Tag Archives: Matheau J. W. Stout

What are DTC Opinions of Counsel?

DTC Requests Legal Opinions from Outside Counsel

DTC evaluates securities for DTC eligibility on an individual, case-by-case basis.  After DTC has reviewed the information provided by the Issuer’s sponsoring broker-dealer/market maker (“DTC Particpant”), DTC decides whether or not a legal opinion from the Issuer’s outside counsel will be required to substantiate the legal basis for DTC eligibility.

Reasons DTC Can Request a Legal Opinion

DTC Opinions of Counsel are typically requested to confirm:
  1. that the registration requirements for the Issuer’s securities under the Securities Act of 1933 (“Securities Act”)  have been met; or
  2. that the securities are exempt from SEC registration under the Securities Act, under a recognized exemption that will not restrict the transfer and ownership of the Issuer’s securities; or
  3. that the Issuer’s securities are eligible for deposit for the appropriate DTC program under SEC Rule 144A or Reg S.

DTC Opinions are Required for all Securities With New CUSIP

DTC Opinions are also required for certain corporate actions or share reorganizations that result in the issuance of securities under a new CUSIP which will be held at DTC.

DTC can also request a legal opinion from outside counsel for any reason at its discretion in order to protect DTC and its DTC Participants from perceived risk .

DTC Eligibility Securities Lawyer

Matheau J. W. Stout, securities lawyer, drafts DTC Opinions of Counsel and DTC Eligibility Opinions for OTC Bulletin Board (OTCBB) and OTC Markets OTCQX, OTCQB and OTC Pink Sheets and can be reached at (410) 429-7076 with questions about the DTC Eligibility process.

Are S-8 Shares Free Trading?

S-8 Shares Are Free Trading When Form S-8 Is Filed

One reason why employees and consultants of OTC Bulletin Board or OTC Markets OTCQB Issuers like to receive S-8 Shares is that  an S-8 is immediately effective upon filing. This means that S-8 stock is free trading upon filing Form S-8 for employees and consultants who are not Affiliates.   S-8 stock is still subject to the Rule 144 volume limitations if owned by officers, directors and other Issuer control persons.

SEC Reporting Company Requirements To Use S-8

In order to meet the requirements of S-8 Shares, the OTC Issuer doing an S-8 offering must meet every one of the SEC’s requirements for S-8 stock.  The Public Company Issuer MUST:

  1. be “fully reporting to the SEC,” subject to the reporting requirements under Section 13 or 15 (d) of the Exchange Act;
  2. have filed all SEC reports for the past year (or for whatever shorter period the Issuer was required to file SEC reports);
  3. show that the consultant provided “bona fide services” to the Issuer;
  4. show that the services provided by the consultant were not “in connection with the offer or sale of securities in a capital raising transaction”;
  5. show that the services provided by the consultant were not “in connection with directly or indirectly promoting or maintaining a market for the Issuer’s securities”;
  6. The consultant must be a natural person (an individual) since Form S-8 cannot be used to issue stock to a corporation or other entity;
  7. The consulting agreement must be between the Issuer and the natural person; and
  8. The Issuer must issue the stock directly to the natural person as opposed to a corporate entity.

All SEC reporting companies, including OTCBB and OTC Markets OTCQB issuers can discuss the process of creating and registering S-8 Shares for employees and consultants by contacting securities lawyer Matheau J. W. Stout at (410) 429-7076 or mstout@otclawyers.com.

Current Public Information and the Alternative Reporting Standard Under Rule 144

Current Public Information Under Rule 144

Under SEC Rule 144, there must be “adequate current information” about the OTC Markets Issuer publicly available before the sale of restricted stock can be made. According to the SEC for “reporting companies” that file quarterly and annual financial reports with the SEC via its EDGAR filing system, this generally means that those Issuers have complied with the periodic reporting requirements of the Securities Exchange Act of 1934.

The reporting companies’ compliance with those reporting requirements is easily seen on OTC Markets via the current OTCQB or OTCQX designation, which demonstrates that an Issuer is current in its filings.

Current Information Under the Alternative Reporting Standard for Pink Sheets

For “non-reporting” companies, that are not subject to the reporting requirements under the Securities Exchange Act of 1934, this current information requirement means that certain company information is publicly available via OTCMarkets.com in the form of Quarterly and Annual reports showing the Issuers unaudited balance sheet, profit & loss statement and cash flow statement are posted.

