Category Archives: OTC Markets Pink Sheets

Who is a Control Person Under Rule 144?

Affiliates According to Rule 144

An affiliate under SEC Rule 144 is, in general terms a person, such as an officer, director or large shareholder, in a relationship of control with the public company.

Rule 144 Affiliates Include Officers, Directors and Others by Beneficial Ownership

The standard group of easily identifiable affiliates includes a company’s officers, directors, or owners of greater than 9.99% of the securities of any class. But then, under the concept of beneficial ownership, we must add to that list, the spouse of an affiliate, or anyone living in the same household as an affiliate.  They too, are considered affiliates under Rule 144 because they are deemed in theory to exercise the same type of control.

How Does the SEC Define Control Person?

According to the SEC, “control” means the power to direct the management and policies of the public company.  That control could be exercised by an affiliate through ownership of voting securities or by agreement.

Does the Securities Act or Rule 405 Define Control Person?

However, the Securities Act of 1933 doesn’t define the terms “control person” or “control relationship”. That being said, in Rule 405, the SEC defines “control” as follows:

“The term “control” (including the terms “controlling,” “controlled by,” and “under common control with,” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”

Affiliate shareholders of microcap public companies quoted on the OTC Markets, or listed on NASDAQ or NYSE can contact an experienced securities attorney for a no cost review of their Form 144, stock certificates and supporting documentation at (410) 429-7076.  If an opinion can be issued, affiliates will receive a prompt turnaround and a reasonable flat fee.

 

Sales of Affiliate Stock Under Rule 144

What Are the Conditions for Selling Stock Under Rule 144?

One possible way to sell restricted stock to the public, is to meet the criteria of Rule 144.  While Rule 144 is not the only exemption used by non-affiliate shareholders of restricted stock to sell their securities, Rule 144 offers a “safe harbor” exemption to Affiliates when the requirements are met.

Five Criteria For Using Rule 144 To Clear Restricted Stock

  1. Holding Period Under Rule 144

    If the public company that issued the Affiliate’s restricted stock is a “fully reporting company” that is technically “subject to” the reporting requirements of the Securities Exchange Act of 1934 (a/k/a Exchange Act or 34 Act), then the minimum holding period is six months. If the public company that issued your restricted stock is not subject to the reporting requirements of the 34 Act, then you must hold the stock for at least one year. Please note that the calculation for the holding period does not begin until the stock is “fully paid for.”

  2. Current Public Information Requirement of Rule 144

    The public company’s filings must show “adequate current information” about the company, that is publicly available, before the sale can be made. For SEC filers subject to the Exchange Act this generally means that the the company has filed all of its 10-Q, 10-K, 8-K reports and links to such reports are available on its website. For non-reporting companies, whether they are voluntary filers under the 33 Act or just Pink Sheets filing disclosures on OTCMarkets.com, the SEC states that “certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements” must be publicly available.

  3. Trading Volume Formula for Affiliates Under Rule 144

    For Affiliates of the public company only, there is a trading volume limitation placed on their ability to sell stock.  The SEC allows such an Affiliate (an owner of greater than 9.99% of the outstanding securities of any class, an officer, director, control person, or their spouses…or those living in the same household as the foregoing…)  to sell during any three-month period a maximum of 1% of the outstanding shares of the same class being sold (if an OTC Markets stock), or if the class is listed on a stock exchange, such as NASDAQ or NYSE, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.  OTC stocks, including those previously quoted on the old OTC Bulletin Board and those now quoted on the OTC Markets Pink Sheets, must be sold by Affiliates using the 1% maximum.

  4. Ordinary Brokerage Transactions Under Rule 144

    For Affiliates of publicly traded companies, their restricted stock sales must be handled in all respects as “routine trading transactions, and brokers may not receive more than a normal commission” according to the SEC.  That means neither the seller nor the broker “can solicit orders to buy the securities.”

  5. Filing a Notice of Proposed Sale With the SEC

    Affiliates must also file Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.  Most brokerages will require an Affiliate of the public company to fill out Form 144 for every sale, which will list the current issued and outstanding shares of common stock, and state the proposed maximum (1%) that the Affiliate intends to sell.  Affiliates must update their Form 144 periodically and brokers often require updated Rule 144 legal opinions to be issued in order for the Affiliate to continue selling.

