Laura Anthony

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    • Member Type(s): Expert
    • Title:Founding Partner
    • Organization:Legal & Compliance, LLC
    • Area of Expertise:Securities Law
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    New SEC Guidelines Clarify Activities, Definition of Foreign Private Issuers at a Time of Heightened Investment Activity in Indi

    Tuesday, June 27, 2017, 3:31 PM [General]
    0 (0 Ratings)

    New Securities and Exchange Commission (SEC) guidelines published in late December 2016 provide clarity to the investment community about who and which companies qualify as foreign private issuers and how they must register, operate and report their activities to federal authorities.

    Among a total of 35 new compliance and disclosure interpretations (CD&I), seven help define foreign private investors and five address reporting and filing requirements.

    The CDIs come at time of heightened interest in U.S. investment in start-up firms based in India, considered one of the world’s fastest-growing economies, and in reverse-merger transactions by India-based firms with companies in the U.S., according to West Palm Beach Attorney Laura Anthony, founding partner of Legal and Compliance, LLC.

    Pent-up U.S. interest in Indian businesses picked up speed in 2016 when the Indian government overturned restrictive investment laws and finally allowed non-Indian individuals and companies to invest directly in Indian companies. Of particularly interest are companies in the defense, aviation, pharmaceutical and technology sectors.

    Less than a year later, evidence of the more open investment guidelines can be seen in the July 2016 reverse-merger agreement between India-owned online travel agency Yatra Online Inc., and U.S.-based Terrapin 3 Acquisition Corp. Likewise, two Indian companies – Vidocon d2h and Strand Life Sciences Pvt. Ltd – went public in the U.S. in 2016 as a result of reverse-merger agreements. Yatra and Strand both received several rounds of funds from U.S.-based companies, venture capital and private equity firms.

    “In my practice alone, I have been approached by several groups that see the U.S. public markets as offering incredible potential to the exploding Indian start-up and emerging growth sector,” Anthony writes in the Securities Law blog (March 14, 2017).

    The same registration process can be used to co-issue securities by a parent foreign issuer and one or more subsidiaries that do not qualify – if both are eligible to present condensed, consolidating financial information. Additionally, wholly owned foreign subsidiaries of foreign private investors can omit certain information form the F-20 in the same way that wholly owned U.S. subsidiaries can omit information from annual reports (Form 10-K) filed with the SEC.

    In defining foreign private issuers, the SEC guidelines use these parameters:

    · Individuals (and shareholders) are considered U.S. residents if they have a green card for immigration purposes; other factors that can be considered include tax residency, nationality, mailing address, physical presence, location of a significant portion of their financial and legal relationships and immigration status. Immigration status is determined individually, not collectively, for all of a company’s directors and officers.

    · Determination can be made based on whether 50% or more a company’s outstanding securities are directly or indirectly owned by U.S. residents, and the 50% guideline can be used to determine if more than half of a company’s assets are located outside the U.S.

    The December guidelines and definitions also cover foreign private investor disclosure forms, reporting requirements other topics.

    OTC Markets Amends Listing Standards For OTCQB

    Tuesday, June 27, 2017, 8:14 AM [General]
    0 (0 Ratings)

    Effective May 18, 2017, the OTC Markets has amended its qualification rules for the OTCQB to allow quotation by companies that follow its alternative reporting standard (“Alternative Reporting Standard”). OTC Markets aligned the new requirements with the existing OTCQX Alternative Reporting Standard requirements. In addition, the OTC Markets made clarifying amendments to its rules, amended the rules related to the timing of removal for delinquent filers, and revised the rules for international reporting companies.

    Highlights of Changes

    To qualify for the OTCQB using the Alternative Reporting Standard, a company must file audited financial statements prepared in accordance with U.S. GAAP by a PCAOB qualified auditor, have a minimum bid price of $0.01, not be subject to bankruptcy or reorganization proceedings, and maintain corporate governance including (i) have a board of directors that includes a minimum of two independent directors, and (ii) have an audit committee comprised of a majority of independent directors.

    The cure period for delinquent filings has been extended to 45 days from the prior 30-day period. However, the cure period for a bid price deficiency has been reduced in half to 90 days from the prior 180 days. Moreover, if a company’s closing bid price falls below $0.001 at any time for five consecutive days, the company will automatically be removed from the OTCQB.

    The new rules clarify that a U.S. transfer agent is only required for U.S. and Canadian incorporated companies. However, international reporting companies must now file their reports with OTC Markets immediately after such filing with their primary international market.

    The new rules clarify that the OTCQB annual fee is due 30 days prior to the beginning of each new annual service period. An OTCQB company must remain registered and in good standing in its state of incorporation.

    The OTCQB has been recognized by most U.S. states as a “securities manual” for the purpose of the blue sky manual’s exemption. In order to qualify, companies must file reports with OTC Markets that meet the information requirements for the manual’s exemption in the state.  The OTC Markets filings requirements are designed to ensure satisfaction of these requirements.

    Finally, the new rules clarify that an OTCQB company is required to make timely disclosures of news releases and developments whether through an SEC form 8-K or press release with OTC Markets. A company must also act promptly to dispel unfounded rumors which result in unusual market activity or price variations.

    Comprehensive Refresher on OTCQB, Including the New Amendments

    The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink. The OTC Pink, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. The OTCQB is considered the venture market tier designed for entrepreneurial and development-stage U.S. and international companies. To apply to the OTCQB, a company must submit a completed application and quotation agreement and pay the application fee.

    Eligibility Requirements

    To be eligible to be quoted on the OTCQB, all companies will be required to:

    • Meet a minimum closing bid price on OTC Markets of $.01 for each of the last 30 calendar days and as of the day the OTCQB application is approved;
    • In the event that there is no prior public market and a 15c2-11 application has been submitted to FINRA by a market maker, OTC Markets can waive the bid requirement at its sole discretion;
    • In the event that a company is a seasoned public issuer that completed a reverse stock split within 6 months prior to applying to the OTCQB, the company must have a post-reverse-split minimum bid price of $.01 at the close of business on each of the 5 consecutive trading days immediately before applying to the OTCQB;
    • In the event the company is moving to the OTCQB from the OTCQX, it must have a minimum closing bid price of $.01 for at least one (1) of the 30 calendar days immediately preceding;
    • Companies may not be subject to bankruptcy or reorganization proceedings the company’s application;
    • Either be subject to the reporting requirements of the Securities Exchange Act of 1934 and be current in such reporting obligations, be a Tier 2 Regulation A reporting company and be current in such reporting obligations, or, if an international issuer, be eligible to rely on the registration exemption found in Exchange Act Rule 12g-2(b) and be current and compliant in such requirements or be a bank current in its reporting obligations to its bank regulator, or be current in the OTC Markets Alternative Reporting Standards;
    • Have U.S. GAAP audited financials prepared by a PCAOB qualified auditor, including an audit opinion that is not adverse, disclaimed or qualified. International reporting companies may have audited financial statements prepared in accordance with IFRS;
    • Be duly organized, validly existing and in good standing under the laws of each jurisdiction in which it is organized and does business;
    • Submit an application and pay an application and annual fee;
    • Maintain a current and accurate company profile on the OTC Markets website;
    • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the company’s securities, including but not limited to shares authorized, shares issued and outstanding, and share issuance history; and
    • Submit an OTCQB Annual Certification confirming the accuracy of the current company profile and providing information on officers, directors and controlling shareholders.
    • For companies that are relying on the Alternative Reporting Standard (i.e., not reporting to the SEC), meet minimum corporate governance requirements, including (i) have a board of directors that includes at least two independent directors; and (ii) have an audit committee comprised of a majority of independent directors. A company may request the ability to phase in compliance with this requirement if: (a) at least one member of the board of directors and audit committee are independent at the time of the application; and (b) at least two members of the board and a majority of the audit committee are independent within the later of 90 days after the company begins trading on the OTCQB or by the time of the company’s next annual meeting and in no event later than one year from joining the OTCQB.

    All companies are required to post their initial disclosure on the OTC Markets website and make an initial certification.  The initial disclosure includes:

    • Confirmation that the company is current in its SEC reporting obligations, whether subject to the Exchange Act reporting requirements or Regulation A+ reporting requirements, and has filed all reports with the SEC, that all financial statements have been prepared in accordance with U.S. GAAP, and that the auditor opinion is not adverse, disclaimed or qualified;
    • Bank Reporting Companies must have filed all financial reported required to be filed with their banking regulator for the prior two years, including audited financial statements;
    • International Companies – (i) Companies subject to the Exchange Act reporting requirements must be current in such reports; (ii) A company that is not an SEC Reporting company must be current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and shall have posted in English through the OTC Disclosure & News Service or an Integrated Newswire, the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b) for the preceding 24 months (or from inception if less than 24 months); and all financial statements have been prepared in accordance with U.S. GAAP and that the auditor opinion is not adverse, disclaimed or qualified;
    • Alternative Reporting Companies must have filed, through the OTC Disclosure and News Services, an information and disclosure statement meeting the requirements of the OTCQX and OTCQB disclosure guidelines; and
    • Verification that the company profile is current, complete and accurate.

    In addition, all companies will be required to file an initial and annual certification on the OTC Markets website, signed by the CEO and/or CFO, stating:

    • The company’s reporting standing (i.e., whether SEC reporting, Regulation A+ reporting, Alternative Standards Reporting, bank reporting or international reporting) and briefly describing the registration status of the company;
    • If the company is an international company and relying on 12g3-2(b), that it is current in such obligations;
    • That the company is current in its reporting obligations to its regulator and that such information is available either on EDGAR or the OTC Markets website;
    • That the company profile on the OTC Markets website is current and complete and includes the total shares outstanding, authorized and in the public float as of that date;
    • That the company is duly organized, validly existing and in good standing under the laws of each state or jurisdiction in which the company is organized and conducts business;
    • States the law firm and/or attorneys that assist the company in preparing its annual report or 10-K;
    • Identifies any third-party providers engaged by the company, its officers, directors or controlling shareholders, during the prior fiscal year and up to the date of the certification, to provide investor relations services, public relations services, stock promotion services or related services;
    • Confirms the total shares authorized, outstanding and in the public float as of that date; and
    • Names and shareholdings of all officers and directors and shareholders that beneficially own 5% or more of the total outstanding shares, including beneficial ownership of entity shareholders.

    An application to OTCQB can be delayed or denied at OTC Markets’ sole discretion if they determine that admission would be likely to impair the reputation or integrity of OTC Markets group or be detrimental to the interests of investors.

    Requirements for Bank Reporting Companies

    Bank reporting companies must meet all the same requirements as all other OTCQB companies except for the SEC reporting requirements.  Instead, bank reporting companies are required to post their previous two years’ and ongoing yearly disclosures that were and are filed with the company’s bank regulator, on the OTC Markets website.

    International Companies

    In addition to the same requirements for all issuers as set forth above, foreign issuers must be listed on a Qualified Foreign Exchange and be compliant with SEC Rule 12g3-2(b). Moreover, a foreign entity must submit a letter of introduction from a qualified OTCQB Sponsor which states that the OTCQB Sponsor has a reasonable belief that the company is in compliance with SEC Rule 12g3-2(b), is listed on a Qualified Foreign Exchange, and has posted required disclosure on the OTC Markets website. A foreign entity must post two years’ historical and ongoing quarterly and annual reports, in English, on the OTC Markets website which comply with SEC Rule 12g3-2(b). I am a qualified OTCQB Sponsor and assist multiple international companies with this process.

    Application Review Process

    OTC Markets will review all applications and may request additional information on any of the information submitted. In addition, OTC Markets can require that a company provide a further undertaking, such as submission of personal information forms for any executive officer, director or 5% or greater beneficial owner. OTC Markets can request that third parties provide confirmations or information as well.  OTC Markets can, and likely will, conduct independent due diligence including through the review of publicly available information.

    OTC Markets can deny an application if it determines, upon its sole and absolute discretion, that the admission of the company would be likely to impair the reputation or integrity of OTC Markets or be detrimental to the interests of investors.

    Upon approval of an application, the company’s securities will be designated as OTCQB on the OTC Markets websites, market data products and broker-dealer platforms.

    Ongoing Requirements

    • All companies are required to remain in compliance with the OTCQB standards, including the ongoing disclosure obligations;
    • S. OTCQB companies will be required to remain current and timely in their SEC reporting obligations, including either Exchange Act reports, Regulation A+ reports or Alternative Reporting Standard and including all audited financial statement requirements;
    • A foreign company that is not an SEC Reporting Company must remain current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and in any event shall, on an ongoing basis, post in English through the OTC Disclosure & News Service or an Integrated Newswire the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b);
    • Banks must remain current in their banking reporting requirements and file copies of their reports on the OTC Markets website no later than 45 days following the end of a quarter or 90 days following the end of the fiscal year;
    • All OTC Markets postings and reports must be filed within 45 days following the end of a quarter or 90 days following the end of the fiscal year for US Exchange Act issuers and Alternative Reporting Standard filers, as required by Regulation A+ for Regulation A+ reporting issuers, and immediately after their submission to their primary regulator for international companies; where applicable, file a notice of late filing allowing for 5 extra days on a quarterly report and 15 extra days on an annual or semiannual report;
    • All OTCQB companies will be required to post annual certifications on the OTC Markets website signed by either the CEO or CFO no later than 30 days following the company’s annual report due date;
    • All companies are required to comply with all federal, state, and international securities laws and must cooperate with all securities regulatory agencies;
    • Must pay the annual fee within 30 days of prior to the beginning of each new annual service period;
    • All companies must respond to OTC Markets inquiries and requests;
    • All companies must maintain an updated verified company profile on the OTC Markets website and must submit a Company Update Form at least once every six months;
    • OTCQB is a recognized securities manual for purposes of blue sky secondary market exceptions. A precondition to relying upon the manuals exemption is the maintenance of current updated disclosure information as required by OTC Markets;
    • All companies must make a press release and possibly other public disclosure (such as a Form 8-K) to inform the public of any news or information which might be reasonably expected to materially affect the market of its securities;
    • All companies must file interim disclosures in the event the company undergoes a reverse merger or change of control and make new updated certifications and disclosure related to the new business and control persons;
    • In the event that OTC Markets determines, upon its sole discretion, that a company is the subject of promotional activities that encourage trading, OTC Markets may require the company to provide additional public information related to shareholdings of officers, directors and control persons and confirmation of shares outstanding, and any share issuance in the prior two years. OTC Markets may also require submission of a Personal Information Form for any executive officer, director or 5%-or-greater shareholder.
    • Not be subject to bankruptcy or reorganization proceedings;
    • Be duly organized and in good standing under the laws of each jurisdiction in which the company is organized or does business;
    • Companies relying on the Alternative Reporting Standard must comply with the ongoing corporate governance requirements subject to a notice and one-year grace period if the company falls into noncompliance;
    • All OTCQB companies must meet the minimum bid price of $.01 per share at the close of business of at least one of the previous thirty (30) consecutive calendar days; in the event that the price falls below $.01, the company will begin a grace period of 90 calendar days to maintain a closing bid price of $.01 for ten consecutive trading days; and
    • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the company’s securities, including but not limited to shares authorized, shares issued and outstanding, and share issuance history.

