Getting Funded 101

A private or public company can raise capital in a number of ways. Traditional sources of financing for companies include loans from branks or other financial institutions, receivable financing and  from friends and family. Private companies can also finance in going public transactions by selling securities in a Rule 506 Offering prior to filing a Form S-1 Registration Statement with the SEC. Going public is a milestone for any company and there are both advantages and  disadvantages of public company status. Companies going public do so because of the general perception that public company status will make it easier to raise capital.

Form S-8 Registration Statements Q & A

A. Form S-8 (“Form S-8”) is a short-form registration statement under the Securities Act of 1933, as amended (the “Securities Act”).  Most companies use Form S-1 in going public transactions when conducting a direct public or initial public offering (“IPO”).

Form S-1 registration statements require complete and comprehensive disclosures of the issuer’s business, finances and management functions as a prospectus for investors in an initial public offering. It’s also the most time-consuming registration statement to prepare because of the expansive disclosures required.

The Laws That Apply to Finders

Companies seeking capital are frequently approached by finders who offer to locate investors in exchange for a fee.  This is particularly true in going public transactions. Most finders are not registered as broker-dealers with the Securities and Exchange Commission (the “SEC”).

The possibility of receiving capital even through the efforts of a finder creates a tempting opportunity for issuers who need capital.

Matching companies with investors can be a lucrative proposition for the finder. While it may seem harmless enough, the SEC does not think so and in fact, the SEC frequently brings cases against unregistered finders and those who aid and abet them.

12b-25 Question and Answer

Accelerated filers, non-accelerated filers and smaller reporting companies occasionally have difficulty meeting the Securities and Exchange Commission’s (“SEC”) reporting due dates.

Rule 12b-25 adopted by the SEC under the Securities Exchange Act of 1934, provides an extension of the SEC’s reporting due dates. This blog post contains common questions and our responses to common questions we receive about Rule 12b-25 and exensions of filing due dates of periodic reports.

OTC Pink Sheet l Question and Answer

Q. What are the benefits of  listing on the OTCMarkets OTC Pink Sheets?

A.  There are a couple of benefits for companies opting to list on the OTC Pink Sheets.

Pink Sheet listings are much less expensive and the disclosure requriements are less stringent than a listing on the OTCMarkets OTCQB because audited financial statements are not required.  Despite that audited financial statements are not required, issuers who publish the information required by the OTCMarkets Pink Sheet Disclosure Guideslines provide transparency to investors and comply with SEC Rule 15c-211.

SEC Charges Lance Berger In Connection With FUEG

According to the SEC, in December 2012, Lance T. Berger, a stock promoter for several penny stock companies, including FUEG, along with another stock promoter who was a business associate of Berger’s, began discussions with the cooperating witness regarding possible fraudulent stock transactions involving several issuers, including FUEG.

FUEG is a Florida corporation with principal offices located in Valley Stream, New York. FUEG purported to be in the business of operating an internet gaming website that charged a monthly membership fee. FUEG’s stock was quoted on the OTC Link operated by OTC Markets Group, Inc. and the OTC Bulletin Board under the symbol “FUEG.”

SEC Charges Caroline Winsor,Richard Walchuk, Lance Bauerlein and Lisa Esposito

The SEC has charged Caroline Winsor, a Canadian stock promoter, Richard W. Walchuk, the president and Chief Executive Officer of Viosolar Inc. and Lisa A. Esposito, a former registered representative, in connection with the manipulation of the common stock of two penny stock issuers, Violsolar and FACT Corporation.

According to the SEC, Lance W. Bauerlein aided and abetted the manipulation of FACT corporation’s common shares.

Violsolar is purportedly an alternative energy company in the business of constructing solar parks in Greece and other south and southeastern European Union countries.  Viosolar’s common stock is quoted on the OTCBB and OTC Link under the symbol VIOSF.

House Committee Passes Law Reducing Business-Broker Regulation

On November 14, 2013, the Financial Services Committee of the U.S. House of Representatives voted unanimously to report HR 2274, as amended, to the full House with a favorable recommendation.  HR 2274 is known as the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013, and its intention is to amend the Securities Exchange Act of 1934 (“Securities Act”) to provide for a notice-filing registration procedure for business brokers performing services in connection with the transfer of ownership of small privately held companies and to provide for regulation appropriate to the limited scope of their activities.

Under existing regulations, the same broker-dealer registration requirements apply to business brokers who assist with the sale of a small business to a purchaser who will be active in managing the business after sale and a securities brokers who engage in the offer and sale of securities of a publicly-traded companies to passive investors.  Existing regulations fail to distinguish between these two activities despite the obvious need for differential treatment.

Boiler Rooms Are Back in Style

Everyone who’s seen the movie “Boiler Room” is familiar with how these operations work; for once, the film makers had no need to exaggerate.  Real-life boiler rooms are run by unscrupulous con artists who hire cold callers to sell stocks and other securities to their naïve and unwary victims, using extremely high-pressure sales tactics.

The classic boiler room is run by a broker-dealer that claims to be independent, specializing in stocks chosen by their “analysts,” who, they say, have conducted extensive due diligence on the issues.  In reality, the boiler room usually colludes with company management and/or insiders.  Often they own large blocks of stock obtained at very low prices; sometimes they paid nothing at all.  They will sell into their own promotion.

Rule 506(C) Verification of Accredited Investor Status

Rule 506(c) of Regulation D of the Securities Act became effective on September 23, 2013.   The rule fundamentally changes how private placements are conducted, by allowing issuers to engage in general solicitation and advertising of their private placements if specific requirements are met.

The SEC has confirmed that the Rule 506(c) exemption will not be forgiving for issuers who engage in general solicitation but fail to comply with its requirements.Even one sale to a non-accredited investor in s private placement will prevent the issuer from relying upon the exemption, making it a time bomb for issuers who fail to adopt proper compliance methods for their offerings.

SEC Issues Small Entity Compliance Guide For JOBS Act

The Jumpstart Our Business Startups Act, or JOBS Act, is intended, among other things, to reduce barriers to capital formation, particularly for smaller companies in going public transactions.  The JOBS Act requires the SEC to adopt rules amending existing exemptions from registration under the Securities Act of 1933 and creating new exemptions that permit issuers of securities to raise capital without SEC registration.

On July 10, 2013, the SEC adopted amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to implement the requirements of Section 201(a) of the JOBS Act.  The amendments became effective on September 23, 2013.