It is important to note that Rule 144 cannot be used by Shareholders of non reporting Pink Sheets to clear restricted stock if the public company is a current shell or a former shell.    Shareholders of SEC filers which are subject to the reporting requirements of the Exchange Act may use Rule 144 only if the requirements of the Evergreen Rule are met.  (In these cases, if Rule 144 is unavailable as an exemption, it may be possible for non-affiliate stockholders to use Section 4(a)(1) instead.)

Shareholders of OTC Markets public companies, or those trading on the NASDAQ or NYSE needing Rule 144 legal opinions to deposit restricted stock can reach an experienced securities attorney by calling (410) 429-7076 any time.  There is never a cost to review certificates and supporting documents, and if a legal opinion can be issued, a reasonable flat fee will be quoted.

The JOBS Act and Foreign Private Issuers Going Public in the United States

The JOBS Act reduces many of the regulatory burdens on smaller companies that are filing an initial public offering (“IPO”) in the United States in order to go public on the OTC Bulletin Board or OTCMarkets. For a Foreign Private Issuer (“FPI”) that qualifies as an Emerging Growth Company, the JOBS Act allows for a streamlined IPO “on‐ramp” process that either avoids or defers some of the more costly SEC disclosure requirements.

The JOBS Act allows a Foreign Issuer that is also an Emerging Growth Company the option in certain cases to do the following when filing an F-1 Registration Statement:

  1. Confidential Submissions: An Emerging Growth Company is allowed in certain cases to submit a draft F-1 Registration Statement or a draft Form 20‐F to the SEC for confidential, nonpublic review prior to the public filing.
  2. Testing‐the‐Waters: An Emerging Growth Company is allowed to continue oral or written communications with qualified institutional buyers, (“QIBs”), and institutional accredited investors in order to gauge their interest in a proposed IPO, both before and after filing an F-1 Registration Statement.
  3. Research Report: A broker‐dealer can publish and distribute a research report about an Emerging Growth Company  without the research report being deemed an “offer” under the Securities Act whether or not the broker‐dealer is participating in the IPO.
  4. Audited Financials: An Emerging Growth Compay is required to present only Two (2) Years of audited financial statements with its F-1 Registration Statement.
  5. Auditor Attestation Report on Internal Controls: An Emerging Growth Company is exempt from the requirement to obtain an auditor attestation report on internal controls over financial reporting.

Securities Attorney for Foreign Companies Going Public in the United States

US securities attorney Matt Stout represents foreign companies going public in the United States via F-1 Registration Statement.  All securities legal representation is performed under an agreed upon flat fee, payable in stages, and defined under a written scope of work in an F-1 Engagement Agreement.

OTC Markets securities lawyer Matt Stout can introduce FPI’s to all other service providers needed in order to go public, including PCAOB Auditors, Transfer agents, EDGAR filers and Market Makers.

Management of Foreign Private Issuers considering an IPO in the US OTC Markets can contact Matheau J. W. Stout, Esq. for a no cost consultation at (410) 429-7076 or mstout@otclawyers.com.

 

 

How Does a Foreign Private Issuer Go Public in the United States?

Foreign Issuers File F-1 Registration Statements to Go Public in the US

A Foreign Private Issuer (“FPI”) that wants to raise capital in the United States publicly for the first time must register its shares on SEC Form F‐1. An F-1 Registration Statement is similar to a Form S‐1 filed by US domestic Issuers in that it requires detailed disclosures about the FPI’s business operations and financials.

An experienced US securities attorney can help a Foreign Issuer draft an F-1 and respond to all SEC comments efficiently under a flat fee.  Once the F-1 is declared Effective by the SEC, a securities attorney can recommend a Market Maker to sponsor the Foreign Issuer for a FINRA ticker symbol so that its securities can be quoted on the OTCMarkets OTCQB or OTC Bulletin Board (“OTCBB”).

What Types of Securities Can a Foreign Company Register in the United States?

