FINRA Addresses Financial Fraud
In September 2013, the Financial Industry Regulatory Authority (“FINRA”), with the help of the National Center for Victims of Crime, compiled and circulated “An Advocate’s Guide to Assisting Victims of Financial Fraud.” The lengthy paper explains the types of fraud most prevalent today, and offers copious advice to people whose work it is to help victims cope with their losses. Read More
SEC Does Not Act on 20 Percent of Wells Notices Issued
Securities Lawyer 101 Blog
When the Securities and Exchange Commission (“SEC”) substantially completes an investigation into violations of the securities laws, it may issue what’s known as a “Wells notice” to targets, informing them that it intends to bring litigation, pending the Commission’s approval. The notice is named after John Wells, who once chaired a committee that recommended a procedure of this kind. When the Wells notice is received, the recipient can do nothing, or make a “Wells submission” offering explanations and defenses. The SEC will then proceed with a lawsuit, or not. Read More
Panama Enacts New Bearer Shares Law
On July 29, 2013, the Panamanian National Assembly enacted a law that “sets forth a custody regime applicable to bearer shares.” It requires that any and all owners of bearer shares must appoint an authorized custodian—banks and trust companies authorized to do business in Panama, brokerage houses or certain lawyers and law firms—who will maintain custody of the bearer certificates.
The implementation of this new law is likely to make trouble for those who seek to conceal their ownership of nominee entities formed in Panama, among other things. Read More
SEC Brings Enforcement Action in EB-5 Visa Program Investment Scam
Securities Lawyer 101 Blog
Like many other countries, the United States offers potential immigrants preferential treatment—in the form of conditional visas and eventual green cards—if they’re willing to invest in economic development projects that will preserve or create jobs in their new home. What’s offered is called the EB-5 Visa Program. While it should be a win-win proposition for well-off immigrants and the U.S. economy, the process Read More
Whistleblower Award $14 Million Bounty By SEC
On October 1, 2013, the Securities and Exchange Commission (the “SEC”) announced it had awarded more than $14 million to a whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds. Payments to whistleblowers are made from a separate fund previously established by the Dodd-Frank Act and do not reduce amounts paid to investors. The award is the largest made by the SEC’s whistleblower program since its inception in 2011.
The SEC’s whistleblower program rewards high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million.
The bounties under the SEC whistleblower program range from 10 percent to 30 percent of the amount collected in an SEC action. Read More
Wedding Singer Charged by the SEC with Fraud
Securities Lawyer 101 Blog
The Securities and Exchange Commission (the “SEC”) brought a securities fraud enforcement action against an Oklahoma wedding singer and former investment adviser, Larry J. Dearman, Sr., and his special friend, Marya Gray in connection with fraudulent securities offerings that raised at least $4.7 million from more than 30 of Dearman’s advisory clients.
The SEC action, filed in the U.S. District Court in Tulsa, Oklahoma, alleges that Dearman recommended that his clients invest in various businesses that Gray owned in Bartlesville, Oklahoma. Read More
Can I List On the OTC Pinks Using a Reverse Merger? Going Public Lawyers
One way for private companies to go public is through a Reverse Merger (“Reverse Merger”) with a public shell company. Securities regulators tend to look askance at Reverse Mergers, fearing they may be used as vehicles for fraud either by stock promoters or others- -including securities lawyers- who manufacture or hijack them particularly in the OTC Pink markets. In a Reverse Merger, a private operating company or its business operations are acquired by or merge into a publicly traded shell company (“Public Shell”). Read More
SEC Charges Three Penny Stock Auditors
On September 30, 2013, the SEC charged three penny stock auditors, Malcolm L. Pollard, Wilfred W. Hanson and John Kinross-Kennedy, for violating federal securities laws or failing to comply with U.S. auditing standards during their audits and reviews of financial statements for publicly traded companies. The actions are part of the SEC’s agenda to hold gatekeepers accountable for the important roles they play in the securities industry. “Operation Broken Gate,” is the SEC Enforcement Division’s efforts to identify auditors who fail to carry out their duties and responsibilities consistent with professional standards.
Gatekeepers that fail to comply with the SEC’s required standards put investors at risk due to the possibility of undetected fraud or other financial misstatements.
Pollard and Hanson agreed to settle the respective actions against them and will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. Kinross-Kennedy is litigating his action in a proceeding before an administrative law judge at the agency.
