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.

 

Initial Public Offerings on the OTC Markets

What is an IPO on the OTC Markets?

The term “initial public offering” or IPO, refers to the first time a company sells stock to the general public.  To register an IPO, a microcap company seeking to become quoted on the OTC Bulletin Board or OTC Markets files an S-1 Registration Statement.

SEC Comments and Amendments to an S-1

S-1 Registration Statements for IPOs are reviewed by the SEC to monitor compliance. When reviewing an S-1, the SEC staff concentrates on disclosures that may conflict with SEC rules or need further explanation to make them clear. The SEC then issues comments, which the company uses to revise and amend its S-1 Registration Statement.  The amendments are marked S-1/A.

When an S-1 Registration Statement is Declared Effective

After all SEC staff comments have been addressed by the Issuer, the SEC will issue an order declaring the S-1 Registration Statement Effective.  This is shown as EFFECT on SEC.gov, and means the Issuer may sell stock under the S-1 to any investor.

After an S-1 is declared Effective, all of the SEC’s comments and the Issuer’s replies are also made visible on SEC.gov under CORRESP, which is short for “correspondence.”

How do I invest in an OTC Markets IPO?

Microcap companies filing an S-1 Registration Statement to go public usually do not have underwriters.  Instead, the Issuer’s Officers and Directors communicate directly with investors and the stock is sold via Subscription Agreement after the S-1 is declared Effective. S-1 stock purchased soon after the Effective date is free trading, and can be deposited by the Investor into a brokerage account and sold “on the market.”

In order to invest in a microcap OTC Markets IPO, a prospective Investor will need to contact the Issuer or its securities attorney, using the information on the first page of an S-1 to indicate their interest in purchasing stock once the S-1 is declared Effective.

OTC Securities Lawyer Files S-1 Registration Statements for Microcap Companies

Private companies seeking to go public on the OTC Markets can contact securities lawyer Matt Stout for a free consultation at (410) 429-7076 or mstout@otclawyers.com.  All S-1 Registration Statements are prepared under an agreed-upon flat fee.   Matheau J. W. Stout, Esq. can provide introductions to an entire team of S-1 professionals including PCAOB auditors, Transfer Agents, EDGAR filers, Market Makers and DTC Eligibility specialists.

 

Anatomy of an S-1 Registration Statement

All US companies seeking to go public on the OTC Markets may use SEC Form S-1 to conduct an initial public offering (“IPO”).  S-1 Registration Statements can be filed efficiently by an experienced OTC securities attorney and if the S-1 follows a standard procedure using best practices, this helps the SEC review and approve an S-1 in a timely fashion.

S-1 Registration Statements have Two Main Parts

  1. Part I is the Prospectus.  The Prospectus is the legal “selling” document. In the Prospectus, the Issuer of the securities must describe, in easy to understand plain English, important facts about its business operations , financial condition, results of operations, risk factors, and management. It must also include audited financials. The Prospectus must be delivered to everyone who buys securities, and everyone who is offered the securities.
  2. Part II contains additional information that the Issuer is not obligated to deliver to Investors but must still file with the SEC, such as copies of material contracts and agreements.

Specific Disclosures About the Company Required in an S-1 Prospectus

All successful S-1 Registration Statements must include specified disclosures about the Issuer in the Prospectus, including:

  1. A description of the Issuer’s business, properties, and competition;
  2. A description of the risks of investing in the Company;
  3. A discussion and analysis of the Issuer’s financial results and financial condition as seen through the eyes of management (Management Discussion & Analysis or “MD&A”);
  4. The identity of the Issuer’s Officers and Directors, including their compensation;
  5. A description of material transactions between the Issuer and its Officers, Directors, and Affiliates;
  6. A description of material legal proceedings (litigation) involving the Issuer and/or its Officers and Directors; and
  7. A description of the Issuer’s material contracts and agreements, if any.

