Hamilton & Associates Law Group, P.A.
Securities Lawyers | Corporate Finance
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Form S-1 Risk Factor Disclosures l Securities Lawyer 101
The Securities Act of 1933 is often called the “truth in securities” law. It has two basic objectives: to require that investors receive financial and other important information about securities being offered for sale, and to prohibit deceit, misrepresentation, and other fraud in the sale of securities.
When an issuer files a Form S-1 registration statement, it must provide specific Form S-1 risk factor disclosures about its business plan, its operating history and financial condition. Risk factors are a primary part of Form S-1 registration statement disclosures. Item 503 of Regulation S-K sets forth the requirements for risk factor disclosures. Read More
A registration statement on Form S-1 can be used to register various types of securities offerings with the Securities and Exchange Commission (“SEC”). Form S-1 provides issuers with flexibility in the types of securities that can be registered. Form S-1 is used more often by issuers than any other type of registration statement form. The form 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.
These include:
A company becomes subject to SEC reporting requirements by filing a registration statement on Form 10 or Form 8-A under the Securities Exchange Act. Upon effectiveness, the company becomes subject to the SEC’s reporting requirements. These SEC reporting requirements include filing annual, quarterly, and current reports. Additionally, the company’s shareholders and management become subject to various requirements discussed below upon effectiveness of the company’s Form 10 registration statement or Form 8-A
A company whose Form 10 has been declared effective must comply not only with the SEC’s periodic reporting requirements, it must also comply with the SEC’s proxy rules whenever its management submits proposals to shareholders that will be subject to a shareholder vote, usually at a shareholders’ meeting. Read More
Go Public Using Form S-1 – 2018
Private companies going public commonly use a registration statement (“Registration Statement”) on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”). When a Form S-1 Registration Statement is used, the company must file it with the Securities & Exchange Commission (the “SEC”), registering securities it plans to sell or securities held by its existing shareholders (“Selling Shareholders”).
SEC Comments on Form S-1 Registration Statements
Smaller reporting companies that go public using Form S-1 may receive comments from the SEC to the Registration Statement. The SEC reviews and comments on the disclosures provided in the Registration Statement. Upon confirmation that the SEC is satisfied that the Company has addressed to the SEC Comments and the disclosures satisfy the disclosure requirements of the securities laws, it will declare the Registration Statement effective and the securities may be sold. Read More
Companies that register securities for direct public offering on Form S-1 as part of their going public transaction must provide audited financial statements to the Securities and Exchange Commission (“SEC”). These financial statements include a balance sheet, statement of shareholders’ equity, income statement and statement of cash flows.
This blog post discusses the financial statement requirements for Form S-1 registration statements in direct public offerings. Read More
Companies going public with Form S-1 or Regulation A + 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 on Form S-1 is often combined with a capital raising transaction to provide capital to offset going public costs. Read More
Supreme Court Addresses SEC ALJ’s
On June 21, 2018 The Supreme Court handed down a ruling in Lucia et al. v. Securities and Exchange Commission; the Commission lost, 7-2. At issue was whether the SEC’s method of appointing administrative law judges (ALJs) was unconstitutional because it was not consistent with the Appointments Clause of the Constitution. Lucia and several other similar cases involving SEC ALJ’s have been making their way through the courts for the past five years or so. In early 2017, we examined the situation as it stood at that time. Read More
Form S-1 is 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 registration statement on Form S-1 has two principal parts which require expansive disclosures. Part I of the registration statement is the prospectus which requires that the company provide certain disclosures about its business operations, financial condition, and management. Part II 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
On June 19, 2018, The Securities and Exchange Commission (“SEC”) filed charges and obtained an asset freeze against the individuals and companies behind a $102 million Ponzi scheme that deceived investors throughout the U.S.
