Category Archives: Alternative Reporting Standard

SEC Adopts Amendments to Implement JOBS Act and FAST Act Changes for Exchange Act Registration Requirements

The Securities and Exchange Commission has approved amendments to revise the thresholds for registration of securities, termination of registration, and suspension of reporting obligations under Section 12(g) of the Securities Exchange Act of 1934.

How Do the Amendments Affect SEC Reporting Companies?

For the majority of microcap OTC Bulletin Board and OTC Markets public companies, the practical effect of these amendments make it easier for delinquent SEC reporting companies which are facing de-registration to file SEC Form 15 in order to become Current Pink Sheets on OTCMarkets.com under the Alternative Reporting Standard.

What are the JOBS Act Amendments to Exchange Act Rules 12g?

The Commission approved final rules to implement the JOBS Act and FAST Act by:

  1. Amending Exchange Act Rules 12g-1 through 12g-4 and 12h-3, governing registration and termination of registration under Section 12(g), and suspension of Section 15(d) reporting obligations, to reflect new thresholds established by the JOBS Act and the FAST Act.
  2. Using the definition of “accredited investor” in Securities Act Rule 501(a) to determine which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1).
  3. Allowing the Issuer to make the accredited investor determination as of the last day of its fiscal year.

New Thresholds for Assets and Number of Shareholders of Record

As a result of JOBS Act and FAST Act changes, an Issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if

  1. it has more than $10 million of total assets; and
  2. the securities are “held of record” by either 2,000 persons; or
  3. 500 persons who are not accredited investors.

The vast majority of OTC Bulletin Board and OTC Markets SEC filers have far less than $10 Million in total assets and most never reach 2,000 shareholders.

Filing SEC Form 15 to Cease Exchange Act Reporting Obligations

For this reason, the key threshold change as a result of the JOBS Act is that SEC filers which are delinquent in their 10-K, 10-Q filings due to audit costs can more readily file the Form 15 to cease reporting under the Exchange Act.

By reviewing a Shareholder List as of the end of the Issuer’s last fiscal year, Management with close to 500 shareholders may be able to identify several which are clearly accredited, in order to meet the threshold of 500 non-accredited shareholders.

OTC Securities Lawyer for Delinquent SEC Filers Seeking to Become Pink Current

Matheau J.W. Stout, Esq. represents delinquent SEC filers in becoming current using the OTC Markets Alternative Reporting Standard and can be reach at (410) 429-7076 or mstout@otclawyers.com.

As part of the Pink Current process, securities attorney Matt Stout can file SEC Form 15, prepare Information and Disclosure Statements for OTCMarkets, and issue the Current Information Legal Opinion.

 

Pink Sheets and the Current Public Information Requirement of Rule 144(c)(2)

One of the requirements of Rule 144 is that current information about the Issuer must be publicly available before the sale.

SEC Filers Must Have Audited Financials to Be Current

For SEC reporting companies, this means that the Issuer is current in its reporting obligations under the Securities Exchange Act of 1934, which includes audited financials on forms 10-K, and 10-Q.  Without “current information” an SEC filer will be marked “delinquent” and its Shareholders will not be permitted to use the abbreviated Six (6) Month Holding Period for removing restricted legends on their OTC stock.

Non-Reporting Issuers Do Not Need Audited Financials to Be Marked Pink Current

Non-reporting companies, and voluntary SEC filers, are not eligible for the Six (6) Month holding period even if they are “current” since they are not “subject to” the Exchange Act.

For non-reporting Pink Sheets, being current under the Alternative Reporting Standard means filing an up-to-date Information and Disclosure Statement and either the latest Quarterly Report or Annual Report on OTCMarkets.com.

Together, these OTC Markets filings contain information regarding the nature of the Issuer’s business, its officers and directors, and its financial statements, similar to what would be found in a Form 211 filed under 15c211.

Non-Reporting Pink Sheets are not required to have audited financials in order to meet the current reporting requirement under Rule 144(c)(2).

Securities Attorney for OTC Bulletin Board and OTC Markets Filers

Securities lawyer Matt Stout works with public companies that are delinquent in SEC and OTC Markets filings in order to help them become “current.”   In this context, he can review or draft SEC filings and issue OTC Markets Current Information Legal Opinions for those Issuers filing on OTCIQ.   Matt Stout, securities attorney can be reached at (410) 429-7076 or mstout@otclawyers.com.

