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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    Initial Coin Offerings (ICO), Capturing Attention in the Investment Community, Also Attract Cryptocurrency Scrutiny by the SEC a

    Wednesday, October 18, 2017, 10:23 AM [General]
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    As activity picks up around investments and sales that involve digital coins and cryptocurrencies, so is scrutiny by the U.S. Securities and Exchange Commission (SEC) and other federal agencies that oversee the financial services and securities industries.

    Indeed, Bitcoins, other virtual currencies and the underlying blockchain processes and distributed ledgers that underlie their transactions are creating “a wave of questions and concerns” within the SEC, according to a September 11 speech by Wesley R. Bricker, SEC chief accountant to the American Institute of CPAs (AICPA).

    West Palm Beach Attorney Laura Anthony, founding partner of Legal & Compliance, LLC, writing in the Securities Law Blog, discusses Bricker’s speech and the far-reaching impact of these new types of digital assets on the investment community, including SEC financial reporting requirements and registration of securities offers that involve digital currencies, or so-called “initial coin offerings” (ICO’s).

    The key takeaway for investors, she says, is an understanding that transactions and sales involving cryptocurrencies are subject to the same accounting principles and reporting requirements as traditional investments and transactions. Likewise, both holders and issuers of investments that involve digital currencies should ask key questions.

    Rulings and decisions that emerged from recent ICO’s and federal investigations have made it clear that “U.S. accounting principles apply to ICO’s as they do with any other offerings,” Ms. Anthony points out.

    Federal securities laws, reporting requirements, disclosure requirements, exemptions and registration requirements apply to companies or firms that offer and sell securities in the U.S., she writes — whether the purchases involve U.S. dollars or virtual currencies, and whether the transactions are distributed in certificated form or through the distributed ledger technology (DLT) that underlies cryptocurrency transactions.

    Just within the last year, she notes, ICO’s have drawn the attention of the SEC’s Division of Corporation Finance, Division of Enforcement, and Investor Advisory Committee, as well as interest from the Financial Industry Regulatory Authority (FINRA), Office of the Comptroller of the Currency, the U.S. Commodity Futures Trading Commission, the Federal Reserve Board and the Internal Revenue Service.

    And as federal scrutiny has grown, so has activity around ICO’s, including an August $285 million Filecoin ICO, which used the SEC Rule 506(c) exemptionin an offering that attracted investors from Sequoia Capital, Andreessen Horowitz and Union Square Ventures, she writes.

    “Other similar offerings have been, and continue to be, launched on platforms such as CoinList (which is partnered with AngelList) and now more traditional securities offering platforms, such as Start Engine,” according to Ms. Anthony. “I am certain the number of securities ICO’s relying on traditional securities offering registration or exemption rules and regulations will continue to increase dramatically.”

    Ms. Anthony reiterates key questions posed by the SEC’s Bricker for both issuers and holders of cryptocurrency or digital currency assets and transactions:

    · Issuers: Which financial statement filing requirements apply? Do liabilities exist that require recognition or disclosure? Do previously recognized assets require de-recognition? Do revenues or expenses require recognition or deferral? Do owners’ transactions result in debt classification, equity classification or compensation expenses? Do income taxes apply?

    · Holders: Does specialized accounting guidance (e.g., for investment companies) apply to the holder’s financial statement presentation? Which specific characteristics of the coin or virtual token determine whether, how and at what value the transaction will affect the holder’s financial statements? What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?

    SEC Chief Accountant Speaks On Initial Coin Offerings (ICO’s)

    Tuesday, October 17, 2017, 9:50 AM [General]
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    On September 11, 2017, the SEC Chief Accountant, Wesley R. Bricker, gave a speech before the AICPA National Conference on Banks & Savings Institutions. The bulk of the speech was similar to Mr. Bricker’s June 2017 speech before the 36th Annual SEC and Financial Reporting Institute Conference, summarized HERE. However, one topic that was new, and interesting enough to spark this blog, was related to initial coin offerings (ICO’s). Note that offers and sales of digital coinscryptocurrencies or tokens using distributed ledger technology (DLT) or blockchain have become widely known as ICO’s.

    As the capital markets become more and more focused on all things blockchain, including ICO’s, secondary token trading, and disruptive changes made possible by distributed ledger technology (DLT), which is inevitably transforming capital market processes, the SEC is fronting a wave of questions and concerns on the subject. On July 25, 2017, the SEC issued a report on an investigation related to an ICO by the DAO and statements by the Divisions of Corporation Finance and Enforcement related to the investigative report. On the same day, the SEC issued an Investor Bulletin related to ICO’s. (See summary of the report, statement and investor bulletin HERE).

    Almost all divisions and committees of the SEC are and will be impacted by DLT and ICO’s and are working diligently to address the technology and the public markets’ wave of interest. In August 2017 the SEC suspended the trading in a slew of bitcoin-based companies questioning the accuracy of publicly reported information and press releases. On September 20, 2017, the SEC’s Investor Advisory Committee announced the agenda for its next meeting to be held on October 12, the first item on which is blockchain and other distributed ledger technology and its implications for securities markets.

