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SEC Issues New Guidance on Use of Twitter and Other Social Media Communications

by Laura Anthony, Esq. on April 29, 2014 in C&DI, Corporate Law, Regulation FD, Rule 134, SEC Guidance, Small Cap Market, Uncategorized with No Comments

On April 21, 2014, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI) to provide guidance as to the use of Twitter and other social media communications in conjunction with a public offering or business combination transaction.

Background

Previously, on April 2, 2013, in response to a Facebook post made by Reed Hastings, CEO of Netflix, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company.

Regulation FD requires that companies take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner such that the public as a whole has simultaneous access to the information. Regulation FD ended the era of invitation-only conference calls between company management and a select group of brokers and investment bankers, in which plans and earnings would be discussed and material information shared in advance of such information becoming public knowledge. In its report issued on April 2, 2013, the SEC confirmed that Regulation FD applies to social media in the same manner it applies to company websites. In a series of blogs entitled SEC Guidance on Social Media and Websites for Company Announcements and Communications published here , and 4/25/2013, 5/3/2013, and 5/14/2013 I discussed this guidance.

Moreover, federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue while it is “in registration” in connection with a public offering. The purpose of these regulations is to ensure that communications are fair and balanced and not intended to condition the market for the offering. Failure to comply with these restrictions could delay or prevent the public offering and result in civil and criminal penalties. According to the SEC, “in registration” refers to the entire process from the time an issuer reaches an understanding with its managing underwriter or an internal decision to file a registration statement, through the period of effectiveness. In addition to the anti-fraud provisions, the SEC requires that certain notices (a “legend”) be placed on written communications.

Similarly, the federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue in conjunction with the solicitation of shareholder consent and proxies associated with a business combination transaction (i.e., a merger).

New Guidance on Use of Social Media for Communications Related to or During an Offering

The SEC has many rules and regulations related to communications surrounding an offering period. Rule 134 addresses communications made after the filing of a registration statement by an Issuer regarding the issuer, the offer, and procedural matters related to the offering. Except where the communication is a simple tombstone ad containing no more than the contact information and a URL link to the filed registration statement, and identifying the type of security and price range and underwriter, Rule 134 requires that certain legends appear on all such communications. For instance, Rule 134(b) requires the following legend on all communications after the filing of a registration statement and prior to its effectiveness:

“A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.”

Rule 134(d) requires that a communication that is accompanied or preceded by the prospectus must contain the following legend:

“No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.”

Clearly, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the required statements satisfy the Rule 134(b) or Rule 134(d) requirements?”

The SEC provides the following answer:

“Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders and potential investors, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 134(b) or Rule 134(d) in the following limited circumstances:

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;
Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required statements would be inappropriate.” [April 21, 2014]

Moreover, the SEC provided guidance on a Company’s responsibilities for a third party’s re-transmission or re-posting of a Company’s communication. That is, the SEC addresses a Company’s responsibility where a third party retweets or shares a company communication. In particular, the SEC C&DI provides:

“Answer: If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.” [April 21, 2014]

Note that Securities Act Release No. 33-8591 (July 19, 2005) is the Securities Offering Reform Act of 2005, which included the initial enactment of Rule 134. A complete discussion of the Securities Reform Act is beyond the scope of this blog; however, the Act loosened up pre- and post-filing offer and communication rules dramatically.

In addition, Rule 433 contains requirements for communications (“free writing prospectus”) made after the effectiveness of a registration statement which information is not contained in such registration statement. The SEC repeats its guidance related to direct company communications and third-party reposts of such communications, verbatim, in relation to Rule 433.

New Guidance on Use of Social Media for Communications in Connection With a Business Combination Transaction

Similar to the rules related to communications during an offering process, the SEC has rules related to communications both before and after the filing of a registration statement in conjunction with a business combination (merger) transaction and communications made for the purpose of soliciting votes in favor of or against a proposed transaction. Rule 165 governs such communications. Rule 165 communications requires a legend, similar to Rule 134, on Company communications.

Again, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the legend satisfy the Rule 165(c)(1) requirement?”

The SEC guidance mirrors the guidance related to Rule 134 communications. The SEC states:

“Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 165(c)(1) in the following limited circumstances:

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;
Including the legend in its entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the required legend, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required legend would be inappropriate. This position also applies to written communications that constitute solicitations made in reliance on Exchange Act Rule 14a-12 and pre-commencement written communications subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).” [April 21, 2014]

Conclusion

Although this guidance is helpful, it is also problematic. In particular, the SEC requires “[T]he communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.” The obvious issue is: how can a Company satisfy this requirement and include any other information of relevance in 140 characters or fewer? Also not addressed is whether a Company can post a series of communications, which are obviously related both in topic and time (such as a delay of no more than a few minutes between each post), and only include the required hyperlink and statement in one of such posts.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.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.

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Tags: Exchange Act Rule 14a-12, Federal Securities Laws, Regulation Fair Disclosure, Regulation FD, Rule 134, Rule 165, Rule 433, SEC C&DI, SEC Guidance

OTCQX Listing and Quotation Eligibility and Requirements for U.S. Companies

by Laura Anthony, Esq. on April 22, 2014 in DAD/PAL, OTC Market, OTC Markets Listing Requirements, OTC Pink, OTC Pink Listing Requirements, OTCBB, OTCQB, OTCQB and OTCQX, OTCQB Listing Requirements, OTCQX, OTCQX Listing Requirements, Pinksheets, Small Cap Market, Uncategorized with No Comments

On February 13, 2014, OTC Markets Group, Inc., published its OTCQX Rules For U.S. Companies version 6.5. This blog summarizes those rules. A complete copy of the rules are available on the OTC Link website, otcmarkets.com.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX U.S. Premier (also eligible to quote on a national exchange); and (ii) OTCQX U.S. issuers on the OTCQX must meet specified eligibility requirements, which interestingly do not include a requirement as to being subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) for OTCQX U.S. Moreover, OTC Markets has the discretionary authority to allow quotation to substantially capitalized acquisition entities that are analogous to SPAC’s.

