Monthly Archives: January 2015

What is Rule 10b5-1?

Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”) addresses the issue of insider trading liability.

Specifically, 10b5-1 discusses when liability stems from a trader’s “use” or “knowing possession” of “material nonpublic information.”

10b5-1 states that a trade is made “on the basis of” material nonpublic information if the trader buys or sells securities while aware of the information.

Affirmative Defenses to Insider Trading

With this in mind, Rule 10b5-1 provides some affirmative defenses to insider trading that allow traders to buy and sell securities in specific circumstances when it is clear that the material nonpublic information was not a factor in the decision to trade.

What are the 10b5-1 Affirmative Defenses?

Under Rule 10b5-1(c)(1)(i)(A), the SEC does not consider the purchase or sale to be “on the basis of” material nonpublic information if, before becoming “aware” of material nonpublic information, the trader

  1. Already entered into a binding contract to buy or sell the security; or
  2. Already instructed another person to buy or sell the security; or
  3. Previously adopted a written plan for trading securities.

What is a 10b5-1 Trading Plan?

A 10b5-1 trading plan is a structured securities trading plan or strategy that a trader can set up when he or she is not aware of material nonpublic information.   In theory, if documented properly, this trading plan can then be followed even if the trader later becomes aware of material nonpublic information.

What is SEC Form 424B3?

Form 424B3 is a type of prospectus for an investment offering that reflects facts or events that are a substantive change from or addition to the information set forth in the last form of prospectus filed with the SEC.

A Form 424B3 is filed under Rule 424(b)(3) of the Securities Exchange Act of 1933 and can be filed following the effective date of an S-1 Registration Statement.

What are SEC Forms 3, 4 and 5?

These forms are used by a public company’s insiders in order to report beneficial ownership of securities.   A corporate insider in this case refers to the public company’s officers, directors, and anyone beneficially owning greater than Ten (10%) Percent of a class of stock registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”).

SEC Form 3

Form 3 is for filing an initial statement of beneficial ownership. An public company insider must file this Form no later than the effective date of the registration statement if the Issuer is registering stock for the first time under Section 12 of the Exchange Act.

If the public company is already registered under Section 12, Form 3 must be filed within Ten (10) days of the date on which the shareholder became an insider–that is, when he or she became an officer, director, or beneficial owner of greater than Ten (10) percent.

SEC Form 4

Form 4 is used for reporting Changes in beneficial ownership to the SEC.  SEC Form 4 must be reported to the SEC within Two (2) business days. There are certain, limited categories of transactions that are not subject to the Two (2) business day reporting requirement.

SEC Form 5

Form 5 is used by insiders  to report transactions that should have been reported earlier on a Form 4.  Form 5 can also be used for “deferred reporting.” If a Form 5 is filed, it is due Forty-Five (45) days following the end of the public company’s fiscal year.

Obligation to File Reports Under the Securities Exchange Act of 1934

Exchange Act Reporting Requirements

When a public company registers its securities under the Securities Act of 1933 (the “Securities Act”) through the filing of an S-1 Registration Statement, it must continue to file periodic reports with the SEC under the Securities Exchange Act of 1934 through at least the end of the fiscal year in which the S-1 becomes effective.

After the end of that fiscal year, the public company must continue reporting to the SEC unless its obligation to report is suspended.   The SEC will suspend an Issuer’s filing obligations if

  1. The number of shareholders falls below 300 for the class of securities offered; or
  2. The number of shareholder is below 500 for the class of securities offered and the Issuer had less than $10 million in total assets in each of the last 3 fiscal years.

An Issuer can request that the SEC suspend its filing obligations by filing a Form 15.   From there, Issuers usually choose to become a Pink Sheet and file under the Alternative Reporting Standard used by the OTC Markets Group.

There are two situations in which a public company would still have the obligation to file SEC Exchange Act reports, regardless of its preference for the alternative reporting standard:

  1. If the public company lists its securities on an exchange, like the New York Stock Exchange, the NYSE MKT or the NASDAQ; or
  2. If the Issuer has record shareholders greater than 2,000.

Can the SEC Revoke a Stock’s Registration?

Yes, the SEC can revoke the registration of a stock under the Securities Exchange Act of 1934 (the “Exchange Act”).

If a public company remains out of compliance with federal securities laws, Section 12(j) of the Exchange Act  authorizes the SEC to revoke the registration of its stock, in which case broker-dealers may not execute trades in that stock.

What is a Trading Halt?

In contrast to an SEC trading suspension, which lasts for 10 days over a public interest concern, a trading halt is used by is used by securities exchanges like the New York Stock Exchange (NYSE) and the NASDAQ, and usually lasts less than an hour.

Reasons for a Trading Halt

A trading halt can be called at any time during the trading day

  1. So a public company can release important news which is likely to have a huge effect, either positive or negative, on the stock’s volume; or
  2. When there is a major imbalance in orders between buyers and sellers in a stock.

What is a Trading Delay?

A trading halt is also called a trading delay.   The term “delayed opening” is used when a securities exchange halts trading at the start of the trading day.

Types of Trading Halts and Delays

There are two different kinds of trading halts and delays.