According to the SEC’s order instituting a settled administrative proceeding against Pollard and his firm also located in Erie, they engaged in improper professional conduct while auditing three penny stock public shell companies. According to the SEC, Pollard and his firm’s audits of the issuers were seriously deficient. They failed to include evidence of procedures performed or conclusions reached, and they failed to retain required documentation, perform the required engagement quality reviews, and consider fraud risks and obtain written management representations. Despite these audit failures, Pollard and his firm represented in each of their audit reports that they had conducted the audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB).
Antonia Chion, an Associate Director in the SEC’s Division of Enforcement stated, “Pollard and his firm repeatedly engaged in unreasonable conduct that resulted in violations of applicable professional standards. Their misconduct demonstrates a lack of competence to audit the financial statements of companies registered with the Commission.”
According to the SEC’s order instituting a litigated administrative proceeding against Kinross-Kennedy, he has been the independent accountant for as many as 23 public companies since 2009. The SEC’s Enforcement Division and Office of Chief Accountant allege that there were significant deficiencies in six of Kinross-Kennedy’s audit engagements, and that he failed to obtain engagement quality reviews (EQRs) for more than 30 other audit engagements. Kinross-Kennedy falsely represented that he conducted his audits in accordance with PCAOB standards.
According to the SEC’s order instituting a settled administrative proceeding against Hanson, he conducted EQRs for five of Kinross-Kennedy’s audits, but was not competent to serve as the engagement quality reviewer and failed to exercise due professional care. Accordingly, he failed to conduct multiple EQRs in accordance with PCAOB standards.
“Engagement quality reviews are intended to be a meaningful check on the audit engagement team’s work, and when conducted properly they improve the reliability of a public company’s financial statements,” said David Peavler, Associate Regional Director for Enforcement in the SEC’s Fort Worth Regional Office. “Kinross-Kennedy failed to exercise due professional care on fundamental aspects of the audits by, for example, using outdated audit templates and failing to adapt to changes in auditing standards. He also retained Hanson to conduct engagement quality reviews when Hanson did not have the recent experience necessary to serve as a competent engagement partner.”
By issuing inaccurate audit reports, the SEC’s order finds that Pollard and his firm violated Securities Exchange Act of 1934 Rule 2-02 of Regulation S-X. The SEC’s order also finds that Pollard and his firm violated Exchange Act Section 10A(a)(1) and (b)(1) by failing to have procedures in place to detect, investigate, and report illegal acts. In agreeing to settle the charges without admitting or denying the SEC’s findings, Pollard and his firm consented to the entry of an order to cease and desist from committing or causing any violations of Exchange Act Section 10A(a)(1) and (b)(1) and Rule 2-02 of Regulation S-X. Pollard and his firm also consent to an order suspending their right to appear and or practice before the Commission as an accountant.
The SEC’s order against Kinross-Kennedy alleges violations of Sections 10A(j) and 10A(k) of the Exchange Act and Rules 2-02 and 2-07 of Regulation S-X, and improper professional conduct under Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act.
The SEC order finds that Hanson engaged in improper professional conduct under Rule 102(e)(1)(ii) and Rule 102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act. Without admitting or denying the SEC’s findings, Hanson consented to an order suspending him from practicing before the Commission as an accountant.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
DTC Proposes Procedures For DTC Chills and Global Locks
The Depository Trust Company is a subsidiary of The Depository Trust & Clearing Corporation (“DTCC”), and is the central securities depository in the U.S. The SEC, the Federal Reserve System and the New York State Department of Financial Services regulate DTC.
In certain circumstances, a DTC Chill or a Global Lock on a company’s securities. As a result, they will trade with difficulty, or not at all. The number of Chills and Locks has increased in recent years, and more and more issuers have been faced with the task of trying to get them lifted. That has often proved difficult, if not impossible.
DTC has proposed new procedures to the Securities and Exchange Commission (“SEC”) for issuers whose securities may be subject to DTC Chills and Global locks.
They are designed to prevent the imposition of these sanctions, and to set conditions for their removal should they be imposed.
Their purpose is to ensure compliance with the SEC’s registration provisions and impose specific procedures when the securities of shell companies used in reverse merger transactions are deposited with DTC. The new initiative demonstrates that DTC is the new watchdog for issuers who do not comply with the SEC’s registration provisions. A common characteristic of reverse merger issuers involves the issuance and transfer of free trading securities in violation of the registration provisions.