    FINRA is likewise as attentive to DLT and its far-reaching implications.  On July 13, 2017, FINRA held a Blockchain Symposium including participation by the Office of the Comptroller of Currency, the US Commodity Futures Trading Commission (CFTC), the Federal Reserve Board and the SEC. Earlier in the year, FINRA published a report on the technology and its potential impacts on broker-dealers and the markets in general. See HERE for a summary.

    Although outside of my practice area, the Internal Revenue Service is stepping up efforts to make sure taxes are reported and paid for trading profits and other taxable income related to cryptocurrencies. In that regard, the IRS has contracted with a company that provides software that analyzes and tracks bitcoin transactions.

    Mr. Bricker’s Remarks on ICO’s

    Mr. Bricker begins by talking about the SEC report on the DAO investigation, stating that “[T]he report makes clear that the federal securities laws apply to those who offer and sell securities in the U.S., regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, whether those securities are purchased using U.S. dollars or virtual currencies, or whether they are distributed in certificated form or through distributed ledger technology.”

    All offers and sales of securities in the U.S. must either be registered with the SEC or must qualify for an exemption. The SEC’s registration requirements include the filing of audited financial statements. In addition, I note that many exemptions likewise require the disclosure of either audited or unaudited financial statements. Furthermore, the basic antifraud principles encompassed in Rule 10b-5 of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933, require full and fair disclosure, which includes financial information about the issuer.

    Mr. Bricker confirms the basics that U.S. accounting principles apply to ICO’s as they do with any other offerings. Issuing companies should review guidance related to the presentation and disclosure of financial statements, consolidation, translation, assets, liabilities, revenue, expenses and ownership.

    Mr. Bricker lists questions that both issuers and holders should consider:

    Issuers:

    What are the necessary financial statement filing requirements?

    Are there liabilities requiring recognition or disclosure?

    Are there previously recognized assets that require de-recognition?

    Are there revenues or expenses requiring recognition or deferral?

    Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?

    Are there implications for the provision for income taxes?

    Holders:

    Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?

    What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?

    What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?

    A new wave of ICO’s

    Since the SEC issued its report on the DAO, my office has been actively involved with clients and potential clients interested in structuring ICO’s which comply with the federal (and state) securities laws. Although I have yet to see a registered ICO, several are now utilizing 506(b) or 506(c) to complete their offerings. For instance, the recent $285 million Filecoin ICO was completed in reliance on Rule 506(c) and included such institutional investors as Sequoia Capital, Andreessen Horowitz and Union Square Ventures. Other similar offerings have been and continue to be launched on platforms such as CoinList (which is partnered with AngelList) and now more traditional securities offering platforms such as Start Engine. I am certain the number of securities ICO’s relying on traditional securities offering registration or exemption rules and regulations will continue to increase dramatically.

    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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    SEC Grants Filing Extensions to Companies, Agents and Investors Impacted by Hurricanes Harvey, Irma and Maria

    Tuesday, October 10, 2017, 10:42 AM [General]
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    The U.S. Securities and Exchange commission is giving some U.S. companies, investors, agents and municipal advisors a “hurricane break” in the next few weeks.

    In a September 28 announcement, the federal agency that oversees securities laws has extended filing deadlines into mid-October and early November for companies, investors or businesses whose operations were impacted by three recent U.S. hurricanes or whose records were damaged, destroyed or lost as a result of the storms.

    Laura Anthony, founding partner of Legal and Compliance, LLC, a national corporate and securities law firm in West Palm Beach, notes in the Securities Law Blog that the filing extension covers nearly 20 required reports or filings that apply to publicly traded companies, investment firms, accountants, transfer agents, municipal advisors and others who were negatively impacted by Hurricanes Harvey, Irma or Maria.

    Others who do not fit into those categories but are also unable to provide required information to the SEC or their shareholders by standard October deadlines can ask the agency for relief on a case-by-case basis.

    In general, SEC filing deadlines have been extended to:

    · October 10 for those affected by Hurricane Harvey, which swept primarily through Texas and Louisiana from August 24-September 3

    · October 19 for those affected by Hurricane Irma, which swept through the Caribbean, U.S. Virgin Islands, Puerto Rico, Florida, Georgia, South Carolina, North Carolina and Tennessee from September 6-16

    · November 2 for those affected by Hurricane Maria, which swept through the Lower Caribbean, Puerto Rico and U.S. Virgin Islands from September 19-23

    The filing exemptions apply to a variety of reports covered by the Exchange Act provisions, including Forms 10-Q, 10-K and 8-K under sections 13(a); 13(d), (f) and (g) filings for reports of ownership in excess of 5%: Section 14 proxy, information and tender offer filings; Section 15(d) filings that include Forms 10-K, 10-K and 8-K; 16(a), Regulations 13A, 13 D-G, 14A, 14C, 15D, and Exchange Act Rules 13f-1, 14f-1 and 16a-3.

    For exempted forms mailed to shareholders, companies must show that the intended recipients had addresses in the areas affected by in hurricane areas where mail was suspended. In most cases, exemptions will be granted if companies met all filing requirements and deadlines prior to the storms.