What is Rule 144?

Rule 144 Safe Harbor for Clearing Restricted Stock

SEC Rule 144 is the most common safe harbor that Shareholders of restricted stock in OTC Markets companies use to sell their shares.

Rule 144 has three major questions that must be answered before it can be used to remove a restricted legend from a stock certificate.  These questions determine Affiliate Status, 144 Holding Period and Shell Status.

Is the Shareholder an Affiliate of the Issuer under Rule 144?

Under Rule 144, an Affiliate is a “control person” which is most often an officer, director, or owner of greater than 9.99% of the total issued and outstanding shares of any class of stock in the Issuer.

If a Shareholder is an Affiliate, or was an Affiliate within the past 90 days, then he or she is subject to trading volume limitations under Rule 144.

What are the Affiliate Trading Volume Limitations Under Rule 144?

Affiliate Shareholders of OTC Bulletin Board and OTC Markets OTCQB, OTCQX and Pink Sheets, can only sell up to 1% of the Issuer’s total issued and outstanding shares during any 3 month period, and such sales must be reported to the SEC on Form 144.

What is the Shareholder’s Holding Period under Rule 144?

Whether or not the Shareholder is an Affiliate, the restricted stock must be held for a certain period of time, known as the Rule 144 “holding period” after the Shareholder acquires the shares and before the Shareholder sells the stock.

What is the 144 Holding Period for SEC Reporting Companies?

For SEC reporting public companies, like those quoted on the OTC Bulletin Board (OTCBB) and the OTC Markets OTCQB and OTCQX, and for those listed on the NASDAQ or NYSE MKT, the Rule 144 holding period is a minimum of six (6) months.

In order to qualify, the public company must be “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.  This is also known as a mandatory SEC filer.

Rule 144 Holding Period for Non Reporting Companies

For Non SEC Reporting Issuers, like those quoted on the OTC Markets Pink Sheets and filing OTC Markets Disclosure Statements, the Rule 144 holding period is twelve (12) months.

Voluntary SEC filers are also considered non reporting companies and have a Rule 144 holding period of twelve (12) months.

Voluntary filers are those which go public via S-1, but which have not yet filed an 8A-12g or 8A-12b or Form 10 under the 34 Act, so they are not yet technically “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.

Was the Issuer Ever A “Shell Company” under Rule 144?

Current Shells Cannot Use Rule 144 to Clear Stock

Rule 144 does not allow Shareholders of public companies that are currently classified as a “shell company” to use its safe harbor to clear and sell restricted stock.

This is true even if the Shareholder is not an Affiliate, and if the Shareholder has held stock for longer than the required holding period under Rule 144.

Can Former Shells Use Rule 144?

Former shell companies that now have assets and an operating business must wait one (1) year after the Issuer ceases to be a shell before their shares may be sold using Rule 144, and then only if the public company is an SEC filer and subject to the filing requirements of the Exchange Act of 1934.

The moment a public company ceases to be a shell is sometimes clear because it is found in an SEC filing, like a “Super 8-K” for instance.  This could be the date upon which the company acquired an operating business or assets, in a reverse merger.

The Evergreen Rule:  Rule 144 Applied to Former Shell Companies

Former shells that are fully reporting OTCQB, OTCQX and OTC Bulletin Board companies must have filed current SEC reports like the 10-Q, 10-K and 8-K for a minimum of one (1) year from the date they ceased to be a shell, and they must be current in their filings now, before its Shareholders can avail themselves of the exemption from registration offered by Rule 144.

The term “Evergreen Rule” refers to the requirement that former shell companies must remain current in their filings (forever) in order for Rule 144 to be used.  If a former shell becomes delinquent in SEC filings, Rule 144 cannot be used until the Issuer is current.

Non Reporting Pink Sheet Former Shells Cannot Use Rule 144

Former shell companies that are OTC Markets Pink Sheets cannot used Rule 144 even if they are “Pink Current” now meaning that they are up to date on their OTC Markets Quarterly Reports, Annual Reports and their Information & Disclosure Statements.

Section 4(a)(1) Can Be Used to Clear Stock of Pink Sheet Former Shells

If the shares are greater than Two (2) Year old, OTC shareholders in Pink Sheets or delinquent SEC filers may be able to use Section 4(a)(1) (also known as Section 4(1) or simply 4-1) to clear and deposit their restricted stock.