Issuers on the OTCQB must be fully reporting and current in their SEC reporting obligations, meet minimum price standards, file annual reports and pay annual fees, but do not undergo additional quality review.

Issuers on the pinksheets are not required to be reporting with the SEC. However, such issuers are then further qualified based on the level of voluntary information provided to the www.otcmarkets.com. Issuers with no information are denoted by a skull and crossbones, issuers with limited financial and business information are classified as “limited information,” and issuers which provide information as set forth in the OTC Markets Pink Alternative Reporting Standard are denoted with a “current information” symbol.

OTCQX Rules for U.S. Companies – Requirements for Admission

A. To be eligible to be quoted on the OTCQX U.S., companies must:

Have $2 million in total assets as of the most recent annual or quarter end;
As of the most recent fiscal year end have at least one of the following: (i) $2 million in revenues; (ii) $1 million in net tangible assets; (iii) $500,000 in net income; or (iv) $5 million in market value of publicly traded securities;
Meet one of the following penny stock exemptions under Rule 3a51-1 of the Exchange Act: (i) have a bid price of $5 or more; or (ii) have net tangible assets of $2 million if the if the Company has been in continuous operation for at least three years, or $5,000,000 if the Company has been in continuous operation for less than three years; or (iii) have average revenue of at least $6,000,000 for the last three years;
Not be a blank check or shell company as defined by the Securities Act of 1933 (“Securities Act”);
Not be in bankruptcy or reorganization proceedings;
Be in good standing in its state of incorporation and in each state in which it conducts business;
Have a minimum of 50 beneficial shareholders owning at least one round lot (100 shares) each;
Be quoted by a market maker on the OTC Link;
Have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211, then the Company may apply to OTC Markets for an exemption from the minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operations and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
Have GAAP compliant (i) audited balance sheets as of the end of each of the two most recent fiscal years, or as of a date within 135 days if the Company has been in existence for less than two fiscal years, and audited statements of income, cash flows and changes in stockholders’ equity for each of the fiscal years immediately preceding the date of each such audited balance sheet (or such shorter period as the Company has been in existence), and must include all going concern disclosures including, plans for mitigation; and GAAP compliant (ii) unaudited interim financial reports, including a balance sheet as of the end of the Company’s most recent fiscal quarter, and income statements, statements of changes in stockholders’ equity and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year; and
Be included in a Recognized Securities Manual or be subject to the reporting requirements of the Exchange Act.

B. To be eligible to be quoted on the OTCQX U.S. Premier, companies must:

Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
Have (i) At least (a) 500,000 publicly held shares; and (b) $1 million in market value of publicly held shares; and (ii) at least (a) $500,000 in net income (in the latest fiscal year or in two of the last three fiscal years); or (b) $2.5 million in stockholders’ equity; or (c) $35 million in market value of listed securities;
Have a minimum of 100 beneficial shareholders owning at least one round lot (100 shares) each;
Have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211 and (iii) the bid price is equal to or greater than $1.00, then the Company may apply to OTC Markets for an exemption from the 30-day minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operations and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
Conduct annual shareholders’ meetings and submit annual financial reports to its shareholders at least 15 calendar days prior to such meetings.

C. To be eligible to be quoted as an OTCQX U.S. Acquisition Company, companies must:

Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
Have $25 million in net tangible assets as of the most recent annual or quarterly year end;
Have $10 million in market value of publicly traded securities as of the most recent fiscal year end;
Have a minimum bid price of $5.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX; and
Be subject to the reporting requirements of the Exchange Act.

Designated Advisors for Disclosure

All U.S. companies that are quoted on the OTCQX must have either an Attorney Designated Advisor for Disclosure (“DAD”) or an Investment Bank DAD. All DAD’s must be approved by OTCQX after submitting an application. OTC Markets publishes a list of pre-approved DADs. A Company may appoint a new DAD at any time, provided that the Company retains an approved DAD at all times.

A DAD’s primary role is to provide advice and guidance to a Company in meeting its OTCQX obligations. The OTCQX puts a great deal of onus on the DAD to be responsible for the Company in which it sponsors, emphasizing the negative impact on the DAD’s reputation for sponsoring Companies that are not of acceptable quality. In addition to providing advice and counsel to a Company, a DAD is required to conduct investigations to confirm disclosures. A DAD must submit a Letter of Introduction and subsequent annual letters confirming their duties and the attesting to the disclosures made by the Company.

Application to the OTCQX for U.S. Companies

All U.S. companies that are quoted on the OTCQX must submit an application and pay an application fee. The application consists of (i) the contractual agreement with OTCQX for quotation; (ii) personal information for each executive officer, director and beneficial owner of 10% or more of the securities, except for companies already traded on a foreign exchange or moving from a recognized U.S. exchange; (iii) designation of the DAD/PAL or application for same; (iv) appointment form for the DAD/PAL; (v) a letter from the Company’s independent auditor affirming their role and qualifications; and (vi) a digital Company logo.

Applications are reviewed and subject to a comment process. An application may be denied if the Company’s quotation would “likely impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.”

Initial Disclosure Obligations

A Company must post its initial disclosure documents on the OTC Markets website within 90 days of submission of its application to quote on the OTCQX and such posting must be confirmed with a notice by the Company DAD/PAL. The filing of the initial disclosure is a precondition to acceptance of an application for quotation. Initial disclosure documents include: (i) SEC reports if the Company is subject to the Exchange Act reporting requirements; and (ii) current information in accordance with OTC Markets disclosure guidelines including financial statements.