How DTC Monitors Securities
DTC is responsible for clearance and settlement of securities transactions that are eligible for its depository and book-entry transfer services. When securities are “free trading shares” they are deposited at DTC in the name of CEDE and Co.
As part of DTC’s routine monitoring of securities transactions, it identifies large deposits of thinly traded, low- priced free trading securities. Such deposits are often indicators of potential illegal distributions. If DTC determines that securities deposited at DTC are not lawfully free trading, it may impose a DTC Deposit Chill which prevents further deposits of free trading shares of that particular issuer.
Getting a DTC or Global Lock Removed
In order to have the DTC Deposit Chill removed, the issuer must demonstrate that DTC that the securities are free trading. If DTC determines there is “definitive evidence” that improperly free trading shares have been deposited, it may impose a Global Lock. In this context, “definitive evidence” typically means that the SEC or another regulatory or law enforcement agency has brought an enforcement action alleging that the securities are restricted and not lawfully free trading. These types of actions are common after reverse merger transactions with public shell companies.
DTC Book Entry Requirements
DTC accepts deposits of securities that meet its eligibility requirements for book-entry services from its DTC Participants. DTC’s eligibility standards include that the securities in the public float have been distributed in compliance with Section 5 of the Securities Act of 1933, in a manner that does not impose ownership or transfer restrictions, so that the securities are freely transferable. This means that the securities were offered pursuant to an effective registration statement filed with the SEC or pursuant to an exemption from registration that does not impose ownership or transfer restrictions. Securities must meet these standards to be eligible for DTC’s book-entry services.
DTC’s Restrictions for Improperly Issued Free Trading Shares
If DTC has reason to believe that securities deposited with DTC are not properly free trading, it may restrict services to the securities pending the issuer establishing that the securities are freely transferrable. These restrictions typically are: (i) not accepting additional deposits of these securities (a “Deposit Chill”), or (ii) it may cease to provide any book-entry services with respect to these securities (a “Global Lock”).
DTC’s Proposals
DTC’s proposed rules will formalize the process for issuers to receive notices of restrictions and to have their objections heard. The process will work as follows:
♦ Issuers will be notified in writing of any service restriction;
♦ Issuers will have reasonable time frames in which to respond;
♦ Issuers will have clear guidelines to support a release or prevent restrictions;
♦ DTC will respond to issuers within stated time frames;
♦Throughout the notice and review process, DTC and its counsel will be available to consult with issuers and their counsel regarding compliance with these requirements.
DTC Chills
DTC may impose a Deposit Chill if it detects large-share deposit activity in a thinly traded, low-priced security, because this activity is a recognized red flag for distributions of securities in violation of Section 5 of the Securities Act of 1933.
Issuer Notification of Deposit Chill
DTC will provide the issuer with written notice of the Deposit Chill by overnight courier. DTC will send the notice no later than twenty business days prior to the imposition of the Deposit Chill or, if the Deposit Chill is imposed prior to giving notice, no later than three business days after the Deposit Chill is imposed. DTC will impose a Deposit Chill prior to notice where there is a threat of imminent harm or injury to DTC or the industry, including if circumstances suggest that advance notice might accelerate improper deposits. If DTC acts prior to notice, the issuer will have the opportunity to show that there is no meaningful risk of imminent harm or injury.
The Deposit Chill notice will require, among other things, that the issuer submit a legal opinion from its independent outside counsel. The opinion must confirm that the affected securities are freely transferable and address such other matters of concern as DTC may identify. To guide the issuer, DTC typically provides a template legal opinion. DTC and its counsel are available to an issuer and its counsel to discuss the opinion and related issues.
DTC Review of Issuer Response to the Deposit Chill Notice
DTC will respond in writing to the issuer’s response to the Deposit Chill notice within twenty business days or, if the Deposit Chill has been imposed prior to notice, within ten business days.
An officer of DTC who played no role in the Deposit Chill decision will decide whether the issuer’s response satisfactorily addresses transferability and any other matters requested. The officer may consult with counsel regarding the review. DTC will contact the issuer within the response time frame if further information or clarification seems warranted, and provide the issuer ten additional business days to respond.