Other Disclosure Requirements in an S-1 Registration Statement

The S-1 must also disclose certain information about the offering, including:

  1. A description of the securities being offered;
  2. The plan for distributing the securities, including whether or non an underwriter is involved or commissions will be paid; and
  3. The planned use of the proceeds of the securities offering.

Regulation S-K Provides Guidelines for Non-Financial S-1 Disclosure

Regulation S-K provides guidance to Issuer’s on both the form and content rules for non-financial portions of S-1 Registration Statements.

Regulation S-X Provides Guidelines for Financial S-1 Disclosure

S-1 Registration Statements also must include financial statements that comply with the form and content requirements of Regulation S-X. For US domiciled companies seeking to go public on the OTC Bulletin Board or OTCMarkets OTCQB, these financial statements must be prepared according to GAAP.

S-1 Audited Financials Must Be Signed Off by a PCAOB Auditor

All S-1 Registration Statements also must include financial statements audited by a PCAOB Auditor, which an independent certified public accountant registered with the Public Company Accounting Oversight Board.

Securities Attorney for Going Public via S-1

Matheau J. W. Stout helps microcap companies go public on the OTC Bulletin Board and OTC Markets OTCQB via S-1 Registration Statement.  All legal work necessary is covered by an agreed upon flat fee.  We can introduce you to PCAOB auditors, Transfer Agents, EDGAR filers, and Market Makers as part of the S-1 process.  Contact securities lawyer Matt Stout for a free consultation 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.

 

Continuous S-1 Offering under Securities Act Rule 415

SEC Form S-1 does not provide for forward incorporation by reference of Exchange Act reports filed after the S-1 Registration Statement is declared Effective.

Post-Effective Amendment to Form S-1 for Material Changes

Because of this, when an S-1 is used for a continuous offering per Securities Act Rule 415, a Post-Effective Amendment is needed under Securities Act Section 10(a)(3) to reflect fundamental changes or to disclose material changes in the plan of distribution.  The Post-Effective Amendment is required pursuant to the Issuer’s Item 512(a) undertakings.

Changes via S-1 Prospectus Supplement

Changes which are not fundamental or material can be made to Prospectus contained in the S-1 Registration Statement by filing a Prospectus Supplement.

S-1 Lawyer Matt Stout Helps Microcap Companies Go Public

Matheau J. W. Stout, Esq. represents entrepreneurs seeking to go public via S-1 Registration Statement.  Companies interested in becoming quoted on the OTB Bulletin Board or OTC Markets OTCQB can contact Matt Stout, securities lawyer, at (410) 429-7076 or mstout@otclawyers.com for a free consultation.

Graphics Used in S-1 Registration Statements

Many companies filing IPOs to go public on the OTC Bulletin Board or OTC Markets using S-1 Registration Statements choose to include text or artwork inside the front and back cover pages of the prospectus.

Graphics are permitted in an S-1 Registration Statement, subject to certain best practices.

  1. Registrants should refer to Rule 304 of Regulation S-T to ensure that the graphics are in compliance;
  2. The graphic presentations must accurately represent their actual current business;
  3. Graphics must not depict products that do not exist or are not the Registrant’s actual products;
  4. Registrants cannot include testimonials or statistical data that are taken out of context; and
  5. Registrants should not identify specific customers that are not representative of the registrant’s overall customer base;
  6. Graphics should not use industry jargon or terms that are unfamiliar to the average investor;
  7. The graphic presentation should not include extensive narrative text that repeats information already contained in the Summary or Business Overview sections;
  8. Graphic presentations cannot be confusing or obscure other Prospectus disclosures, and
  9. No graphic presentation should give prominence to selected portions of the Registrant’s business or operations.

S-1 Attorney Offers No Cost Consultations to Discuss Going Public

Microcap companies and entrepreneurs seeking to go public on the OTCQB or OTCBB via S-1 Registration Statements can contact OTCMarkets securities attorney Matt Stout for a free consultation at (410) 429-7076 or mstout@otclawyers.com.

