Tag Archives: Go Public

Do I Need 35 Shareholders Before Filing an S-1 Registration Statement?

No.  There is no minimum shareholder requirement to file an S-1.  Many startup companies with just one founding shareholder file S-1 Registration Statements as the first step to go public. So only one shareholder is required, along with audited financial statements, in order to file the S-1.

When are the 35 Shareholders Needed to Go Public?

The 35 shareholder requirement only applies at the time of the Company’s 15(c)211 application for a FINRA trading symbol, which a Market Maker does not sponsor until all SEC comments are cleared, and after the S-1 is declared Effective by the SEC.

Should a Company Acquire 35 Shareholders via Private Placement or After the S-1 is Effective?

While it is true that many companies acquire these 35 shareholders via Private Placement Memorandum (“PPM”) before the S-1 is filed, it is just as common for companies to sell free trading S-1 shares to friends, family and to the public as soon as the S-1 is declared Effective, in order to meet FINRA’s 35 shareholder threshold.

In many cases, it might be easier for the company to sell the S-1 shares after the Effective Date, since they are free trading and the investors may perceive less of a risk than buying restricted shares in the same company through a Pre-S-1 PPM.

The key is that those 35 shareholders are not required until sometimes months after the S-1 process is started, since the Market Maker cannot even sponsor the Form 15(c)211 application for the FINRA trading symbol until the S-1 is declared Effective.

Should We Delay our S-1 to Do a Larger Private Placement?

With that timing in mind, it makes little sense for private companies to wait forever to file their S-1 under the guise of attempting to sell more shares in a PPM.  Instead, some savvy companies considering an IPO via S-1 Registration Statement will use a Private Placement only to attract some already interested friends and family investors as shareholders so that they do not delay their S-1 audit.

Doing so allows those PPM friends and family shareholders to be listed in the S-1 as “Selling Shareholders” but also allows the S-1 audit to be completed without wasting a lot of time.   Since the audit is typically the most time-consuming part of the S-1, the sooner the PCAOB audited financials are ready, the sooner the company can go public.

OTC Markets Securities Lawyer for Companies Going Public

Matheau J. W. Stout, Esq. is securities lawyer with a practice focused on taking microcap companies public on the OTB Bulletin Board and OTC Markets OTCQB.  Entrepreneurs with questions about taking a company public via S-1 can contact Matt Stout at (410) 429-7076 or mstout@otclawyers.com for a no-cost consultation.




When Does the 90-Day Reporting Period Required by Rule 144(c)(1) Begin?

Companies that go public via S-1 Registration Statement can later file an 8-A12(g) or an 8-A12(b) in order to become “subject to” the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”).

Filing the SEC Form 8-A makes the company a “mandatory SEC filer” rather than a “voluntary filer” and allows shareholders to clear restricted stock under a Rule 144 holding period of six months rather than one year.

In order to qualify for the six month holding period under Rule 144, the public company must have been subject to the SEC reporting requirements for 90 days.  The question arises as to when the 90 Day Reporting Period begins.

The Effective Date of the S-1 Starts the 90 Day Reporting Period

When a company goes public via S-1 Registration Statement, and then files a registration statement pursuant to Exchange Act Section 12(g), the 90-day reporting period required by Rule 144(c)(1) begins on the Effective date of the S-1.

Contact Securities Attorney Matt Stout to Discuss Going Public via S-1

Microcap companies seeking to go public on the OTC Bulletin Board and OTC Markets OTCQB via S-1 Registration Statement or to become subject to the Exchange Act can contact S-1 Lawyer Matt Stout at no cost to discuss the process at mstout@otclawyers.com or (410) 429-7076.


Shell Status for Start Ups and Development Stage Companies Under SEC Rule 144

Revenue and Major Assets Are Not Mandatory to Go Public or Avoid Shell Status

Many entrepreneurs interested in “going public” express concern when learning about the PCAOB audit required before they can file an S-1 Registration Statement.   This concern is usually caused by their belief that their company must be revenue producing and have huge assets before they are eligible to be audited.

Not only is this untrue, but many public companies in the OTC Markets have never produced any revenue, and still avoid being classified as a shell under Rule 144.  Others may have assets which by NYSE standards would seem paltry, but when compared with their peers on the OTC Markets, are normal.

Simply put, when helping to prepare an S-1 Registration Statement to take a company public, an auditor’s job is to audit whatever actually happened, and if the company has earned no revenue, that is of no impediment to going public and it does not automatically make the company a shell.   If the assets consist only of a provisional patent, and a laptop, full disclosure can and should be made without worry, and without exaggeration.

Rule 144:  Start Ups and Development Stage Companies With No Revenue

The majority of microcap public companies are not household names with millions in assets or revenue.  Some of these spend millions doing research and development (“R&D”) of their technology or products, only to falter and switch business models when a “pivot” is necessary to survive.

Others are start ups which involve one entrepreneur with an idea.  He or she is the sole officer and director, who is funding the company’s meager budget out of pocket.  This funding might cover the company’s administrative costs of securities compliance and accounting, leaving little left over for marketing the business.  Perhaps a provisional patent was filed and a web site is created.

Under Rule 144, these companies are still not “shells.”   That is what a start up is supposed to look like, and entrepreneurs seeking to go public should not try to make their companies look bigger than they really are or to wait forever before filing their S-1 Registration Statement.

It is worth revisiting the definition of “shell status” under SEC Rule 144 in order to understand why a pre-revenue company is not necessarily a shell.

Definition of Shell Status Under Rule 144

Under Rule 144, a microcap public company does not meet the definition of a “shell company” if it has more than

  1. Nominal operations;
  2. Assets consisting solely of cash and cash equivalents; or
  3. Assets consisting of any amount of cash and cash equivalents and nominal other assets.

As noted, “revenue” is not shown within the definition.  Operations can be demonstrated in many ways that do not involve sales, revenue or profitability.  Start ups and development stage companies are generally focused on refining their business plan, paying consultants and advisors, protecting intellectual property, staying in compliance with SEC or OTCMarkets filing requirements and building a corporate organization.

Likewise, assets can be shown through leases, intellectual property like patents or trademarks, software, web sites, contracts, agreements, and equipment.

Transparency is the Key to Compliance

When determining shell status under Rule 144, operations are compared with other OTC Markets companies that are in the same boat….not with NASDAQ or NYSE multinationals with revenue in the Billions.

For this reason, start ups should not hesitate to go public if doing so will help achieve the company’s goals.  The key is to simply present the company’s financials as they actually are, and to let the auditors do their job.  In other words, full disclosure means to “tell it like it is.”  That is not glamorous, but it will keep the company out of trouble.

The good news is that Rule 144 was never meant to exclude start ups or development stage companies, which are specifically carved out of the shell status definition.   With that in mind, management should always strive for transparency in their S-1 Registration Statements, SEC Reports, OTC Markets filings, and news releases, even if competitors are doing the opposite.