Securities Lawyers Gone Wild l Brian Reiss
Securities Lawyers Gone Wild Series
On March 8, 2013, the Securities and Exchange Commission (the “SEC”) charged Brian Reiss, a California securities lawyer, with churning out baseless legal opinions for penny stocks traded on the OTC Markets platform. Transfer agents require legal opinions from securities lawyers in order to remove restrictive legends from stock issued in reliance upon an SEC exemption from registration. The SEC alleges that Reiss created a business and accompanying website called 144 letters.com to promote his opinion writing services. He proudly advertised “volume discounts” and assured potential clients that “penny stocks [are] not a problem.” Read More
Dead Stock Walking l Chinese Reverse Mergers
Recent actions by the Securities and Exchange Commission (the “SEC”) and the media have alerted the public to fraud involving reverse mergers and Chinese issuers. In the last two years, the number of securities fraud cases filed by the SEC and the Justice Department against Chinese companies in U.S. courts has soared.
Securities Fraud and the SEC
In nearly all of these cases (according to the SEC), the problem was bad accounting. Some of the companies even kept two sets of books. As a result, investors have begun to demand more aggressive regulation of Chinese and other foreign issuers who offer and sell securities in the United States, as well as of the securities lawyers who represent accounting firms that audit them.
The Securities and Exchange Commission and the Public Company Accounting and Oversight Board (“PCAOB”) have taken steps to focus on securities fraud by Chinese companies, particularly those going public in reverse mergers. The SEC has issued investor bulletins warning of the risks of Chinese reverse merger issuers’ potential for securities fraud. Both the SEC and PCOAB have prepared accounting bulletins relating specifically to publicly traded Chinese companies.
Some critics suggest that the focus on securities fraud involving Chinese issuers does not reflect a growing problem with Chinese companies, but rather with U.S. reverse merger facilitators who have polluted our markets with securities fraud for years.
Reverse Mergers
A reverse merger is a transaction in which a private company acquires a public company to go public. Almost always the public company itself is inactive but its stock still trades. By structuring the transaction as a reverse merger, the private company goes public while skirting the requirements of an initial public offering.
Any foreign or domestic private company seeking to have its securities publicly traded should proceed with caution when considering whether to engage in a reverse merger. Similarly, investors should proceed with caution when considering whether to invest in reverse merger companies. Many reverse merger issuers either fail or struggle to remain viable. Often the public company into which the private company merges has more than a few skeletons in its closet. If potential problems are not discovered at the time of the merger, the “new” company could suffer down the road. One possible consequence might be an SEC enforcement action. In light of these considerations, private companies should consult a qualified and independent securities attorney to perform thorough research and due diligence before engaging in a reverse merger.
To the extent that a private company is willing to expend the time and resources to become public, it should do so the proper by way by filing a registration statement with the SEC and conducting an underwritten or direct public offering, thereby avoiding the growing risks and new requirements involved in reverse merger transactions with public shell companies.