A Company must supplement and update any changes to the initial disclosure within 30 days of acceptance of its application for quotation.

Requirements for Ongoing Qualification for Quotation on the OTCQX

The following is a summary of the ongoing responsibilities for U.S. OTCQX quoted securities:

Compliance with Rules – OTCQX quoted companies must maintain compliance with the OTCQX rules including disclosure requirements. The Company’s DAD/PAL is responsible for reporting their/its potential conflicts of interest;
Compliance with Laws – OTCQX quoted companies must maintain compliance with state and federal securities laws and must cooperate with any securities regulators, including self-regulatory organizations;
Blue Sky Manual Exemption – Companies must either properly qualify for a blue sky manual exemption or be subject to and current in its Exchange Act reporting requirements;
Retention and Advice of DAD – Companies must have a DAD at all times and are required to seek the advice of such DAD as to their OTCQX obligations;
Duty to Inform DAD – As part of its duty to seek advice from its DAD, a Company has an obligation to provide disclosure and information to the DAD, including “complete access to information regarding the Company, including confidential and propriety information” and access to personnel;
Notification of Resignation or Dismissal of DAD – A Company must immediately notify OTC Markets in writing of the resignation or dismissal of the DAD for any reason;
Payment of Fees – a Company must pay its annual fees to OTC Markets;
Sales of Company Securities by Affiliates – Prior to transacting in the Company’s securities through a broker-dealer, each officer, director or other affiliate of the Company shall make its status as an affiliate of the Company known to the broker-dealer;
Distribution and Publication of Proxy Statements – An OTCQX U.S. Premier company shall solicit proxies for all meetings of shareholders. Companies not subject to the Exchange Act reporting requirements must publish, on the OTC Markets website, copies of all proxies, proxy statements and all other material mailed by the Company to its shareholders within 15 days of such mailing;
Redemption Requirements – All redemptions must be either by lot or pro rata and require 15 days’ notice;
Changes in Form or Nature of Securities – All changes in form, nature or rights associated with securities quoted on the OTCQX require 20 days advance notice to OTC Markets;
Transfer Agent – Companies are required to use the services of a registered transfer agent and authorize such transfer agent to share information with OTC Markets;
Accounting Methods – Any change in accounting methods requires advance notice of such change and its impact, to OTC Markets;
Change in Auditors – All changes in auditor requires prompt notification and a letter from such auditor analogous to Form 8-K requirements;
Responding to OTC Markets Group Requests – OTCQX quoted companies are required to respond to OTC Markets comments and amend filings as necessary in response thereto;
Ongoing Disclosure Obligations – (i) Companies subject to the Exchange Act reporting requirements must remain current in such reports; (ii) Companies not subject to the Exchange Act reporting requirements must remain current with the annual, quarterly and current reporting requirements of OTC Markets, including posting annual audited financial statements prepared in accordance with GAAP and audited by a PCAOB auditor; (iii) file a notification of late filing when necessary; (iv) quickly release disclosure of material news and recent developments, whether positive or negative, through a press release on the OTC Markets website; (v) an OTCQX Company should also act promptly to dispel unfounded rumors which result in unusual market activity or price variations;
General requirements regarding integrity – OTCQX quoted Companies are expected to act professionally and uphold the OTC Markets standards for “high quality”; and to release news and reports that are prepared factually and accurately with neither excessive puffery or conservatism; companies must not report or act in a way that could be misleading; and not inundate with non-material releases; must not make misleading premature announcements;
Maintain Company Updated Profile – OTCQX quoted companies are required to maintain updated accurate information on its profile page and to verify same every six months;
DAD Letter – Within 120 days of each fiscal year end and after the posting of the Company’s annual report, every Company must submit an annual DAD letter;
To remain eligible for trading on the OTCQX U.S. tier, the Company’s common stock must have a minimum bid price of $0.10 per share as of the close of business for at least one of every thirty consecutive calendar days. In the event that the minimum bid price for the Company’s common stock falls below $0.10 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $0.10 for ten consecutive trading days;
To remain eligible for trading on the OTCQX U.S. Premier tier, the Company’s common stock must have a minimum bid price of $1.00 per share as of the close of business for at least one of every thirty consecutive calendar days. In the event that the minimum bid price for the Company’s common stock falls below $1.00 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $1.00 for ten consecutive trading days. In the event that the Company’s common stock does not regain compliance during the grace period, the Company shall have a fast-track option to have its securities traded on the OTCQX U.S. tier.

Fees

Upon application for quotation on the OTCQX, Companies must pay an initial non-refundable fee of $5,000. In addition, Companies must pay an annual non-refundable fee of $15,000.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

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

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

Download our mobile app at iTunes.

Tags: DAD/PAL, Designated Advisor for Disclosure, GAAP Compliant, OTC markets, OTC Markets Listing Requirements, OTC Markets Pink Alternative Reporting Stantard, OTCQB Listing Requirements, OTCQX Listing Requirements, OTCQX Obligations, OTCQX U.S., OTCQX U.S. Tier, Pinksheets

Public Company SEC Reporting Requirements

by Laura Anthony, Esq. on April 15, 2014 in Form 10, Form 10-K, Form 10-Q, Form 8-K, Regulation FD, Rule 144, S-1 Registration Statement, Schedule 13D, Schedule 14C, SEC Schedule 14A, Securities Attorneys, Uncategorized with No Comments

A public company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”). The underlying basis of the Reporting Requirements is to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

A company becomes subject to the Reporting Requirements by filing an Exchange Act Section 12 registration statement on either Form 10 or Form 8-A. A Section 12 registration statement may be filed voluntarily or per statutory requirement if the issuer’s securities are held by either (i) 2,000 persons or (ii) 500 persons who are not accredited investors and where the issuer’s total assets exceed $10 million. In addition, companies that file a Form S-1 registration statement under the Securities Act of 1933, as amended (“Securities Act”) become subject to Reporting Requirement; however, such obligation becomes voluntary in any fiscal year at the beginning of which the company has fewer 300 shareholders.