    In another departure from SEC policy, independent auditors will be allowed to provide books and records to clients to help reconstruct accounting records that were lost or destroyed by either of the three hurricanes, with the understanding that auditors will resume their independent, third-party status as soon as financial records have been restored and the company can resume normal business and accounting operations.

    Updates On Regulation A+

    Tuesday, October 10, 2017, 8:41 AM [General]
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    On September 14, 2017, the SEC issued three new Compliance and Disclosure Interpretations (C&DI) to provide guidance related to the filing of a Form 8-A in conjunction with a Tier 2 Regulation A offering. The new guidance addresses the timing of financial statements and subsequent reporting requirements under the Securities Exchange Act of 1934 (“Exchange Act”).

    Furthermore, earlier in September, the House passed the Improving Access to Capital Act, which would allow companies subject to the reporting requirements under the Exchange Act to use Regulation A, a change the entire marketplace is advocating for.

    As I do with each blog on Regulation A, I have included an ongoing commentary, 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

    As a reminder, Tier 2 issuers that have used the S-1 format for their Form 1-A filing are 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. The Form 8-A must be filed within 5 days of qualification of the Form 1-A by the SEC. A Form 8-A is a simple Exchange Act 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.

    On March 31, 2017, the SEC issued initial guidance on the timing of the filing of the Form 8-A for an exchange listing. 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 new September 14, 2017 CD&I, the SEC confirmed that an issuer may also file a Form 8-A concurrently (i.e., within five days) with the qualification of a post-qualification amendment to a Form 1-A. Financial statements in any qualified Form 1-A must be current at the time of qualification, and the same holds true for a post-qualification amendment. The SEC also points out that the reason a Form 8-A may only be filed concurrently with qualification is to ensure that financial statements are current at the time a company becomes registered under the Exchange Act and subject to its reporting requirements.

    The SEC has clarified the timing of an annual report on Form 10-K once an 8-A has been filed.  In particular, in the event that a qualified Form 1-A did not contain an audit of the last full fiscal year, the SEC will allow the company to file its annual report within 90 days of effectiveness of a Form 8-A. A Form 8-A is usually effective as of its filing, but can be preconditioned on certain events, such as a certification of a national exchange as described above. For example, if a company with a calendar year-end qualifies a Form 1-A on March 30, 2018 and files an 8-A on April 4, 2018, it would be required to file a Form 10-K for fiscal year-end December 31, 2017 (with the 2016 comparable period) within 90 calendar days from the effectiveness of the Form 8-A.

    Likewise, the SEC provided guidance on the timing of a quarterly report on Form 10-Q following effectiveness of a Form 8-A. Generally, a company must file its 10-Q within 45 days of the effectiveness of a registration statement, or on the due date of its regular 10-Q if the company was already subject to the Exchange Act reporting requirements. The SEC has confirmed that it will allow a 10-Q to be filed within 45 days of effectiveness of a Form 8-A filed in connection with a Form 1-A qualification. Moreover, a company may actually have to file two Form 10-Q’s in that time period. A Form 1-A does not require (or allow for) the filing of quarterly stub periods; rather, a stub period must be for a minimum of a six-month financial period. Accordingly, it is possible that a company would need to file two Form 10-Q’s for two stub periods, within 45 days of effectiveness of its Form 8-A.

    For example, a company with a calendar year-end qualifies a Form 1-A on August 10, 2018 and files a Form 8-A, which goes effective on the same day. The qualified Form 1-A contains an audit for fiscal year-end December 31, 2016 and 2017, but does not contain any stub period financial statements for 2018 (note that the 2017 year-end audit would not go stale for purposes of Regulation A until September 30, 2018 in this example). In this case, the company would need to file its Form 10-Q’s for both quarters ended March 31, 2018 and June 30, 2018 by September 24, 2018.

    Improving Access to Capital Act

    The Improving Access to Capital Act is a short Act with only two sections. First the Act requires that companies subject to the Exchange Act reporting requirements not be ineligible to utilize Regulation A. As noted below, Regulation A is written to include a list of ineligible issuers. The Act would remove reporting companies from that list. Second the Act provides that Exchange Act reports will satisfy the Tier 2 reporting requirements.

    The Act was passed with a 403-3 vote by the House and will next be presented to the Senate. I am hopeful that this much-needed change will come to fruition.

    The Final Rules – Summary of Regulation A

    I’ve written about Regulation A+ on numerous occasions, including detailing the history and intent of the rules. Title IV of the JOBS Act, which 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. The new rules 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 (Florida, New York, Texas, Arizona and North Dakota) do not have “issuer exemptions” for public offerings such as a Regulation A offering.  Companies completing a Regulation A offering without a broker-dealer will need to register as an “issuer dealer” in those states.

    Two Tiers of Offerings

    Regulation A is now divided 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 cannot be used for an initial going public transaction.

    Both Tier I and Tier 2 offerings contain minimum basic requirements, including issuer eligibility provisions and disclosure requirements.  Resales of securities by selling security holders are limited to no more than 30% (including affiliate selling shareholders) 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 preempts 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 to register under the Exchange Act. 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, 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. 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 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.