More information about Reverse Mergers can be found in our blog post:
https://www.securitieslawyer101.com/reverse-mergers/
The SEC’s bulletins concerning reverse merger issuers can be found at:
http://www.sec.gov/investor/alerts/reversemergers.pdf
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 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
Supreme Court Says the Securities Statute of Limitations is 5 Years
On February 27, 2013, in the case of Gabelli v. Securities and Exchange Commission, the U.S. Supreme Court unanimously concluded that the securities statute of limitations for SEC enforcement actions seeking civil penalties expires 5 years after the time when the alleged fraud takes place, not when it is discovered. In 2008, the SEC brought a civil enforcement action against Gabelli, its Chief Operating Officer, and a former portfolio manager, alleging that they allowed an investor to engage in “market timing.” This activity ended in 2002. The SEC alleged violations of 15 U.S.C. §§ 80b-6(1) and (2) and sought civil penalties under § 80b-9. Read More
SEC Approves FINRA Rule 5123
The Securities and Exchange Commission recently approved the Financial Industry Regulatory Authority (“FINRA”) proposals to amend Rule 5123 governing FINRA members who participate in private offerings of securities (“Rule 5123”). Rule 5123 requires FINRA members selling securities in non-public offerings, such as private placements, or participating in the preparation of private placement documents such as memoranda, term sheets or other disclosure documents, to submit such disclosure documents with FINRA within fifteen days after the first sale of securities, or state that no offering documents were used. Rule 5123 became effective on December 3, 2012. Read More
What is a SCOR Offering? l Securities Lawyer 101
State Blue Sky laws play a significant role in the enforcement of the securities laws. Each State has its own securities laws and regulations. Issuers selling securities must comply with both federal and state securities laws and regulations in the states where they choose to offer and sell securities. An offering exempt under state securities laws is not necessarily exempt from federal securities laws. Each state’s securities laws have their own separate registration requirements and exemptions from registration. Read More
Bogus State Court Actions Used in Unico Fraud
On January 22, the U.S. Attorney’s Office in San Diego unsealed an indictment charging Mark Anthony Lopez, the former CEO of Unico Inc., with conspiracy to commit securities fraud and obstruction of justice. Much of the evidence used to indict Lopez was based on state court proceeding filed in Sarasota, Florida. Unico was a fully-reporting penny company purportedly engaged in the mining business. According to the SEC, under Lopez’s governance, what Unico really mined was investors’ pockets.
The SEC’s Corporate Hijacking Task Force
A few weeks ago, the Securities and Exchange Commission (the “SEC”) issued its “Enforcement Initiatives to Combat Financial Reporting and Microcap Fraud and Enhance Risk Analysis.” The SEC release identified financial reporting, microcap fraud and enhancing risk analysis as the SEC’s new enforcement initiatives.A primary target of the new task force will be reverse merger purveyors and securities attorneys involved in corporate hijackings. The release emphasized the importance of the role gatekeepers—attorneys, auditors, broker-dealers, and transfer agents—play, or ought to play, in stopping fraud before it happens. All too often, unfortunately, those gatekeepers collude with the fraudsters particularly where corporate hijackings are present. Read More
What is Broker-Dealer Registration? Securities Lawyer 101
Broker-dealers are subject to regulation by the SEC, FINRA, Self Regulatory Organizations (“SROs”) such as stock exchanges, and the states in which they do business. The Securities Exchange Act of 1934 (the “1934 Act”) requires that any broker-dealer effecting securities transactions by means of interstate commerce be registered.
State laws also regulate broker-dealer activity within their jurisdictions. Unless an exemption from registration is available, state laws require registration of any broker-dealer doing business from or with persons in their state. The broker-dealer’s employees doing business within the state must also be registered there. Read More
The OTCBB Obsolete Marketplace l Securities Lawyer 101 Blog
The OTC Bulletin Board (“OTCBB”) is an electronic quotation system that provides real-time quotes, last-sale prices, and volume information for some over-the-counter securities not listed on a national securities exchange such as NASDAQ. Brokers-dealers who subscribe to the OTCBB can use its platform to look up prices or enter quotes for securities quoted by the OTC.
Years ago, the OTCBB provided the only widely accepted venue for quotation of micro-cap companies that were SEC filers. Companies that did not meet the OTCBB’s requirements were delisted to what was then called the Pink Sheets. Now many market makers have abandoned the OTCBB entirely; the securities of issuers who used their services have been removed to OTCMarkets. Read More
Going Public – OTC Markets OTCQB – Going Public Lawyers
Many private companies seeking to go public are opting for going public transactions on the OTC Markets OTCQB. The OTC Markets Group operates an electronic inter-dealer quotation system called OTC Link. OTC Markets ranks issuers in tiers; each issuer’s rank depends upon the amount of disclosure provided. Issuers using registration statements followed by Rule 15c2-11 applications to go public qualify for the “OTCQB” tier. The QTCQB tier is only available to issuers who file reports with the SEC. These issuers are not required to provide additional disclosures to the OTC Markets.
In order for a private company to go public on the OTCQB, it must become an SEC reporting issuer. Once the company is reporting, it can then obtain its ticker symbol assignment from the Financial Industry Regulatory Authority (“FINRA”) if it meets certain requirements.