A Foreign Issuer may offer any type of securities that a US domestic Issuer is allowed to offer. In addition, an FPI may choose to offer its securities using American Depositary Receipts (“ADRs”). Most Foreign Issuers will choose to register their Common Stock in an F-1 Registration Statement, just like a US domestic Issuer.

Securities Lawyer for Foreign Companies Going Public in the United States

Management of Non US domiciled companies seeking to become publicly traded in the United States can contact OTC securities lawyer Matheau J. W. Stout, Esq. to discuss the time frame and costs involved with going public on the OTC Markets or OTC Bulletin Board via F-1 Registration Statement.

Qualified Foreign Issuers can later uplist to the OTCQX, NASDAQ or NYSE MKT when appropriate.  Matt Stout can be reached at (410) 429-7076 or mstout@otclawyers.com for a free consultation.

Selling Stock in Former Shell Companies Under Rule 144

Rule 144 is the most common exemption from registration of microcap stock, and is often cited by securities attorneys in legal opinions used to deposit restricted shares in OTCMarkets companies.

However, Rule 144 can never be used if the Issuer is currently a shell company.  If the Issuer is a former shell, Rule 144 can only be used by a shareholder if certain conditions apply.  These requirements for former shells are known informally as “The Evergreen Rule.”

What are the Requirements of the Evergreen Rule under Rule 144?

  1. The Issuer of the securities must have ceased to be a shell company;
  2. The Issuer must be “subject to” the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”).  This means the Issuer must be a “mandatory SEC filer” or “fully reporting.”;
  3. The Issuer must have filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, during the last 12 months, other than Form 8-K reports; and
  4. The Issuer must have filed current ‘‘Form 10 information.”  This includes audited financials and could be done in a Form 10, but is more likely achieved in a combination of other SEC filings, including a “Super 8-K.”

If the foregoing requirements of the Evergreen Rule are met, then Rule 144 might be available, subject to all other applicable Rule 144 conditions, such as Affiliate status, and holding period.

Section 4(a)(1) Alternative to Rule 144 for Current and Former Shells

In many cases, the requirements of the Evergreen Rule cannot be met.  For instance, if an Issuer is currently marked a shell company, or if a former shell is delinquent in its SEC filings, then Rule 144 cannot be used.   If the securities are greater than Two (2) Years old, Section 4(a)(1) may offer a solution.

Requirements of Section 4(a)(1) Legal Opinions

Matheau J. W. Stout, Esq. drafts Section 4(a)(1) legal opinions for shareholders who are not “issuers, underwriters or dealers.”   Because shell status is not an element of Section 4(a)(1), these legal opinions can issued for Non Affiliate shareholders in current shells or former shell companies.

Current information is also not an element of Section 4(a)(1), such that these opinions can also be drafted even when the Issuer is delinquent in its filings, and marked as a Yield Sign or Stop Sign at OTCMarkets.com.

Section 4(a)(1) is concerned with the shareholder, rather than the Issuer.   Section 4(a)(1) opinions cite case law extensively and are typically much longer than the average Rule 144 opinion, as they go into great detail when examining whether or not a shareholder can be classified as an issuer, underwriter, or dealer in securities.

Securities Attorney Drafting Section 4(a)(1) Opinion Letters for Shareholders

Shareholders with stock in current or former shell companies quoted on the OTC Bulletin Board or OTC Markets can contact OTC securities lawyer Matt Stout for a no cost review of their certificate and supporting documents at (410) 429-7076 or mstout@otclawyers.com.

 

 

SEC Exchange Act Filings for Foreign Private Issuers After Going Public in the US

A Foreign Private Issuer (“FPI”) that has registered securities under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) or is required to file under Section 15(d) of the Exchange Act after completing its F-1 Registration Statement is required to file the following reports with the SEC:

Annual Report for Foreign Issuers on SEC Form 20‐F

SEC Form 20‐F is only filed by foreign issuers and can be used as an Annual Report, just like a Form 10‐K would be filed by domestic United States domiciled issuers. The information required to be disclosed in an SEC Form 20‐F includes the same information that would be found in a 10-K for a United States domestic issuer:

  1. operating results;
  2. liquidity and capital resources;
  3. trend information;
  4. off‐balance sheet arrangements;
  5. consolidated statements and other financial information;
  6. significant business changes;
  7. selected financial data;
  8. risk factors;
  9. history and development of the issuer;
  10. business overview; and
  11. organizational structure.