According to the SEC’s complaint, the defendants cheated more than 600 investors through sales of securities in issuers they controlled, including First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp. The complaint alleges that investors were lied to that their funds would be used for the companies and some were guaranteed dividends or double-digit returns. But, according to the complaint, the defendants spent at least $20 million to enrich themselves, paid $38.5 million in Ponzi-like payments, and transferred much of the remainder in transactions that appear unrelated to the issuers’ purported businesses. The complaint charges Perry Santillo, of Rochester, New York, Christopher Parris, also of Rochester, Paul LaRocco, of Ocala, Florida, John Piccarreto, of San Antonio, and Thomas Brenner, of Orville, Ohio, along with the three companies. Read More
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 can also raise capital in going public transactions by selling their securities prior to filing a Form S-1 SEC registration or Regulation A+ Offering Circular. Going public is a milestone for any company and there are both advantages and disadvantages that attach to public company status. Companies going public do so because of the general perception that their new status will make it easier to raise capital.
If a private or public company is offering and selling securities, even if to only one person, the offer and sale of the securities must either be registered with the Securities and Exchange Commission (“SEC”) or must qualify for an exemption from the registration statements requirements of the Securities Act of 1933, as amended (the “Securities Act”). Read More
Issuers filing registration statements using a direct public offering in their going public transactions must comply with the disclosure requirements of Form S-1. These include Item 11A of Form S-1 as set forth below.
Form S-1 Item 11A Material Changes
If the registrant elects to incorporate information by reference pursuant to General Instruction VII., describe any and all material changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest Form 10-K and that have not been described in a Form 10-Q or Form 8-K filed under the Exchange Act. Read More
On May 16, 2018, the Securities and Exchange Commission (“SEC”) charged the owner of a Manhattan-based alternative investment firm with misappropriating close to $6 million in investor funds reserved to finance the construction of an international airport in Belize.
The SEC complaint alleges that from 2014 through 2017, Brent Borland, the owner of a Manhattan-based alternative investment firm, sold more than $21 million of promissory notes to at least 44 investors in eight different states, and guaranteed that the funds will be used for financing the development of an international airport in Placencia, Belize, and that the investment would be safe guarded by pledges of real estate as collateral. Borland marketed and sold the notes through two companies, Borland Capital Group LLC, which is active in “alternative investment,” and Fund I, LLC, which is said to be in the business of construction finance. In addition, Boland used millions of investor funds for personal expenses and unrelated business expenses, including mortgage and property tax payments on his family’s Florida mansion, luxury automobiles, private school tuition for his children, $36,000 for his family’s beach club membership, and almost $2.7 million to pay off personal credit card debt. Borland allegedly duped investors by pledging the same collateral to multiple investors.
On June 28, 2018, the Securities and Exchange Commission voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The SEC’s new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The rules will become effective 60 days after publication in the Federal Register. The SEC’s fact sheet on the amendments is below. Read More
Private companies seeking to raise capital often file a Registration Statement on SEC Form S-1 or Offering Circular on Form 1-A pursuant to Regulation A+ in connection with their going public transaction. Both options have unique benefits. For Example, All companies qualify to register securities on a Form S-1 Registration Statement, while only certain issuers qualify to use Regulation A+. This blog post focuses on Forms S-1. More Information about Regulation A+ can be found here. Read More
The Securities and Exchange Commission (“SEC”) announced on June 12, 2018 that Merrill Lynch, Pierce, Fenner & Smith Inc. will pay more than $15 million to settle charges that its employees misled customers into overpaying for Residential Mortgage Backed Securities (RMBS). Merrill Lynch agreed to repay more than $10.5 million to its customers and to pay penalties of approximately $5.2 million.
Going public is a big step for any company. Companies can go public and become listed on National Securities Exchanges like NASDAQ or the New York Stock Exchange (“NYSE”) or they can have their shares quoted on the OTC Markets inter-dealer quotation system. Regardless of the trading or listing venue, the process of “going public” is complex and at times precarious. While going public offers many benefits it also comes with risks and lots of regulations with which issuers must become familiar. The U.S. markets remain an attractive source of capital for both domestic and foreign issuers.