Funding Portal Registration And the JOBS Act
On February 5, 2013, the SEC’s Division of Trading provided guidance on the exemption from broker-dealer registration in Title II of the Jumpstart Our Business Startups Act (“JOBS Act”). The SEC’s FAQs are not rules, regulations or statements of the SEC and the Commission has neither approved nor disapproved them. Section 201(c) of the JOBS Act adds new paragraph (b) to Section 4 which clarifies that a platform can rely on the exemption from broker-dealer registration in Securities Act Section 4(b) until the SEC’s rules permitting general solicitation in Rule 506 offerings are adopted. Read More
Rule 5123 Requires the Filing of Private Placement Documents
The SEC recently approved Rule 5123 that any FINRA member firm selling an issuer’s securities in a non-public offering in reliance on an exemption from registration under the Securities Act is required to file copies of private placement materials such as memorandums, term sheets, or other offering documents with FINRA within 15 days after the first sale. INRA 5123 Notice Filing
Filings under FINRA Rule 5123 are treated as “notice” filings, and FINRA will not review or respond to the filing with a comment letter or provide a clearance letter. FINRA will treat all documents filed as confidential. Read More
Shareholder Solicitations & the SEC’s Proxy Rules
Most public companies hold a stockholders’ meeting annually and hold special meetings to vote on special corporate actions such as name changes and mergers. Shareholder voting on takes place either in person or by proxy. Proxy solicitation is governed by a number of rules and regulations including: (i) state corporate law; (ii) stock exchange listing requirements; (iii) SEC proxy rules; and (iv) the issuers’ articles and bylaws. Issuers who have a class registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are subject to the proxy rules. The SEC’s proxy rules are loccated in Section 14(a) of the Exchange Act.
OTC Markets Rules of the Road
The Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”) regulate trading of stocks quoted by the OTC Markets Group.
OTC Markets is not a regulator and is not affiliated with FINRA or the SEC. Additionally, OTC Markets is not a stock exchange and it has no listing requirements.
FINRA and OTC Markets
FINRA establishes rules that impact OTC Markets in several ways. These include FINRA rules regulating its broker-dealer members and setting qualification standards for securities industry professionals as well as rules governing compliance.
OTC Markets OTC Pink Tier
The OTC Markets Group operates an electronic inter-dealer quotation system called OTC Link that broker-dealers use to trade securities not listed on a national securities-related exchange. OTC Markets has three OTC Pink tiers. Each issuer’s rank in the OTC Pink tiers depends upon the amount of disclosure provided. Issuers using SEC Rule 15c2-11 qualify for the “OTC Pink Current Information” tier.
OTC Pink Tiers – The Pink Current Tier Read More
Boca Raton Attorney William J. Reilly Indicted For Securities Fraud
Lawyers Gone Wild Series
On October 24, 2012, Boca Raton securities lawyer William J. Reilly was arrested by the FBI for allegedly engaging in a scheme to fraudulently sell stock in a company called Caribbean Pacific Marketing. In its S-1 registration statement filed with the Securities and Exchange Commission (“SEC”), Caribbean Pacific claimed it qualified as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Once the S-1 was deemed effective by the SEC in August 2012, Reilly sold stock to, among others, a “confidential source” who was working with the FBI. Read More
What Are Form 8-K Disclosures? Going Public Lawyer
Private companies seeking to go public should be aware that once their S-1 or other registration statement is declared effective by the SEC, the company will be required to publicly file on the SEC’s EDGAR database annual reports on Form 10-K and quarterly reports on Form 10-Q. SEC reporting companies must also report certain material events within four days ofthe event. Current Reports on Form 8-K provide investors with current information to enable them to make informed investment decisions. The information required to be disclosed on Form 8-K is generally considered to be “material” information. Generally, this means that there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision.
NYSE and NASDAQ Compensation Committee Proposals
On January 17, 2013, the Securities and Exchange Commission (the “SEC”) approved proposals by the New York Stock Exchange (“NYSE”) and the NASDAQ Stock Market (“NASDAQ”) regarding compensation committee and compensation adviser independence, as required by the new SEC rules issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”). Read More
How Can I List My Company on NASDAQ?