Determination
If the DTC officer determines that the issuer’s response reasonably establishes that the securities are freely transferable and not otherwise impaired, DTC will promptly lift the Deposit Chill or, in notice-first cases, DTC will not impose the Deposit Chill.
If the issuer fails to respond within twenty business days (or any extended period) or if the DTC officer finds that the response does not satisfy the requirements, the Deposit Chill will continue and DTC may impose a Global Lock. Before doing so, DTC will give the issuer an additional ten business days for a supplemental response; issuers should bear in mind that the supplemental response will be limited to proving the original response was properly submitted within the required time frame or that DTC made a clerical mistake in review of the original response. The supplement will not be an opportunity to begin the review process again.
The proposed rules impose strict deadlines on both issuers and DTC. The proposal also gives DTC the discretion to lift or modify a Deposit Chill if it reasonably believes that it is in the best interest of DTC and its participants.
Global Locks
DTC may impose a Global Lock, which suspends both deposits and book-entry transfers of a security, as well as withdrawals and physical deliveries of the security, based on legal actions commenced by government or law enforcement authorities, most typically the SEC. Additionally, DTC will impose a Global Lock if an issuer fails to satisfy the requirements for lifting a Deposit Chill.
Issuer Notification of Global Lock
DTC will provide the issuer with written notice of the Global Lock via overnight courier. DTC will send the notice no later than twenty business days prior to the imposition of the Global Lock or, if the Global Lock is imposed prior to giving notice, no later than three business days after the Global Lock is imposed. DTC will impose a Global Lock prior to notice where there is a threat of imminent harm or injury to DTC or the industry. This would include situations where the SEC has alleged that the defendants in a civil or criminal action are in possession of additional unregistered shares that they could deposit into the DTC system. If DTC acts prior to notice, the issuer will have the opportunity to show that there is no meaningful risk of imminent harm or injury.
The Global Lock notice will, among other things, include the reason for the Global Lock and identify the regulatory or law enforcement proceeding upon which the restriction is based. It will note the date the restriction was or will be imposed, and that the issuer has twenty business days to respond, although DTC may provide a twenty-business-day extension for good cause.
The Global Lock notice will afford the issuer the opportunity to demonstrate that the securities deposited at DTC were not the subject of the legal proceeding on which DTC based its restriction. The issuer will also have the opportunity to demonstrate that the proceeding has been withdrawn, dismissed, or otherwise resolved in favor of the defendant that deposited the securities at DTC. Otherwise, DTC will restrict the securities, based on the allegations in the pleadings.
DTC Review of Issuer Response to the Global Lock Notice
DTC will respond in writing to the issuer’s response to the Global Lock notice within twenty business days or, if the Global Lock has been imposed prior to notice, within ten business days.
Where DTC bases a Global Lock on allegations in an SEC enforcement action or other regulatory or law enforcement proceeding, DTC’s review is necessarily limited. It will not provide the issuer with an alternative forum in which to litigate the issues pending before a court or administrative agency.
Where a Global Lock results from the issuer’s failure to satisfy DTC’s eligibility concerns that led to Deposit Chill, the procedure for releasing the Lock is described below.
Determination
If DTC determines that the issuer’s Global Lock response satisfies the conditions set forth in the Global Lock notice, DTC will release or not impose the Global Lock. Otherwise, DTC will impose the Global Lock or maintain one previously imposed.
Procedures For Removing Restrictions
DTC’s proposed rule will also seek SEC approval to reinstate full services under the following circumstances.
Under the Safe Harbor provision of Securities Act Rule 144, restricted securities may become freely transferable after a specified holding period has elapsed. Because securities that have been Globally Locked have been credited to participant accounts without transfer during the period of the Global Lock, DTC is proposing, by analogy to Rule 144, to release Global Locks after the following periods have elapsed:
If the Global Lock is the result of a judicial action or administrative proceeding alleging that the issuer’s shares had been distributed in violation of Section 5 of the Securities Act:
DTC may lift the Global Lock one-year after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any defendant that deposited the securities at DTC. This one-year approach applies to issuers that are not SEC reporting companies, DTC may lift the Global Lock six-months after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any such defendant. This six-month approach applies to issuers that are SEC reporting companies. In the case of SEC-filers, DTC may lift the Global Lock six-months after the latest date on which the outstanding litigation or administrative proceeding has been resolved with respect to any such defendant.