Going public is a complicated and intricate procedure, and it is important to have an experienced securities attorney to help your company navigate through the process in dealing with the Securities & Exchange Commission the (“SEC”), the Financial Regulatory Authority (“FINRA”) and the Depository Trust Company (“DTC”). Upon completion of a going public transaction, companies become subject to the regulations that apply to public companies, including those of the Securities Act of 1933, as amended (the “Securities Act”) and Securities Exchange Act of 1934, as amended (the “Exchange Act”). Read More
Going Public Using a Form S-1- 2018
Private companies going public commonly use a registration statement (“Registration Statement”) on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”). When a Form S-1 Registration Statement is used, the company files it with the SEC, registering securities it plans to sell or securities held by its shareholders (“Selling Shareholders”).
SEC Comments on Form S-1 Registration Statements
Smaller reporting companies going public should anticipate SEC comments to the Registration Statement. The SEC reviews and often comments on the disclosures provided in the Registration Statement. Upon confirmation that the SEC is satisfied that the disclosures satisfy the disclosure requirements of the securities laws, it will declare the Registration Statement effective and the securities may be sold. Read More
The OTC Markets created the OTCQB Venture Market early-stage and developing U.S. and international companies. To be eligible for quotation on the OTCQB Venture Market, companies must be current in their reporting obligations, have a minimum bid price of $0.01 for their shares, may not be in bankruptcy and must undergo an annual verification and management certification process. These standards are designated to provide transparency and improve the information and trading experience for investors.
The OTC Markets OTCQB Standards for quotation consist of certain regulations adopted by OTC Markets Group to prescribe the rights, privileges and obligations of companies with securities quoted on the OTCQB market. The OTCQB Standards outline for companies and investors the standards that a company must meet to be eligible to be traded on the OTCQB market and describe the initial and ongoing disclosure OTCQB companies must provide to the investing public. Read More
FINRA & Penny Stocks
When the subject of penny stock enforcement actions arises, most people think first of the Securities and Exchange Commission (SEC), or erroneously, of OTC Markets Group (OTCM). The SEC has ultimate authority to deal with violations of the securities laws. It has jurisdiction of penny stocks that are SEC registrants that trade over-the-counter, and of non-registrant Pinks and Greys as well. It does not, however, subject non-registrants to any kind of reporting regime, and many abuses go unnoticed by it. It’s empowered to impose 10 day trading suspensions to protect potential investors from falling for blatant scams. Generally speaking, OTC issuers may be suspended for three reasons: suspected fraud, shell status that makes them vulnerable to corporate hijackers, and delinquent filings. Needless to say, only registrants can be suspended for delinquency; when they are, the regulator initiates a simultaneous action to revoke registration. When registration is revoked, the stock’s ticker is killed, and the company effectively becomes a private entity. If it wishes to trade again, it must file an initial registration statement to become a registrant once more, and in the future keep current with its required periodic filings.
If a company or its management has engaged in fraud that’s particularly outrageous, or that resulted in massive losses to investors, the SEC may litigate. Often the litigation follows a suspension, though by no means immediately. The agency will extend the investigation it made to warrant the suspension, and when it’s satisfied it can make a case, it will file a civil complaint in federal district court. The federal statute of limitations for fraud is five years; the regulator can, and often does, wait that long, or almost that long, to bring charges. The SEC is not a criminal prosecutor; it can only bring civil actions. But if a case is particularly serious, it may ask for assistance from the Department of Justice (DOJ). Often the DOJ and the SEC will file against the company in question and/or its management at the same time. The advantage of that approach is that the SEC, with its securities expertise, will conduct the investigation that ensures the DOJ can prove its charges beyond a reasonable doubt. Read More
Issuers utilizing Regulation A+ are permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers. Using Regulation A+, you can advertise everywhere you want, including all over social media in places where you think you’ll find potential investors. You can put together a formal ad campaign costing tens of thousands of dollars or just do it yourself. Of course, all you get are non-binding indications of interest so you can’t hold people to their indication of interest in investing in your company. However, it gives you the opportunity 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 preparing and qualifying the offering. Read More
Regulation A+ expands existing Regulation A. Existing Regulation A provides an existing exemption from registration 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. This blog post addresses the most common questions we receive about Regulation A+.
Can All Companies Use Regulation A+?