Private companies that go public often attempt to list on a national securities exchange. One of these, the NASDAQ Stock Market (“NASDAQ”) has three distinct tiers for companies considering an exchange listing as part of their going public transaction. These tiers are the NASDAQ Global Select Market, the NASDAQ Global Market and the NASDAQ Capital Market. Issuers must satisfy specific Read More
OTC Markets Eliminates Quarterly Legal Opinions For OTC Pink Market
On January 3, 2013, OTC Markets revised its disclosure requirements for issuers quoted on OTC Markets’ “OTC Pink Current Information” tier. As set forth in our January 4, 2013 blog post, these revisions reduced the filing deadline for reporting a laundry list of corporate events but eliminated the obligations of issuers to provide quarterly legal opinion letters from their securities attorneys.
About the OTC Markets Disclosure Tiers Read More
Spam 101 l Securities Lawyer 101 Blog
Spam is unsolicited information–usually cast in the form of an advertisement–that is sent to a large number of recipients electronically. Spam may take the form of an email or a series of message board postings. The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”) addresses commercial email. Commercial email is defined as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service.” Read More
SEC Seeks Order For Section 3(a)(10) Action
On December 23, 2013, the Securities and Exchange Commission (“SEC”) entered into a proposed settlement of a pending civil action against Advanced Cell Technology, Inc. (“Advanced Cell”), arising out of Advanced Cell’s issuance of hundreds of millions of unregistered shares of common stock on thirteen separate occasions without qualifying for any exemption from registration. The settlement is subject to the Court’s approval. Read More
OTC Markets Increases Disclosure Requirements for OTC Pink Issuers
On January 3, 2013, the OTC Markets revised its disclosure requirements for issuers quoted with an OTC Markets “OTC Pink Current” tier. These revisions increase current events disclosures for a laundry list of corporate events but reduce the obligations of issuers to provide quarterly legal opinion letters from their securities lawyers.
The OTC Markets Group operates an electronic inter-dealer quotation system for broker-dealers to trade securities not Read More
What Is Section 16 Reporting? Securities Lawyer 101
Section 16(a) of the Exchange Act of 1934 (the “Exchange Act”) requires the reporting of beneficial ownership by the officers, directors and stockholders who hold stock directly or indirectly, beneficially owning more than 10% of the company’s common stock or other class of equity securities registered under Section 12(b) or 12(g) of the Exchange Act. Section 16 reporting requirements apply only to companies that have registered a class of securities under Section 12(b) or Section 12(g).
Issuers that voluntarily file periodic reports under Section 15(d) of the Exchange Act, and their directors, officers and large stockholders, are not subject to the reporting obligations of Section 16. Nor are issuers that are required to file periodic reports under the Securities Act of 1933 bound by the provisions of Section 16.
Beneficial Ownership
For the purposes of Section 16, beneficial ownership means having or sharing, directly or indirectly, either investment or voting power or both. To determine what or how many securities are reported under Section 16, beneficial ownership means having an economic or pecuniary interest, which includes directly or indirectly receiving or sharing in profits from a transaction in the securities, whether by agreement, relationship or other arrangement (See Rule 16(a)-1, Exchange Act). Direct economic interests are defined as ownership of securities in certificate form, or of securities held in a brokerage account bearing the individual’s name. Indirect economic interests that imply beneficial ownership include the following:
♦ A person is generally regarded as beneficially owning securities held in the name of immediate family members sharing the same household. As such, if a spouse or household family member purchases an issuer’s securities, the spouse or other members of the household have an interest in those shares;
♦ An indirect pecuniary interest in securities can cause beneficial ownership to be attributed to multiple persons, such as when persons are acting as a group to acquire, hold, vote or dispose of an issuer’s equity securities. Each person in the group is deemed to be a beneficial owner of all the issuer’s equity securities that are beneficially owned by the other persons within the group; and
♦ The right to acquire equity securities by the exercise or conversion of a derivative including debt security is considered an indirect pecuniary interest in the underlying equity security whether or not the right is presently exercisable.