A reporting company also has record keeping requirements, must implement internal accounting controls and is subject to the Sarbanes-Oxley Act of 2002, including the CEO/CFO certifications requirements, prohibition on officer and director loans, and independent auditor requirements. Under the CEO/CFO certification requirement, the CEO and CFO must personally certify the content of the reports filed with the SEC and the procedures established by the issuer to report disclosures and prepare financial statements.

All reports filed with the SEC are subject to SEC review and comment and, in fact, the Sarbanes-Oxley Act requires the SEC undertake some level of review of every reporting company at least once every three years.

Following are the reports that generally make up a public company’s Reporting Requirements and which are applicable to smaller reporting companies. A “smaller reporting company” is an issuer that is not an investment company or asset-backed issuer or majority-owned subsidiary and that (i) had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter; or (ii) in the case of an initial registration statement, had a public float of less than $75 million as of a date within days of the filing of the registration statement; or (iii) in the case of an issuer whose public float as calculated by (i) or (ii) is zero, had annual revenues of less than $75 million during the most recently completed fiscal year for which audited financial statements are available.

Annual Reports on Form 10-K

All smaller reporting companies are required to file an annual report with the SEC on Form 10-K within 90 days of end of its fiscal year. An extension of up to 15 calendar days is available for a Form 10-K as long as the extension notice on Form 12b-25 is filed no later than the next business day after the original filing deadline.

A Form 10-K includes the company’s audited annual financial statements, a discussion of the company’s business results, a summary of operations, a description of the overall business and its physical property, identification of any subsidiaries or affiliates, disclosure of the revenues contributed by major products or departments, and information on the number of shareholders, the management team and their salaries, and the interests of management and shareholders in certain transactions. A Form 10-K is substantially similar to a Form 10 registration statement and updates shareholders and the market on information previously filed in a registration statement, on an annual basis.

Quarterly Reports on Form 10-Q

All smaller reporting companies are required to file a quarterly report on Form 10-Q within 45 days of end of each of its fiscal quarters. An extension of up to 5 calendar days is available for a Form 10-Q as long as the extension notice on Form 12b-25 is filed no later than the next business day after the original filing deadline.

The quarterly report includes unaudited financial statements and information about the company’s business and results for the previous three months and for the year to date. The quarterly report compares the company’s performance in the current quarter and year to date to the same periods in the previous year.

Current Reports on Form 8-K

Subject to certain exceptions, a Form 8-K must be filed within four (4) business days after the occurrence of the event being disclosed. No extension is available for an 8-K. Companies file this report with the SEC to announce major or extraordinary events that shareholders should know about, including entry into material agreements; mergers and acquisitions; change in control; changes in auditors; the issuance of unregistered securities; amendments in company articles or bylaws; company name changes; issues with reliance on previously issued financial statements; changes in officer or directors; bankruptcy proceedings; change in shell status regulation F-D disclosures and voluntary disclosures (voluntary disclosures have no filing deadline).

The Fair Disclosure Regulation, enacted in 2000 (“Regulation FD”), stipulates that publicly traded companies broadly and publicly disseminate information instead of distributing it selectively to certain analysts or investors only. Companies are encouraged to use several means of information dissemination including Form 8-K, news releases, Web sites or Web casts, and press releases. A Form 8-K under Regulation FD must be filed (i) simultaneously with the release of the material that is subject of the filing (generally a press release); or (ii) the next trading day.

Other than when there has been a change of shell status, the financial statements of an acquired business must be filed no later than 71 calendar days after the date the initial Form 8-K was filed reporting the closing of the business acquisition (which initial Form 8-K is due with 4 days).

Consequences and Issues Related to Late Filing

Late filings carry severe consequences to small business issuers. Generally the shareholders of late filing issuers cannot rely on Rule 144 for the sale or transfer of securities while the issuer is delinquent in its filing requirements. Rule 144(c) requires that adequate current public information with respect to the company must be available. The current public information requirement is measured at the time of each sale of securities. That is, the issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. For reporting issuers, adequate current public information is deemed available if the issuer is, and has been for a period of at least 90 days immediately before the sale, subject to the Exchange Act reporting requirements and has filed all required reports, other than Form 8-K, and has submitted electronically and posted on its website, if any, all XBRL data require to be submitted and posted.

An issuer that is late or has failed to maintain its Reporting Requirements is disqualified from use of Form S-3, which is needed to conduct at the market direct public offerings, shelf registrations and types of registered securities. Likewise, a Form S-8 cannot be filed while an issuer is either late or delinquent in its Reporting Requirements. Late or delinquent filings may also trigger a default in the terms of contracts, including corporate financing transactions. Finally, the SEC can bring enforcement proceedings against late filers, including actions to deregister the securities.

Proxy Statements

All companies with securities registered under the Exchange Act (i.e., through the filing of a Form 10 or Form 8-A) are subject to the Exchange Act proxy requirements found in Section 14 and the rules promulgated thereunder. Companies required to file reports as a result of an S-1 registration statement that have not separately registered under the Exchange Act are not subject to the proxy filing requirements. The proxy rules govern the disclosure in materials used to solicit shareholders’ votes in annual or special meetings held for the approval of any corporate action requiring shareholder approval. The information contained in proxy materials must be filed with the SEC in advance of any solicitation to ensure compliance with the disclosure rules.

Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which shareholders are asked to vote. The disclosure information filed with the SEC and ultimately provided to the shareholders is enumerated in SEC Schedules 14A.

