 16 is not applicable to companies that have reporting obligations under Section 15(d) because of filing a Form S-1 or other registration statement under the Securities Act of 1933, as amended (the “Securities Act”).
Under Section 16(a) requires certain insiders to report his or her initial ownership of the company’s equity securities on Form 3 after an initial triggering event. Section 16 insiders must report any changes to the amount of securities subsequently owned on Form 4. Section 16 insiders must also file an Annual Statement of Changes in Beneficial Ownership on Form 5 if there are any transactions in the company’s equity securities that the Section 16 insider engaged in during the company’s most recently completed fiscal year that were not previously reported on a Form 4, other than transactions that are exempt from Form 5’s SEC reporting requirements. Read More
Form S-1 Selling Shareholders Disclosures – Going Public Lawyers
Companies going public have a variety of structures for their transactions. Companies can sell shares in reliance upon Rule 506 of Regulation D and file a selling shareholder registration statement with the Securities and Exchange Commission (“SEC”) to register the resale of those shares on Form S-1. A selling shareholder registration statement can be combined with a capital raising transaction to provide capital to offset going public costs.
Item 507 of Regulation S-K of the Securities Act of 1933, as amended sets forth the requirements for selling shareholder disclosures.
Item 507 of Regulation S-K requires the following disclosures:
• Name of each selling security holder and if a corporate entity its control person
• Relationship between each selling shareholder and the company
• Relationship between each selling shareholder and one another
• Number of shares being registered? Read More
What Is a Seed Stockholder? Going Public Lawyers
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 subject to the reporting requirements of the Securities and Exchange Commission (“SEC”). Even companies that are not subject to SEC reporting requirements must meet certain requirements to have their shares publicly traded. One requirement is that the issuer obtain sufficient stockholders to establish a trading market. These initial investors are commonly referred to as “Seed Stockolders” or “Seed Shareholders”.
Seed Stockholders Requirements in Going Public Transactions
The first step in a going public transaction is most often obtaining the number of Seed Stockholders required by the Financial 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. Generally, shares in the public float must either be subject to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) or an exemption from such registration must be available.
Why Form 10 Shells Are High Risk – Form 10 Reverse Mergers
What Isn’t Wrong With a Form 10 Shell?
Registration Statement (“Form 10 Shell”) under the Securities Exchange Act of 1934, (the “Exchange Act”), are being marketed as a method for private companies to obtain public company status. More often than not, Form 10 Shells are not a timely solution or cost effective method for a private company to obtain public company status.
Most Form 10 Shells are not structured properly for a going public transaction because unlike registration statements filed under the Securities Act of 1933, as amended (the “Securities Act”), a Form 10 cannot be used to create unrestricted shares. A purchaser of a Form 10 Shell may incur the expenses of SEC reporting yet may derive no benefit because the securities are not publicly traded. As a result, the cost of Form 10 Shell exceeds the expenses of a direct public offering and listing. Read More
CAN-SPAM Issuers and Investor Relations – Securities Lawyer 101
If you use email in your business, you should be aware of the requirements of the CAN-SPAM Act (“CAN-SPAM”). For years, issuers have hired promoters who use used spam investor relations materials to increase their stock price. Many businesses including investor relations firms may not fully understand what constitutes spam. The definition of spam is much broader than most businesses realize. CAN-SPAM establishes requirements for commercial messages, gives recipients the right to have you stop emailing them, and spells out significant penalties for violations.
Many recipients would agree that most penny stock promotional email does not comply with CAN-SPAM. Issuers should also be cautious of CAN-SPAM’s requirements. Even if an issuer hires another company to handle stock promotion, it remains responsible. The issuer can’t contract away its legal responsibility to comply with the law. Both the issuer whose shares are promoted and the investor relations provider that actually sends the email messages are legally responsible. Read More
What SEC Reporting Requirements Apply to a Direct Public Offering?
Exchange Act Reporting After SEC Effectiveness of a Registered Direct Public Offering
Upon completion of a registered direct public offering, the Exchange Act imposes periodic reporting obligations. If the issuer is a domestic issuer subject to SEC reporting requirements then it must file an Annual Report on Form 10-K, 10-Q’s for the three quarters following its fiscal year end and current reports on Form 8-K upon the occurrence of certain material events including bankruptcy, and fundamental changes, changes in accounting, changes in the control and departure of officers, and non-reliance on prior financial statements or audit reports. For those issuers who register a class of securities under the Exchange Act, additional reporting obligations apply. These include the SEC’s proxy rules that require disclosures be made on Schedules 14A or 14C and certain procedures for the solicitation of shareholder votes. Additionally, shareholders and management must file beneficial ownership reports of their trading activities in the company’s securities. Read More
Rule 506-c Accredited Investor Offerings, Regulation D Securities Lawyers
Rule 506(c) of Regulation D – Accredited Investor Offerings
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. Companies can raise the funds themselves or use broker-dealer or an intermediary such as an accredited crowdfunding platform. Read More
Deadlines for SEC Reporting Requirements Extended Due to COVID-19
On March 25, 2020, the Securities and Exchange Commission (the “SEC”) issued an order (the “SEC Order”) providing extensions to SEC reporting requirements deadlines for issuers affected by COVID‑19, further extending the deadlines set forth in a March 4, 2020 order. The prior order only granted extensions for SEC periodic reports and filings due on or before April 30, 2020. The new SEC Order grants extensions to issuers that would have been required to submit SEC periodic reports and filings between March 1 and July 1, 2020.