    Officers and directors of the company are responsible for compliance with the ongoing requirements and the content of all information.  Entities that do not meet the requirements of either OTCQX or OTCQB will be quoted on the OTC Pink.

    Fees

    Newly applying entities must pay an initial application fee of $2,500, which fee is waived for existing OTCQB entities. All OTCQB companies will be required to pay an annual fee of $10,000. Fees are nonrefundable.

    Removal/Suspension from OTCQB

    A company may be removed from the OTCQB if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a notice and opportunity to cure. Companies that are delinquent in filing and reporting requirements are subject to a 45-day cure period.  Companies with a bid price deficiency shall have a 90-day cure period. However, in the event the company’s bid price falls below $0.001 at any time for five consecutive trading days, the company will be immediately removed from the OTCQB. All other deficiencies are subject to a 30-day cure period. OTC Markets may provide additional cure periods, but in no event may audited financial statements be older than 18 months.

    In addition, OTC Markets Group may remove the company’s securities from trading on OTCQB immediately and at any time, without notice, if OTC Markets Group, upon its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.

    In addition, OTC Markets can temporarily suspend trading on the OTCQB pending investigation or further due diligence review.

    A company may voluntarily withdraw from the OTCQB with 24 hours’ notice.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    330 Clematis Street, Suite 217
    West Palm Beach, FL 33401
    Phone: 800-341-2684 – 561-514-0936
    Fax: 561-514-0832
    LAnthony@LegalAndCompliance.com
    www.LegalAndCompliance.com
    www.LawCast.com

    Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

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    © Legal & Compliance, LLC 2017

    OTC Markets Amends Listing Standards For OTCQB To Allow Non-Reporting Issuers

    Tuesday, June 27, 2017, 8:13 AM [General]
    0 (0 Ratings)

    Effective May 18, 2017, the OTC Markets has amended its qualification rules for the OTCQB to allow quotation by companies that follow its alternative reporting standard (“Alternative Reporting Standard”). OTC Markets aligned the new requirements with the existing OTCQX Alternative Reporting Standard requirements. In addition, the OTC Markets made clarifying amendments to its rules, amended the rules related to the timing of removal for delinquent filers, and revised the rules for international reporting companies.

    Highlights of Changes

    To qualify for the OTCQB using the Alternative Reporting Standard, a company must file audited financial statements prepared in accordance with U.S. GAAP by a PCAOB qualified auditor, have a minimum bid price of $0.01, not be subject to bankruptcy or reorganization proceedings, and maintain corporate governance including (i) have a board of directors that includes a minimum of two independent directors, and (ii) have an audit committee comprised of a majority of independent directors.

    The cure period for delinquent filings has been extended to 45 days from the prior 30-day period. However, the cure period for a bid price deficiency has been reduced in half to 90 days from the prior 180 days. Moreover, if a company’s closing bid price falls below $0.001 at any time for five consecutive days, the company will automatically be removed from the OTCQB.

    The new rules clarify that a U.S. transfer agent is only required for U.S. and Canadian incorporated companies. However, international reporting companies must now file their reports with OTC Markets immediately after such filing with their primary international market.

    The new rules clarify that the OTCQB annual fee is due 30 days prior to the beginning of each new annual service period. An OTCQB company must remain registered and in good standing in its state of incorporation.

    The OTCQB has been recognized by most U.S. states as a “securities manual” for the purpose of the blue sky manual’s exemption. In order to qualify, companies must file reports with OTC Markets that meet the information requirements for the manual’s exemption in the state.  The OTC Markets filings requirements are designed to ensure satisfaction of these requirements.

    Finally, the new rules clarify that an OTCQB company is required to make timely disclosures of news releases and developments whether through an SEC form 8-K or press release with OTC Markets. A company must also act promptly to dispel unfounded rumors which result in unusual market activity or price variations.

    Comprehensive Refresher on OTCQB, Including the New Amendments

    The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink. The OTC Pink, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. The OTCQB is considered the venture market tier designed for entrepreneurial and development-stage U.S. and international companies. To apply to the OTCQB, a company must submit a completed application and quotation agreement and pay the application fee.

    Eligibility Requirements

    To be eligible to be quoted on the OTCQB, all companies will be required to:

    • Meet a minimum closing bid price on OTC Markets of $.01 for each of the last 30 calendar days and as of the day the OTCQB application is approved;
    • In the event that there is no prior public market and a 15c2-11 application has been submitted to FINRA by a market maker, OTC Markets can waive the bid requirement at its sole discretion;
    • In the event that a company is a seasoned public issuer that completed a reverse stock split within 6 months prior to applying to the OTCQB, the company must have a post-reverse-split minimum bid price of $.01 at the close of business on each of the 5 consecutive trading days immediately before applying to the OTCQB;
    • In the event the company is moving to the OTCQB from the OTCQX, it must have a minimum closing bid price of $.01 for at least one (1) of the 30 calendar days immediately preceding;
    • Companies may not be subject to bankruptcy or reorganization proceedings the company’s application;
    • Either be subject to the reporting requirements of the Securities Exchange Act of 1934 and be current in such reporting obligations, be a Tier 2 Regulation A reporting company and be current in such reporting obligations, or, if an international issuer, be eligible to rely on the registration exemption found in Exchange Act Rule 12g-2(b) and be current and compliant in such requirements or be a bank current in its reporting obligations to its bank regulator, or be current in the OTC Markets Alternative Reporting Standards;
    • Have U.S. GAAP audited financials prepared by a PCAOB qualified auditor, including an audit opinion that is not adverse, disclaimed or qualified. International reporting companies may have audited financial statements prepared in accordance with IFRS;
    • Be duly organized, validly existing and in good standing under the laws of each jurisdiction in which it is organized and does business;
    • Submit an application and pay an application and annual fee;
    • Maintain a current and accurate company profile on the OTC Markets website;
    • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the company’s securities, including but not limited to shares authorized, shares issued and outstanding, and share issuance history; and
    • Submit an OTCQB Annual Certification confirming the accuracy of the current company profile and providing information on officers, directors and controlling shareholders.
    • For companies that are relying on the Alternative Reporting Standard (i.e., not reporting to the SEC), meet minimum corporate governance requirements, including (i) have a board of directors that includes at least two independent directors; and (ii) have an audit committee comprised of a majority of independent directors. A company may request the ability to phase in compliance with this requirement if: (a) at least one member of the board of directors and audit committee are independent at the time of the application; and (b) at least two members of the board and a majority of the audit committee are independent within the later of 90 days after the company begins trading on the OTCQB or by the time of the company’s next annual meeting and in no event later than one year from joining the OTCQB.

    All companies are required to post their initial disclosure on the OTC Markets website and make an initial certification.  The initial disclosure includes:

    • Confirmation that the company is current in its SEC reporting obligations, whether subject to the Exchange Act reporting requirements or Regulation A+ reporting requirements, and has filed all reports with the SEC, that all financial statements have been prepared in accordance with U.S. GAAP, and that the auditor opinion is not adverse, disclaimed or qualified;
    • Bank Reporting Companies must have filed all financial reported required to be filed with their banking regulator for the prior two years, including audited financial statements;
    • International Companies – (i) Companies subject to the Exchange Act reporting requirements must be current in such reports; (ii) A company that is not an SEC Reporting company must be current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and shall have posted in English through the OTC Disclosure & News Service or an Integrated Newswire, the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b) for the preceding 24 months (or from inception if less than 24 months); and all financial statements have been prepared in accordance with U.S. GAAP and that the auditor opinion is not adverse, disclaimed or qualified;
    • Alternative Reporting Companies must have filed, through the OTC Disclosure and News Services, an information and disclosure statement meeting the requirements of the OTCQX and OTCQB disclosure guidelines; and
    • Verification that the company profile is current, complete and accurate.

    In addition, all companies will be required to file an initial and annual certification on the OTC Markets website, signed by the CEO and/or CFO, stating:

    • The company’s reporting standing (i.e., whether SEC reporting, Regulation A+ reporting, Alternative Standards Reporting, bank reporting or international reporting) and briefly describing the registration status of the company;
    • If the company is an international company and relying on 12g3-2(b), that it is current in such obligations;
    • That the company is current in its reporting obligations to its regulator and that such information is available either on EDGAR or the OTC Markets website;
    • That the company profile on the OTC Markets website is current and complete and includes the total shares outstanding, authorized and in the public float as of that date;
    • That the company is duly organized, validly existing and in good standing under the laws of each state or jurisdiction in which the company is organized and conducts business;
    • States the law firm and/or attorneys that assist the company in preparing its annual report or 10-K;
    • Identifies any third-party providers engaged by the company, its officers, directors or controlling shareholders, during the prior fiscal year and up to the date of the certification, to provide investor relations services, public relations services, stock promotion services or related services;
    • Confirms the total shares authorized, outstanding and in the public float as of that date; and
    • Names and shareholdings of all officers and directors and shareholders that beneficially own 5% or more of the total outstanding shares, including beneficial ownership of entity shareholders.

    An application to OTCQB can be delayed or denied at OTC Markets’ sole discretion if they determine that admission would be likely to impair the reputation or integrity of OTC Markets group or be detrimental to the interests of investors.

    Requirements for Bank Reporting Companies

    Bank reporting companies must meet all the same requirements as all other OTCQB companies except for the SEC reporting requirements.  Instead, bank reporting companies are required to post their previous two years’ and ongoing yearly disclosures that were and are filed with the company’s bank regulator, on the OTC Markets website.

    International Companies

    In addition to the same requirements for all issuers as set forth above, foreign issuers must be listed on a Qualified Foreign Exchange and be compliant with SEC Rule 12g3-2(b). Moreover, a foreign entity must submit a letter of introduction from a qualified OTCQB Sponsor which states that the OTCQB Sponsor has a reasonable belief that the company is in compliance with SEC Rule 12g3-2(b), is listed on a Qualified Foreign Exchange, and has posted required disclosure on the OTC Markets website. A foreign entity must post two years’ historical and ongoing quarterly and annual reports, in English, on the OTC Markets website which comply with SEC Rule 12g3-2(b). I am a qualified OTCQB Sponsor and assist multiple international companies with this process.

    Application Review Process

    OTC Markets will review all applications and may request additional information on any of the information submitted. In addition, OTC Markets can require that a company provide a further undertaking, such as submission of personal information forms for any executive officer, director or 5% or greater beneficial owner. OTC Markets can request that third parties provide confirmations or information as well.  OTC Markets can, and likely will, conduct independent due diligence including through the review of publicly available information.

    OTC Markets can deny an application if it determines, upon its sole and absolute discretion, that the admission of the company would be likely to impair the reputation or integrity of OTC Markets or be detrimental to the interests of investors.

    Upon approval of an application, the company’s securities will be designated as OTCQB on the OTC Markets websites, market data products and broker-dealer platforms.

    Ongoing Requirements

    • All companies are required to remain in compliance with the OTCQB standards, including the ongoing disclosure obligations;
    • S. OTCQB companies will be required to remain current and timely in their SEC reporting obligations, including either Exchange Act reports, Regulation A+ reports or Alternative Reporting Standard and including all audited financial statement requirements;
    • A foreign company that is not an SEC Reporting Company must remain current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and in any event shall, on an ongoing basis, post in English through the OTC Disclosure & News Service or an Integrated Newswire the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b);
    • Banks must remain current in their banking reporting requirements and file copies of their reports on the OTC Markets website no later than 45 days following the end of a quarter or 90 days following the end of the fiscal year;
    • All OTC Markets postings and reports must be filed within 45 days following the end of a quarter or 90 days following the end of the fiscal year for US Exchange Act issuers and Alternative Reporting Standard filers, as required by Regulation A+ for Regulation A+ reporting issuers, and immediately after their submission to their primary regulator for international companies; where applicable, file a notice of late filing allowing for 5 extra days on a quarterly report and 15 extra days on an annual or semiannual report;
    • All OTCQB companies will be required to post annual certifications on the OTC Markets website signed by either the CEO or CFO no later than 30 days following the company’s annual report due date;
    • All companies are required to comply with all federal, state, and international securities laws and must cooperate with all securities regulatory agencies;
    • Must pay the annual fee within 30 days of prior to the beginning of each new annual service period;
    • All companies must respond to OTC Markets inquiries and requests;
    • All companies must maintain an updated verified company profile on the OTC Markets website and must submit a Company Update Form at least once every six months;
    • OTCQB is a recognized securities manual for purposes of blue sky secondary market exceptions. A precondition to relying upon the manuals exemption is the maintenance of current updated disclosure information as required by OTC Markets;
    • All companies must make a press release and possibly other public disclosure (such as a Form 8-K) to inform the public of any news or information which might be reasonably expected to materially affect the market of its securities;
    • All companies must file interim disclosures in the event the company undergoes a reverse merger or change of control and make new updated certifications and disclosure related to the new business and control persons;
    • In the event that OTC Markets determines, upon its sole discretion, that a company is the subject of promotional activities that encourage trading, OTC Markets may require the company to provide additional public information related to shareholdings of officers, directors and control persons and confirmation of shares outstanding, and any share issuance in the prior two years. OTC Markets may also require submission of a Personal Information Form for any executive officer, director or 5%-or-greater shareholder.
    • Not be subject to bankruptcy or reorganization proceedings;
    • Be duly organized and in good standing under the laws of each jurisdiction in which the company is organized or does business;
    • Companies relying on the Alternative Reporting Standard must comply with the ongoing corporate governance requirements subject to a notice and one-year grace period if the company falls into noncompliance;
    • All OTCQB companies must meet the minimum bid price of $.01 per share at the close of business of at least one of the previous thirty (30) consecutive calendar days; in the event that the price falls below $.01, the company will begin a grace period of 90 calendar days to maintain a closing bid price of $.01 for ten consecutive trading days; and
    • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the company’s securities, including but not limited to shares authorized, shares issued and outstanding, and share issuance history.