    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 Regulation A 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 Rule 262 “bad actor” provisions

    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 company that voluntarily files reports under the Exchange Act is not “subject to the Exchange Act reporting requirements” and therefore is eligible to use Regulation A. A wholly owned subsidiary of an Exchange Act reporting company parent is eligible to complete a Regulation 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 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. Also, as discussed at the beginning of this blog, the House has now passed the Improving Access to Capital Act, which would allow companies subject to the reporting requirements under the Exchange Act to use Regulation A.

    Regulation 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 are also required to comply with applicable state law related to such solicitation and advertising, including any prohibitions of 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 an offering circular 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.

    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 “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. There is no requirement that the materials be filed prior to use—only that they be included as an exhibit to the final qualified offering circular. In a CD&I the SEC has also confirmed 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 involving interests in real estate limited partnerships.

    A company can use Twitter and other social media that limits the number of characters in a communication, to test the waters as long as the company provides a hyperlink to the required disclaimers. 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 can 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, is allowed and is not considered solicitation materials.

    Continuous or Delayed Offerings

    Continuous or delayed offerings (a form of a shelf offering) are 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. When continuously offering securities under an open Regulation A offering, a company must update its offering circular, via post-qualification amendment, to disclose material changes of fact and to keep the financial statements current.

    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.

    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 the majority of state blue sky laws 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.

    A company completing a Tier 2 offering may file a Form 8-A concurrently with the qualification of the Form 1-A (i.e., no later than 5 days following qualification), 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 companies 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 within five (5) days of the qualification of the Form 1-A or a post-qualification amendment to the initial qualified Form 1-A. An issuer could not qualify a Form 1-A, wait a year or two, and 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 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 company will become subject to the full Exchange Act reporting obligations, and the scaled-down Regulation A reporting will automatically be suspended.

    A company that reports under the scaled-down Regulation A requirements is not considered to be subject to the Exchange Act reporting requirements, and therefore its shareholders will need to satisfy the longer one-year holding period under Rule 144.

    In a CD&I, the SEC confirmed that a company may withdraw a Tier 2 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.

    A company 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–Regulation CF).

    The SEC has 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 offering. Under Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the company 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.  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 offering.

    In the absence of a clear exemption from integration, companies 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. 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 is 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. In a CD&I, the SEC 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. 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).

    To qualify additional securities, a post-qualification amendment must be used.  In a CD&I 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.

    Offering Statement – Non-Public (Confidential) Submission

    The rules permit a company 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. The confidential filing, SEC comments, and all amendments must be publicly filed 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 offering 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. 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 company 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 disqualifications and disclosures; 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 company 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.

    Companies 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.  Financial statements 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.

    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.

    In a CD&I the SEC confirmed that companies using Form 1-A benefit from Section 71003 of the FAST Act. 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.  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.

    Part III requires an exhibits index and a description of exhibits required to be filed as part of the offering statement. A tax opinion is not required to be filed as an exhibit to Form 1-A, but a company may do so voluntarily.

    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. In a 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.

    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 for.

    A company that completes a Tier 2 offering and files a form 8-A may immediately apply for trading on a national exchange such as the NASDAQ or NYSE American. In 2017, several Regulation A issuers have begun trading on both exchanges.

    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.

    Since neither Tier 1 nor Tier 2 Regulation A issuers are subject to the Exchange Act reporting requirements (unless a Form 8-A is filed), 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. However, securities traded on a national exchange are covered securities. Moreover, the OTCQB and OTCQX levels of OTC Markets are becoming widely recognized as satisfying the manual’s exemption for resale trading in most states.

    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.

    Regulation A – Private or Public Offering?

    The legal nuance that Regulation A is an “exempt” offering under Section 5 has caused confusion and the need for careful thought by practitioners and the SEC staff alike. Regulation 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.

    As mentioned above, 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. 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 offering.

    Regulation 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 are 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. The Form 8-A must be filed within 5 days of the qualification of the Form 1-A or any post-qualification amendments. 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. 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.

    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 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 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 if the intent is to be sure that the shareholder is covered. Likewise, if the intent is to exclude Regulation A offerings from the registration rights, that exclusion should be added to the language to avoid any dispute.

    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 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...

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    SEC Disclosure Requirements for Hacking Events

    Wednesday, October 4, 2017, 4:05 PM [General]
    0 (0 Ratings)

    Do U.S. companies face SEC securities liabilities and disclosure requirements if their own accounts or their customers’ accounts are hacked?

    It’s a question addressed by securities and investment attorney Laura Anthony, founding partner of Legal and Compliance, LLC, in West Palm Beach, in a blog post about a late September 2014 cybersecurity attack that targeted at least 500 million Yahoo users’ accounts – information that was not disclosed by the web services provider until nearly two years later, before its acquisition by Verizon Communications.

    The disclosure issue was raised September 26, 2016, in a letter by U.S. Senator Mark Warner (D-VA), member of the Senate Intelligence and Banking Committee and co-founder of the bipartisan Senate Cybersecurity Caucus. Warner asked the U.S. Securities and Exchange Commission (SEC) to investigate Yahoo and to re-examine its policies about cybersecurity disclosurein general.