How to Update the Prospectus for a Continuous Offering on Form S-1

If a microcap company files an S-1 Registration Statement for a continuous securities offering, how should its prospectus be updated to reflect new information in subsequent 10-Q and 10-K reports?

When SEC Form S-1 is used for a continuous offering, the prospectus may should be revised periodically to reflect new information because unlike Form S-3, the S-1 does not provide for incorporation by reference of subsequently filed periodic reports.

Post Effective Amendments to Form S-1

For example, in a continuous offering on a Form S-1 pursuant to Rule 415(a)(1)(ix), an OTCQB company wants to update the prospectus to include Exchange Act reports filed after the effective date of the Form S-1.

In that case, if the company files a post-effective amendment, it could incorporate by reference previously filed Exchange Act reports like the 10-K and 10-Q if it satisfied the conditions in Form S-1 allowing incorporation by reference.

Item 512(a)(1) of Regulation S-K also requires some changes, including a Section 10(a)(3) update, to be reflected in a post-effective amendment.

Rule 424(b) Prospectus Supplement

Other changes can be made in a prospectus supplement filed pursuant to the various categories under Rule 424(b) of the Securities Act of 1933.

S-1 Registration Statement Attorney Free Consultation

Matheau J. W. Stout, Esq. answers questions regarding S-1 Registration Statements and going public via S-1 at mstout@otclawyers.com or (410) 429-7076.  There is no cost for an initial consultation to explain the mechanics of filing an IPO via S-1 in order to become a publicly traded company on the OTC Bulletin Board or OTC Markets.

 

What are the Regulation S Safe Harbor Categories?

There are Three Issuer Safe Harbor Categories under Regulation S

The Regulation S issuer safe harbor contains three categories of offerings, depending on the nationality and reporting status of the Issuer, and whether or not there is substantial US market interest in the securities.

The three categories represent increasing protections to make sure that the securities offered in a Regulation S offering are not part of an unregistered distribution of securities in the United States.

Regulation S Safe Harbor Category 1

The first Issuer Safe Harbor under Regulation S contains the least restrictive conditions and is for offerings of securities of Foreign Companies:

  1. with no substantial US market interest in these foreign securities,
  2. securities offered and sold in “overseas directed offerings,”
  3. securities backed by the full faith and credit of a foreign government, and
  4. securities offered and sold pursuant to certain employee benefit plans.

For offerings in Category 1, there are no requirements other than the Regulation S General Conditions.  Category 1 Regulation S securities are not the subject of legal opinions by US securities attorneys.

Regulation S Safe Harbor Category 2

The second Issuer Safe Harbor under Regulation S applies to offerings that are not eligible for Category 1.  These would include the following:

  1. equity securities of a reporting foreign company; or
  2. debt securities of a reporting foreign or US Issuer or a non-reporting foreign company.

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for a period of 40 days.

Category 2 Regulation S securities are rarely the subject of legal opinions by US securities attorneys.  Today it would be very difficult to find a brokerage firm which would accept for deposit any restricted securities using the 40 day holding period.  Most, if not all, of such brokers were based offshore and have since been shut down.  Nevertheless, when some think if Reg S, they assume the holding period is only 40 days.   Even in the heyday of offshore brokerages, this was only true for stock of “reporting” foreign companies, since debt securities would need to be converted into stock anyway in order for deposit and trading.

Regulation S Safe Harbor Category 3

The third Regulation S Issuer Safe Harbor contains the most restrictive conditions and applies to all securities not eligible for Categories 1 and 2. This includes the following:

  1. equity securities of a reporting US Issuer;
  2. any securities of a non-reporting US Issuer; and
  3. equity securities of a non-reporting foreign company that has a substantial US market interest in its equity securities.