    Officers and directors of the company are responsible for compliance with the ongoing requirements and the content of all information.  Entities that do not meet the requirements of either OTCQX or OTCQB will be quoted on the OTC Pink.

    Fees

    Newly applying entities must pay an initial application fee of $2,500, which fee is waived for existing OTCQB entities. All OTCQB companies will be required to pay an annual fee of $10,000. Fees are nonrefundable.

    Removal/Suspension from OTCQB

    A company may be removed from the OTCQB if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a notice and opportunity to cure. Companies that are delinquent in filing and reporting requirements are subject to a 45-day cure period.  Companies with a bid price deficiency shall have a 90-day cure period. However, in the event the company’s bid price falls below $0.001 at any time for five consecutive trading days, the company will be immediately removed from the OTCQB. All other deficiencies are subject to a 30-day cure period. OTC Markets may provide additional cure periods, but in no event may audited financial statements be older than 18 months.

    In addition, OTC Markets Group may remove the company’s securities from trading on OTCQB immediately and at any time, without notice, if OTC Markets Group, upon its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.

    In addition, OTC Markets can temporarily suspend trading on the OTCQB pending investigation or further due diligence review.

    A company may voluntarily withdraw from the OTCQB with 24 hours’ notice.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    330 Clematis Street, Suite 217
    West Palm Beach, FL 33401
    Phone: 800-341-2684 – 561-514-0936
    Fax: 561-514-0832
    LAnthony@LegalAndCompliance.com
    www.LegalAndCompliance.com
    www.LawCast.com

    Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

    Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

    This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

    © Legal & Compliance, LLC 2017

    SEC Issues Additional Guidance on Regulation A+

    Monday, June 26, 2017, 7:52 AM [General]
    0 (0 Ratings)

    On March 31, 2017, the SEC Division of Corporation Finance issued six new Compliance and Disclosure Interpretations (C&DI) to provide guidance related to Regulation A/A+. Since the new Regulation A+ came into effect on June 19, 2015, its use has continued to steadily increase. In my practice it is the most popular method for a public offering under $50 million.

    As an ongoing commentary on Regulation A+, following a discussion on the CD&I guidance, I have included practice tips, and thoughts on Regulation A+, and a summary of the Regulation A+ rules, including interpretations and guidance up to the date of this blog.

    New CD&I Guidance

    In the first of the new CD&I, the SEC clarifies the timing of the filing of a Form 8-A to register a class of securities under Section 12(b) or (g) of the Exchange Act.  In particular, in order to be able to file a Form 8-A as part of the Regulation A+ process, in addition to utilizing Form S-1 format in the Regulation A+ offering circular, a company must file the Form 8-A concurrent with qualification of the offering circular. Registration under 12(g) occurs automatically; however, Registration under 12(b) requires that the applicable national securities exchange certify the registration within five calendar days. As with any SEC filings based on calendar days, where the fifth day falls on a Saturday, Sunday or federal holiday, the certification may be received on the next business day.

    In the second new CD&I, the SEC confirms that a company may withdraw a Tier 2 Regulation A offering after qualification but prior to any sales or the filing of an annual report, by filing an exit report on Form 1-Z and thereafter be relieved of any further filing requirements.

    The third new CD&I addresses the age of financial statements to be included in a Tier 2 offering circular. In particular, financial statements generally do not go stale for nine months, as opposed to 135 days for other filings under Regulation S-X. Interim financial statements should be for a period of six months following the date of the fiscal year-end.

    In the fourth new CD&I, the SEC confirmed that a tax opinion is not required to be filed as an exhibit to Form 1-A, but a company may do so voluntarily.

    In the fifth new CD&I, the SEC confirmed that it will not object if an auditor’s consent is not included as an exhibit to an annual report on Form 1-K, even if though the report contains audited financial statements. The report would still need to contain the auditor’s report, but a separate consent is not required.

    Finally in the last of the new CD&I, the SEC confirms that the requirement under Industry Guide 5 that sales material be submitted to the SEC before use, does not apply to Regulation A offerings. Industry Guide 5 relates to registration statements relating to interests in real estate limited partnerships.

    Refresher on CD&I Issued November 2016

    In November 2016, the SEC issued three CD&I providing guidance on Regulation A. In the first, the SEC has clarified that where a company seeks to qualify an additional class of securities via post-qualification amendment to a previously qualified Form 1-A, Item 4 of Part I, which requires “Summary Information Regarding the Offering and Other Current or Proposed Offerings,” need only include information related to the new class of securities seeking qualification.

    In a reminder that Regulation A+ is technically an exemption from the registration requirements under Section 5 of the Securities Act, the SEC confirmed that under Item 6 of Part I, requiring disclosure of unregistered securities issued or sold within the prior year, a company must disclose all securities issued or sold pursuant to Regulation A in the prior year.

    Question 182.13 clarified the calculation of a 20% change in the price of the offering to determine the necessity of filing a post-qualification amendment which would be subject to SEC comment and review, versus a post-qualification supplement which would be effective immediately upon filing. In particular, Rule 253(b) provides that a change in price of no more than 20% of the qualified offering price, may be made by supplement and not require an amendment. An amendment is subject to a whole new review and comment period and must be declared qualified by the SEC. A supplement, on the other hand, is simply added to the already qualified Form 1-A, becoming qualified itself upon filing. The 20% variance can be either an increase or decrease in the offering price, but if it is an increase, it cannot result in an offering above the respective thresholds for Tier 1 ($20 million) or Tier 2 ($50 million).

    In the third CD&I, the SEC confirmed that companies using Form 1-A benefit from Section 71003 of the FAST Act.  In particular, the SEC interprets Section 71003 of the FAST Act to allow an emerging growth company (EGC) to omit financial information for historical periods if it reasonably believes that those financial statements will not be required at the time of the qualification of the Form 1-A, provided that the company file a pre-qualification amendment such that the Form 1-A qualified by the SEC contains all required up-to-date financial information. Interestingly, Section 71003 only refers to Forms S-1 and F-1 but the SEC has determined to allow an EGC the same benefit when filing a Form 1-A. Since financial statements for a new period would result in a material amendment to the Form 1-A, potential investors would need to be provided with a copy of such updated amendment prior to accepting funds and completing the sale of securities.

    In addition, on June 23, 2015, the SEC updated its Division of Corporation Finance C&DI to provide guidance related to Regulation A/A+ by publishing 11 new questions and answers and deleting 2 from its forms C&DI which are no longer applicable under the new rules. The summary below includes that guidance.

    Regulation A/A+ – Private or Public Offering?

    The legal nuance that Regulation A/A+ is an “exempt” offering under Section 5 has caused confusion and the need for careful thought by practitioners and the SEC staff alike. So far, it appears that Regulation A/A+ is treated as a public offering in almost all respects except as related to the applicability of Securities Act Section 11 liability. Section 11 of the Securities Act provides a private cause of action in favor of purchasers of securities, against those involved in filing a false or misleading public offering registration statement. Any purchaser of securities, regardless of whether they bought directly from the company or secondarily in the aftermarket, can sue a company, its underwriters, and experts for damages where a false or misleading registration statement had been filed related to those securities. Regulation A is not considered a public offering for purposes of Section 11 liability.

    Securities Act Section 12, which provides a private cause of action by a purchaser of securities directly against the seller of those securities, specifically imposes liability on any person offering or selling securities under Regulation A. The general antifraud provisions under Section 17 of the Securities Act, which apply to private and public offerings, of course apply to Regulation A/A+.

    When considering integration, in addition to the discussion in the summary below, the SEC has now confirmed that a Regulation A/A+ offering can rely on Rule 152 such that a completed exempt offering, such as under Rule 506(b), will not integrate with a subsequent Regulation A filing. Under Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently makes a public offering. The SEC has also issued guidance that Rule 152 applies to prevent integration between a completed 506(b) offering and a subsequent 506(c) offering, indicating that the important factor in the Rule 152 analysis is the ability to publicly solicit regardless of the filing of a registration statement.

    Along the same lines, as Rule 506(c) is considered a public offering for this analysis, there would be nothing preventing a company from completing a Rule 506(c) offering either before, concurrently or after a Regulation A/A+ offering.

    Regulation A/A+ is definitely used as a going public transaction and, as such, is very much a public offering. Securities sold in a Regulation A+ offering are not restricted and therefore are available to be used to create a secondary market and trade, such as on the OTC Markets or a national exchange.

    Tier 2 issuers that have used the S-1 format for their Form 1-A filing will be permitted to file a Form 8-A to register under the Exchange Act and become subject to its reporting requirements and to register with a national exchange. A Form 8-A is a simple registration form used instead of a Form 10 for issuers that have already filed the substantive Form 10 information with the SEC.  Upon filing a Form 8-A, the issuer will become subject to the full Exchange Act reporting obligations, and the scaled-down Regulation A+ reporting will automatically be suspended. A form 8-A can also be used as a short form registration to list on a national exchange under Section 12(b) of the Exchange Act.

    A Regulation A process is clearly the best choice for a company that desires to go public and raise less than $50 million. An initial or direct public offering on Form S-1 does not preempt state law. By choosing a Tier 2 Regulation A+ offering followed by a Form 8-A, the issuer can achieve the same result – i.e., become a fully reporting trading public company, without the added time and expense of complying with state blue sky laws. In addition to the state law preemption benefit, Regulation A provides relief from the strictly regulated public communications that exist in an S-1 offering.

    Also, effective July 10, 2016, the OTCQB amended their rules to allow a Tier 2 reporting entity to qualify to apply for and trade on the OTCQB; however, unless the issuer has filed a Form 8-A or Form 10, they will not be considered “subject to the Exchange Act reporting requirements” for purposes of benefiting from the shorter 6-month Rule 144 holding period.

    Practice Tip on Registration Rights Contracts

    In light of the fact that Regulation A/A+ is technically an exemption from the Section 5 registration requirements, it might not be included in contractual provisions related to registration rights. In particular, the typical language in a piggyback or demand registration right provision creates the possibility that the company could do an offering under Regulation A/A+ and take the position that the shareholder is not entitled to participate under the registration rights provision because it did not do a “registration.” As an advocate of avoiding ambiguity, practitioners should carefully review these contractual provisions and add language to include a Form 1-A under Regulation A/A+ if the intent is to be sure that the shareholder is covered. Likewise, if the intent is to exclude Regulation A/A+ offerings from the registration rights, that exclusion should be added to the language to avoid any dispute.

    Refresher:  The Final Rules – Summary of Regulation A+

    I’ve written about Regulation A/A+ on numerous occasions, including detailing the history and intent of the rules. Title IV of the JOBS Act that was signed into law on April 5, 2012, set out the framework for the new Regulation A and required the SEC to adopt specific rules to implement the new provisions, which it did. The new rules quickly became known as Regulation A+ and came into effect on June 19, 2015. For a refresher on such history and intent, see my blog HERE. Importantly, as I point out in that blog and others I have written on the subject, Tier 2 of Regulation A preempts state blue sky law.

    In addition to the federal government, every state has its own set of securities laws and securities regulators. Unless the federal law specifically “preempts” or overrules state law, every offer and sale of securities must comply with both the federal and the state law. There are 54 U.S. jurisdictions, including all 50 states and 4 territories, each with separate and different securities laws.  Even in states that have identical statutes, the states’ interpretations or focuses under the statutes differ greatly. On top of that, each state has a filing fee and a review process that takes time to deal with. It’s difficult, time-consuming and expensive.

    However, as I will discuss below, this does not include preemption of state law related to broker-dealer registration. Five states do not have “issuer exemptions” for public offerings such as a Regulation A offering.

    Specifics of Regulation A+ – How Does it Work?

    The new Regulation A+ divided Regulation A into two offering paths, referred to as Tier 1 and Tier 2. Tier 1 remains substantially the same as the old pre-JOBS Act Regulation A but with a higher offering limit and allowing for more marketing and testing the waters. A Tier 1 offering allows for sales of up to $20 million in any 12-month period. Since Tier 1 does not preempt state law, it is really only useful for offerings that are limited to one but no more than a small handful of states. Tier 1 does not require the company to include audited financial statements and does not have any ongoing SEC reporting requirements. Tier 1 will likely not be used for a going public transaction.

    Both Tier I and Tier 2 offerings have minimum basic requirements, including issuer eligibility provisions and disclosure requirements. In addition to the affiliate resale restrictions, resales of securities by selling security holders are limited to no more than 30% of a total particular offering for all Regulation A+ offerings. For offerings up to $20 million, an issuer can elect to proceed under either Tier 1 or Tier 2. Both tiers will allow companies to submit draft offering statements for non-public SEC staff review before a public filing, permit continued use of solicitation materials after the filing of the offering statement and use the EDGAR system for filings.

    Tier 2 allows a company to file an offering circular with the SEC to raise up $50 million in a 12-month period. Tier 2 pre-empts state blue sky law.  A company may elect to either provide the disclosure in the new Form 1-A or the disclosure in a traditional Form S-1 when conducting a Tier 2 offering. The Form S-1 format is a precondition to being able to file a Form 8-A as discussed further in this summary. Either way, the SEC review process is a little shorter, and a company can market in a way that it cannot with a traditional IPO. Regulation A has specific company eligibility requirements, and there are investor qualifications and associated per-investor investment limits.

    Also, the process is not inexpensive. Attorneys’ fees, accounting and audit fees and, of course, marketing expenses all add up. A company needs to be organized and ready before engaging in any offering process, and especially so for a public offering process.  Even though a lot of attorneys, myself included, will provide a flat fee for the process, that flat fee is dependent on certain assumptions, including the level of organization of the company.