Foreign Issuers Filing SEC Reports on Form 6‐K

In addition to an Annual Report on Form 20-F, an FPI must also file Form 6‐K with the SEC. Form 6‐K generally takes the place of both the 10‐Q and the 8-K that US domestic issuers are required to file with the SEC.   When filed in order to provide the information contained in a 10-Q, Form 6-K will include financials. In other instances, the Form 6-K will include timely disclosure of material events, which would be filed in an 8-K by US domestic issuers.

However, unlike in an 10‐Q or 8‐K, there are no specific disclosures required by Form 6‐K for foreign issuers. Instead, an FPI must file a 6‐K with the SEC promptly whenever the following occurs:

  1. The foreign issuer makes information public pursuant to the laws of its home domicile or the laws in the jurisdiction in which it is incorporated; or
  2. The foreign issuer is required to file information with a stock exchange on which its securities are traded and which was made public by that exchange; or
  3. The foreign issuer is required to distribute information to its shareholders.

US Securities Lawyer for Foreign Companies Going Public in the United States

Foreign companies going public on the OTC Bulletin Board or OTC Markets in the United States, or those seeking to dual list their securities in the US markets like the NASDAQ can contact securities attorney Matt Stout for a no cost consultation at (410) 429-7076 or mstout@otclawyers.com.

Matheau J. W. Stout, Esq. works with foreign management of US companies and foreign domiciled corporations to help them go pubic in the US via F-1 Registration Statement and filing the Form 20-F.

What is SEC Form 20-F?

A Form 20‐F is filed by non-United States domiciled companies known as foreign issuers and serves many purposes, from registration statement to annual report.

Why Do Foreign Companies File SEC Form 20-F?

Form 20-F Subjects a Foreign Issuer to Exchange Act Reporting Requirements

Foreign companies file SEC Form 20-F  in order to become subject to the reporting requirements under the Securities Exchange Act of 1934 in the same way that a domestic US issuer could file the Form 10.

Form 20-F is Mandatory When the Threshold Number of Shareholders is Reached

In some instances, the foreign issuer is required to file the 20-F, such as when it reaches the holder of record threshold under Section 12(g) of the Exchange Act, and there is no other exemption available.

Foreign Companies Can File Form 20-F After an F-1 is Declared Effective

In other instances, the foreign issuer will choose to file the Form 20-F in order to become a “fully reporting SEC filer” such as after its F-1 Registration Statement is declared Effective.   An F-1 is similar to the S-1 Registration Statement filed by US domestic companies going public in the United States.   In that respect, when filed after an F-1 becomes Effective, the Form 20-F serves essentially the same purposes as a Form 8A for a domestic US issuer.

Form 20-F is also the Annual Report for Foreign Issuers

A Form 20-F is also the Annual Report pursuant to Section 13 or 15(d) of the Exchange Act, and thus also serves essentially the same purpose as a 10-K would for a US domestic issuer.

Securities Attorney for Foreign Issuers Going Public in the United States

OTC Bulletin Board and Pink Sheets securities lawyer Matt Stout represents foreign private issuers seeking going public in the United States by filing F-1 Registration Statements.

Likewise, foreign management of US domiciled companies work with Matt Stout to go public via S-1 Registration Statement following private placements under Regulation S.

Foreign companies which are planning to “go public” on the OTC Markets or OTC Bulletin Board in the US by filing an F-1 Registration Statement can also work with an experienced securities attorney such as Matheau J. W. Stout, Esq. in order to prepare the SEC Form 20-F for filing once the F-1 is declared Effective.  Matt Stout can be reach at (410) 429-7076 or mstout@otclawyers.com.

 

 

 

 

 

 

Broker and Finder Registration Under the Securities Act

Many transactions in the OTC Markets involve the work of Brokers, Finders and other Intermediaries serving as Consultants.  Microcap companies often engage consultants to assist in marketing, investor relations, raising capital and introducing or closing M&A transactions.