No. Regulation A+ offerings can only be conducted by companies that are domiciled in and have their principal place of business in the United States or Canada. As such, foreign issuers may not conduct Regulation A+ offerings and must locate an alternative exemption for their unregistered offering.
What Securities Can Be Registered on Form 1-A Under Regulation A+?
Regulation A+ is limited to shares, warrants and convertible equity securities.
How Much Can I Raise with Regulation A+?
Tier 1 of Regulation A+ 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. Read More
According to the The Securities and Exchange Commission (“SEC”), Woojae “Steve” Jung, an investment banker at Goldman Sachs, used confidential client information to trade in the securities of 12 different companies prior to the announcement of market-changing events. He used his access to highly confidential information, to place illegitimate and highly profitable trades in advance of deal negotiations in which the bank was providing investment banking services. He placed illegal trades and generate profits of approximately $140,000.
On May 31, 2018, The SEC charged an employee of a well-known bank with frequently using his access to highly confidential information in order to place illegitimate and highly profitable trades in advance of deal negotiations in which the bank was providing investment banking services. Read More
On May 30, 2018, the Securities and Exchange Commission (“SEC”) charged a former Long Island registered representative with defrauding long-standing brokerage customers in an $8 million investment scam. According to the SEC, Steven Pagartanis, who was an associate with a broker-dealer in Long Island, NY, defrauded investor and retiree customers, that he would invest their funds in either a public or private land development company. The SEC’s complaint, charges Pagartanis with violating the anti-fraud provisions of the federal securities laws.
The SEC alleges, Steven Pagartanis, who was an associate with a registered broker-dealer in Long Island, NY, falsely told investor and retiree customers that he would invest their funds in either a public or private land development company. He assured that the funds would be safe and promised guaranteed monthly interest payments on the investments. Pagartanis’s directed his customers to write checks payable to an entity that Pagartanis secretly controlled. As a result, the customers invested approximately $8 million to Pagaratanis. Pagartanis used the funds to pay personal expenses and make the promised “interest” payments to his customers. To defraud customers, Pagartanis created fake account statements reflecting ownership interests in the land development companies. The scheme became public earlier this year when Pagartanis quit making the phony interest payments to customers. Read More
Going public using Form S-1 or Form 1-A allows issuers to chose from a variety of offering structures. Private companies seeking to raise capital often file a registration statement on SEC Form S-1 or Form 1-A of Regulation in connection with their going public transaction. Once a Form S-1 is effective, the company becomes subject to the SEC reporting requirements. The most commonly used registration statement form is Form S-1.
All companies qualify to register securities on a Form S-1 registration statement. 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.
A Form S-1 registration statement on Form S-1 has two principal parts which require line item disclosures. Part I of the registration statement is the prospectus, which requires that the company provide certain disclosures about its business operations, financial condition, and management. Part II contains information that doesn’t have to be delivered to investors. Read More
On May 16th, 2018, the Securities and Exchange Commission (“SEC”) charged three former executives for Constellation Healthcare Technologies Inc. (Constellation), a Houston- based company, who falsified financial and other information they provided to a private firm while negotiating the private firm’s acquisition of a majority stake in Constellation. A little more than a year after the January acquisition, Constellation filed for bankruptcy in March.
According to the SEC, the executives persuaded a private firm to acquire a majority of Constellation’s equity and provided fake information, including financial statements for three fictitious subsidiaries supposedly acquired for more than $62 million. The complaint alleges that the former executives funded the bogus acquisitions with stock sales in London and then pocketed the proceeds for themselves. The complaint charges former Constellation chief executive Parmjit (Paul) Parmar, former chief financial officer Sotirios (Sam) Zaharis, and former company secretary Ravi Chivukula. In September 2017, amid doubts about Constellation’s financial condition, Parmar resigned and Zaharis and Chivukula were put on administrative leave. Similarly, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Parmar, Zaharis, and Chivukula.
On May 16, 2018, the Securities and Exchange Commission (“SEC”) charged Chardan Capital Markets LLC (Chardan Capital) and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS), a New York City based brokerage firm, alleging the report of suspicious sales of 12.5 billions in penny stock shares.