    Eligibility Requirements

    Regulation A+ is available to companies organized and operating in the United States and Canada. The following issuers are not eligible for a Regulation A+ offering:

    • Companies currently subject to the reporting requirements of the Exchange Act;
    • Investment companies registered or required to be registered under the Investment Company Act of 1940, including BDC’s;
    • Blank check companies, which are companies that have no specific business plan or purpose or whose business plan and purpose is to engage in a merger or acquisition with an unidentified target; however, shell companies are not prohibited, unless such shell company is also a blank check company. A shell company is a company that has no or nominal operations; and either no or nominal assets, assets consisting of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets.  Accordingly, a start-up business or minimally operating business may utilize Regulation A+;
    • Issuers seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights;
    • Issuers that have been subject to any order of the SEC under Exchange Act Section 12(j) denying, suspending or revoking registration, entered within the past five years;
    • Issuers that became subject to Exchange Act reporting requirements, such as through a Tier 2 offering, and did not file required ongoing reports during the preceding two years; and
    • Issuers that are disqualified under the “bad actor” rules and, in particular, Rule 262 of Regulation A+.

    A company will be considered to have its “principal place of business” in the U.S. or Canada for purposes of determination of Regulation A/A+ eligibility if its officers, partners, or managers primarily direct, control and coordinate the company’s activities from the U.S. or Canada, even if the actual operations are located outside those countries.

    A company that was once subject to the Exchange Act reporting obligations but suspended such reporting obligations by filing a Form 15 is eligible to utilize Regulation A/A+. A company that voluntarily files reports under the Exchange Act is not “subject to the Exchange Act reporting requirements” and therefore is eligible to rely on Regulation A/A+. A wholly owned subsidiary of an Exchange Act reporting company parent is eligible to complete a Regulation A/A+ offering as long as the parent reporting company is not a guarantor or co-issuer of the securities being issued.

    Unfortunately, in what is clearly a legislative miss, companies that are already publicly reporting – that is, are already required to file reports with the SEC – are not eligible. OTC Markets has petitioned the SEC to eliminate this eligibility criteria, and pretty well everyone in the industry supports a change here, but for now it remains. One of the top recommendations by the SEC Government-Business Forum on Small Business Capital Formation has also been to expand Regulation A/A+ to allow reporting issuers to utilize the process.  For more information on the OTC Markets petition and discussion of the reasons that a change is needed in this regard, see my blog HERE.

    Regulation A/A+ can be used for business combination transactions, but is not available for shelf SPAC’s (special purpose acquisition companies).

    Eligible Securities

    Regulation A is limited to equity securities, including common and preferred stock and options, warrants and other rights convertible into equity securities, debt securities and debt securities convertible or exchangeable into equity securities, including guarantees. If convertible securities or warrants are offered that may be exchanged or exercised within one year of the offering statement qualification (or at the option of the issuer), the underlying securities must also be qualified and the value of such securities must be included in the aggregate offering value. Accordingly, the underlying securities will be included in determining the offering limits of $20 million and $50 million, respectively.

    Asset-backed securities are not allowed to be offered in a Regulation A offering. REIT’s and other real estate-based entities may use Regulation A and provide information similar to that required by a Form S-11 registration statement.

    General Solicitation and Advertising; Solicitation of Interest (“Testing the Waters”)

    Other than the investment limits, anyone can invest in a Regulation A offering, but of course they have to know about it first – which brings us to marketing. All Regulation A offerings will be allowed to engage in general solicitation and advertising, at least according to the SEC. However, Tier 1 offerings will be required to review and comply with applicable state law related to such solicitation and advertising, including any prohibitions related to same.

    Regulation A allows for prequalification solicitations of interest in an offering, commonly referred to as “testing the waters.”  Issuers can use “test the waters” solicitation materials both before and after the initial filing of the offering statement and by any means.  A company can use social media, Internet websites, television and radio, print advertisements, and anything they can think of. Marketing can be oral or in writing, with the only limitations being certain disclaimers and antifraud. Although a company can and should be creative in its presentation of information, there are laws in place with serious ramifications requiring truth in the marketing process. Investors should watch for red flags such as clearly unprovable statements of grandeur, obvious hype or any statement that sounds too good to be true – as they are probably are just that.

    When using “test the waters” or prequalification marketing, a company must specifically state whether a registration statement has been filed and if one has been filed, provide a link to the filing. Also, the company must specifically state that no money is being solicited and that none will be accepted until after the registration statement is qualified with the SEC. Any investor indications of interest during this time are 100% non-binding – on both parties. That is, the potential investor has no obligation to make an investment when or if the offering is qualified with the SEC and the company has no obligation to file a registration statement or if one is already filed, to pursue its qualification. In fact, a company may decide that based on a poor response to its marketing efforts, it will abandon the offering until some future date or forever.

    As such, solicitation material used before qualification of the offering circular must contain a legend stating that no money or consideration is being solicited and none will be accepted, no offer to buy securities can be accepted and any offer can be withdrawn before qualification, and a person’s indication of interest does not create a commitment to purchase securities.

    For a complete discussion of Regulation A/A+ “test the waters” rules and requirements, see my blog HERE.

    All solicitation material must be submitted to the SEC as an Exhibit under Part III of Form 1-A. This is a significant difference from S-1 filers, who are not required to file “test the waters” communications with the SEC.

    A company can use Twitter and other social media that limit the number of characters in a communication, to test the waters as long as the company provides a hyperlink to the required disclaimers. In particular, a company can use a hyperlink to satisfy the disclosure and disclaimer requirements in Rule 255 as long as (i) the electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication; (ii) including the entire disclaimer and other required disclosures would exceed the character limit on that particular platform; and (iii) the communication has an active hyperlink to the required disclaimers and disclosures and, where possible, prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

    Unlike the “testing of the waters” by emerging growth companies that are limited to QIB’s and accredited investors, a Regulation A+ company could reach out to retail and non-accredited investors. After the public filing but before SEC qualification, a company may use its preliminary offering circular to make written offers.

    Of course, all “test the waters” materials are subject to the antifraud provisions of federal securities laws.

    Like registered offerings, ongoing regularly released factual business communications, not including information related to the offering of securities, will be allowed and will not be considered solicitation materials.

    Continuous or Delayed Offerings

    Continuous or delayed offerings (a form of a shelf offering) will be allowed only if the offering statement pertains to: (i) securities to be offered or sold solely by persons other than the issuer (however, note that under the rules this is limited to 30% of any offering); (ii) securities that are offered pursuant to a dividend or interest reinvestment plan or employee benefit plan; (iii) securities that are to be issued upon the exercise of outstanding options, warrants or rights; (iv) securities that are to be issued upon conversion of other outstanding securities; (v) securities that are pledged as collateral; or (vi) securities for which the offering will commence within two days of the offering statement qualification date, will be made on a continuous basis, will continue for a period of in excess of thirty days following the offering statement qualification date, and at the time of qualification are reasonably expected to be completed within two years of the qualification date. Under this last continuous offering section, issuers that are current in their Tier 2 reporting requirements may make continuous or delayed offerings for up to three years following qualification of the offering statement. Moreover, in the event a new qualification statement is filed for a new Regulation A offering, unsold securities from a prior qualification may be included, thus carrying those unsold securities forward for an additional three-year period.

    Additional Tier 2 Requirements; Ability to List on an Exchange

    In addition to the basic requirements that apply to all Regulation A offerings, Tier 2 offerings also require: (i) audited financial statements (though I note that state blue sky laws almost all require audited financial statements, so this federal distinction does not have a great deal of practical effect); (ii) ongoing reporting requirements including the filing of an annual and semiannual report and periodic reports for current information (Forms 1-K, 1-SA and 1-U, respectively); and (iii) a limitation on the number of securities non-accredited investors can purchase of no more than 10% of the greater of the investor’s annual income or net worth.

    The investment limitations for non-accredited investors resulted from a compromise with state regulators that opposed the state law preemption for Tier 2 offerings. It is the obligation of the issuer to notify investors of these limitations.  Issuers may rely on the investors’ representations as to accreditation (no separate verification is required) and investment limits.

    An issuer may file a Form 8-A concurrently with the qualification of the Form 1-A, to register under the Exchange Act, and may make immediate application to a national securities exchange. A Form 8-A is a simple (generally 2-page) registration form used instead of a Form 10 for issuers that have already filed the substantive Form 10 information with the SEC (generally through an S-1). The Form 8-A will only be allowed if it is filed concurrently with the Form 1-A. That is, an issuer could not qualify a Form 1-A, wait a year or two, then file a Form 8-A.  In that case, they would need to use the longer Form 10.

    Where the securities will be listed on a national exchange, the accredited investor limitations will not apply. When the Form 8-A is for a registration with a national securities exchange under Section 12(b) of the Exchange Act, the national exchange must certify the Form 8-A within five (5) business days of its filing.

    Upon filing a Form 8-A, the issuer will become subject to the full Exchange Act reporting obligations, and the scaled-down Regulation A+ reporting will automatically be suspended.

    An issuer that reports under Regulation A is not considered to be subject to the Exchange Act reporting requirements and therefore its shareholders will be subject to the longer one-year holding period under Rule 144.

    An issuer that reports under Regulation A may apply to trade on any of the three OTC Markets tiers of quotation (Pink, OTCQB or OTCQX).

    Integration

    The final rules include a limited-integration safe harbor such that offers and sales under Regulation A will not be integrated with prior or subsequent offers or sales that are (i) registered under the Securities Act; (ii) made under compensation plans relying on Rule 701; (iii) made under other employee benefit plans; (iv) made in reliance on Regulation S; (v) made more than six months following the completion of the Regulation A offering; or (vi) made in crowdfunding offerings exempt under Section 4(a)(6) of the Securities Act (Title III crowdfunding – i.e., Regulation CF).

    The SEC has now confirmed that a Regulation A offering can rely on Rule 152 such that a completed exempt offering, such as under Rule 506(b), will not integrate with a subsequent Regulation A filing. Under Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently makes a public offering. The SEC has also issued guidance that Rule 152 applies to prevent integration between a completed 506(b) offering and a subsequent 506(c) offering, indicating that the important factor in the Rule 152 analysis is the ability to publicly solicit regardless of the filing of a registration statement. As Rule 506(c) is considered a public offering for this analysis, there would be nothing preventing a company from completing a Rule 506(c) offering either before, concurrently or after a Regulation A/A+ offering.

    In the absence of a clear exemption from integration, issuers would turn to the five-factor test. In particular, the determination of whether the Regulation A offering would integrate with one or more other offerings is a question of fact depending on the particular circumstances at hand. In particular, the following factors need to be considered in determining whether multiple offerings are integrated: (i) are the offerings part of a single plan of financing; (ii) do the offerings involve issuance of the same class of securities; (iii) are the offerings made at or about the same time; (iv) is the same type of consideration to be received; and (v) are the offerings made for the same general purpose.

    Offering Statement – General

    A company intending to conduct a Regulation A offering must file an offering circular with, and have it qualified by, the SEC. The offering circular will be filed with the SEC using the EDGAR database filing system. Prospective investors must be provided with the filed prequalified offering statement 48 hours prior to a sale of securities.  Once qualified, investors must be provided with the final qualified offering circular. Like current registration statements, Regulation A rules provide for an “access equals delivery” model, whereby access to the offering statement via the Internet and EDGAR database will satisfy the delivery requirements.

    There are no filing fees for the process. The offering statement is reviewed, commented upon and then declared “qualified” by the SEC with an issuance of a “notice of qualification.” The notice of qualification can be requested or will be issued by the SEC upon clearing comments. The SEC has been true to its word in that the review process has been substantially lighter than that normally associated with an S-1 or other Securities Act registration statement.

    Issuers may file offering circular updates after qualification in lieu of post-qualification amendments similar to the filing of a post-effective prospectus for an S-1. To qualify additional securities, a post-qualification amendment must be used.

    Offering Statement – Non-Public (Confidential) Submission

    The rules permit an issuer to submit an offering statement to the SEC on a confidential basis. However, only companies that have not previously sold securities under a Regulation A or a Securities Act registration statement may submit the offering confidentially.

    Confidential submissions will allow a Regulation A issuer to get the process under way while soliciting interest of investors using the “test the waters” provisions without negative publicity risk if it alters or withdraws the offering before qualification by the SEC. However, the confidential filing, SEC comments, and all amendments must be publicly filed as exhibits to the offering statement at least 15 calendar days before qualification.

    Confidential submissions to the SEC are completed by choosing a “confidential” setting in the EDGAR system. To satisfy the requirement to publicly file the previous confidential information, the company can file all prior confidential information as an exhibit to its non-confidential filing, or change the setting in the EDGAR system on its prior filings, from “confidential” to “public.” In the event the company chooses to change its EDGAR setting to “public,” it would not have to re-file all prior confidential material as an exhibit to a new filing.

    If a company wants to keep certain information confidential, even after the required time to make such information public, it will need to submit two confidential requests, one as part of the registration review process and one when prior confidential filings are made public. During the confidential Form 1-A review process, the company should submit a request under Rule 83 in the same manner it would during a typical review of a registered offering. Once the company is required to make the prior filings “public” (15 days prior to qualification), the company would make a new request for confidential treatment under Rule 406 in the same manner other confidential treatment requests are submitted. In particular, for a confidential treatment request under Rules 83 and 406, a company must submit a redacted version of the document via EDGAR with the appropriate legend indicating that confidential treatment has been requested. Concurrently, the company must submit a full, unredacted paper version of the document to the SEC using the ordinary confidential treatment procedure (such filings are submitted via a designated fax line to a designated person to maintain confidentiality).

    Offering Statement – Form and Content

    An offering statement is submitted on Form 1-A.  Form 1-A consists of three parts: Part I – Notification, Part II – Offering Circular, and Part III – Exhibits. Part I calls for certain basic information about the issuer and the offering, and is primarily designed to confirm and determine eligibility for the use of the Form and a Regulation A offering in general. Part I includes issuer information; issuer eligibility; application of the bad-actor disqualification and disclosure; jurisdictions in which securities are to be offered; and unregistered securities issued or sold within one year. As Regulation A is legally an unregistered offering, all Regulation A securities sold within the prior year must be included in this section.

    Part II is the offering circular and is similar to the prospectus in a registration statement. Part II requires disclosure of basic information about the issuer and the offering; material risks; dilution; plan of distribution; use of proceeds; description of the business operations; description of physical properties; discussion of financial condition and results of operations (MD&A); identification of and disclosure about directors, executives and key employees; executive compensation; beneficial security ownership information; related party transactions; description of offered securities; and two years of financial information.