If the Global Lock is the result of an issuer’s failure to respond or to respond adequately to a Deposit Chill notice:
DTC may lift the Global Lock one year after the date it was imposed for issuers that are not SEC reporting companies, and after six months for issuers that are SEC reporting companies.
The release of a Global Lock under these circumstances would only be available to an issuer that is not, and never has been, a “shell company” as defined in Securities Act Rule 144(i), unless the issuer had ceased to be a shell company and filed the specified disclosures required by this rule to no longer be deemed a shell company. If new facts come to light during the six-month or one-year period that call into question whether the securities satisfy DTC’s eligibility requirements, DTC may not release the Global Lock (subject to the fair procedures discussed above.)
When approved by the SEC, the new DTC proposals will eliminate most of the confusion surrounding the imposition of Chills and Global Locks, and will make it easier for issuers to avoid them, or to see to their removal once imposed.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
SEC Charges Tibor Klein and Michael Shechtman With Insider Trading
Continuing its crackdown on violators of insider trading laws, on September 20, 2013 the Securities and Exchange Commission (“SEC”) charged Tibor Klein, president of Klein Financial Services, with illegal insider trading in his own and client accounts based on non-public information in advance of a major merger announcement. Also charged was Klein’s friend Michael Shechtman, a South Florida stockbroker who was tipped to the deal by Klein.
According to the SEC’s complaint, Klein learned of the impending merger between Pfizer, Inc. and King Pharmaceuticals in August 2010 from one of his clients, Robert Schulman, an attorney who works for King. Merely possessing that information was not a violation of any laws or regulations.
It only became one when Klein traded on it for his own and his clients’ benefit. That happened on the day after Klein was told the news. On August 16 he began buying large amounts of stock in King. He also called his high school buddy Shechtman, who began buying for himself and his wife.
The story of how Klein came by his insider information offers a lesson in the dangers of drink. Klein and Schulman, who has not been charged in the case, had been friends for about a decade. Several times a year, Klein visited the Shulmans, went over their investments with them, had dinner, and stayed overnight. As friends do, they shared personal matters, and talked about their work. Both men were familiar with insider trading laws.
Over the weekend of August 13-15, Klein was in the Washington, D.C. area on business. His last stop was an overnight visit with the Schulmans. At dinner, Schulman indulged in several glasses of wine and became literally “tipsy,” telling Klein, “It would be nice to be King for a day.”
Klein took note, and began buying King Pharmaceuticals as soon as he returned to New York.
The public announcement of Pfizer’s tender offer to King was made on October 10. King’s stock rose 39% on heavy volume. Klein and his clients made profits of $328,375.02; Shechtman and his wife’s positions generated $109,040.53. Ironically, Klein hadn’t ventured much in his own account. He made only $8,824.
The SEC’s complaint charges Klein and Shechtman with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The agency seeks disgorgement of ill-gotten gains, financial penalties and permanent injunctions against the pair.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
SEC Charges ImageXpres and John and Kevin Zankowski With Securities Fraud
Securities Lawyer 101 Blog
On September 25, 2013, the Securities and Exchange Commission (“SEC”) charged ImageXpres Corporation (ImageXpres), its CEO and president John Zankowski, and its CFO Kevin Zankowski with securities fraud.
ImageXpres is a microcap technology company located in Rochester, New York. It says it develops imaging systems solutions for commercial printing, consumer photo, health and business communications Read More
SEC Charges South Florida Boiler Room Operators in NFL Scam
On September 26, 2013, the Securities and Exchange Commission (“SEC”) charged two Floridians, Peter Kirschner and Stuart Rubens, with defrauding investors—many of them seniors—in a boiler room scheme they operated between July 2011 and at least November 2012.
Kirschner and Stuart entered into an agreement with Thought Development Inc. (TDI), a private company, to solicit potential investors to buy Read More
SEC Suspends Trading in Left Behind Games and Charges Founder Troy Lyndon
Securities Lawyer 101 Blog
On September 25, 2013, the Securities and Exchange Commission (the “SEC”) brought three enforcement actions against penny stock company Left Behind Games (LFBG), its founder, Troy Lyndon, and a consultant, Ronald Zaucha. The three enforcement actions were a trading suspension of LFBG, notice of an administrative proceeding to revoke registration of the company’s stock, and a civil lawsuit charging Lyndon and Zaucha with securities fraud. LFBG went public in 2003, and by 2006 enjoyed considerable success, but although it generated $500,000 in revenues that year, it subsequently lost favor with gamers.