    Ms. Anthony points out that under current rules, “there is no specific disclosure requirement or rule under either Regulation S-K or S-X that addresses cybersecurity risks, attacks or other incidences.” Both S-K and S-X filings govern company disclosures and reporting requirements.

    But she also highlights key categories and issues that companies must consider when deciding whether to disclose a cybersecurity incident to the SEC.

    Current SEC disclosure requirements are based on the premise that “timely, comprehensive and accurate information about risks and events” should be reported if a reasonable investor would consider it important to an investment decision.”

    According to Ms. Anthony, cyberattacks or hacking incidents can put companies, investments and investors at risk on several fronts, including unauthorized access to company or customers’ information, data corruption, misappropriated assets, access to sensitive information, operational disruption, or theft of financial assets or intellectual property. Hacks can create negative financial impacts for targeted companies, including remediation costs, expert or consulting fees, litigation costs, reputational damage, liability for stolen assets, higher cybersecurity costs and more.

    Based on the small number of company-filed disclosure reports, especially when contrasted with the number of documented cybersecurity attacks, Ms. Anthony says that most companies typically do not file reports with the SEC after a determination that the attacks were not material to investment decisions.

    She urges companies to consider their “obligation to disclose cybersecurity risks, attacks or other incidents,” especially if they fall into key categories, including:

    · Risk factors, based the qualitative and quantitative magnitude of the attack or incident on business operations, outsourcing, insurance coverage, costs of past incidents or costs related to incidents that go unreported for long periods

    · Management discussion and analysis, with a special focus on a cybersecurity attack’s impact on company operations, liquidity or financial condition

    · Business descriptions, especially if an incident impacts a company’s products, services, relationships with customers or supplier, or competitive status

    · Legal proceedings, especially if cyberattacks results in litigation

    · Financial statements that are filed prior to, during or after an incident to address associate preventive costs, direct losses, incentives paid to affected customers or vendors, and costs related to warranties, breach of contract, product recalls/replacements, trademarks, patents, capitalized software, inventory and the like

    · Controls and procedures that might be deficient as a result of a cyberattack

    2014 Cyberattack on 500 Million Yahoo User Accounts Draws U.S. Senate Scrutiny of SEC Disclosure Requirements for Hacking Events

    Wednesday, October 4, 2017, 4:05 PM [General]
    0 (0 Ratings)

    Do U.S. companies face SEC securities liabilities and disclosure requirements if their own accounts or their customers’ accounts are hacked?

    It’s a question addressed by securities and investment attorney Laura Anthony, founding partner of Legal and Compliance, LLC, in West Palm Beach, in a blog post about a late September 2014 cybersecurity attack that targeted at least 500 million Yahoo users’ accounts – information that was not disclosed by the web services provider until nearly two years later, before its acquisition by Verizon Communications.

    The disclosure issue was raised September 26, 2016, in a letter by U.S. Senator Mark Warner (D-VA), member of the Senate Intelligence and Banking Committee and co-founder of the bipartisan Senate Cybersecurity Caucus. Warner asked the U.S. Securities and Exchange Commission (SEC) to investigate Yahoo and to re-examine its policies about cybersecurity disclosurein general.

    Ms. Anthony points out that under current rules, “there is no specific disclosure requirement or rule under either Regulation S-K or S-X that addresses cybersecurity risks, attacks or other incidences.” Both S-K and S-X filings govern company disclosures and reporting requirements.

    But she also highlights key categories and issues that companies must consider when deciding whether to disclose a cybersecurity incident to the SEC.

    Current SEC disclosure requirements are based on the premise that “timely, comprehensive and accurate information about risks and events” should be reported if a reasonable investor would consider it important to an investment decision.”

    According to Ms. Anthony, cyberattacks or hacking incidents can put companies, investments and investors at risk on several fronts, including unauthorized access to company or customers’ information, data corruption, misappropriated assets, access to sensitive information, operational disruption, or theft of financial assets or intellectual property. Hacks can create negative financial impacts for targeted companies, including remediation costs, expert or consulting fees, litigation costs, reputational damage, liability for stolen assets, higher cybersecurity costs and more.

    Based on the small number of company-filed disclosure reports, especially when contrasted with the number of documented cybersecurity attacks, Ms. Anthony says that most companies typically do not file reports with the SEC after a determination that the attacks were not material to investment decisions.

    She urges companies to consider their “obligation to disclose cybersecurity risks, attacks or other incidents,” especially if they fall into key categories, including:

    · Risk factors, based the qualitative and quantitative magnitude of the attack or incident on business operations, outsourcing, insurance coverage, costs of past incidents or costs related to incidents that go unreported for long periods

    · Management discussion and analysis, with a special focus on a cybersecurity attack’s impact on company operations, liquidity or financial condition

    · Business descriptions, especially if an incident impacts a company’s products, services, relationships with customers or supplier, or competitive status

    · Legal proceedings, especially if cyberattacks results in litigation

    · Financial statements that are filed prior to, during or after an incident to address associate preventive costs, direct losses, incentives paid to affected customers or vendors, and costs related to warranties, breach of contract, product recalls/replacements, trademarks, patents, capitalized software, inventory and the like

    · Controls and procedures that might be deficient as a result of a cyberattack

    SEC Provides Regulatory Relief To Hurricane Victims

    Tuesday, October 3, 2017, 8:49 AM [General]
    0 (0 Ratings)

    On September 28, 2017, the SEC announced interim final temporary rules (“Exemptive Order”) to provide relief to publicly trading companies, investment companies, accountants, transfer agents, municipal advisors and others affected the Hurricanes Harvey, Irma and Maria.  In addition to the interim rules, the SEC urges others not covered by the relief but affected in their ability to provide information to the SEC or shareholders to contact the SEC to seek relief on a case-by-case basis.