    The required information in Part 2 of Form 1-A is scaled down from the requirements in Regulation S-K applicable to Form S-1.  Issuers can complete Part 2 by either following the Form 1-A disclosure format or by including the information required by Part I of Form S-1 or Form S-11 as applicable. Note that only issuers that elect to use the S-1 or S-11 format will be able to subsequently file an 8-A to register and become subject to the Exchange Act reporting requirements.

    Moreover, issuers that had previously completed a Regulation A offering and had thereafter been subject to and filed reports with the SEC under Tier 2 can incorporate by reference from these reports in future Regulation A offering circulars.

    Form 1-A requires two years of financial information.  All financial statements for Regulation A offerings must be prepared in accordance with GAAP. Financial statements of a Tier 1 issuer are not required to be audited unless the issuer has obtained an audit for other purposes. Audited financial statements are required for Tier 2 issuers. Audit firms for Tier 2 issuers must be independent and PCAOB-registered.  An offering statement cannot be qualified if the date of the balance sheet is more than nine months prior to the date of qualification.  Interim periods are only required for six-month intervals.

    A recently created entity may choose to provide a balance sheet as of its inception date as long as that inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date. The date of the most recent balance sheet determines which fiscal years, or period since existence for recently created entities, the statements of comprehensive income, cash flows and changes in stockholders’ equity must cover. When the balance sheet is dated as of inception, the statements of comprehensive income, cash flows and changes in stockholders’ equity will not be applicable.

    Part III requires an exhibits index and a description of exhibits required to be filed as part of the offering statement.

    Offering Price

    All Regulation A+ offerings must be at a fixed price. That is, no offerings may be made “at the market” or for other than a fixed price.

    Ongoing Reporting

    Both Tier I and Tier 2 issuers must file summary information after the termination or completion of a Regulation A offering. A Tier I company must file certain information about the Regulation A offering, including information on sales and the termination of sales, on a Form 1-Z exit report no later than 30 calendar days after termination or completion of the offering. Tier I issuers do not have any ongoing reporting requirements.

    Tier 2 companies are also required to file certain offering termination information and have the choice of using Form 1-Z or including the information in their first annual report on Form 1-K. In addition to the offering summary information, Tier 2 issuers are required to submit ongoing reports including: an annual report on Form 1-K, semiannual reports on Form 1-SA, current event reports on Form 1-U and notice of suspension of ongoing reporting obligations on Form 1-Z (all filed electronically on EDGAR).

    A Tier 2 issuer may file an exit form 1-Z and relieve itself of any ongoing requirements if no securities have been sold under the Regulation A offering and the Form 1-Z is filed prior to the company’s first annual report on Form 1-K

    The ongoing reporting for Tier 2 companies is less demanding than the reporting requirements under the Securities Exchange Act. In particular, there are fewer 1-K items and only the semiannual 1-SA (rather than the quarterly 10-Q) and fewer events triggering Form 1-U (compared to Form 8-K). Companies may also incorporate text by reference from previous filings.

    The annual Form 1-K must be filed within 120 calendar days of fiscal year-end.  The semiannual Form 1-SA must be filed within 90 calendar days after the end of the semiannual period. The current report on Form 1-U must be filed within 4 business days of the triggering event. Successor issuers, such as following a merger, must continue to file the ongoing reports.

    The rules also provide for a suspension of reporting obligations for a Regulation A issuer that desires to suspend or terminate its reporting requirements.Termination is accomplished by filing a Form 1-Z and requires that a company be current over stated periods in its reporting, have fewer than 300 shareholders of record, and have no ongoing offers or sales in reliance on a Regulation A offering statement. Of course, a company may file a Form 10 to become subject to the full Exchange Act reporting requirements.

    The ongoing reports will qualify as the type of information a market maker would need to support the filing of a 15c2-11 application.  Accordingly, an issuer that completes a Tier 2 offering could proceed to engage a market maker to file a 15c2-11 application and trade on the OTC Markets. The OTC Markets allows Regulation A reporting companies to apply for any of its tiers of listing, including the Pink, OTCQB or OTCQX depending on which tier the company qualifies.

    Freely Tradable Securities

    Securities issued to non-affiliates in a Regulation A offering are freely tradable.  Securities issued to affiliates in a Regulation A offering are subject to the affiliate resale restrictions in Rule 144, except for a holding period. The same resale restrictions for affiliates and non-affiliates apply to securities registered in a Form S-1.

    However, since neither Tier 1 nor Tier 2 Regulation A+ issuers are subject to the Exchange Act reporting requirements, the Rule 144 holding period for shareholders is the longer 12 months and such shareholders would not be able to rely on Rule 144 at all if the company has been a shell company at any time in its history. For more information on Rule 144 as relates to shell companies, see HERE.

    Treatment under Section 12(g)

    Exchange Act Section 12(g) requires that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited, register with the SEC, generally on Form 10, and thereafter be subject to the reporting requirements of the Exchange Act.

    Regulation A exempts securities in a Tier 2 offering from the Section 12(g) registration requirements if the issuer meets all of the following conditions:

    • The issuer utilizes an SEC-registered transfer agent. Such transfer agent must be engaged at the time the company is relying on the exemption from Exchange Act registration;
    • The issuer remains subject to the Tier 2 reporting obligations;
    • The issuer is current in its Tier 2 reporting obligations, including the filing of an annual and semiannual report; and
    • The issuer has a public float of less than $75 million as of the last business day of its most recently completed semiannual period or, if no public float, had annual revenues of less than $50 million as of its most recently completed fiscal year-end.

    Moreover, even if a Tier 2 issuer is not eligible for the Section 12(g) registration exemption as set forth above, that issuer will have a two-year transition period prior to being required to register under the Exchange Act, as long as during that two-year period, the issuer continues to file all of its ongoing Regulation A reports in a timely manner with the SEC.

    State Law Preemption

    Tier I offerings do not preempt state law and remain subject to state blue sky qualification. The SEC encourages Tier 1 issuers to utilize the NASAA-coordinated review program for Tier I blue sky compliance. For a brief discussion on the NASAA-coordinated review program, see my blog HERE.  However, in practice, I do not think this program is being utilized; rather, when Tier 1 is being used, it is limited to just one or a very small number of states and companies are completing the blue sky process independently.

    Tier 2 offerings are not subject to state law review or qualification – i.e., state law is preempted.  Securities sold in Tier 2 offerings were specifically added to the NSMIA as federally covered securities. Federally covered securities are exempt from state registration and overview.  Regulation A provides that “(b) Treatment as covered securities for purposes of NSMIA… Section 18(b)(4) of the Securities Act of 1933… is further amended by inserting… (D) a rule or regulation adopted pursuant to section 3(b)(2) and such security is (i) offered or sold on a national securities exchange; or (ii) offered or sold to a qualified purchaser, as defined by the Commission pursuant to paragraph (3) with respect to that purchase or sale.”  For a discussion on the NSMIA, see my blogs HERE and HERE.

    State securities registration and exemption requirements are only preempted as to the Tier 2 offering and securities purchased pursuant to the qualified Tier 2 for 1-A offering circular. Subsequent resales of such securities are not preempted.

    State law preemption only applies to the securities offering itself and not to the person or persons who sell the securities.  Unfortunately, not all states offer an issuer exemption for issuers that sell their own securities in public offerings such as a Regulation A offering. In particular, Arizona, Florida, Texas, New York and North Dakota require issuers to register with the state as issuer broker-dealers to qualify to sell securities directly. Each of these states has a short-form registration process in that regard.  In addition, Alabama and Nevada require that the selling officers and directors of issuers register with the state.

    Federally covered securities, including Tier 2 offered securities, are still subject to state antifraud provisions, and states may require certain notice filings. In addition, as with any covered securities, states maintain the authority to investigate and prosecute fraudulent securities transactions.

    Broker-Dealer Placement

    Broker-dealers acting as placement or marketing agents are required to comply with FINRA Rule 5110 regarding filing of underwriting compensation, for a Regulation A offering.

    Further Thoughts

    Although I am a big advocate of Regulation A, companies continue to learn that it is just a legal process with added benefits, such as active advertising and solicitation including through social media. There is no pool of funds to tap into; it is not a line of credit; it is just another process that companies can use to reach out to the investing public and try to convince them to buy stock in, or lend money to, their company.

    As such, companies seeking to complete a Regulation A/A+ offering must consider the economics and real-world aspects of the offering.  Key to a successful offering are a reasonable valuation and rational use of proceeds. A company should demonstrate value through its financial statements and disclosures and establish that the intended use of proceeds will result in moving the business plan ahead and hopefully create increased value for the shareholders. Investors want to know that their money is being put to the highest and best use to result in return on investment. Repayment of debt or cashing out of series A investors is generally not a saleable use of proceeds. Looking for $50 million for 30% of a pre-revenue start-up just isn’t going to do it! The company has to be prepared to show you, the investor, that it has a plan, management, vision and ability to carry out the business proposition it is selling.

    From the investors’ perspective, these are risky investments by nature. Offering materials should be scrutinized. The SEC does not pass on the merits of an offering – only its disclosures. The fact that the registration statement has been qualified by the SEC has no bearing on the risk associated with or quality of the investment. That is for each investor to decide, either alone or with advisors, and requires really reviewing the offering materials and considering the viability of the business proposal. At the end of the day, the success of the business, and therefore the potential return on investment, requires the company to perform – to sell their widgets, keep ahead of the competition, and manage their business and growth successfully.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    330 Clematis Street, Suite 217
    West Palm Beach, FL 33401
    Phone: 800-341-2684 – 561-514-0936
    Fax: 561-514-0832
    LAnthony@LegalAndCompliance.com
    www.LegalAndCompliance.com
    www.LawCast.com

    Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    Recommendations of the SEC Government Business Forum- Part 3

    Tuesday, June 13, 2017, 11:39 AM [General]
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    Recommendations of the SEC Government Business Forum- Part 3- Over the last couple of LawCasts I have been summarizing the 15 recommendations of the Forum in the order of priority.Today I am starting with the 9th recommendation and completing my summary.

    9. The eligibility requirements for the use of Form S-3 should be revised to include all reporting companies.

    10. The SEC should clarify the relationship of exempt offerings in which general solicitation is not permitted, such as in Section 4(a)(2) and Rule 506(b) offerings, with Rule 506(c) offerings involving general solicitation in the following ways: (i) the facts and circumstances analysis regarding whether general solicitation is attributable to purchasers in an exempt offering should apply equally to offerings that allow general solicitation as to those that do not (such that even if an offering is labeled 506(c), if in fact no general solicitation is used, it can be treated as a 506(b); and (ii) to clarify that Rule 152 applies to Rule 506(c) so that an issuer using Rule 506(c) may subsequently engage in a registered public offering without adversely affecting the Rule 506(c) exemption. I note that within days of the forum, the SEC did indeed issue guidance on the use of Rule 152 as applies to Rule 506(c) offerings, at least as relates to an integration analysis between 506(b) and 506(c) offerings.

    11. The SEC should amend Regulation ATS to allow for the resale of unregistered securities including those traded pursuant to Rule 144 and 144A and issued pursuant to Sections 4(a)(2), 4(a)(6) and 4(a)(7) and Rules 504 and 506.

    12. The SEC should permit an ATS to file a 15c2-11 with FINRA and review the FINRA process to make sure that there is no undue burden on applicants and issuers. An ATS is an “alternative trading system.” The OTC Markets’ trading platform is an ATS. This recommendation would allow OTC Markets to directly file 15c2-11 applications on behalf of companies. A 15c2-11 application is the application submitted to FINRA to obtain a trading symbol and allow market makers to quote the securities of companies that trade on an ATS, such as the OTC Markets. Today, only market makers seeking to quote the trading in securities can submit the application. Also today, the application process can be difficult and lack clear guidance or timelines for the market makers and companies involved. This process definitely needs attention and this recommendation would be an excellent start.

    13. Regulation CF should be amended to (i) permit the usage of special-purpose vehicles so that many small investors may be grouped together into one entity which then makes a single investment in a company raising capital under Regulation CF; and (ii) harmonize the Regulation CF advertising rules to avoid traps in situations where an issuer advertises or engages in general solicitations under Regulation A or Rule 506(c) and then converts to or from a Regulation CF offering.

    14. The SEC should provide greater clarity on when trading activities require ATS registration, and when an entity or technology platform needs to a funding portal, broker-dealer, ATS and/or exchange in order to “be engaged in the business” of secondary trading transactions.

    15. Reduce the Rule 144 holding period to 3 months for reporting companies. I fully support this recommendation.

    Financial Choice Act 2.0 Has Made Progress

    Tuesday, June 13, 2017, 8:13 AM [General]
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    On June 8, 2017, the U.S. House of Representative passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act (the “Financial Choice Act 2.0” or the “Act”) by a vote of 283-186 along party lines. Only one Republican did not vote in favor of the Act. On May 4, 2017, the House Financial Services Committee voted to approve the Act. A prior version of the Act was adopted by the Financial Services Committee in September 2016 but never proceeded to the House for a vote.

    The Financial Choice Act 2.0 is an extensive, extreme piece of legislation that would dismantle a large amount of the power of the SEC and strip the Dodd-Frank Act of many of its key provisions. The future of the Act is uncertain as it is unlikely to get through the Senate, although a rollback of Dodd-Frank remains a priority to the current administration. It is also possible that parts of the lengthy Act could be bifurcated out and included in other Acts that ultimately are passed into law.

    Introduction

    The Executive Summary for the  as presented to the House lists the following seven key principles of the Act:

    1. Taxpayer bailouts of financial institutions must end and no company can remain “too big to fail”;
    2. Both Wall Street and Washington must be held accountable;
    3. Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful;
    4. Economic growth must be revitalized through competitive, transparent, and innovative capital markets;
    5. Every American, regardless of their circumstances, must have the opportunity to achieve financial independence;
    6. Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty; and
    7. Systemic risk must be managed in a market with profit and loss.

    The Act focuses on dismantling Dodd-Frank, including the controversial Volcker Rule, which prohibits banks from engaging in proprietary trading; the U.S. Department of Labor fiduciary rule, which went into effect on June 9, 2017; and the “too big to fail” provisions allowing for federal government bailouts. Among many provisions directly impacting the authority of the SEC, the Act would strip the SEC of the power to use administrative proceedings as an enforcement tool.