According to the SEC, from October 2013 to June 2014, Chardan, an introducing broker, liquidated more than 12.5 billion penny stock shares for seven of its customers and ICBCFS cleared the transactions. Chardan failed to file any SARs even though the transactions raised red flags, including similar trading patterns and sales in issuers who lacked revenues and products. The SEC found that ICBCFS similarly failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers. As noted in the complaint, guidance for preparing SARs from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) clearly states that “[e]xplaining why the transaction is suspicious is critical.” To help detect potential securities law and anti-money laundering practices, broker-dealers are required to file Suspicious Activity Reports (SARs) that describe suspicious transactions that take place through their firms. Read More
On April 4, 2018, the Securities and Exchange Commission (“SEC”) charged Gregory Bercowy with a fraudulent scheme to manipulate the stock price of Aureus, Inc., a penny stock company incorporated in Nevada.
The SEC alleges that between August 4 and August 15, 2016, Gregory Bercowy, who is associated with a state-registered investment adviser, sold shares of certain Fortune 500 companies, including Abbott and Apple, in his relative’s brokerage account in order to buy over three million shares of Aureus at a total cost of more than $2.8 million. According to the SEC’s complaint, while Gregory Bercowy was accumulating these shares of Aureus, he entered (and later cancelled) a large number of orders to buy Aureus shares at prices higher than the then-current price of the stock. The orders allegedly were intended solely to maintain or boost the stock’s price. The price per share of Aureus securities increased from $0.52 on August 4, 2016, to $1.62 on August 16, 2016. According to the SEC’s complaint, Gregory Bercowy stated in recorded phone calls with a representative of a brokerage firm that he and others were trying to boost Aureus’s stock price. Read More
It is routine for public companies and private companies seeking to go public to place restrictive legends (“Restrictive Legends” on the certificates representing their Restricted Stock not covered by a registration statement under the Securities Act of 1933, as amended (the “Securities Act”). The Securities Act does not require that issuers place restrictive legends (“Restrictive Legends”) on certificates representing restricted stock. It is also a routine matter for an issuer’s transfer agent to require that Restrictive Legends be prominently placed on stock certificates representing restricted securities. Read More
On April 13, 2018, the Securities and Exchange Commission charged Andrew Kandelapas with making false and misleading statements in the company’s SEC filings and press releases and with manipulating the company’s stock.
The SEC’s complaint against Andrew Kandalepas, the CEO of Wellness Center USA, Inc. (Wellness), filed in the U.S. District Court for the Northern District of Illinois, alleges that Andrew Kandelapas took $450,000 in unauthorized withdrawals from the company and then concealed his actions by causing Wellness to characterize his withdrawals as salary, prepayments, or loans in false and misleading Forms 10-K and 10-Q. The complaint further alleges that Andrew Kandelapas caused the company to issue false and misleading press releases touting non-existent sales of medical devices by a Wellness subsidiary.
According to the complaint, Andrew Kandelapas also manipulated the market for Wellness stock through secret trading in a friend’s brokerage account and pocketed more than $130,000 from his secret trading. According to the complaint, Andrew Kandelapas coordinated trading with Matthew Mushlin, who Andrew Kandelapas hired as an unregistered broker to solicit investments in Wellness through private placement agreements.
On April 17, 2018, a federal district court sentenced the John Milne to two years imprisonment for violating the conditions of his supervised release by failing to pay court-ordered disgorgement in a civil action brought by the Securities and Exchange Commission.
In 2008, the SEC charged John Milne and others with fraud for engaging in a series of fraudulent transactions to meet URI’s forecasts and analyst expectations. A federal grand jury in the District of Connecticut also indicted John Milne in a parallel criminal action. John Milne subsequently pleaded guilty and agreed to settle the SEC’s charges. The judgment entered against John Milne in the SEC’s action ordered him, among other things, to pay disgorgement and interest of $6.25 million. Before John Milne was sentenced, he paid $1 million to the SEC. As part of John Milne’s criminal sentence, the court ordered him to pay the remaining $5.25 million to the SEC as a condition of his supervised release.