Where a shareholder vote is not being solicited, such as when a company has obtained shareholder approval through written consent in lieu of a meeting, a company may satisfy its Section 14 requirements by filing an information statement with the SEC and mailing such statement to its shareholders. In this case, the disclosure information filed with the SEC and mailed to shareholders is enumerated in SEC Schedule 14C. As with the proxy solicitation materials filed in Schedule 14A, a Schedule 14C Information Statement must be filed in advance of final mailing to the shareholder and is reviewed by the SEC to ensure that all important facts are disclosed. However, Schedule 14C does not solicit or request shareholder approval (or any other action, for that matter), but rather informs shareholders of an approval already obtained and corporate actions which are imminent.

In either case, a preliminary Schedule 14A or 14C is filed with the SEC, who then reviews and comments on the filing. Upon clearing comments, a definitive Schedule 14A or 14C is filed and mailed to the shareholders as of a certain record date.

Generally, the information requirements in Schedule 14C are less arduous those in a Schedule 14A in that they do not include lengthy material regarding what a shareholder must do to vote or approve a matter. Moreover, the Schedule 14C process is much less time-consuming, as the shareholder approval has already been obtained. Accordingly, when possible, companies prefer to utilize the Schedule 14C Information Statement as opposed to the Schedule 14A Proxy Solicitation.

Reporting Requirements for Company Insiders

All executive officers and directors and 10%-or-more shareholders of a company with securities registered under the Exchange Act (i.e., through the filing of a Form 10 or Form 8-A) are subject to the Exchange Act Reporting Requirements related to the reporting of certain transactions. The initial filing is on Form 3 and is due no later than ten days of becoming an officer, director, or beneficial owner. Changes in ownership are reported on Form 4 and must be reported to the SEC within two business days. Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a form must be filed, it is due 45 days after the end of the company’s fiscal year.

Additional Disclosures

Other federal securities laws and SEC rules require disclosures about a variety of events affecting the company. Under the Exchange Act, parties who will own more than five percent of a class of the company’s securities after making a tender offer for securities registered under the Exchange Act must file a Schedule TO with the SEC. The SEC also requires any person acquiring more than five percent of a voting class of a company’s Section 12 registered equity securities directly or by tender offer to file a Schedule 13D. Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D.

Termination of Reporting Requirements

To deregister and suspend Reporting Requirements, an eligible issuer can file a Form 15. To qualify to file a Form 15, an issuer must either have (i) fewer than 300 shareholders; or (ii) fewer than 500 shareholders and the issuer’s assets do not exceed $10 million.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

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

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

Download our mobile app at iTunes.

Tags: Form 10, form 10-k, form 10-q, Form 8-K, Form S-1 registration statement, proxy filing requirements, Regulation FD, Rule 144, Rule 144(c), Schedule 13D, Schedules 14A

Concurrent Public and Private Offerings

by Laura Anthony, Esq. on April 08, 2014 in Concurrent Private and Public Offerings, Corporate Law, Gun Jumping, Private Placement, Regulation D, Rule 144, S-1 Registration Statement, Safe Harbors, Section 4(2), Section 4(a)(2), Securities Attorneys, Uncategorized with One Comment

Background

Conducting concurrent private and public offerings has historically been very tricky and limited, mainly as a result of the SEC’s position that the filing of an S-1 registration statement and unlimited ability to view such registration statement on the SEC EDGAR database in and of itself acted as a general solicitation and advertisement negating the availability of most private placement exemptions. In addition to the impediment of finding a private exemption to rely on, concurrent private and public offerings raised concerns of gun jumping by offering securities for sale prior to the filing of a registration statement, as prohibited by Section 5(c) of the Securities Act of 1933, as amended. However, with the enactment of the JOBS Act including its Rule 506(c) allowing general solicitation and advertising in an exempt offering, rules allowing the confidential submittal of registration statements for emerging growth companies (EGC) and rules permitting testing the waters communications prior to and after the filing of a registration statement, the ability to conduct concurrent private and public offerings has been dramatically changed.

The two principals that generally limit concurrent private and public offerings are 1) gun jumping and 2) the unavailability of an exemption where there is general solicitation or advertising. Gun jumping generally prohibits the offer or sale of securities prior to a registration statement being declared effective. However, the JOBS Act now allows for both oral and written test-the-waters communications and accordingly, would seem to be less of a concern in today’s market.

The SEC has historically held the view that an offering must either be public or private; it cannot be both. Over the years, the SEC has recognized instances when a private and public offering may be conducted concurrently and has promulgated rules and issued no-action letters and guidance on the subject. Issuers that do not desire to rely on Rule 506(c), can still rely on these existing exemptions.

Analysis for Completing Concurrent Private and Public Offerings

An issuer that desires to complete a concurrent private and public offering may proceed using any one or combination of the following:

1. Intergration Rules: Several rules address the subject of integration. In general the concept of integration is whether two offerings integrate such that either offering fails to comply with the exemption or registration rules being relied upon.

Rule 502(a) of Regulation D provides a five-factor test to determine whether separate offerings should be integrated (and thus whether an exemption is available for the private offering and there have been no violations of Section 5 for the registered offering). The five factors are: (1) whether the offerings are part of a single plan of financing; (2) whether the offerings involve issuance of the same class of security; (3) whether the offerings are made at or about the same time; (4) whether the same type of consideration is to be received; and (5) whether the offerings are for the same general purpose. The five-factor test is subjective and the SEC staff has not provided definitive guidance as to what weight to give to the various factors or indeed how many of them have to be met.

Rule 502(a) also provides for a six-month safe harbor wherein multiple private offerings that are conducted at least six (6) months apart will not be integrated. A private offering that is conducted at least six (6) months before or after a registered or exempt public offering will not be integrated with the public offering.