Section 4(a)(1) can only be used if the shareholder is not an Issuer, Underwriter or Dealer, and if the shareholder can document the origin and history of the Shares as dating back greater than Two (2) Years.

OTC Bulletin Board (OTCBB) and OTC Markets Issuers seeking a securities attorney with expertise in Rule 144 and Section 4(a)(1) can contact Matt Stout at (410) 429-7076 or mstout@otclawyers.com for further information.

What does an E Suffix Mean for an OTCBB Trading Symbol?

NASDAQ and OTCBB Companies Delinquent in SEC Filings

Whenever a public company trading on the NASDAQ or the OTC Bulletin Board (“OTCBB”) becomes delinquent in its SEC reporting obligations, the letter “E” is added to company’s ticker symbol.

NYSE Companies Delinquent in SEC Filings

Companies listed on the New York Stock Exchange (“NYSE”) which fall behind in their SEC reports receive the suffix “LF” following their trading symbol.

OTCMarkets Companies Delinquent in Filings

Public companies quoted on OTCMarkets.com which are delinquent in their SEC filings are marked “delinquent” first if they are on the OTCQB Market Tier.  After remaining delinquent for a period of time, they get further marked down to Pink Yield and are removed from the OTCQB.

Bulletin Board and OTC Markets Lawyer Matt Stout

Management and shareholders of SEC filers which are delinquent in their filings under the Securities Exchange Act of 1934 can contact securities attorney Matt Stout to discuss the implications for depositing restricted stock using Rule 144 legal opinion letters and Section 4(a)(1) opinions at (410) 429-7076 or mstout@otclawyers.com.

What is the Penny Stock Rule?

SEC Penny Stock Rule

The Penny Stock Rule refers to the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”), under which broker-dealers must follow a series of compliance measures in order to effect transactions in penny stocks.

The term “penny stock” usually refers to a security issued by a very small company trading at less than Five Dollars ($5.00) per share.

Penny stocks are sometimes known as OTC Markets stocks and are typically quoted over-the-counter on OTCMarkets.com  operated by OTC Markets Group, Inc. or on FINRA’s Bulletin Board (“OTCBB”).

Section 15(h) of the Exchange Act

Because of the inherently speculative characteristics of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Exchange Act, which states that broker-dealers  must

  1. approve the customer for the specific penny stock transaction and receive a written agreement to the transaction;
  2. furnish the customer with a disclosure document describing the risks of investing in penny stocks;
  3. disclose to the customer the current market quotation, if any, for the penny stock;
  4. disclose to the customer the amount of compensation the firm and broker will receive for executing the trade; and
  5. after executing the trade, a broker-dealer must send to its investing customer monthly account statements that show the market value of all penny stock held in the customer’s account.

Transactions Exempt from the Penny Stock Rule

Some transactions in penny stocks are exempt from the Penny Stock Rule. Examples of exempt transactions are those with an established customer, who has either done business with the brokerage for greater than one year, or who has made at least three penny stock purchases.  Likewise, transactions with institutional investors may also be exempt.

Some Companies with Low Stock Prices are Not Penny Stocks

Companies quoted on the OTCQX, the highest market tier of OTCMarkets.com, are not considered Penny Stocks even if they have low stock prices because they must meet one of the exemptions to the Penny Stock Rules involving minimum net tangible assets or revenue.

Brokerages Specialize in OTC Markets Penny Stocks

An experienced securities attorney like Matheau J. W. Stout, Esq. can refer shareholders to one of the few brokerage firms which specialize in OTC Markets stocks.

These OTC brokers have streamlined the process of opening accounts for penny stock investors.  Their compliance and legal departments are familiar with penny stocks and the Rule 144 legal opinions needed to deposit OTC stocks.

Interested OTC stock shareholders can review SEC Schedule 15g for further information or contact Matt Stout, microcap securities attorney at (410) 429-7076 or via email at mstout@otclawyers.com.

What is OTCQX?

OTCQX is the highest market tier on OTCMarkets.com, and is reserved for “established, investor-focused U.S. and global companies.”  The OTCQX marketplace attracts the best public companies since it has relatively high financial requirements, and only accepts those with a history of compliance with U.S. securities laws that are current in their disclosure.   OTCQX companies must also be sponsored by a professional third-party advisor known as “DAD/PAL.”