    Summary of Key Provisions

    Executive Compensation

    Many of the changes would repeal provisions related to executive compensation.  Related to executive compensation, the Financial Choice Act would include:

    1. Pay Ratio. The Act would repeal the section of Dodd-Frank which requires companies to disclose the pay ratio between CEO’s and the median employees. For a summary of the pay ratio rule, see my blog HERE. This rule is under scrutiny and attack separately and apart from the Financial Choice Act as well.  On February 6, 2017, acting SEC Chair Michael Piwowar called for the SEC to conduct an expedited review of the rule for the purpose of reconsidering its implementation.  It is highly likely that this rule will not be implemented as written, if at all.
    2. Incentive-based Compensation. The Act would repeal provisions of Dodd-Frank that require enhanced disclosure related to incentive-based compensation by certain institutions.
    3. Hedging. Proposal to repeal the section of Dodd-Frank which requires companies to disclose whether employees or directors can offset any increase in market value of the company’s equity grants as compensation.
    4. Say on Pay. The Act will amend the Say on Pay rules such that the current advisory vote would only be necessary in years when there has been a material change to compensation arrangements, as opposed to the current requirement that a vote be held at least once every 3 years.  For more information on the Say on Pay rules, see my blog HERE.
    5. Clawback Rules. The Clawback rules would prohibit companies from listing on an exchange unless such company has policies allowing for the clawback of executive compensation under certain circumstances. This would be in the form of additional corporate governance requirements. For more information on the clawback rules, see my blog HERE. The Act will amend the clawback rules such that they will only apply to current and former executives that had “control or authority” over the company’s financial statements.

    On the bank-specific side, the Act would eliminate bank prohibitions on capital distributions and limitations on mergers, consolidations, or acquisitions of assets or control to the extent that these limitations relate to capital or liquidity standards or concentrations of deposits or assets.

    Key Provisions on Securities Laws

    Key provisions directly impacting the federal securities laws and potentially my client base:

    1. An increase in the Sarbanes-Oxley Act (“SOX”) Rule 404(b) compliance threshold from $250 million public float to $500 million. Currently smaller reporting companies and emerging-growth companies are exempted from compliance with Rule 404(b).  A “smaller reporting company” is currently defined in Securities Act rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K, as one that: (i) has a public float of less than $75 million as of the last day of their most recently completed second fiscal quarter; or (ii) a zero public float and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.

    Interestingly, when the SEC proposed an increase in the threshold definition of “smaller reporting company” in June of last year from $75 million to $250 million, it specifically chose to concurrently amend the definition of an “accelerated filer” to eliminate the benefit of an exclusion from the SOX 404(b) requirements for companies with a float over $75 million. In particular, the SEC proposed to amend the definition of “accelerated filer” to eliminate an exclusion for smaller reporting companies such that a company could be a smaller reporting company but also an accelerated filer. The SEC noted in its rule release that it intended to be sure that companies with a float over $75 million, whether a smaller reporting company or not, would have to comply with SOX 404(b) and the accelerated filing schedule for quarterly and annual reports. See my blog HERE.  If passed, the Financial Choice Act 2.0 would override the SEC’s current proposal on this point.

    1. The Financial Choice Act 2.0 would increase the registration threshold requirements under Section 12(g) of the Securities Exchange Act for smaller companies. The Act 2.0 would also index the thresholds for inflation moving forward. In addition, the Act would eliminate the requirement to obtain ongoing accredited investor verifications for determining the Section 12(g) registration requirements.  On May 1, 2016, the SEC amended Exchange Act Rules 12g-1 through 12g-4 and 12h-3 related to the procedures for termination of registration under Section 12(g) through the filing of a Form 15 and for suspension of reporting obligations under Section 15(d), to reflect the higher thresholds set by the JOBS Act. The SEC also made clarifying amendments to: (i) cross-reference the definition of “accredited investor” found in rule 501 of Regulation D, with the Section 12(g) registration requirements; (ii) add the date for making the registration determination (last day of fiscal year-end); and (iii) amend the definition of “held of record” to exclude persons who received shares under certain employee compensation plans. Under the rules, a company that is not a bank, bank holding company or savings-and-loan holding company is required to register under Section 12(g) of the Exchange Act if, as of the last day of its most recent fiscal year-end, it has more than $10 million in assets and securities that are held of record by more than 2,000 persons, or 500 persons that are not accredited. As I discussed in this blog on the subject HERE identifying accredited investors for purposes of the registration, and deregistration, requirements could be problematic. Investors are not necessarily responsive to inquiries from a company and may balk at providing personal information, especially those that have purchased in the open market but then subsequently, for whatever reason, converted such ownership to certificate/book entry or otherwise “record ownership.”
    2. The Financial Choice Act 2.0 would expand the coverage under Title 1 of the JOBS Act to allow all companies to engage in certain test-the-waters communications in an IPO process and to file registration statements on a confidential basis. Title 1 of the JOBS Act specifically only applies to emerging-growth companies (EGC’s). In particular, Section 105(c) of the JOBS Act provides an EGC with the flexibility to “test the waters” by engaging in oral or written communications with qualified institutional buyers (“QIB’s”) and institutional accredited investors (“IAI’s”) in order to gauge their interest in a proposed offering, whether prior to (irrespective of the 30-day safe harbor) or following the first filing of any registration statement, subject to the requirement that no security may be sold unless accompanied or preceded by a Section 10(a) prospectus.  Generally, in order to be considered a QIB, you must own and invest $100 million of securities, and in order to be considered an IAI, you must have a minimum of $5 million in assets.  For more information on test-the-waters communications by EGC’s, see my blog HERE.

    The Financial Choice Act 2.0 will also expand the ability to file a registration statement on a confidential basis to all companies and not just EGC’s.  Currently, an EGC may initiate the “initial public offering” (“IPO”) process by submitting its IPO registration statements confidentially to the SEC for nonpublic review by the SEC staff. A confidentially submitted registration statement is not deemed filed under the Securities Act and accordingly is not required to be signed by an officer or director of the issuer or include auditor consent.  Signatures and auditor consent are required no later than 15 days prior to commencing a “road show.”  If the EGC does not conduct a traditional road show, then the registration statements and confidential submissions must be publicly filed no later than 15 days prior to the anticipated effectiveness date of the registration statement. I note that the JOBS Act had originally set the number of days for submission of all information at 21 days and the FAST Act shortened that time period to 15 days.

    1. A requirement that the SEC Chair conduct a study and issue a report on self-regulatory organizations, including recommendations to eliminate duplications and inefficiencies amongst the various organizations.
    2. The Financial Choice Act 2.0 would increase the allowable offering amount for Tier 2 of Regulation A (i.e., Regulation A+) from $50 million to $75 million in any 12-month period. I often write about Regulation A/A+.  For the most recent comprehensive article on the subject, see my blog HERE.
    3. The Financial Choice Act 2.0 would prohibit the SEC from requiring the use of “universal proxies” in contested elections of directors. Pre-change in administration, on October 16, 2016, the SEC proposed a rule requiring the use of the use of universal proxy cards in connection with contested elections of directors.  The proposed card would include the names of both the company and opposed nominees.  The SEC also proposed amendments to the rules related to the disclosure of voting options and standards for the election of directors.  My blog on the proposed rule can be read HERE.
    4. An inflation update to the minimum thresholds for shareholders to be able to submit proposals for annual meetings. Currently Rule 14a-8 permits qualifying shareholders to submit matters for inclusion in the company’s proxy statement for consideration by the shareholders at the company’s annual meetings. Procedurally to submit a matter, among other qualifications, a shareholder must have continuously held a minimum of $2,000 in market value or 1% of the company’s securities entitled to vote on the subject proposal, for at least one year prior to the date the proposal is submitted and through the date of the annual meeting.  For further reading on this rule, see HERE.  The Financial Choice Act 2.0 would update the ownership requirement thresholds for inflation.
    5. Delay the repeal of the Chevron doctrine for two years. Under the Chevron doctrine, a court must defer to an agency’s interpretation of statutes and rules.  The Financial Choice Act called for the immediate repeal of this doctrine.  The Act 2.0 would delay such repeal for two years.
    6. Increase the limits on disclosure requirements for employee-issued securities under Rule 701 from $10 million as set forth in version 1.0 to $20 million with an inflation adjustment. Rule 701 of the Securities Act provides an exemption from the registration requirements for the issuance of securities under written compensatory benefit plans. Rule 701 is a specialized exemption for private or non-reporting entities and may not be relied upon by companies that are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Rule 701 exemption is only available to the issuing company and may not be relied upon for the resale of securities, whether by an affiliate or non-affiliate.  Currently, additional disclosures are required for issuance valued at $5 million or more in any 12-month period.  For more information on Rule 701, see my blog HERE.
    7. The Act seeks to shift enforcement and penalties away from companies and towards individual officers, directors and other offenders. The SEC would be required to conduct an economic analysis before enforcing civil penalties against a company, to ensure that the company itself benefited from the alleged wrongdoing.  The intent is to prevent harm to innocent shareholders by penalizing a company for the wrongdoing of individuals.  Likewise, the Act will increase the penalties that can be imposed against individuals by two and in some cases three times the current amounts where the penalties are tied to the defendant’s illegal profits.  The Act would give the SEC new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” and increase the stakes for repeat offenders.  Moreover, the Act will increase the maximum criminal fines for persons that engage in insider trading or other corrupt practices.
    8. The Act would strip the SEC of the power to use administrative proceedings as an enforcement tool. The new law would permit a respondent to remove any administrative proceeding to a federal district court. Moreover, the Act would raise the SEC’s standard of proof in administrative proceedings from “preponderance of evidence” to the higher “clear and convincing” evidence of wrongdoing.   For more on this topic, see HERE.
    9. The Act would reduce the SEC’s enforcement power in other areas as well. The duration of both the SEC’s and CFTC’s subpoena power would be reduced.  All investigations would be subject to a process for timely conclusion.  Respondents would also be guaranteed access to commissioners at the Wells process stage (before a formal complaint). In addition, the Act would restrict the SEC’s ability to leverage settlement by threatening the company or individual with automatic disqualification from regulated activities. Instead, disqualification would now require a formal hearing. The SEC would also have to publish its enforcement manual, providing further transparency into filing decisions.
    10. The Act would require that all fines collected by the PCAOB and Municipal Securities Rulemaking Board be remitted to the Treasury for deficit reduction.

    Too Big to Fail Bailouts

    Related to bailouts, the Financial Choice Act 2.0 would, in summary:

    1. Repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions (i.e., “too big to fail”);
    2. Repeal Title II of Dodd-Frank and replace it with new bankruptcy code provisions specifically designed to accommodate large, complex financial institutions. Title II of Dodd-Frank is the orderly liquidation authority, granting authority to the federal government to obtain receivership control over large financial institutions;
    3. Repeal Title VIII of Dodd-Frank, which gives the Financial Stability Oversight Council access to the Federal Reserve discount window for systematically important financial institutions (i.e., gives the federal government the money to bail out financial institutions) as well as the authority to conduct examinations and enforcement related to risk management;
    4. Restrict the Federal Reserve’s discount window lending to Bagehot’s dictum; and
    5. Prohibit the use of the Exchange Stabilization fund to bail out financial firms or creditors.

    Financial Regulator Accountability

    Related to accountability from financial regulators, the Act would:

    1. Make all financial regulatory agencies subject to the REINS Act related to appropriations and place all such agencies on an appropriations process subject to congressional control and oversight;
    2. Require all financial regulators to conduct a detailed cost-benefit analysis for all proposed regulations to ensure that benefits outweigh costs (provisions analogous to this are already required, but this would be more extreme);
    3. Increase transparency of financial regulations’ costs to state and local governments and private-sector entities;
    4. Reauthorize the SEC for a period of 5 years with funding, structural and enforcement reforms (i.e., dismantle the current SEC and replace it with a watered-down version);
    5. “Institute significant due-process reforms for every American who feels that they have been the victim of a government shakedown”;
    6. Repeal the Chevron Deference doctrine.  Under this doctrine, a court must defer to an agency’s interpretation of statues and rules;
    7. Demand greater accountability and transparency from the Federal Reserve, both in its conduct of monetary policy and its prudential regulatory activity, by including the House-passed Fed Oversight Reform and Modernization Act;
    8. Abolish the Office of Financial Research;
    9. Require public notice and comment for any international standard-setting negotiation;
    10. Prohibit the financial regulators and DOJ from using settlement agreements to require donations to non-victims;
    11. Increase transparency and accountability in the Federal Reserve’s conduct of the supervisory stress tests while streamlining duplicative and overly burdensome components; and
    12. Institute criminal penalties for leaks of sensitive, market-moving information related to the Federal Reserve’s stress-test and living-will processes.

    Financial Institutions

    The Act intends to create strongly capitalized, well-managed financial institutions by:

    1. Providing an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital.  Any banking organization that makes a qualifying capital election but fails to maintain the specified non-risk-weighted leverage ratio will lose its regulatory relief;
    2. Exempting banking organizations that have made a qualifying capital election from any federal law, rule or regulation that provides limitations on mergers, consolidations, or acquisitions of assets or control, to the extent that the limitations relate to capital or liquidity standards or concentrations of deposits or assets; and
    3. Exempting banking organizations that have made a qualifying capital election from any federal rule, law or regulation that permits a banking agency to consider risk “to the stability of the US banking or financial system” which was added to various federal banking laws by Section 604 of Dodd-Frank, when reviewing an application to consummate a transaction or commence an activity.

    Miscellaneous Provisions

    Under the heading “[U]leash opportunities for small businesses, innovators, and job creators by facilitating capital formation,” the Act would:

    1. Repeal multiple sections of Dodd-Frank, including the Volker Rule (which restricts U.S. banks from making speculative investments, including proprietary trading, venture capital and merchant bank activities);
    2. Repeal the SEC’s authority to either prospectively or retroactively eliminate or restrict securities arbitration;
    3. Repeal Dodd-Frank’s non-material specialized disclosure; and
    4. Incorporate more than two dozen committee- or House-passed capital formation bills, including H.R. 1090 – Retail Investor Protection Act (prohibiting certain restrictions on investment advisors), H.R. 1312 – Small Business Capital Formation Enhancement Act (requiring prompt SEC action on finding of the annual SEC government business forum), H.R. 79 – Helping Angels Lead Our Startups Act (directing the SEC to amend Regulation D, expanding the allowable use of solicitation and advertising), and H.R. 910 – Fair Access to Investment Research Act (expanding exclusion of research reports from the definition of an offer for or to sell securities under the Securities Act).