Rule 152 is a safe harbor for issuers undertaking a registered public offering after conducting a private offering. As interpreted by the SEC, a completed private offering will not be integrated with a subsequently commenced registered public offering. Note that Rule 152 provides protection for private offerings under Section 4(a)(2) and Rule 506 but not for the Section 3(b) exemptions under Rules 504 or 505.

In addition, Rule 155 sets forth a safe harbor for abandoned private and public offerings. Generally, the rule creates safe harbors to allow: (i) a public offering immediately following an abandoned private offering and (ii) a private offering thirty (30) days after an abandoned public offering, without integrating the public and private offerings in either situation. These safe harbors provide issuers with more flexibility to react to volatile capital market conditions.

Rule 155 does not replace, but rather supplements, the five-factor test that will be used whenever the safe harbor is inapplicable. For example, the five-factor test, rather than Rule 155, would apply when evaluating whether two or more private offerings should be integrated with each other. Moreover, Rule 155 like Rule 152 recognizes only Sections 4(a)(2) and Rule 506 offerings as exempt offerings. Rule 155 is not available for shelf registration statements.

2. Integration No-action Letters and Interpretations

The integration rules are supplemented by the SEC staff in its no-action letters to Black Box Inc. and Squadron, Ellenoff, Pleasant & Lehrer. In these letters, the staff indicated that it would not integrate a registered offering and a concurrent unregistered offering made only to Qualified Institutional Buyers (as defined by Rule 144A under the 1933 Act) and no more than two or three large accredited institutional investors.

Moreover, an issuer may rely on Section 4(a)(2) of the Securities Act provided that the issuer could establish that the investors did not learn of the offering through the registration statement and thus through general solicitation. An S-1 registration statement is deemed a general solicitation. In this case if the investors in the private offering become interested in the private offering through some means other than the registration statement – for example, there is a substantive, pre-existing relationship between the investors and the company – then the registration statement would not have served as a general solicitation for the private offering and Section 4(a)(2) would be available, assuming the offering is otherwise consistent with the exemption (i.e., the investors are accredited and sophisticated and the offering is not widely participated in such as to create a public offering).

3. Section 5(d); Rule 506(c); Confidential Submission of Registration Statement

The prior concerns that in a registered offering, communications that may be deemed offers, prior to the effectiveness of a registration statement, would violate Section 5 of the Securities Act have been greatly alleviated by new Section 5(d). In addition, new Rule 506(c) has provided an exemption that issuers can rely on that allows for general solicitation and advertising in conducting a private offering. Both of these rules provide the basis for issuers to proceed with concurrent private and public offerings without gun-jumping or violating Section 5 of the Securities Act.

Testing the Waters

Section 105(c) of the JOBS Act added renumbered paragraph (d) to Section 5 of the Securities Act, which permits emerging growth companies (“EGC”), and any person acting on their behalf to test the waters by engaging in pre-filing communications with qualified institutional buyers or institutions that are accredited investors regarding their interest in the offering subject to the requirement that no security may be sold unless accompanied or preceded by a Section 10(a) prospectus. As an EGC would not have filed any documents or requests with the SEC at this stage, it will be up to the EGC to determine whether it qualifies as an EGC prior to commencing test-the-waters communications. Under current rules, “well-known seasoned issuers,” or WKSIs, can engage in similar test-the-waters communications, but smaller, less mature public companies and pre-IPO companies cannot. These new test-the-waters communications can be oral or written, and can be made either before filing a registration statement or after. They can be made in connection with an IPO or any other registered offering. These communications will still be subject to anti-fraud rules.

In addition, an EGC may engage in test-the-waters communications with QIBs and institutional accredited investors in connection with exchange offers and mergers. However, the JOBS Act does not amend the exchange offer or merger requirements under the Exchange Act. Accordingly, an EGC would still be required to make filings under Sections 13 and 14 of the Exchange Act for pre-commencement tender offer communications and proxy soliciting materials in connection with a business combination transaction.

Rule 506(c)

Historically, a fundamental basis for the private offering exemption, in the view of the SEC, is the absence of general solicitation of investors. That has changed. On September 23, 2013, the SEC adopted new Rule 506(c) which permits the use of general solicitation and advertising to offer and sell securities under Rule 506 provided that the following conditions are met:

1. the issuer takes reasonable steps to verify that the purchasers are accredited;

2. all purchasers of securities must be accredited investors, either because they come within one of the categories in the definition of accredited investor, or the issuer reasonably believes that they do, at the time of the sale; and

3. all terms and conditions of Rule 501 and Rules 502(a) and (d) must be satisfied.

Rule 501 sets out definitions, including the definition of accredited investors. Rule 502(a) is the integration rule providing a six-month safe harbor from integration for successive Regulation D offerings and setting out a five-factor fact test analysis which can be used if the six-month rule is not available. Rule 502(d) provides that securities sold in Regulation D offerings (with certain Rule 504 exceptions) are restricted under Rule 144.

Prior to September 23, 2013, it was very difficult for a company to overcome the prohibition against general solicitation and advertising in a private offering, if it attempted to conduct concurrent private and public offerings. To the extent this remains a concern, emerging growth companies have the ability under the JOBS Act to submit their registrations statements to the SEC for review confidentially, which may negate the general solicitation.

Confidential submittal and review of registration statements:

The JOBS Act allows the confidential submittal, review and treatment of initial public offering (IPO) registration statements with the SEC until just 21 days prior to commencing a road show. An EGC may initiate the “initial public offering” (“IPO”) process by submitting its IPO registration statements confidentially to the SEC for nonpublic review by the SEC staff. A confidentially submitted registration statement is not deemed filed under the Securities Act and accordingly is not required to be signed by an officer or director of the issuer or include auditor consent. Signatures and auditor consent are required at the time the registration is filed, no later than 21 days prior to commencing a “road show.” If the EGC does not conduct a traditional road show, then the registration statements and confidential submissions must be publicly filed no later than 21 days prior to the anticipated effectiveness date of the registration statement.