The SEC Order includes the following periodic reports and filings:
- Annual Reports on Form 10-K,
- Quarterly Reports on Form 10-Q,
- Current Reports on Form 8-K, and
- Preliminary and Definitive Proxy Statements.
What are the Requirements of Regulation CF Crowdfunding?
SECTION 4(A)6 OF THE SECURITIES ACT
Section 4(a)(6) of the Securities Act of 1933, as amended (the “Securities Act” is also known as Regulation CF. These rules have made it easier for companies to raise money from a wider range of investors than ever before. Traditional crowdfunding models may or may not involve the offer and sale of a security, but if so, the issuer must comply with federal and state securities laws, which we discuss in this section. Like offerings under Tier 2 of Regulation A and Rule 506(c), one notable benefit of Regulation CF is that state blue-sky laws are preempted.
Regulation CF provides an exemption from the registration requirements of the Securities Act for certain crowdfunding transactions. To qualify for this exemption, the transactions must meet specific requirements, including limits on the dollar amount of the securities that may be sold by an issuer and the dollar amount that may be invested by an individual in a 12-month period. It also must be conducted through a registered intermediary that complies with specified requirements. These intermediaries are called “funding portals.” Title III also provides limitations on who may rely on the exemption and establishes specific liability provisions for material misstatements or omissions in connection with Section 4(a)(6)-exempt transactions. Read More
Regulation A Reporting Obligations – Crowdfunding with Regulation A
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. The Regulation A 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 Regulation A reporting obligations, though such obligations are significantly less burdensome than those that apply to SEC reporting issuers filing Form S-1 Registration Statements.
Regulation A 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. Read More
Regulation A and Crowdfunding Issuers granted SEC Extensions
The SEC recently granted issuers using Regulation A and Regulation Crowdfunding known as Regulation CF have been granted extensions to their SEC reporting obligations. Last month, the SEC published new temporary final rules extending the due dates for certain ongoing SEC reporting requirements imposed by Regulation Crowdfunding also known as Regulation CF and Regulation A under the Securities Act of 1933 (the “Securities Act”). The SEC’s rules were created due to potential disruptions of COVID-19 which could prevent issuers and other filers from complying with their SEC filing deadlines.
An issuer may only rely on the SEC’ extended due dates if its failure to comply with the original due date relates to circumstances arising from COVID-19. The SEC’s new temporary rule does not relieve issuers from their obligation to evaluate and comply with their obligations to make true and complete disclosures to investors under federal securities laws. Read More
What is Accredited Investor Verification? Going Public Lawyers
“Accredited Crowdfunding” under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended allows an issuer to use general solicitation in connection with its private placement of securities. Rule 506(c) requires the issuer to take reasonable steps to verify that all of the investors in its private placement are accredited investors. This verification requirement is in addition to the requirement that sales only be made to accredited investors.
Since Rule 506(c) was adopted and Accredited Crowdfunding has grown in popularity, third party service providers have popped up offering accredited-investor verification services. In order for verification to be comply with the Securities and Exchange Commission’s requirements, a third party service provider must review sensitive financial information about the investor’s financial condition. This review and the lack of regulation concerning third party verification providers has raised significant concerns among market participants. The accredited investor third-party verification segment is still relatively new and there are few if any, barriers to entry. It is no surprise to find that there are numerous third-party verification providers readily available through the internet who tout their services but fail to provide meaningful background information. Read More
Crowdfunding During Coronavirus – COVID-19 Securities Lawyer 101
Crowdfunding Offerings in the Time of Coronavirus
In the past few months, the COVID-19 outbreak has caused quarantines and closures, and has restricted the movement of people and goods between countries and within the United States. It has devastated certain industries and economies at home and abroad. Uncertainty about the duration of the crisis has roiled the financial markets, leading to worries about a global recession to come. Large businesses like Boeing will survive, as in 2008, because they’re “too big to fail,” but the small businesses that are the real backbone of the U.S. economy may face hardship. Some—the lucky ones—will need to raise capital to respond to increased demand for their crisis-related products; others will need additional cash to keep their businesses viable during the pandemic.
U.S. small businesses are left unsure whether they’ll survive without an injection of cash. While government relief is in the works, many businesses won’t qualify, or the resources available to them will not be enough to address their needs. But some industries will not be impacted, and may even experience growth during the coronavirus crisis. Companies in these industries that need capital to meet rising demand should consider crowdfunding a securities offering as an option. Read More
Short Sale – Q & A – Short Seller Rules – Regulation SHO Lawyers
A short sale transaction can be part of a legitimate trading strategy. It is often endorsed for its beneficial effects on the securities markets, which include increasing liquidity. Short selling is also criticized. Short sellers profit by identifying companies that are weak or overvalued, and companies whose shares have been manipulated to rise to artificially high share prices. The most widely misunderstood aspect of short selling is under what circumstances it becomes illegal. This post addresses the most common questions we receive about Short Sales. Read More