It also means that the Pink Sheet Issuer’s Information and Disclosure Statement is posted on time, as well as.   The OTC Markets disclosures include information regarding the nature of the Issuer’s business operations, the bios of its officers and directors, and its share and debt structure.

OTC Pink Current

A Pink Current designation on OTCMarkets.com provides investors with the knowledge that the Pink Sheet Issuer has timely filed all of its disclosures and financials on OTCIQ in compliance with the Alternative Reporting Standard.

If those disclosures and financials are detailed and professionally prepared, they can be as informative and revealing to investors as an SEC Form 10-Q or 10-K.

A Pink Current Issuer is considered to have satisfied the requirement of “adequate public information” under Rule 144.

Must Affiliates File a Notice on Form 144 When Selling Stock?

Affiliates Filing a Notice of Proposed Sale With the SEC

Affiliates are generally officers, directors, or beneficial owners of more than 10% of an Issuer’s stock, and like all shareholders in Over-the-Counter microcap companies, Affiliates sooner or later want to sell some of their securities.  When an Affiliate wishes to sell stock, the U.S. Securities and Exchange Commission requires filing SEC Form 144, which puts the public on notice of the Affiliate’s proposed sale.  

Greater than 5,000 Shares or $50,000 in 3 Month Period

Affiliates of an OTC Bulletin Board or OTC Markets Pink Sheet Issuer must file a notice with the SEC on Form 144 if

  1. the sale of securities involves more than 5,000 shares; or
  2. the aggregate dollar amount is greater than $50,000 in any 3 month period.  

The sale of the Affiliate’s securities must take place within 3 months of filing Form 144.  If the securities have not been sold within those 3 months, the Affiliate must file an amended notice.

Affiliates of OTC Bulletin Board or OTC Markets OTCQB, OTCQX and Pink Sheets Issuers with questions on the process of selling restricted stock under Rule 144 can contact Matt Stout, securities lawyer for information.

Convertible Debt of Pink Sheet and Bulletin Board Companies

Perhaps the foremost concern of the buyers of a public vehicle, or of any major investor seeking to purchase a large stake in a OTC Bulletin Board or OTC Pink Sheet issuer, is the existence of aged convertible debt.  This is not only true from a balance sheet perspective, but also true because of the potential for the conversion of aged debt into large blocks of free trading stock under SEC Rule 144 or the provisions of 4(1).

Conversion Features May Not Be Public Information if the Issuer is Not Current in its OTC Markets Filings

Because Pink Sheet issuers do not have to file SEC Form 8-K, the fact that management may have just taken out a large loan with high interest and severe default provisions may not come to light for a full quarter, if the issuer is Pink Current.  OTC Markets Quarterly and Annual Reports do not require a photocopy of the actual Convertible Promissory Note to be included, although its terms are supposed to be fully outlined within the Notes to the financial statements and within the Annual Disclosure itself.

If the issuer is Pink Yield Sign or Pink Stop Sign, information on that loan, including the principal amount, interest rate, and maturity date may not be publicly available at the moment a securities attorney is reviewing the OTC Markets filings.  Perhaps most importantly, the conversion features of the loan may not be known.

Pink Sheet Issuers Rarely File Interim Reports to Disclose Convertible Debt

While one could argue that OTC Pink Sheet issuers should be filing Interim Disclosures and Interim financials when a debt of material size is undertaken, the fact is that this rarely happens, both due to lack of knowledge on the part of management and due to the perceived cost associated with the filings.

For this reason, it is recommended that any group performing due diligence on an OTC Pink Sheet retain a securities lawyer to not only review the filings, but request the actual debt instruments from the company for review.  Even when these debts are not mentioned in the filings, once must presume they exist and proceed accordingly.  Securities lawyer, Matt Stout, is available to perform due diligence on all tiers of OTC Markets Pink Sheet issuers.

Convertible Debt of OTC Bulletin Board and OTCQB Issuers

SEC reporting public companies file Forms 10-Q, 10-K and 8-K, among others, with the SEC using the EDGAR filing system.  OTC Issuers that retain PCAOB registered auditors and undergo the quarterly and annual audits are the only companies eligible to be quoted on the OTC Markets tiers known as OTCQX and OTCQB.

During the process of an audit, issuers are required to obtain confirmation’s of debt owed to each creditor, which show the terms and current balance.  Auditors then use these debt confirmations to provide the loans payable figures found in 10-Q and 10-K reports.