Most often, consultants are not registered broker-dealers with the SEC.  In many cases, registration as a Broker is not required.  However, depending on the language of the agreements, how consultants are paid, and the actual work performed, there may be occasions when SEC registration is either advisable or mandated under the Securities Act.

Who Must Register with the SEC as a Broker?

Section 3(a)(4)(A) of the Securities Act of 1933 defines a “Broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.”

Examples of Persons Who May Need to Register as a Broker

In its Guide to Broker Dealer Registration, the SEC provides examples of certain individuals or businesses that may need to register under the Securities Act.  In typical microcap OTC Markets transactions, these may include “Finders” or “Consultants” if their activities include the following:

  1. Finding investors or clients for registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
  2. Making referrals to registered broker-dealers, investment companies, etc., or splitting commissions with them;
  3. Finding investment banking clients for registered broker-dealers;
  4. Finding Investors for “Issuers”, even in a consulting role;
  5. Engaging in, or finding investors for, venture capital or “angel” financing rounds, including private placements (PPMs);
  6. Finding buyers and sellers of businesses in reverse merger or acquisition transactions when the sale of securities (debt or equity) is involved;
  7. Acting as “Placement Agents” for private placements of securities;

How to Tell if a Finder Should Be Registered as a Broker with the SEC

If consultant fits into one of the examples above,  the SEC looks at the actions or duties the person or business actually performs to determine if registration as a Broker is necessary.  Some of the questions the SEC considers when examining the conduct of Finders or consultants include:

  1. Does the consultant participate in the solicitation, negotiation, or execution of the securities transaction?
  2. Does the consultant’s compensation depend upon, or is it determined by the outcome or size of the transaction or deal?
  3. Does the consultant receive trailing commissions, such as 12b-1 fees?
  4. Does the consultant receive any other transaction-related compensation?
  5. Is the consultant engaged in the business of effecting or facilitating securities transactions or is this a one-time deal?
  6. Does the consultant handle the securities or funds of others in connection with securities transactions?

According to the SEC’s compliance guidelines, if a consultant answers “yes” to any of these questions, they may need to register as a Broker.

Brokers Generally Must Register with the SEC under Section 15(a)(1)

Section 15(a)(1) of the Securities Act generally makes it unlawful for any Broker to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that Broker or dealer is registered with the SEC under Section 15(b) of the Securities Act.

Microcap Securities Attorney Matt Stout

OTC Bulletin Board and Pink Sheet Issuers and Consultants seeking compliance with SEC guidelines can contact securities regulation lawyer Matt Stout for a review of business practices, as well as existing contracts and agreements to determine if registration as a Broker under Section 15(b) is necessary at (410) 429-7076 or mstout@otclawyers.com.

 

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.

 

Authorized US Representative for F-1 Registration Statements

Foreign companies that are not incorporated or domiciled in the United States use SEC Form F-1 Registration Statement to “go public.”   The Form F-1 is similar to the familiar S-1 Registration Statement used by domestic or US based companies to file an IPO.   One difference is that the F-1 requires the signature of the Registrant’s Authorized US Representative, which is most often the company’s US based securities attorney.

Who Qualifies as an Authorized US Representative on Form F-1?

The term Authorized US Representative is discussed in Securities Act Release No. 6360 (Nov. 20, 1981), which states that

the Commission generally accepts the signature of an individual who is an employee of the registrant or an affiliate, or who is the registrant’s counsel or underwriter in the United States for the offering, because the signature clearly identifies an individual that is connected with the offering as subject to the liability provisions of the Securities Act. By similar reasoning, the Commission generally has refused to accept the appointment of a newly formed or shell corporation in the United States as the authorized representative.

US Securities Lawyer for Foreign Companies Going Public

US based securities attorney Matheau J. W. Stout, Esq. serves as Authorized US Representative on Form F-1 Registration Statements for foreign companies seeking to go public on the OTC Markets.   OTC Securities Lawyer Matt Stout can work alongside local counsel outside of the United States to coordinate the filing of a Form F-1, and subsequent quarterly and annual filings, and can recommend PCAOB auditors familiar with Non US companies going public.