California Attorney David Tamman Sentenced to Seven Years in Securities Fraud Case
Securities Lawyers Gone Wild Blog
On 23 September 2013, the U.S. Attorney’s Office for the Central District of California announced that attorney David Tamman, formerly of the Nixon Peabody law firm, had been sentenced to seven years’ imprisonment for obstructing two investigations into a $22 million investment fraud.
Judge Phillip S. Gutierrez noted that in addition to the crimes Tamman had helped cover up, he also lied to the Securities and Exchange Commission (“SEC”) during their investigation and doubled down on those lies during his 2012 trial.
Evidence produced at the trial showed that Tamman conspired with John Farahi to conceal Farahi’s illegal activities. Farahi, a fund manager and radio personality, told his investors that he was buying corporate bonds backed by the Troubled Asset Relief Program (TARP) for his NewPoint Financial Services, Inc., when in fact he was running a Ponzi scheme. Farahi targeted the Iranian-American community in the Los Angeles area, making use of a daily financial radio show broadcast in Farsi. Read More
General Solicitation and Advertising Under Rule 506
As of September 23, 2013, the Securities and Exchange Commission (“SEC”) rules implementing some provisions of the JOBS Act became effective. Among them is the new Regulation D Rule 506(c).
While the floodgates to raising capital will not open at the break of dawn, within a few weeks market observers and participants are likely to be subjected to a great deal of advertising of investments. Read More
SEC Proposes Pay Ratio Disclosure Rule in Compliance with Dodd-Frank Act
On September 18, 2013, the Securities and Exchange Commission (“SEC”) voted to propose a new rule that would require public companies to state pay ratio disclosure of the compensation of its chief executive officer (“CEO”) to the median compensation of its employees.
In recent years, there’s been a great deal of discussion among Wall Street observers about the extremely high salaries and benefits paid to some CEOs Read More
SEC Charges Three in Assured Capital High Yield Investment Scam
Securities Lawyer 101 Blog
On September 20, 2013, the Securities and Exchange Commission (“SEC”) charged Jennifer Hoffman and John Boschert, former principals of a dissolved Florida company called Assured Capital Consultants, LLC, and Bryan Zuzga, Assured’s purported escrow agent, in connection with a prime bank offering and a Ponzi scheme.
Prime bank offerings, also called high yield investment programs (“HYIPs”), are a form of fraud with a long history. Scammers seek to impress Read More
FBI Arrests Securities Attorney and Stock Promoter in Texas
Securities Lawyers Gone Wild Blog
On September 19, 2013, the Dallas Division of the Federal Bureau of Investigation (“FBI”) announced the unsealing of an indictment charging Jason Wynn, a former penny stock promoter, and securities attorney Martin Cantu with crimes committed in connection with a company called ConnectAJet.com (CAJT). The two men were arrested last Friday and Wednesday, respectively. Each stands accused of one count of conspiracy to commit securities fraud, and one count of securities fraud. Read More
Rule 506 Offerings Q & A l Securities Lawyer 101
Securities Lawyer 101 Blog
Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital before, during and after a going public transaction. Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective compliance strategies into place. Effective on September 23, 2013, issuers will be able to use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital and obtain the shareholders required in going public transactions. Rule 506 offerings are frequently used to raise capital in connection with going public transactions that involve filing a registration statement on Form S-1. Read More
Ohio Shuts Down Crowdfunding Website SoMoLend
Securities Lawyer 101 Blog
Since the JOBS Act became law, numerous crowdfunding websites have popped up on the internet. This month, the first enforcement action was brought against a crowdfunding web-site. The Ohio Division of Securities issued a notice of intent to issue a cease-and-desist order against a crowdfunding platform known as SoMoLend and its owner and Chief Executive Officer, Candace Klein. Candace Klein is an advocate for crowdfunding who featured in well known media publications including Entrepreneur Magazine.