Likewise, FINRA’s OTCBB or OTC Bulletin Board only posts quotations for issuers which are current SEC filers, all of which are undergoing PCAOB audits.

OTCBB and OTCQB Issuers Should Report Debt on Form 8-K

Having an OTC issuer’s stock quoted on the OTC Bulletin Board or the OTC Markets OTCQB tier implies that the companies are “currently reporting” with the SEC. This fact gives investors, and securities attorneys doing due diligence, some degree of peace of mind since in theory, all material events, including the taking on of convertible debt, should be reported.

Form 8-K, known as the “Current Report” is used whenever there is the occurrence of a “material event” in a company’s operations.   There are several common events that trigger an 8-K filing.  Convertible Notes of any size should be considered by the management of OTC public companies to be material, and the news, whether perceived as good or bad, should be found in the filings.  In reality, however, this is not always the case.

It is important to remember that reviewing an issuer’s filings is only the first step in performing due diligence for a securities lawyer.  The next step should always be asking questions about what is not shown in the SEC and OTC Markets filings, even if the issuer is an SEC reporting company.

For further information on how aged convertible debt can be reviewed in OTC Bulletin Board and Pink Sheet companies, contact Matheau J. W. Stout, securities lawyer at (410) 429-7076.


Foreign Broker Dealer Registration Under the Securities Exchange Act of 1934

Foreign broker-dealers are required to be registered under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”) unless they are exempt under the Foreign Broker-Dealer Exemption (Rule 15a-6).

Every broker dealer which physically operates in the US must register with the SEC even if their business is directed only to foreign investors outside of the boundaries of the United States.

Every foreign broker dealer that attempts to market securities to any person in the United States must also register with the SEC.   This marketing includes the use of the internet, including blogs, websites, and emails to offer securities to US citizens, residents or companies.

Further information on what foreign broker dealers can do to remain exempt under the Foreign Broker-Dealer Exemption is shown in this post by Matheau J. W. Stout, Securities Lawyer.

What Financials are Required for Pink Current Status on OTCMarkets?

Pink Current Status Requires Financials in a Specific Format

Pink Current       Achieving Pink Current status is worthwhile for any Issuer listed on the Pink Sheets, since it provides investors with the confidence that comes from being a fully reporting company under the Alternate Reporting Standard.  In order for an Issuer on the OTCMarkets Pink Sheets to maintain its status as “Pink Current” the Company must file both Quarterly and Annual financial reports when due.   Many Pink Sheet Issuers discover that OTCMarkets requires these financials in a specific format, which is sometimes not what their bookkeeper provides at tax time.  There is also a specific way the financials should be posted within the OTC Disclosure and News Service so that they clearly state for which “period end” the financials apply.

Many Issuers Post Inadequate or Improper Financials in OTCIQ and Stay at Yield Sign

Many times, Issuers post inadequate or improperly formatted financials and wonder why they stay at a Yield Sign (Pink Limited Information).  When this happens, an Issuer must go back and reformat the financials in order to comply with OTCMarkets guidelines, which sometimes requires emails with OTCMarkets staff.  It is easy enough for management or an Issuer’s securities counsel to delete the improper reports and upload new PDFs showing the correct format which OTCMarkets requires.  Although the OTC staff is always helpful, and willing to assist Issuers learning the OTCIQ process, working with an experienced microcap securities attorney can help do things right the first time, saving accounting costs with some planning beforehand. At the Law Office of Matheau J. W. Stout, Esq., we often serve as corporate counsel to Pink Sheet companies, and serve as authorized user on OTCIQ so that we can make sure the postings are done correctly each time.  This saves Issuers considerable time so management can focus on operating the business rather than on the legal and administrative aspects of reporting.

OTCMarkets Requires Issuers to Post a Balance Sheet, Profit & Loss Statement and Cash Flow Statement

Each of these reports should state the Issuer’s corporate name in the heading, as well as the “period end” date, such as September 30, 2013.  Quickbooks has the ability to format the Quarterly Report properly, so long as the user specifies the parameters and requests a Balance Sheet, P&L and Cash Flow Statement.   Taking the time to format these properly once will save considerable time and expense later, since each Quarter the same reports will be posted.  Consolidated reports can be used by Issuers having multiple subsidiaries, so long as this is clearly disclosed.  OTCMarkets provides helpful information for Issuers on all aspects of using the OTIQ service, including an article on how to save financials to a PDF.  Issuers interested in obtaining Pink Current Status can begin the process by reviewing an OTCIQ Agreement and submitting it to OTCMarkets.com.