Section 16 requires the following reports:
♦ SEC Form 3 to report an initial statement of beneficial ownership;
♦ Form 4 to report changes in beneficial ownership; and
♦ Form 5 to report annual statements of beneficial ownership.
Form 3
A Form 3 for the initial statement of beneficial ownership should be filed after one of the following events:
♦ Upon an issuer listing for the first time on a securities exchange under Section 12(b) of the Exchange Act;
♦ Upon an issuer’s first registration statement under Section 12(g) of the Exchange Act such as Form 10 or Form 8A becomes effective; or
♦ After a person becomes a director, officer or 10% holder of the issuer.
A Form 3 is required by Section 16 even if the insider does not beneficially own any of the issuer’s securities at that time. Newly-appointed directors and officers, and new greater-than-10% shareholders must file Forms 3 within ten days.
Form 4
Any change in ownership after the filing of the Form 3 must be reported on Form 4. A single Form 4 can be used to report multiple transactions. A Form 4 should be filed for any purchases, sales, gifts, or exercise of options that result in acquisition or disposition of the issuer’s equity securities. With limited exceptions, Forms 4 must be filed within two days.
Form 5
An annual report on Form 5 is required once annually to report transactions that occurred during the prior fiscal year that either were not required to be reported on a Form 4 or should have been reported on a Form 3 or Form 4 but were not. They must state the filer’s beneficial ownership at the end of the fiscal year. The Form 5, if required, is due within 45 days following the end of the company’s fiscal year.
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 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
Emerging Growth Company – Going Public Attorneys
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), which was intended to help smaller and emerging growth companies raise capital in the U.S. markets. The JOBS Act amends, and adds new sections to, the Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”), as well as the Sarbanes-Oxley Act of 2002. The JOBS Act implements measures relating to initial and direct public offerings and creates a new category of issuer known as the Emerging Growth Company. Read More
The SEC Issues Trading Suspension of Southridge Enterprises
On Dec 28, 2012, the Securities and Exchange Commission (“SEC”) announced a trading suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of the securities of Southridge Enterprises, Inc. (SRGE), a Nevada corporation (“Southridge”).
The SEC’s Order of Suspension of informs the public that, “It appears … that there is a lack of current and accurate information concerning the securities of Southridge because of questions regarding the accuracy of statements made by Southridge. Read More
Securities Registration and the Emerging Growth Company
If a private company undertakes a public offering, the Securities Act of 1933, as amended (the “1933 Act”) requires the private company to file a registration statement with the SEC before it may offer its securities for sale to the public. The registered offering can be a direct public offering for a company that chooses to go public directly or an initial public offering (“IPO”) for company conducting an underwritten public offering. The company may not sell the securities covered by the registration statement until the SEC staff declares the registration statement “effective.” The disclosures required by the 1933 Act vary depending upon if the issuer qualifies as an emerging growth company and whether the company previously engaged in a reverse merger with a public shell company. Read More
How Do I Go Public to Raise Capital?
A private or public company can raise capital in a variety of ways. Traditional sources of capital for companies include loans from financial institutions such as a bank, or from friends and family as well as receivable financing. Companies can also raise capital in going public transactions by selling their securities prior to filing an SEC registration. Read More
JOBS Act l Research Analysts and Underwriters
On September 28, 2012, the Financial Industry Regulatory Authority, Inc. (“FINRA”) proposed rule changes to the Securities and Exchange Commission (the “SEC”), for NASD Rule 2711, which regulates the activities of research analysts. The proposals were made pursuant to the requirements of the Jumpstart Our Business Startups Act (the “JOBS Act”).
JOBS Act – Research Analyst Communications Read More
Securities Lawyers Gone Wild l Carl Duncan
On September 27, 2012, the SEC charged 8000, Inc. and Carl Duncan, Esq. for his role in a scheme to manipulate 8000, Inc.’s stock price. The SEC complaint alleges that certain defendants misrepresented 8000, Inc.’s financial condition to investors while simultaneously selling, or facilitating the sale of, the company’s securities in violation of the antifraud and securities registration provisions of the federal securities laws. Read More