If issued, the order will force SoMoLend to close its crowdfunding platform. Read More
The Role of Legal Opinions in the CMKM Fraud
In the penny stock markets it has become almost common practice for restricted stockholders to attorney shop for legal opinion writers so that they can receive unrestricted or free trading securities. Sometimes these shareholders lawyer shop until they can get even a second legal opinion as backup in the event that the tradability of their shares is ever questioned. Many shareholders foolishly believe that a legal opinion from a securities lawyer (even if baseless) will protect them. In the case of the SEC v. CMKM over 450 legal opinion letters written by one lawyer covering at least 233.7 billion shares of stock, and the opinions were still not the basis for an effective defense to the SEC’s charges. Read More
FINRA Issues Risk Alert For Rule 506 Private Placements
Securities Lawyer 101 Blog
On September 17, 2013, The Financial Industry Regulatory Authority (“FINRA”) issued an investor alert concerning Rule 506 private placement offerings to caution investors about the risks involved in private placement offerings. FINRA cautions investors that Rule 506 private placements are risky and illiquid investments that can tie up their money for a long time.
A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (the “SEC”) and is not offered to the public at large. Rule 506(c) which becomes effective next Read More
SEC Issues Trading Suspension of the Securities of PacWest Equities
Securities Lawyer 101 Blog
On September 17, 2013, the Securities and Exchange Commission (“SEC”) issued a trading suspension of the common shares of PacWest Equities (“PWEI”), a company whose shares were quoted on the OTC Markets with an OTC Pink Current tier. The SEC trading suspension is for a ten day period.
The SEC action was brought because “questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the company’s business operations and assets.” Read More
What is Depository Trust Company?
Securities Lawyer 101 Blog
Q. What is The Depository Trust Company (DTC)?
A. It is the only stock depository in the United States.
Q. How do public companies obtain DTC eligibility?
A. Issuers must satisfy specific criteria established by DTC to receive initial DTC eligibility after their going public transaction is complete, and to remain DTC eligible. Even after the securities become DTC eligible, DTC may limit or terminate its services.
Q. How does DTC limit its services? Read More
Going Private Attorneys – Securities Lawyer 101
The Sarbanes-Oxley Act, the declining U.S. economy and increasing legal, auditing and other compliance costs reduced the number of issuers electing to become Securities & Exchange Commission (“SEC”) reporting issuers, particularly in the micro-cap markets. With new Rule 506(c) pursuant to the JOBS Act allowing general solicitation and advertising in private placements, many issuers are evaluating whether any benefits of public company status remain.
In some instances, issuers are seeking to voluntarily de-register with the SEC – commonly referred to as “going dark” or “going private”. The once perceived benefits of being an SEC reporting publicly traded company are dwindling as many micro-cap issuers are able to use general solicitation and advertising for their private placements. The less money the issuer has, the more difficult it becomes to maintain an SEC reporting company status since the issuer spends more of its financial, personnel, and outside resources to maintain its SEC reporting status; resources of which may have served (or will be served) better to improve and expand the issuer’s business. Read More
How Can I Go Public Via a Slow PO?
Securities Lawyer 101 Blog
Many owners of small businesses give thought to going public, but wonder if the risks and the expense may outweigh the rewards. They’ve heard that traditional Initial Public Offerings (“IPOs”) using registration statements are complicated and costly, and that Securities and Exchange Commission (“SEC”) reporting obligations can be significant. It has become almost impossible for a small private company to locate an underwriter for an IPO. As a result, many private companies seeking to go public conduct direct public offerings by filing a registration statement with the SEC to sell shares themselves.
There are alternatives to embarking upon a full-fledged IPO or DPO, and even alternatives to assuming public status as an SEC-reporting entity upon completition of a going public transaction. If it wishes, a company can move up the ladder in stages, assuming more visibility and more responsibility as it feels prepared to do so.
Cromwell Couslon Speaks
A few months ago, OTCMarkets founder Cromwell Coulson gave testimony at a House of Representatives subcommittee hearing entitled “Reducing Barriers to Capital Formation.” Among other things, Coulson enumerated reasons for going public and explained how the going public process can be made easier for microcaps through the use of what he calls the “Slow PO.”
Coulson listed the following benefits of going public:
Visibility – A company that goes public has a higher profile than a private company. The media are more likely to pay attention to a public company because information about it is readily available and easy to find. It also “creates a connection with investors, employees, strategic partners and customers that is invaluable to a growing organization.”
Liquidity – When a company’s shares are publicly traded, they have a realizable value, and can also be used as collateral, which is advantageous to investors. Property is more valuable if it is transferable.
