OTC Markets Reporting l Securities Lawyer 101

Unlike securities listed on stock exchanges such as NASDAQ or the NYSE, securities may trade through the OTCMarkets interdealer quotation system whether they are Securities and Exchange Commission (“SEC”) reporting issuer or not.

There are three reporting standards for companies quoted

The Securities Exchange Act of 1934

The Securities Exchange Act of 1934 (the “1934 Act”) grants broad authority to the Securities and Exchange Commission (“SEC”) to oversee the securities industry. The SEC’s authority includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies; as well as securities self regulatory organizations (SROs), including the  Financial Industry Regulatory Authority (“FINRA”).

In addition, the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options Exchange are all subject to regulation under the 1934 Act.

Rule 506(C) Q & A

Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital before, during and after a  going public transaction.  Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective compliance strategies into place.

As of September 23, 2013, issuers were allowed to use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors.

Zombie Tickers 101

The Securities and Exchange Commission (“SEC”) has continued its trend of instituting administrative proceedings to revoke the registrations of hundreds of dormant issuers. The issuers are being suspended pursuant to the Securities Exchange Act of 1934, after being delinquent in the filing of their periodic financial reports required by the Commission.

The SEC has been proactive in preventing corporate hijackings of dormant shell companies for reverse merger transactions and has suspended hundreds of issuers.  We expect to see many enforcement actions arising from corporate hijackings of dorman shells in the near future.

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.

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.

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.