Tag Archives: Alternative Reporting Standard

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.

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.

What is the Alternative Reporting Standard for OTCQX Issuers?

Most public companies that qualify for the OTCQX market tier are SEC reporting companies and already file the typical 10-Q, 10-K and 8-K forms.  In other words, they are the same fully reporting Issuers you would see on the OTCQX or OTC Bulletin Board….but they make more money and have more assets.

However, even when SEC registration is not required, OTCQX companies must still make information publicly available pursuant to Rule 10b-5 under the Securities Exchange Act of 1934 (“Exchange Act”) and pursuant to Rule 144(c)(2) under the Securities Act of 1933 (“Securities Act”).

In order to comply with these requirements, OTC Markets Group offers the Alternative Reporting Standard for companies that elect to make material information publicly available to investors.

To qualify for OTCQX, U.S., companies not already fully reporting to the SEC can follow the Alternative Reporting Standard.  These companies submit information to OTC Markets per the OTCQX U.S. Disclosure Guidelines and are then subject to the eligibility requirements, terms and conditions of the OTCQX Rules for U.S. Companies.

Under the Alternative Reporting Standard, OTCQX Issuers provide investors with all material information necessary for the investor to make an informed investment decision.  This essentially amounts to the same information SEC reporting companies put in their Form 10 filings.