This confidential process will allow an EGC to defer the public disclosure of sensitive or competitive information and avoid the public disclosure altogether if it ultimately decides not to proceed with the offering. In addition, the confidential process would allow an EGC to proceed with a private offering without violating general solicitation prohibitions.

Prior to the JOBS Act and its changes discussed herein, the SEC Compliance and Disclosure Interpretations published the below question and answer. Although the SEC has not issued specific guidance on the issue since enactment of 506(c) and the ability to confidentially submit registration statements, these changes clearly eliminate the issue of general solicitation and advertising.

Question: Does the five-factor integration analysis in Securities Act Rule 502(a) apply to the situation in which an issuer is conducting concurrent private and public offerings?

Answer: No. The Commission’s integration guidance in Securities Act Release No. 8828 (Aug. 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Section 4(2) or the Securities Act Rule 506 safe harbor with a registered public offering without having to limit the private offering to qualified institutional buyers and two or three additional large institutional accredited investors, as under the Black Box (June 26, 1990) and Squadron, Ellenoff (Feb. 28, 1992) no-action letters issued by the Division, or to a company’s key officers and directors, as under our so-called “Macy’s” position. The filing of the registration statement does not eliminate the company’s ability to conduct a concurrent private offering, whether it is commenced before or after the filing of the registration statement. This guidance does not negate the five-factor integration analysis outlined in Securities Act Release No. 4552 (Nov. 6, 1962) and in Rule 502(a), which should be used to test whether two or more otherwise exempt offerings should be treated as a single offering to determine whether an exemption is available.

Specifically, the Commission’s guidance focuses on how the investors in the private offering are solicited – whether by the registration statement or through some other means that would not otherwise foreclose the availability of the Section 4(2) exemption. If the investors in the private offering become interested in the private offering by means of the registration statement, then the registration statement will have served as a general solicitation for the securities being offered privately and Section 4(2) would not be available. On the other hand, if the investors in the private offering become interested in the private offering through some means other than the registration statement – for example, there is a substantive, pre-existing relationship between the investors and the company – then the registration statement would not have served as a general solicitation for the private offering and Section 4(2) would be available, assuming the offering is otherwise consistent with the exemption. Hence, there would be no integration of the private offering with the public offering.

In short, in the specific situation of concurrent public and private offerings, only the guidance set forth in the Securities Act Release No. 8828 applies. [Nov. 26, 2008]

Conclusion

An Issuer may conduct concurrent private and public offerings if:

1. The issuer satisfies itself that the two offerings will not integrate using traditional integration analysis

2. The issuer limits the private offering to qualified institutional buyers and two or three additional large institutional accredited investors, as under the Black Box (June 26, 1990) and Squadron, Ellenoff (Feb. 28, 1992) no-action letters issued by the Division;

3. The issuer limits the offering such that it would qualify under Section 4(a)(2) of the Securities Act provided that the issuer could establish that the investors did not learn of the offering through the registration statement and thus through general solicitation; or

4. The private offering qualifies under new Rule 506(c), which allows for general solicitation and advertising as long as all investors are accredited and the company takes steps to verify accredited status. Self-verification will not suffice.

5. The issuer’s registration statement is confidential and the issuer relies on an exemption that does not allow for general solicitation or advertising. In this case, a standard integration analysis would also be prudent.

In all cases, the private and public offerings are and remain two separate offerings. An issuer should proceed cautiously, being cognizant that it does not violate either the rules related to its private offering or its public offering.

Click Here to Print Concurrent Public and Private Offerings- Concurrent Public and Private Offerings

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

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

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

Download our mobile app at iTunes.

Tags: emerging growth companies (EGC), IPO Registration Statements, pre-IPO companies, Private Offering, registration statement, Regulation D, Rule 144, safe harbor, SEC Compliance and Disclosure Interpretations, Section 4(a)(2), Section 5(d)

OTC Markets has Modified its OTCQB Eligibility Criteria Effective May 1, 2014

by Laura Anthony, Esq. on April 01, 2014 in OTC Market, OTCBB, OTCQB and OTCQX, OTCQX, Pinksheets, SEC Rule 15c2-11, Uncategorized with No Comments

OTC Markets has unveiled changes to be quoted on the OTCQB, which changes become effective May 1, 2014. The OTC Markets changes are designed to attract venture investors to provide more information to investors and to improve such information with Real-Time Level 2 quotes. The OTC Markets press and informational releases related to the change concentrate on the push to create a successful venture-stage marketplace by removing underperforming companies.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals. Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC but do not undergo additional quality review.

Effective January 3, 2013, OTC Markets modified its OTC Markets Pink Alternative Reporting Standard for current information status. In particular, it streamlined its disclosure guidelines to align them more closely with the SEC Rule 15c2-11 guidelines, eliminated the requirement for an attorney letter where audited financial statements are provided, and reduced the requirement for attorney letters from every quarter to just once a year upon the filing of an annual report. The prior Pink Alternative Reporting Standard was more analogous to an SEC registration statement than the SEC Rule 15c2-11 guidelines. The streamlined disclosure allowed more companies to provide current information, which weren’t quite ready to provide the type of information required of a company subject to the SEC reporting requirements.

The New OTC Markets OTCQB Eligibility Criteria

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

Meet a minimum bid price of $.01 or be downgraded to OTC Pink;
Submit an application and pay an application and annual fee;
Submit an OTCQB Annual Certification confirming the accuracy of the current company profile and providing information on officers, directors and controlling shareholders.