Because of these requirements, OTCQX can be a logical step toward a future uplisting onto the NYSE MKT or NASDAQ.

There are Three Types of OTCQX Companies

 OTCQX International

OTCQX International is the marketplace for global companies whose securities are already listed on an international stock exchange.   The platform provides visibility to US investors and a recognized forum for disclosure and transparency.

OTCQX US

OTCQX US is the OTCMarkets’ tier for smaller and high-growth United States based public companies which exceed certain high financial requirements and operating standards.  These OTCQX Issuers are demonstrating a commitment to full disclosure and transparency.

OTCQX for Banks

OTCQX for Banks is the marketplace for well capitalized regional and community banks with strong management.  OTCQX for Banks accepts both SEC reporting banks and non reporting banks, and the platform gives each the ability to increase their investor visibility while meeting existing regulatory requirements.

 

Pink Sheet Stop Signs and Shell Status Under Rule 144

Sometimes shareholders cannot obtain a Rule 144 legal opinion letter from a securities attorney even though they have held shares in an OTC Markets public company for greater than one year. When this happens, the problem is usually a lack of current public information, which is required under Rule 144.

A Stop Sign Could Be a Shell Under Rule 144

How does a securities lawyer determine whether or not the Issuer is a Shell Company as defined under Rule 144 if the Issuer is a Stop Sign and has not published any public information? An OTCMarkets.com Stop Sign is technically a Pink No Information company under the Alternative Reporting Standard, and this implies that there is not enough information made available to warrant even a Yield Sign.

Simply put, regardless of the Issuer’s past filings, it doesn’t meet Rule 144’s current information requirement so Rule 144 cannot be used. Another way to look at this is that a securities attorney also cannot be sure the Issuer is not currently a shell if it is marked a Stop Sign.

Section 4(1) Legal Opinions Do Not Address Shell Status

When faced with an Issuer that fails to keep its filings current, a shareholder’s best friend could be Section 4(1). A Section 4(1) legal opinion is sometimes considered by experienced securities law counsel when the shares in question are greater than two (2) years old. This is a holding period twice as long as that required of a current Pink Sheet under Rule 144. If that holding period can be met, then “shell status” is not an element of a Section 4(1) legal opinion, since it concerns itself with whether or not the shareholder is an underwriter or dealer, rather than with the Issuer’s filings.

What is a Reverse Merger?

A Private Company’s Assets or Operations are Vended Into a Public Vehicle

In a reverse merger (or reverse takeover) the controlling shareholders of a public vehicle acquire the business operations or assets of a private company.  Once the reverse takeover (“RTO”) transaction is complete, the private company is either “vended in” as a subsidiary of the Issuer, in which case all of its financials become reported under the umbrella of the public company, or the assets are purchased.

This is usually accomplished via a Share Exchange Agreement in which the shareholders of the private company receive a majority stake or “controlling interest” in the public company.

New Officers and Directors are Appointed from the Private Company in an RTO

With that change in control, new officers and directors are usually appointed from the management of the private company.  The change in control is the reason why reverse mergers are sometimes referred to as a reverse takeover or RTO.

Interestingly, Issuers seeking private company candidates for reverse merger are often called “public shells” even if they have enough assets and operations to avoid classification as a “shell company” under Rule 144.

Super 8-K Type Disclosures Must Be Provided to Investors After a Reverse Merger

Once the reverse merger is complete, the Issuer provides disclosures regarding the private company’s assets and operations using a “Super 8-K” if an SEC reporting company, or an Information and Disclosure Statement if an OTC Markets Pink Sheet using the Alternative Reporting Standard.

The Private Company Now “Trades” on the Public Market

After this disclosure process, the private company’s management is  in control of the public vehicle (which may be a former shell) and its stock is now quoted and trades under the same ticker or trading symbol.  At this point, it often makes sense for the new management to change the name of the company, and its symbol, in order to emphasize the new business operations to investors.

Famous Companies That Went Public Via Reverse Merger or RTO

Some household names which are reported to have gone public via reverse merger or reverse takeover include Berkshire Hathaway, Blockbuster, Waste Management, Jamba Juice, Turner Broadcasting (which later became CNN), Occidental Petroleum,and Texas Instruments.

Entrepreneurs seeking a public shell for a reverse takeover or Issuers looking for private companies to “vend in” can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

Can Stock in Shell Companies Be Sold Under Rule 144?