Valuation – Private businesses are difficult to value. As Coulson puts it, “By making shares publicly traded, in a continuous market accessible through any broker, companies create a huge wealth effect as their investors have a readily transferable asset that can be deposited in brokerage accounts.” Public trading also gives a company an accurate indication of its own value, as the market determines pricing by reacting to news and other disclosures.
Capital – Public companies can raise capital far more easily than private companies, by floating initial or secondary public offerings, or by conducting private placements. Investors will be eager to participate because they know they can find buyers for their shares if and when they decide to sell.
Trust – Publicly traded companies make disclosure of financial and other material information. Coulson believes that the trust this engenders makes them “more sustainable and enduring than private companies.”
For businesses that want to enter the market by stages, Coulson proposes an alternative public offering that he calls the “Slow PO.” He suggests that a company can begin on the Pink Sheets, without reporting to the SEC, then subsequently become an SEC-filer, and finally, if it wishes, move to a national exchange if it meets listing requirements.
He points out that the Nasdaq went public though a Slow PO. In 2000, it made a private placement offering to NASD members. When the Rule 144 holding period expired, it filed a Form 211 to gain compliance with Rule 15c2-11 and began trading on the Pinks. Three years later, it did a secondary offering and uplisted to its own exchange. OTCMarkets went through the same process, initially trading as a Pink, and then qualifying for its own OTCQX marketplace, its highest tier.
As any qualified securities attorney knows, this process is available to any private company, even the smallest. All that’s needed is to begin with a Regulation D private placement, in which shares are sold to friends, family, and other interested participants willing to wait a year to trade. When the holding period is over, the company finds a sponsoring market maker willing to file a Form 211. Once the 211 has passed the Financial Industry Regulatory Authority’s (“FINRA’s”) comment process, the company can apply to FINRA for a ticker symbol and begin trading as a Pink. It can choose among several OTCMarket tiers, depending on the level of disclosure it is prepared to make.
As the company grows and gains confidence, it is free to become an SEC reporter, with the prestige attaching to that status, by filing an initial registration statement—usually a Form S-1—with the agency. If its success continues and it satisfies requirements, it may eventually decide to list on an exchange such as the NYSE MKT (formerly AMEX) or the Nasdaq.
By using this approach, a young company can avoid biting off more than it can chew, taking each step when it feels ready to do so without overreaching.
It’s one way of accomplishing the objective of going public; one that Coulson heartily recommends. Of course, if the company would rather not wait a year before making its public debut, it can proceed directly from a Regulation D private placement to the filing of an S-1 registration statement. If all goes well, the S-1 will be deemed effective, and the private placement stock registered and ready for trading, in the space of three or four months.
The choice is the company’s, but should be made with the help of an experienced securities attorney. Going public is a big step, and it needs to be done properly, no matter what method is selected.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
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The EB-5 offering program was created by the U.S. Congress as part of the Immigration Act of 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. Using an EB-5 offering foreign investors can obtain EB-5 visas designated by the U.S. Citizenship and Immigration Services (USCIS) to gain lawful residency in the U.S. for themselves and their immediate family in exchange for a capital investment. The capital investment must be at least $500,000 in a qualified U.S. business enterprise. When securities are offered to foreign investors pursuant to the EB-5 program, Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”) is typically the securities exemption relied upon by the U.S. business enterprise. Read More
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Why Do I Have To Hire a Transfer Agent When Going Public? – Going Public Lawyers
Transfer agents play a key role in the going public process. Transfer agents are the record keeper for a company’s securities. Share ownership is reflected on the issuer’s shareholder list. Transfer agents issue and cancel certificates to reflect changes in ownership of securities.Transfer agents also function act as an intermediary for the company. In going public transactions, transfer agents provide a shareholder list which the Financial Industry Regulatory Authority (“FINRA”) reviews prior to the issuance of a company’s ticker symbols in going public transactions. Read More
SEC Charges Indiana Man In Ponzi Scheme
Marcum, of Noblesville, Indiana, is the principal of Guaranty Reserves Trust, and was once a broker. He’s also been an investment adviser registered with the SEC. In 2010, he began presenting himself to potential marks as an “experienced money manager” worth $300 million. He told one investor that he’d done so well for himself that he wanted to “give back.” He persuaded these people to give him money in exchange for promissory notes that he characterized as “asset-backed” and “secured.” They were co-signed by the investors and Marcum, and deposited in the investors’ IRA accounts. Read More