    The Act also contains numerous provisions related to small community financial institutions, as well as many provisions fundamentally changing the Consumer Financial Protection Bureau.

    Dodd-Frank Budget Cuts

    A few articles have indicated that President Trump’s fiscal 2018 budget proposal would include a restructure of the U.S. Consumer Financial Protection Bureau (CFPB), which was created by the Dodd-Frank Act. The purpose of the CFPB is to protect borrowers from predatory lending. The restructure would reduce the federal deficit by $145 million in the 2018 fiscal year.  The CFPB has been under attack by the administration. Last year, a U.S. appeals court found that the CFPB structure violated the Constitution, a decision that is currently being appealed.

    The SEC reserve fund, which was also created under Dodd-Frank, would also be eliminated.  Currently the reserve fund is $50 million a year and is used by the SEC to overhaul its information technology, including upgrades to the EDGAR filing system and initiatives to police fraud and track equities trading patterns.

    The remainder of the SEC budget would remain unchanged as it is considered deficit-neutral because the fees it collects from enforcement are matched by congressional funding.

    Thoughts

    In recent years we have seen the most dramatic changes in capital formation regulations and technological developments in the past 30 years, if not longer. Significant capital-formation changes include: (i) the creation of Rule 506(c), which came into effect on September 23, 2013, and allows for general solicitation and advertising in private offerings where the purchasers are limited to accredited investors; (ii) the overhaul of Regulation A, creating two tiers of offerings which came into effect on June 19, 2015, and allows for both pre-filing and post-filing marketing of an offering, called “testing the waters”; (iii) the addition of Section 5(d) of the Securities Act, which came into effect in April 2012, permitting emerging-growth companies to test the waters by engaging in pre- and post-filing communications with qualified institutional buyers or institutions that are accredited investors; and (iv) Title III crowdfunding, which came into effect on May 19, 2016, and allows for the use of Internet-based marketing and sales of securities offerings.

    At the same time, we faced economic stagnation since the recession, a 7-year period of near-zero U.S. interest rates and negative interest rates in some foreign nations, nominal inflation and a near elimination of traditional bank financing for start-ups and emerging companies. If bank credit were available for small and emerging-growth companies, it would be inexpensive financing, but it is not and I do believe that Dodd-Frank and over-regulation are directly responsible for this particular problem.

    In my practice, optimism and growth remain the buzzwords. My clients are universally enthusiastic about the state of the economy and business prospects as a whole. The consistent mantra of decreasing regulations is universally welcomed with a sense of relief. The SEC will not be immune to these changes, and we are just beginning to see what I believe will be an avalanche of positive change for small businesses and capital formation.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    330 Clematis Street, Suite 217
    West Palm Beach, FL 33401
    Phone: 800-341-2684 – 561-514-0936
    Fax: 561-514-0832
    LAnthony@LegalAndCompliance.com
    www.LegalAndCompliance.com
    www.LawCast.com

    Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

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    Memo from House Financial Services Committee Proposes Sweeping Changes to The Financial Choice Act

    Monday, June 12, 2017, 2:02 PM [General]
    0 (0 Ratings)

    Details in a February 2017 memo written by the chair of the U.S. House of Representatives Financial Services Committee illustrate the Trump administration’s interest in sweeping changes and the easing of regulations that govern banks, securities trading, capital investment, corporate reporting, taxpayer bailouts and consumer protection.

    Even though the memo was not intended for public dissemination, and even though some of the suggested changes to the proposed 2016 Financial Choice Act and its more recent 2017 version may never be enacted into law, West Palm Beach Attorney Laura Anthony, founding partner of Legal and Compliance, LLC, says the new thinking highlighted in the memo represents what could be an “avalanche of positive change for small businesses and capital formation.”

    As it lays out a 2017 framework for what it calls Financial Choice Act 2.0, the memo recommends changes to the original House-passed U.S. Financial Choice Act, which if passed, would dismantle much of the Securities and Exchange Commission’s (SEC) power and overturn many key provisions in the Dodd-Frank Act, a sweeping law that was adopted in wake of the 2008 recession and banking scandals, Anthony writes in the Securities Law Blog. (The bill passed the House 233-186 on June 8, and now awaits Senate action).

    Key among the original Financial Choice Act’s provisions were repeal of requirements for companies to report executive compensation, repeal of the federal government’s authority to classify financial institutions as “too big to fail” and cessation of the federal government’s ability to bail out institutions financially, or to investigate risky financial institutions and enforce bail-out provisions.

    Anthony said the updated 2017 recommendations outlined in the memo have specific implications for federal securities law and capital formation, her areas of legal expertise. Among them:

    · A threshold increase from $250 million to $500 million for public floats that would be subject to the reporting provisions of the Sarbanes-Oxley Act (SOX). Smaller reporting companies also would be freed of some SOX reporting requirements.

    · Higher registration thresholds, eased registration requirements and an inflation index for smaller companies involved in securities and investments.

    · Greater flexibility around “test-the-waters” communications during initial public offerings, and expanded ability to file IPO registration statements on a confidential basis to all companies, not just to emerging growth companies.

    · General rollbacks of provisions governing self-regulation, allowable offering amounts, the use of universal proxies in contested elections of directors, shareholder ability to submit proposals for vote at annual meetings, and a two-year delay in the repeal of the Chevron doctrine, which requires courts to defer to an agency’s interpretation of statues and laws.

    “Compared to the past 30 years, recent years have seen the most dramatic changes in capital formation regulations and technological development,” Anthony writes in the Securities Law Blog. “My clients are universally enthusiastic about the state of the economy and business prospects as a whole. The consistent mantra of decreased regulation is universally welcomed with a sense of relief.”

    FINRA Proposes Amendments To The Corporate Financing Rules

    Tuesday, June 6, 2017, 8:10 AM [General]
    0 (0 Ratings)

    On April 11, 2017, the Financial Industry Regulatory Authority (FINRA) released three regulatory notices requesting comment on rules related to corporate financing and capital formation. In particular, the regulatory notices propose changes to Rule 5110, which regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities; Rules 2241 and 2242, which regulate equity and debt research analysts and research reports; and Rule 2310, which relates to public offerings of direct participation programs and unlisted REIT’s.

    The proposed changes come as part of the FINRA360 initiative announced several months ago. Under the 360 initiative, FINRA has committed to a complete self-evaluation and improvement. As part of FINRA360, the regulator has requested public comment on the effectiveness and efficiency of its rules, operations and administrative processes governing broker-dealer activities related to the capital-raising process and their impact on capital formation.

    Regulatory Notice 17-14 – Request for Comment on Rules Impacting Capital Formation

    Regulatory Notice 17-14 is a request for comment on FINRA rules impacting capital formation. In its opening FINRA notes that the ability of small and large businesses to raise capital efficiently is critical to job creation and economic growth and that broker-dealers play a vital role in assisting in that process. FINRA members act as underwriters for public offerings, advisors on capital raising and corporate restructuring, placement agents for private offerings, funding portals and research analysts. Furthermore, there have been significant changes in the capital-raising processes, such as securities-based crowdfunding and Regulation A+ both initiated from the JOBS Act.

    FINRA itself has made changes to modernize its regulations such as through the creation of the new Capital Acquisition Broker (CAB) and funding portal rules for brokers engaged in a limited range of fundraising activities. For more information on the CAB rules, see HERE. FINRA also seeks comments on changes that may be helpful in both the CAB and funding portal rules.

    Below is a brief summary of some, but not all, the rules highlighted in FINRA Regulatory Notice 17-14.

    Rules 2241 and 2242

    The Regulatory Notice seeks comment on any FINRA rules that may impact capital formation, but highlights and summarizes certain rules that have significant impact on the process. For example, FINRA highlights Rule 2241 (Research Analysts and Research Reports) and Rule 2242 (Debt Research Analysts and Debt Research Reports), both of which are subject to a separate Regulatory Notice discussed in this blog.

    Rule 2241 covers equity research reports and requires a separation between research and investment banking, regulates conflicts of interest and requires certain disclosures in reports and public appearances. In Regulatory Notice 17-16, FINRA proposes a safe harbor from Rule 2241 for eligible desk commentary prepared by sales and trading or principal trading personnel that may rise to the level of a research report.

    Rule 2242 covers debt research reports and is similar to Rule 2241 with key differences reflecting the differences in trading of debt and equity.

    Rule 2310

    Rule 2310 addresses underwriting terms and arrangements in public offerings of direct participation programs (DPP’s) and unlisted real estate investment trusts (REIT’s). These investments tend to be complex and as such, the Rule regulates underwriter and placement agent compensation, requires due diligence and contains suitability guidelines.

    The 5100 Series of Rules

    The 5100 series of rules govern underwriting compensation and terms, underwriter conduct, conflicts of interest and related matters.  Although there are nine rules in the 5100 Series, a few in particular most often affect the capital formation process.

    Rule 5110 – Corporate Financing Rule – Underwriting Terms and Arrangements; Rule 5121 – Public Offerings of Securities with Conflicts of Interest

    Rule 5110 regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities.  The Rule prohibits member firms from participating in a public offering of securities if the underwriting terms and conditions, including compensation, are unfair as defined by FINRA. The Rule requires FINRA members to make filings with FINRA disclosing information about offerings they participate in, including the amount of all compensation to be received by the firm or its principals, and affiliations and relationships that could result in the existence of a conflict of interest. In addition, the Rule limits certain compensation such as termination or tail fees and rights of first refusal and imposes lock-up restrictions related to the sale or transfer of securities received as compensation. The lock-up restrictions apply to a period beginning six months prior to the initial filing of a registration statement with the SEC and end 90 days following the effectiveness of the registration statement.

    Where Rule 5110 requires the disclosure of affiliations, Rule 5121 goes further and prevents member firms from participating in offerings where certain conflicts of interest exist. Member firms are prohibited from participating in a public offering where certain conflicts exist, including where the issuer is controlled by or under common control with the FINRA member firm or its associated persons.

    For more information on Rules 5110 and 5121, see HERE.

    Rule 5122 – Private Placement of Securities Issued by Members; Rule 5123 – Private Placement of Securities

    Subject to certain exceptions, such as where an offering is limited to accredited investors, Rule 5123 requires member firms to file a copy of the private placement memorandum, term sheet or other disclosure document with FINRA, for all offerings in which they sell securities, within 15 calendar days of the first sale. FINRA enacted the rule in an effort to further police the private placement market and to ensure that members participating in these private offerings conduct sufficient due diligence on the securities and their issuers.

    Rule 5122 requires members that offer or sell their own securities to file the private placement memorandum, term sheet or other offering document at or prior to the first time the documents are provided to any prospective investor. Rule 5122 also establishes standards on disclosure and the use of private placement proceeds.

    Rule 6432 – Compliance with Rule 15c2-11

    Rule 6432 generally requires that, prior to initiating or resuming quotations in a non-exchange-listed security in a quotation medium, such as OTC Markets, a member firm must demonstrate compliance with Rule 6432 which, in turn, requires that the member firm has the information set forth in Securities Act Rule 15c2-11. Under Rule 6432, a member complies by filing a FINRA Form 211 at least three business days before the member’s quotation is published or displayed in the quotation medium. In reality the processing of the Form 211 application takes much longer than three days, and often several months. Moreover, the information and review conducted by FINRA in this process can be arduous.

    Regulatory 17-15 – Request for Comment on Amendments to the Corporate Financing Rule

    As discussed above, Rule 5110 is the corporate financing rule regulating underwriting compensation and prohibiting unfair arrangements in connection with the public offerings of securities. Under Rule 5110, a member firm is required to submit its underwriting or other arrangements associated with a public offering and obtain a no-objection letter from FINRA before they can proceed. FINRA proposes substantial changes to modernize, simplify and clarify its provisions.

    The proposed amendments will clarify what is included in determining underwriter compensation. The Rule will eliminate a limit that prevents a member and its affiliates from acquiring more than 25% of a company’s stock and increase the fraction of shares sold in a private placement that a syndicate of investors can buy from 20 percent to 40 percent.  Currently, underwriting compensation is defined to include a laundry list of items. The proposed amendment would define “underwriting compensation” to mean “any payment, right, interest, or benefit received or to be received by a participating member from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering.” Underwriting compensation would also include “finder fees and underwriter’s counsel fees, including expense reimbursements and securities.” The proposal would continue to provide two non-exhaustive lists of examples of payments or benefits that would be and would not be considered underwriting compensation.

    The Rule would also allow members to use formulas other than those dictated by FINRA to calculate their underwriting compensation, extend certain filing deadlines, and clarify circumstances in which stock sale restrictions don’t apply.

    The proposed Rule increases the filing deadline from one business day to three business days after the filing of the offering with the SEC.  The Rule also reduces the number of documents that must be filed. Furthermore, if a member participating in the offering files with FINRA, other participating members will be not be required to do so.

    The Rule governs all public offerings subject to exceptions. Moreover, certain offerings are not subject to the Rule, such as offerings exempt under Section 4(a)(1), 4(a)(2) or 4(a)(6) of the Securities Act.

    Regulatory Notice 17-16 – Request for Comment on Proposed Safe Harbor from FINRA Equity and Debt Research Rules

    As discussed above, Rule 2241 covers equity research reports and requires a separation between research and investment banking, regulates conflicts of interest and requires certain disclosures in reports and public appearances. Rule 2242 covers debt research reports and is similar to Rule 2241 with key differences reflecting the differences in trading of debt and equity.

    FINRA proposes a safe harbor from Rule 2241 and 2242 for eligible desk commentary prepared by sales and trading or principal trading personnel that may rise to the level of a research report. In particular, the safe harbor would cover specified brief, written analysis distributed to eligible institutional investors that comes from sales and trading or principal trading personnel but that may rise to the level of a research report (i.e., desk commentary).