  1. Regulatory, usually when a public company has pending news that the exchange believes will cause a volume spike.   This allows market participants time to assess the impact of the news release.
  2. Non-regulatory, usually when there is a question about whether the security continues to meet the exchanges listing requirements or when there is a significant order imbalance.


What is an SEC Trading Suspension?

The Securities and Exchange Commission (“SEC”) has the authority to suspend trading in any stock for up to Ten (10) days when it believes that information about the Company may be inaccurate or unreliable.  Investors can search a list of SEC trading suspensions at

Reasons the SEC Might Suspend Trading

  1. A lack of “current, accurate, or adequate” information about the public company–   If the Issuer is an OTCQB or OTCQX, this will cause OTC Markets to label it as a Pink Sheet until the filings are current.
  2. Questions regarding the accuracy of publicly available information–  This usually refers to press releases, but can also refer to periodic reports, like the 8-K, that mention financials, mergers or acquisitions.
  3. Trading in the stock–  A concern over insider trading or market manipulation involving email spam is often the cause.

Does trading automatically resume after the Ten Day Suspension?

Microcap stocks that are quoted on OTC Markets or on the OTC Bulletin Board (“OTCBB”) do not automatically resume trading following a 10 day SEC trading suspension.

In order for OTC Markets or FINRA’s OTCBB to resume quoting a suspended stock, the Issuer must have a market maker sponsor a new 15c2-11 filing.

Responding to an SEC Trading Suspension

SEC trading suspensions are valid tactics used by the Commission when there is a public interest concern over either a lack of information or the presence of new information that needs to be verified.

The proper response in either case is to make sure that the Issuer’s filings and press releases are current and accurate.  If a mistake was made, the Issuer should file an Amendment immediately.   Once the filings and news releases are current and accurate, then the next job for the Issuer’s securities counsel is to compile and present documentation which supports the statements made in the filings or news releases which caused the concern.

Public companies which post accurate new releases that state verifiable facts and avoid hyperbole should be able to produce supporting documentation within the 10 day SEC trading suspension, and after review by the SEC, the matter should end there.

While it is often true that an SEC review and response to such documentation could take longer than 10 days, and that a new 15c-211 filing may be inevitable, it is the Issuer’s responsibility to cooperate and assist the SEC in their investigation.   The sooner an Issuer provides documentation to the SEC, the sooner the trading suspension can be lifted.

Microcap public companies or shareholders with concerns over an SEC trading suspension or trading halt can contact securities lawyer Matt Stout at (410) 429-7076 or





What are the Penny Stock Rules?

The Penny Stock Rules refer to the requirements of Section 15(h) of the Securities Exchange Act of 1934, under which Congress prohibited broker-dealers from effecting transactions in penny stocks unless they are in compliance.

Under the Penny Stock Rules Broker-Dealers Must Do the Following

  1. Approve the shareholder for the specific penny stock transaction; and
  2. Receive from the shareholder a written agreement to the transaction; and
  3. Provide a disclosure document which describes the risks of investing in penny stocks; and
  4. Disclose the current market quotation, if any, for the penny stock; and
  5. Disclose the amount of compensation the firm and its broker will receive for executing the trade; and
  6. After executing the sale, the broker-dealer must also send monthly account statements to the shareholder, which detail the market value of each penny stock in the shareholder’s account.

What is a Penny Stock?

Most investors believe a Penny Stock must be trading for under one cent, but the term can refer to any microcap public company’s securities that are not listed on a national exchange, like the NYSE or NASDAQ, if those shares are trading for under $5.

 Exclusions from Penny Stock Rules

SEC Rule 3a51-1 allows exclusions for public companies that have
  1. Net tangible assets greater than $2 million if they have been in business at least three years; or
  2. More than $5 million if in business less than three years or
  3. Average revenue of at least $6 million for the last three years.

Penny Stocks are not just Pink Sheets

In fact, under this definition, unless the asset or revenue requirements are met, even those SEC filers with audited financials, quoted on the OTC Bulletin Board (OTCBB), or OTC Markets OTCQB or OTCQX market tiers can be considered penny stocks.

What is a Blank Check Company?

A Blank Check Company is defined by the SEC under the Securities Act of 1933, Rule 419, as a company that has

  1. no specific business plan or purpose, or
  2. has indicated that its business plan is to engage in a merger or acquisition with an unidentified operating business, and
  3. is issuing “penny stock.”

These blank check companies are sometimes referred to as 419 shells.  Blank check companies are similar to a special purpose acquisition company (SPAC) in that both are created to consummate a business combination with an unidentified target company.

S-1 Registration Statements and Blank Check Companies

When filing an S-1 Registration Statement for a development stage start up company, is it not uncommon for initial SEC comments to question whether or not the registrant is a blank check company.  If the company is not a blank check under Rule 419, then the response to the SEC would include information supporting the company’s specific business purpose and a bona fide plan of operations.

Companies that are concerned about being incorrectly labeled a blank check company or 419 shell should take care to draft the business plan portion of the S-1 with sufficient detail so that the question answers itself.

Entrepreneurs considering taking their companies public via S-1 Registration Statement can contact securities attorney Matt Stout with questions at (410) 429-7076 or via