What is a Rule 144 Legal Opinion Letter?

A Rule 144 legal opinion is a letter drafted by a securities attorney to a Transfer Agent that states whether or not a specific transaction complies with the requirements of SEC Rule 144.  Rule 144 has separate elements or requirements that must be met, and supported with documentation, in order for a restricted stock certificate to be cleared for sale under Rule 144.

One of the requirements for compliance with Rule 144 is that the Issuer is not a shell company.

What is a Shell Company under Rule 144?

A shell company under SEC Rule 144 is an Issuer that has either

  1. No operations or nominal operations;
  2. Assets that consists only of cash and cash equivalents; or
  3. Assets that consist of any amount of cash and cash equivalents and nominal other assets.

 What if the Issuer Used to Be a Shell Company But is Not Currently a Shell?

If the Issuer was ever classified or declared a shell company in its past, then the Issuer must have provided current public information for a minimum period of time since it ceased to be a shell, and it must be current in its reporting to the SEC, not under the OTC Markets Alternative Reporting Standard.

SEC Reporting Companies That Used to Be a Shell under Rule 144

For SEC reporting companies that file Forms 10-Q, 10-K and 8-K, these Issuers must be current in their SEC quarterly and annual report filings.  If the Issuer was ever a shell in its past, it must have filed these reports for at least 12 months since it stopped being a shell.

These Issuers will be quoted on the OTC Markets OTCQB or OTCQX market tiers.  They may also be quoted on the OTC Bulletin Board, if the Issuer has chosen to apply for OTCBB.  But a current SEC reporting company that is “fully reporting” will be shown as an OTCQB, at least, on OTCMarkets.com.

Pink Sheets That Used to Be a Shell under Rule 144

Non SEC reporting companies (Pink Sheets) that are subscribed to OTC Markets OTCIQ system, will be shown as a “Pink Current” Issuer on OTCMarkets.com, meaning that the Issuer is current in its quarterly financials, annual financials and disclosure statement filings under the Alternative Reporting Standard.

If a Pink Sheet public company was ever a shell in its past, broker-dealers and clearing firms are not likely to ever accept a Rule 144 legal opinion to clear its stock even if it has ceased being a shell.  This is true under Rule 144 no matter how long ago the Pink Sheet ceased to be a shell.

Pink Sheets that are not current in their filings will be shown as “Pink Limited Information” or Pink Yield Sign, while those Pink Sheets that have missed several filings will be shown as “Pink No Information” or Pink Stop Sign.

Shareholders of Pink Sheet Issuers that were formerly shells can contact Matt Stout, securities attorney for further information on other SEC provisions which may be useful in clearing their Shares under the facts specific to their case.

Do OTC Markets Issuers Need Audited Financials?

Public companies quoted on the OTC Markets OTCQX and OTCQB marketplaces require financials audited by a PCAOB auditor.  Those securities quoted on the OTC Markets Pink Sheet market tier do not required audits, though many Pink Sheets do have audited financials.

Audited Financials Not Required for Non Sec Reporting Companies

FINRA does not require the financial statements of Pink Sheets, which are not SEC reporting companies, to be audited for the Form 211 in the 15c2-11 process. Non SEC reporting companies are those that do not publish their financials and disclosures using the 10-Q, 10-K and 8-K using the SEC’s EDGAR filing system.

Unaudited Financials of US Issuers Must Be Prepared in Accordance with GAAP

However, OTC Markets Pink Sheet Issuers that are US companies should have financials that are prepared in accordance with GAAP. Foreign Issuers, meaning those Issuers that are incorporated offshore as opposed to US corporations that have business headquarters or operations outside of the US, are allowed to post financials that do not follow GAAP if they are prepared in accordance with their home country’s accepted accounting standards.

PInk Current Issuers Without Audits Require an Attorney Letter

Whether a US or foreign Issuer, a public company that wants to maintain Pink Current status on OTCMarkets.com will require an Attorney Letter  with Respect to Current Information at least annually, if they do not file reports with the SEC and do not publish audited financials. Companies that want to maintain Pink Limited Information (Pink Yield Sign) are not required to have audited financials.

Issuers with questions regarding PCAOB audits or questions about filing Form 15 with the SEC to transfer to the OTC Markets Alternative Reporting Standard (thus avoiding audits) can contact Matheau J. W. Stout, Esq. at (410) 429-7076 or mstout@otclawyers.com.