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    330 Clematis Street, Suite 217
    West Palm Beach, FL 33401
    Phone: 800-341-2684 – 561-514-0936
    Fax: 561-514-0832
    LAnthony@LegalAndCompliance.com
    www.LegalAndCompliance.com
    www.LawCast.com

    Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    New FINRA Proposal Governing SEC Exams Could Simplify Registration Process And Address the Challenge of Unlicensed Finders

    Monday, June 5, 2017, 1:18 PM [General]
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    By mid-2017, new rules proposed by the Financial Industry Regulatory Authority (FINRA) could simplify the process by which financial representatives are tested and registered by the SEC, and the same rules hold promise for clarifying SEC accreditation, encouraging cross-training within securities firms, and addressing the issue of unregulated finders.

    Writing in the Securities Law Blog, Laura Anthony, a founding partner of Legal and Compliance, LLC, in West Palm Beach, says that the revised SEC licensing and examination structure – which now includes 16 job-specific exams and 11 FINRA-specific exams – has the potential to save money for FINRA, member firms and representatives by reducing exam redundancies, simplifying the registration process and eliminating outdated exams and materials.

    Key among the FINRA-suggested changes, which will be implemented in a two-phase process, is the creation of a new beginning-level exam, the Security Industry Essentials, or SIE. The SIE would be open to any interested individual, with or without sponsorship by a broker-dealer, and it would be required for anyone interested in working in the securities industry.

    The exam covers four key topic areas, including capital markets, products and risks, regulatory frameworks, and the basics of trading customer accounts and prohibited activities.

    Once employed by a securities firm, SIE-accredited representatives would be required to take additional exams related to their specific job function. FINRA views the new SIE approach as a way to pre-qualify potential job applicants, a measure that saves its member firms the time and expense of vetting and testing prospective candidates, whose passing status and scores would be available from FINRA.

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    “The SIE could also be a factor in considering exemptions from the registration requirements for finders (unlicensed securities representatives), a topic that continues to be at the forefront for regulators and practitioners alike,” according to Anthony. “Perhaps the SEI, or a variation thereof, could be used as part of a workable regulatory regime related to finders.”

    The new FINRA rules suggest other changes to SEC testing and registration requirements:

    · The current two-year time frame in which registered representatives’ licenses expire if they are not employed by a FINRA member firm could be extended up to seven years, if certain conditions are met covering FINRA membership, required forms, work performance and continuing education requirements

    · The number of required exams for representatives would drop from 16 to eight, while exams would we be eliminated for options representatives, corporate securities and government securities representatives, and order processing assistants.

    The current practice of limiting securities licenses to representatives with specific job functions will be eased. Instead, any employee of a member firm can take exams and be licensed in any capacity covered by the firm’s FINRA membership.

    Securities Offerings and Road Shows

    Thursday, June 1, 2017, 2:32 PM [General]
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    We often hear the words “road show” associated with a securities offering. A road show is simply a series of presentations made by company management to key members of buy-side market participants, such as broker-dealers that may participate in the syndication of an offering, and institutional investor groups and money managers that may invest into an offering.

    A road show is designed to provide these market participants with more information about the issuer and the offering, and a chance to meet and assess management, including their presentation skills and competence in a Q&A setting. Investors often place a high level of importance on road-show meetings, so a well-run road show can make the difference of the level of success of an offering.

    A road show usually involves an intensive phase of multiple meetings and presentations in a number of different cities throughout a one-to-two-week period. Although road shows are generally live, they can also be done by teleconference, or electronic using prepared written presentation materials. In today’s Internet world, road shows are often recorded from a live presentation and made available publicly for a period of time. The meetings and presentations can vary in length and depth, depending on the size and importance of the particular audience.

    During the road show, the underwriters are building a book of interest that will help determine the pricing for the offering.

    A company can also conduct a “non-deal road show” for the purpose of driving interest in the company and its stock, when no particular offering is planned.

    Unless it is a non-deal road show, the road show involves an offer of securities. “Offers” of securities are very broadly defined. The Securities Act defines “offer to sell,” “offer for sale,” or “offer” to include “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.”

    The timing and manner of all offers of securities are regulated, especially in registered offerings. All issuers that have filed a registration statement are permitted to make oral offers of their securities, but only certain types of written offers are allowed. Written offers must comply with the Securities Act, requiring that a prospectus meeting the information requirements (in Section 10(a)) be delivered at the time of or prior to the offer. In addition, certain eligible issuers may provide supplemental written information and graphic communications not otherwise included in the prospectus filed with the SEC (i.e., a free writing prospectus) as part of an offer of securities. All of these oral and written communication rules are implicated in the road-show process and must be considered when planning and completing the road show.

    A road show is generally timed to be completed in the last few weeks before a registration statement goes effective or a Regulation A offering circular becomes qualified. In a registered offering, Section 5(c) prohibits offers prior to the filing of the registration statement and as such, the road show would never commence pre-filing. Regulation A is not a registered offering for purposes of Section 5(c), but for practical purposes, a Regulation A road show also commences right before SEC qualification. Rule 163 provides an exception to the pre-filing offer rules only available to well-known seasoned issuers (very big companies).

    For a private offering, the road show occurs once the offering documents are completed. An Emerging Growth Company (EGC) that has filed its registration statement on a confidential basis must make the initial filing, and all confidentially submitted amendments, public a minimum of 15 days prior to starting the road show. A road show is subject to the test-the-waters and pre-effective communication rules.

    A road show is specifically regulated under Rule 433 of the Securities Act and the free writing prospectus rules. Securities Act Rule 433(h)(4) defines a road show as an offer, other than a statutory prospectus, that “contains a presentation regarding an offering by one or more of the members of the issuer’s management ….. and includes discussion of one or more of the issuer, such management, and the securities being offered.” The SEC definition of road show includes the language “other than a statutory prospectus.” The statutory prospectus is one that meets the requirements of Section 10(a) of the Securities Act and is generally the filed final prospectus that contains the disclosures outlined in the particular offering form being used (for example, Form S-1 or 1-A) and including disclosures delineated in Regulations S-K and S-X.

    If the information being presented in a road show is nothing more than what is already included in the prospectus filed with the SEC, there are no particular SEC filing requirements. However, if the information is written and goes beyond the statutory prospectus, it may be considered a “free writing prospectus” and be subject to specific eligibility requirements for use, form and content and SEC filing requirements all as set forth in Rule 433. Rule 405 of the Securities Act defines a free writing prospectus (FWP) as “any written communication as defined in this section that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed… and is made by means other than (i) a prospectus satisfying the requirements of Section 10(a) of the Act…; (2) a written communication used in reliance on Rule 167 and Rule 426 (note that both rules relate to offerings by asset backed issuers); or (3) a written communication that constitutes an offer to sell or solicitation of an offer to buy such securities that falls within the exception from the definition of prospectus in clause (a) of Section 2(a)(10) of the Act.” Section 2(a)(10)(a) exempts written communications that are provided after a registration statement goes effective with the SEC, as long as the effective registration statement is provided to the recipient prior to or at the same time.

    Types of Road Shows, Oral/Live vs. Written, Free Writing Prospectus (FWP) Requirements

    The rules distinguish between a “live” vs. a “written” road-show communication, with one being an “oral offer” and more freely allowed and the other being a “written offer” and more strictly regulated. In addition, the rules differentiate requirements based on whether a road show is for a registered or private offering and, if a registered offering, whether such offering is an initial public offering (IPO) involving common or convertible equity.

    Where a road show communication is purely oral, it is not an FWP and thus there are no specific SEC filing requirements. Where an oral communication implicates Regulation FD, a Form 8-K would need to be filed regardless of whether the communication is during a road show or in any other forum.

    Although road shows are generally live and specifically designed to constitute oral offers, they can also be electronic using prepared written presentation materials. Both live and electronic road shows may be available for replay electronically via the Internet.

    Live road shows include: a live, in-person presentation to a live, in-person audience; a live, real-time presentation to a live audience or simultaneous multiple audiences transmitted electronically; a concurrent live presentation and real-time electronic transmittal of such presentation; a webcast or video conference that originates live and is transmitted in real time; a live telephone conversation, even if it is recorded; and the slide deck or other presentation materials used during the road show, unless investors are allowed to print or take copies of the information.

    The explanatory note to Rule 433(d)(8) states: “A communication that is provided or transmitted simultaneously with a road show and is provided or transmitted in a manner designed to make the communication available only as part of the road show and not separately is deemed to be part of the road show. Therefore, if the road show is not a written communication, such a simultaneous communication (even if it would otherwise be a graphic communication or other written communication) is also deemed not to be written.”

    Road show slides and video clips are not considered to be written offers, as long as copies are not left behind. Even handouts are not considered written offers, as long as they are collected at the end of the presentation. If they are left behind, however, they become a FWP and are subject to Securities Act Rules 164 and 433, including a requirement that the materials be filed with the SEC.

    A video recording of the road show meeting will not need to be filed as an FWP, as long as it is available on the Internet to everyone and covers the same ground as the live road show. Such video road shows are considered a “bona fide electronic road show.” Rule 433(h)(5) defines a “bona fide electronic road show” as a road show “that is a written communication transmitted by graphic means that contains a presentation by one or more officers of an issuer or other persons in an issuer’s management….” It is permissible to have multiple versions of a bona fide electronic road show, as long as all versions are available to an unrestricted audience. For example, different members of management may record different presentations and, although access must be unrestricted, management may record versions that are more retail investor facing or institutional investor facing.

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    On the other hand, a FWP would include any written communication that could constitute an offer to sell or a solicitation of an offer to buy securities subject to a registration statement that is used after the filing of a registration statement and before its effectiveness. A FWP is a supplemental writing that is not part of the filed registration statement. If the writing is simply a repetition of information contained in the filed registration statement, it may be used without regard to the separate FWP rule.

    Rule 405 of the Securities Act defines a written communication as any communication that is “written, printed, a radio or television broadcast or a graphic communication.” A graphic communication includes “all forms of electronic media, including but not limited to, audiotapes, videotapes, facsimiles, CD Rom, electronic mail, Internet websites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks and other forms of computer data compilation.” Basically, for purposes of rules related to FWPs, all communications that can be reduced to writing are considered a written communication. Therefore, radio and TV interviews, other than those published by unaffiliated and uncompensated media, would be considered a FWP and subject to the SEC use and filing rules.

    Electronic road shows that do not originate live and in real time are considered written communications and FWPs. Once it is determined that a road show includes a FWP, unless an exemption applies, an SEC filing is required. Bona fide electronic road shows, although technically a FWP, are not required to be filed with the SEC. In addition, Rule 433 only requires the filing of a FWP for an IPO of common or convertible equity.

    non-exempted FWP must be filed with the SEC, using Form 8-K, no later than the date of first use. An after-hours filing will satisfy this requirement, as long as it is on the same calendar day. In addition, all FWPs must be filed with the SEC, whether distributed by the registrant or another offering participant, and whether such distribution was intentional or unintentional.

    The use of a FWP has specific eligibility requirements. A FWP may not be used by any issuer that is ineligible” for such use. The following entities are ineligible to use a free writing prospectus: companies that are or were in the past three years a blank-check company; companies that are or were in the past three years a shell company; penny-stock issuers; companies that conducted a penny-stock offering within the past three years; business development companies; (vi) companies that are delinquent in their Exchange Act reporting requirements; limited partnerships that are engaged in an offering that is not a firm commitment offering; and companies that have filed or have been forced into bankruptcy in the last three years.

    Small- and micro-cap issuers will rarely be eligible to use an FWP. Accordingly, small and micro-cap companies generally are limited to live road shows involving oral offers not constituting a FWP. Moreover, underwriters generally require specific representations and warranties and indemnification related to FWPs regardless of whether they are required to be filed with the SEC.

    Content

    The road-show presentation usually covers key aspects of the offering itself, including the reasons for the offering and use of proceeds. In addition, management will cover important aspects of their business and growth plans, industry trends, competition, and the market for their products or services. An important aspect of the road show is the question-and-answer period or Q&A, though this is only included in live interactive road shows. It is common for materials to include drilled-down information that is provided on a higher level in the prospectus, as well as theory and thoughts behind business plans and management goals.

    The preparation of the road show content is usually a collaborative effort among the company, underwriters and legal counsel. Although the road show begins much later in the process, since its content is derived from the registration statement, ideally the planning begins at the same time as the registration statement drafting. Also, slides, PowerPoint presentations and other presentation materials should be carefully prepared to get the most out of their effectiveness.

    The lawyer generally reviews all materials for compliance with the rules related to offering communications, as well as potential liability for the representations themselves. Part of the compliance review is ensuring that no statements conflict with or provide a material change to the information in the filed offering prospectus that could be deemed materially misleading by content or omission, and compliance with Regulation FD if applicable.

    From a technical legal perspective, all road show materials should contain a disclaimer for forward-looking statements, and that disclaimer should be read in live or prerecorded road-show presentations. Where the road-show content includes a FWP, it is required to contain a legend indicating that a prospectus has been filed, where it can be read (a hyperlink can satisfy this requirement), and advising prospectus investors to read the prospectus.

    Under Rule 433(b)(2), the FWP for a non-reporting or unseasoned company must be accompanied with or preceded by the prospectus filed with the SEC. The delivery requirement can be satisfied by providing a hyperlink to the filed prospectus on the EDGAR database.

    Road-show materials, even those that are also a FWP, generally are not subject to liability under Section 11 of the Securities Act. Section 11 provides a private cause of action in favor of purchasers of securities, against those involved in filing a false or misleading public offering registration statement. Road-show materials, including FWPs, are not a part of the registration statement, but rather are supplemental materials. Section 12 liability, however, does apply to road-show materials. Section 12 provides liability against the seller of securities for material misstatements or omissions in connection with that sale, whether oral or in writing.

    Follow-on Offerings and Regulation FD

    Regulation FD requires that companies subject to the SEC reporting requirements take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner, such that the public has simultaneous access to the information. Consequently, Regulation FD would be implicated in connection with communications in a road show for a follow-on offering by a company already subject to the Exchange Act reporting requirements. Regulation FD excludes communications: to a person who owes the issuer a duty of trust or confidence, such as legal counsel and financial advisors; communications to any person who expressly agrees to maintain the information in confidence; and communications in connection with certain offerings of securities registered under the Securities Act of 1933.

    When a road show is being conducted by a company subject to the Exchange Act reporting requirements, counsel should ensure that that the presentation either does not include nonpublic information or that the information is simultaneously disclosed to the public in a Form 8-K. As a backstop where Regulation FD applies, the company should also consider having all road-show attendees sign a confidentiality agreement.


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