Moreover, international reporting companies listed on a qualified foreign stock exchange are now eligible for the OTCQB upon submittal of an application and fee, and banks that do not report to the SEC are required to post their regulatory filings on otcmarkets.com. Entities that do not meet the requirements of either OTCQX or OTCQB will be quoted on the OTC Pink.

The changes related to the minimum bid requirements will become effective on May 1, 2014. All OTCQB companies that do not meet the minimum bid price of $.01 per share at the close of business of at least one of the previous thirty consecutive calendar days will be moved to the OTC Pink.

All new companies that are not already quoted on the OTCQB on April 30, 2014 will be required to submit an application, pay a fee and follow certain procedures to become traded on the OTCQB. Companies’ securities will no longer be automatically reported on the OTCQB when they have an active 211 and are fully reporting to the SEC.

Those companies currently quoted on the OTCQB which have not been moved to OTC Pink for failure to meet the minimum bid requirement will be required to meet all the new eligibility standards, including an application and fee and certification regarding company profile information, within 120 days of their next fiscal year end starting with companies with a fiscal year end of March 31, 2014. Companies that fail to comply will be downgraded to OTC Pink.

Requirements for SEC Reporting Companies

All SEC Reporting companies will be required to meet the minimum bid price of $.01. Newly applying companies must meet the minimum bid price at the close of business for each the last 30 calendar days and then for at least one of every 30 calendar days going forward.

Newly applying entities must pay an initial application fee of $2,500, which fee is waived for existing OTCQB entities. Moreover, all OTCQB companies will be required to pay a steep annual fee of $10,000. OTC Markets is offering a discounted fee to existing OTCQB companies that submit their application in 2014 even if those companies are not required to comply until 2015 due to the timing of their next fiscal year end. The discounted fee is $7,500 annual for the first two years.

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

The company’s reporting standing (i.e., whether SEC reporting, bank reporting or international reporting) and briefly describing the registration status of the company;
That the company is current in its reporting obligations to its regulator and that such information is available either on EDGAR or the OTC Markets website;
States the law firm and/or attorneys that assist the company in preparing its annual report or 10-K;
Confirms that the company profile on the OTC Markets website is current and complete;
Confirms the total shares outstanding and in the public float as of the most recent fiscal year end; and

Names and shareholdings of all officers and directors and shareholders that beneficially own 5% or more of the total outstanding shares.

Many OTCQB companies will find this annual fee prohibitive on top of the annual audit, legal and XBRL fees associated with reporting to the SEC. I suspect there will be a sharp rise in reporting OTC Pink entities starting May 1, 2014 and continuing for the next few years.

OTCQB companies will be required to remain current in their SEC reporting obligations. Foreign entities not required to file SEC reports will be required to maintain current information on otcmarkets.com. All OTCQB companies will be required to post an initial and then annual certifications on the OTC Markets website.

Requirements for Bank Reporting Companies

In addition to the same minimum bid price, application and annual certification and fee requirements as SEC Reporting companies, bank reporting companies are required to post their previous two years’ and ongoing yearly disclosure that was and is filed with the company’s bank regulator, on the OTC Markets website.

International Reporting Companies

In addition to the same minimum bid price, application and annual certification and fee requirements as SEC Reporting companies do, foreign issuers must be listed on a Qualified Foreign Exchange and be compliant with SEC Rule 12g3-2(b). Moreover, a foreign entity must submit a letter of introduction from a qualified PAL which states that the PAL has a reasonable belief that the company is in compliance with SEC Rule 12g3-2(b), is listed on a Qualified Foreign Exchange, and has posted required disclosure on the OTC Markets website. A foreign entity must post two years’ historical and ongoing quarterly and annual reports, in English, on the OTC Markets website which comply with SEC Rule 12g3-2(b).

Impact on PIPE Resale Registration Statements, Including Equity Line Transactions

The SEC will permit a company to register the “resale” of securities in a PIPE or equity line transaction prior to its exercise of the put if the transactions meet the following conditions:

the company must have “completed” the private transaction of all of the securities it is registering for “resale” prior to the filing of the registration statement;
the “resale” registration statement must be on the form that the company is eligible to use for a primary offering; and
in the prospectus, the investor(s) must be identified as underwriter(s) as well as selling shareholder(s).

As long as these criteria are met, the SEC will allow pricing based on a formula tied to market price as long as there is an existing market for the securities as evidenced by trading on a national securities exchange or through the OTC Bulletin Board or the OTCQX or OTCQB marketplaces. The OTC Pink is not included in the SEC list of marketplaces. As the OTC Pink is not considered a market: (1) there can be no at-the-market pricing of securities registered for resale by an issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market) for OTC Pink quoted securities.

Conclusion

It seems an effort is being made to increase the quality of companies on the OTCQB while at the same time increasing the quality of the companies on the OTC Pink as more SEC reporting companies fail to meet the minimum bid price requirement or opt out of paying the high annual fee.

Click Here to Print OTC Markets Has Modified its OTCQB- LC PDF Printout 4-21-15 I

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

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

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

Download our mobile app at iTunes.

Tags: OTC Bulletin Board, OTC markets, OTC Pink, OTC Pink quoted securities, OTC Registration, OTCQB, OTCQX, Pink Alternative Reporting Standard, Qualified Foreign Exchange, Rule 15c2-11 guidelines, SEC Rule 12g3-2(b)

Monthly Archives: April 2014

SEC Issues New Guidance on Use of Twitter and Other Social Media Communications

OTCQX Listing and Quotation Eligibility and Requirements for U.S. Companies

Public Company SEC Reporting Requirements

Concurrent Public and Private Offerings

OTC Markets has Modified its OTCQB Eligibility Criteria Effective May 1, 2014

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