    Interim Final Temporary Rules

    Generally the due date for Exchange Act reports for companies relying on the Exemptive Order shall be October 10, 2017 for those affected by Hurricane Harvey, October 19, 2017 for those affected by Hurricane Irma, and November 2, 2017 for those affected by Hurricane Irma.  As such, companies with such extended due dates may also file an additional extension on Form 12b-25 on those dates, and benefit from an additional five days for a Form 10-Q and 15 days for a Form 10-K.  As long as the subject report is filed within the time specified in the 12b-25, such company will still be considered timely and current in its reporting requirements.

    The filing extensions apply to all Exchange Act reports, including under Sections 13(a) such as Forms 10-Q, 10-K and 8-K; 13(d), (f) and (g) for reports of ownership in excess of 5%; Section 14 proxy, information, and tender offer filing; Section 15(d) filings, including Forms 10-Q, 10-K and 8-K; and 16(a), Regulations 13A, 13D-G, 14A, 14C and 15D, and Exchange Act Rules 13f-1, 14f-1 and 16a-3.

    Where the company is seeking relief from a requirement to deliver a report or information to shareholders, such as proxy or tender offer information under Section 14 of the Exchange Act, in addition to the time periods, the company must show that the shareholders had a mailing address located in the zip codes affected by Hurricanes Harvey, Irma or Maria and that mail service was suspended.

    For purposes of the eligibility to use Form S-3, a company relying on the Exemptive Order will be considered current and timely in its Exchange Act filing requirement during the relief period, if such company was current and timely prior to the first day of the period specified in the Order.  As a reminder, among other requirements, to qualify to use an S-3 registration statement a company must have filed all Exchange Act reports in a timely manner, including Form 8-K, within the prior 12 months.  Any delayed reports need to be filed by October 10, 2017 for those affected by Hurricane Harvey, October 19, 2017 for those affected by Hurricane Irma and November 2, 2017 for those affected by Hurricane Irma.

    For purposes of Form S-8 eligibility and the current information requirements under Rule 144(c), a company relying on the Exemptive Order will be considered current in its Exchange Act filing requirements if such company was current and timely prior to the first day of the period specified in the Order.  Again, any delayed reports need to be filed by October 10, 2017 for those affected by Hurricane Harvey, October 19, 2017 for those affected by Hurricane Irma and November 2, 2017 for those affected by Hurricane Irma.

    Registered transfer agents either in areas affected by the Hurricanes, or unable to provide services to security holders in the affected areas, were also granted relief.  Registered transfer agents unable to provide services under Sections 17A and 17(f) of the Exchange Act are granted temporary exemptive relief from compliance from August 25, 2017 through November 2, 2017 if: (i) they notify the SEC in writing by November 2, 2017 that they are relying on the Exemptive Order; (ii) the notification provides a statement of the reasons why, in good faith, the transfer agent was unable to comply with the rules; (iii) if the transfer agent knows or believes that the books and records it is required to maintain were lost, destroyed or materially damaged, the extent of such loss, the affected issuers, and steps taken to rectify the damage; (iv) if the transfer agent knows or believes that funds or securities belonging to either an issuer or security holder that were within its possession were lost, destroyed or materially damaged, the extent of such loss and steps taken to rectify the damage; and (v) the transfer agent must take steps to protect remaining books, records, funds and securities.

    The Exemptive Order also allows independent auditors to provide books and records to issuer clients to assist in the reconstruction of accounting records, without infringing on such auditors’ independence.  In particular, Exchange Act rules and Regulation S-X prohibit an independent auditor from “maintaining or preparing the audit client’s accounting records” or “preparing or originating source data underlying the audit client’s financial statements.”  Relief under the Exemptive Order is conditioned upon limiting services by the independent auditor to reconstruction of previously existing accounting records that were lost or destroyed as a result of the hurricanes and that such services cease as soon as the audit client’s lost or destroyed records are reconstructed, its financial systems are fully operational and the client can effect an orderly and efficient transition to management or other service provider.   In addition, the company’s audit committee must specifically approve the auditor’s services.

    During the period from August 25, 2017 to November 1, 2017, a registered open-end investment company and a registered unit investment trust will be considered to have satisfied the requirements of Section 5(b)(2) of the Securities Act to deliver a summary or a statutory prospectus to an investor, provided that:  (1) the sale of shares to the investor was not an initial purchase by the investor of shares of the company or unit investment trust; (2) the investor’s mailing address for delivery, as listed in the records of the company or unit investment trust, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricanes Harvey, Irma, Maria, of the type or class customarily used by the company or unit investment trust, to deliver summary or statutory prospectuses; and (3) the company, or unit investment trust, or other person promptly delivers the summary or statutory prospectus, either (a) if requested by the investor, or (b) by the earlier (i) of November 2, 2017 or (ii) the resumption of the applicable mail service.  The same dates and parameters apply to registered investment advisers for the delivery of written disclosure statements to advisory clients.