Category 3 encompasses nearly all Regulation S securities which are the subject of legal opinions drafted by US securities attorneys.  In practice, the holding period requirements of Reg S Category 3 are similar to Rule 144 for OTCMarkets or OTC Bulletin Board public companies.

Other Offering Restrictions Under Regulation S for Sales to US Persons under Category 3

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for the following periods:

Equity securities of Non-Reporting Issuers: One Year.  This is the same as a Non-Reporting OTC Markets Pink Sheet or Voluntary SEC Filer under Rule 144.

Equity securities of Reporting Issuers: Six Months.  This is the same as a Mandatory SEC Filer like an OTCQB or OTCBB stock under Rule 144.

Debt Securities: 40 Days.  In practice, this is of no consequence, because in order for the US Shareholder to deposit and sell stock under Reg S Category 3, “Debt Securities” are converted into “Equity Securities” so the respective Six Months or One Year holding periods will still apply.

Securities Attorneys for Selling Regulation S Stock

As a practical matter, all securities sold pursuant to the registration exemption under Regulation S will undergo scrutiny from brokerage compliance officers when the shareholder attempts to clear stock for resale.

Unless the typical Six Months or One Year holding periods are met, it is highly unlikely that US Shareholders will be able to deposit any Reg S stock, regardless of the public’s impression that the holding period is “only 40 days.”  Once those holding periods are met, it may also be possible to obtain a Rule 144 legal opinion even though the original private offering was done under Regulation S.  If the stock is greater than two years old, it may also be possible for a Section 4(a)(1) opinion to be drafted.

It is important to provide an experienced securities attorney like Matt Stout with all documentation showing the origin and history of the Reg S shares when seeking a legal opinion to clear Regulation S stock.

Regulation S Shareholders can contact securities lawyer Matt Stout at mstout@otclawyers.com or (410) 429-7076 to discuss the Regulation S General Conditions and Safe Harbors at no cost.

What are the General Conditions for a Regulation S Offering?

What is Regulation S?

Under Regulation S, certain offers and sales of securities occurring outside of the United States are not subject to the registration requirements contained in Section 5 of the Securities Act of 1933 (“Securities Act”).

Regulation S sets forth some non-exclusive safe harbors for extraterritorial offers, sales, and resales of securities under Rules 903 and 904 of the Securities Act.

General Conditions of Regulation S Offerings

In general, an offering may qualify for an exemption from registration under Regulation S if it meets the following two conditions:

  1. The offer or sale is made in an “offshore transaction”; and
  2. There are no “directed selling efforts” in the United States.

What is an Offshore Transaction under Regulation S?

An Offshore Transaction under Regulation S is defined as one in which:

  1. The offer is not made to a person in the United States; and either
  2. The Buyer is outside the United States, or
  3. The Seller and any person acting on the Seller’s behalf reasonably believe that the Buyer is outside the United States; or
  4. The transaction is executed in, on or through a physical trading floor of an established foreign securities exchange that is located outside the United States; and
  5. Neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.

What are Directed Selling Efforts under Regulation S?

Under Regulation S, Directed Selling Efforts refers to any activity related to “conditioning the market” in the United States for any of the securities being offered in reliance on Regulation S.

An example of Directed Selling Efforts could include placing an advertisement in a publication “with a general circulation in the United States” that refers to the offering of securities being made in reliance upon Regulation S.

Another example of Direct Selling Efforts could be the use of a website directed to US Persons, which does not include express disclaimers stating that that Reg S Offering is not intended for or available to US Persons.

Regulation S Securities Attorney Matheau J. W. Stout, Esq.

Securities lawyer Matt Stout is available to answer questions regarding compliance with Regulation S Offerings and the process of clearing and depositing restricted stock sold under Reg S at (410) 429-7076 or mstout@otclawyers.com.

OTC Bulletin Board and OTC Markets Issuers seeking advice on a Regulation S Private Placement directed to Non US Persons can contact Matheau J. W. Stout, Esq. for a free consultation to discuss best practices for the PPM.