    A registered investment advisor affected by Hurricane Harvey will be considered to have satisfied their Form ADV filing requirements under the Advisors Act, if: (i) their Form ADV filing deadline was between August 25, 2017 and October 6, 2017; and (ii) they filed by October, 10, 2017.

    A registered investment advisor affected by Hurricane Irma will be considered to have satisfied their Form ADV filing requirements under the Advisors Act, if: (i) their Form ADV filing deadline was between September 6, 2017 and October 18, 2017; and (ii) they filed by October, 19, 2017.

    A registered investment advisor affected by Hurricane Maria will be considered to have satisfied their Form ADV filing requirements under the Advisors Act, if: (i) their Form ADV filing deadline was between September 20, 2017 and November 1, 2017; and (ii) they filed by November 2, 2017.

    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

    Like Its Namesake Corporation, the So-Called “Tandy Letter” Dissolves as a Disclosure Requirement for Two SEC Filings

    Tuesday, September 26, 2017, 1:16 PM [General]
    0 (0 Ratings)

    Two U.S. Securities and Exchange Commission (SEC) enforcement actions in late September 2016 serve a potential sign of the agency’s intent to crack down on firms that do not file the necessary forms associated with corporate finance transactions, according to a securities law expert in West Palm Beach.

    The crackdown, according to Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, is directed at so-called PIPE transactions– private equity in a public equity.

    At LawCast.com, Ms. Anthony writes that the enforcement actions targeted filings involving the issuance of convertible debt, preferred equity, warranties and similar investment instruments. SEC rules require firms to file 8-K documents within four days of major corporate events, asset sales, investment disclosure or other significant actions to update the company’s financial status and financial reports.

    Most SEC investigations into the failure to file an 8-K are routine, according to Ms. Anthony, but current actions lead her to believe that “the SEC is reviewing the PIPE industry as a whole—in particular the process, procedure and effects associated with convertible instruments.”

    While perfectly legal, convertible instruments – usually the issuance of notes that convert to common stock following a specific holding period – can be abused, and Ms. Anthony conjectures that the SEC’s investigation into failed 8-K filings is being launched to “assist in a larger investigation into related fraud and other violations.” During the conversion process, stock prices can rise or drop, creating risks for investors and shareholders.

    “The ability of an investor to convert and trade responsibly makes the difference between a successful financing relationship with the investment community and one that can cause long-term damage to a company,” she writes.

    Examples of 8-K violations could include backdating of notes, failure to provide funding for the note, lack of disclosure about affiliations between investments and issuing companies or company officials, manipulative trading practices, and improper stock promotion, Anthony says.

    She points out that a 2014 SEC investigation into failed 8-K reporting resulted in enforcement actions against two companies, Ironbridge and IBC Funds, both of which failed to register as brokers in numerous investment deals. While the Ironbridge and IBC enforcement actions have slowed industry activity in those types of investments, Anthony points out that “attention to due diligence, detail and reporting requirements has increased.”

    Ms. Anthony urges companies that are considering investing in PIPE transactions “to conduct due diligence on the investor, including reputation in the industry and trading history associated with other investments and conversions.”

    The SEC Provides Further Guidance On Financial Statement Requirements In Registration Statements

    Tuesday, September 26, 2017, 8:54 AM [General]
    0 (0 Ratings)

    On August 17, 2017, the SEC issued guidance on financial statement requirements for confidential and public registration statement filings by both emerging growth companies (EGC) and non-emerging growth companies. The new Compliance and Disclosure Interpretations (C&DI’s) follow the SEC’s decision to permit all companies to submit draft registration statements, on a confidential basis (see HERE). The newest guidance is in accord with the SEC’s announced policy to take active measures to promote the U.S. IPO market and small business capital-raise initiatives.

    Earlier in the summer, the SEC expanded the JOBS Act benefit available to emerging growth companies, to be able to file confidential draft registration statements, to all companies. Confidential draft submissions are now available for all Section 12(b) Exchange Act registration statements, initial public offerings (IPO’s) and for secondary or follow-on offerings made in the first year after a company becomes publicly reporting.

    Title I of the JOBS Act initially allowed for confidential draft submissions of registration statements by emerging growth companies but did not include any other companies, such as smaller reporting companies. Regulation A+ as enacted on June 19, 2015, also allows for confidential submissions of an offering circular by companies completing their first Regulation A+ offering.

    The new C&DI’s expand certain FAST Act benefits also only statutorily available to emerging growth companies, to all companies. Like the earlier expansion of the JOBS Act benefit, the new extension of rights was made by staff policy and not a formal rule change.

    Background on Section 71003 of the FAST Act

    Section 71003 of the FAST Act allows an EGC that is filing a registration statement under either Form S-1 or F-1 to omit financial information for historical periods that would otherwise be required to be included, if it reasonably believes the omitted information will not be included in the final effective registration statement used in the offering, and if such final effective registration statement includes all up-to-date financial information that is required as of the offering date. As directed by the FAST Act, the SEC revised the instructions to Forms S-1 and F-1 to reflect the new law.

    The Section 71003 provisions do not allow for the omission of stub period financial statements if that stub period will ultimately be included in a longer stub period or year-end audit before the registration statement goes effective. In a C&DI under the prior SEC administration, the SEC clarified that the FAST Act only allows the exclusion of historical information that will no longer be included in the final effective offering. The C&DI clarifies that “Interim financial information ‘relates’ to both the interim period and to any longer period (either interim or annual) into which it has been or will be included.” For example, an issuer could not omit first-quarter financial information if that first quarter will ultimately be included as part of a second- or third-quarter stub period or year-end audit.

    An SEC C&DI clarified that Section 71003 allows for the exclusion of financial statements for entities other than the issuer if those financial statements will not be included in the final effective registration statement. For example, if the EGC has acquired a business, it may omit that acquired business’ historical financial information as well. In a C&DI, the SEC confirms that: “Section 71003 of the FAST Act is not by its terms limited to financial statements of the issuer. Thus, the issuer could omit financial statements of, for example, an acquired business required by Rule 3-05 of Regulation S-X if the issuer reasonably believes those financial statements will not be required at the time of the offering. This situation could occur when an issuer updates its registration statement to include its 2015 annual financial statements prior to the offering and, after that update, the acquired business has been part of the issuer’s financial statements for a sufficient amount of time to obviate the need for separate financial statements.”

    As a reminder, an EGC is defined as an issuer with less than $1,070,000,000 in total annual gross revenues during its most recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1,070,000,000 or more; the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; the date on which the issuer has, during the previous 3-year period, issued more than $1,070,000,000 in non-convertible debt; or the date on which the issuer is deemed to be a “large accelerated filer.”

    NEW CD&I

    Financial Statement Requirements for Emerging Growth Companies

    Using staff policy, the SEC will not require an EGC to include interim financial information in its draft registration statements, that it reasonably believes it will not be required to present separately at the time of the contemplated offering. For example, if an EGC with a calendar fiscal year-end submits a draft registration statement in November 2017, but does not expect to launch the offering until April 2018, after the full 2017 audit would be required, such EGC could omit the 2015 annual financial statements and stub period information for both 2016 and 2017. That is, since only full-year audits for 2016 and 2017, and no stub period statements for nine months ended 2016 and 2017, would be included in the final effective registration statement, neither the stub periods nor the 2015 statements would need to be included in the draft registration.

    Financial Statement Requirements for Companies Other than an Emerging Growth Company

    The SEC has extended the benefit of Section 71003 of the FAST Act to companies that do not qualify as an EGC to allow for the omission of historical financial statements in its confidential draft registration statements, that it reasonably believes will not be required to be included at the time it files its registration statement publicly.

    A company must publicly file its registration statement and all nonpublic draft submissions at least 15 days prior to any road show, and in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement.

    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 Proposal Would Shorten Electronic Trade Settlements from Three to Two Days, Reducing Risks and Aligning U.S. Cycles to UK, E

    Wednesday, September 20, 2017, 9:58 AM [General]
    0 (0 Ratings)

    If a new rule proposed by the U.S. Securities and Exchange Commission (SEC) takes effect, the estimated $600 billion in broker-initiated trades made each day would be settled in two days instead of three days as a way of reducing financial risks associated with trades and aligning U.S. settlement cycles with those in the UK and many European markets.

    Because all securities trades involve a legally binding contract, each trade is “cleared” when the terms of the contract are met, and each trade is “settled” when the funds are exchanged between buyers and sellers.

    The 1933 Exchange Act required settlements to occur three days (T+3) after the trade date, according to Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm in West Palm Beach. She writes about the issue at LawCast.com.

    Anthony notes that in proposing the shorter cycle, outgoing SEC Chair Mary Jo Whitecalled the change “an important step to the SEC’s ongoing efforts to enhance the resiliency and efficiency of the U.S. clearance and settlement system.”

    Under the proposed amendment, settlements would occur after two days (T+2) to reduce several risks, including:

    · Credit-related risks (e.g., one party is unable to deliver the cash or securities on the settlement date)

    · Market risks (e.g., the value of the securities changes between the trade and settlement, resulting in a loss to one of the parties).

    Reducing risks, aligning U.S. practices

    “It is undisputed that reducing the settlement cycles reduces these risks,” according to Anthony. “The reduction of the settlement cycle to T+2 will also assist in aligning global clearing of securities, as many markets − including the UK and many European countries − are already on the T+2 schedule.”

    The National Securities Clearing Corporation (NSCC) handles all trades. Under the existing three-day cycle, NSCC substitutes itself as the legal buyer-seller of the trade on Day One, issues a summary trade and settlement report containing full financial details to members on Day Two, and processes the electronic settlement on Day Three.

    Shortening the cycle to two days, Anthony points out, reduces the funds that must be kept on deposit by participants, creates liquidity among other funds for additional trades, and aligns U.S. trading settlement practices with those of other major foreign markets.


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