When Should a Pink Sheet File Interim Disclosures with OTCMarkets?

Minimum Reporting Requirements Require Quarterly and Annual Disclosures by Pink Sheet Companies

OTCMarkets requires its Current Pink Sheet customers to file Quarterly and Annual Reports and only one Annual Information and Disclosure Statement as minimum requirements in order to maintain “current pink” status.   However, many Issuers don’t know that they have the option of filing Interim Reports and Interim Disclosures, as well.  Within the OTCIQ reporting system, there are, in fact, options to file nearly any type of report an Issuer could think of.

OTCMarkets Pink Sheet Issuers Should Err on the Side of Full Disclosure

Just as we advise our SEC reporting clients to file Form 8-K whenever anything material happens, and to look at this requirement as an opportunity rather than a burden, companies listed on the OTCMarkets Pink Sheets should likewise file Interim Disclosures under the same guidelines.  Whenever there is a doubt about whether or not an event is “material” management of microcap Pink Sheet companies should err on the side of full disclosure.

Interim Disclosures Make Rule 144 Legal Opinions Easier for Pink Sheets

Although some Issuers might find it a hassle to file Interim Disclosures, filing them whenever something material happens will make it easier for Shareholders to clear stock.  This is because perhaps the primary requirement when clearing restricted stock of OTCMarkets Pink Sheet companies is the preparation of a Rule 144 letter by a qualified securities attorney.  At the Law Office of Matheau J. W. Stout, Esq., our securities attorneys prepare 144 legal opinion letters for many Pink Sheet companies.

And the main element of that 144 opinion when the Issuer is a Pink Sheet, is whether or not adequate, current public information is available on the Company.   When Pink Sheets take the trouble to file Interim Disclosures, in addition to timely filing their Quarterly and Annual Reports and Disclosures with OTCMarkets.com, there is little doubt that that legal opinion will be accepted by transfer agents and brokers.  This means happier Shareholders and more market liquidity.

When Does an Issuer Need to File an 8-K?

An 8-K is Filed When Something Material Happens

One of the most often asked questions of a securities attorney is when an Issuer is required to file an 8-K.  There is a laundry list of specific events that require the filing available at SEC.gov and on the Form 8-K itself.  But it is helpful for management of small public “bulletin board” companies, listed on the OTCMarkets OTCQB, to look at these requirements as more of an opportunity to both document and share news, instead of trying to find a way “not to file” to avoid administrative hassle and costs.

The short answer is whenever there is a material development or the occurrence of an “event” that the Issuer’s shareholders (and the investing public) should know about.  These material events may differ greatly when comparing a development stage, micro cap company with Google or Microsoft, and therefore it likely that a development stage company should actually be filing more 8-Ks if it is actively operating.

Microcap Issuers Should Provide As Much Information As Possible to Shareholders

At the Law Office of Matheau J. W. Stout, Esq., we advise our OTCQB and OTCBB microcap public company clients to err on the side of full disclosure, and if there is a doubt as to whether or not the transaction or event is “material” the Issuer should file the 8-K.  Simply put, there is no penalty for providing shareholders with too much information (“TMI”) as long as that information is accurate and the SEC appreciates those public companies which go above and beyond in communicating with their shareholders.

File an 8-K When News Goes Out In a Press Release

Although it may seem obvious, quite often, development stage OTCQB and bulletin board public companies are so eager to issue good news to the public through press releases that they forget to file the 8-K.  In general, if the news is press release worthy, it might very well be considered material, and there should be an 8-K filed within four (4) business days of the occurrence of the event.   Because of the difference in market cap, shareholder base, revenue and cash flow, the signing of (or loss of ) a Letter of Intent or Purchase Order for $50,000 may not be material for Google, but it may be radically good (or bad) news for a newly reporting Issuer still in the development stage with few assets and no revenue.

This kind of thinking (that there is no such thing as “TMI”) prevents many problems.  When small public companies take the time to think hard about whether the news being distributed can be easily and well documented, that moment of pause can save many headaches later.

What is an OTCMarkets Current Information Legal Opinion?

In order for a Pink Sheet company to be marked “pink current” on OTCMarkets.com, a securities attorney must issue a legal opinion that states the following:

Based on the examination and inquiry set forth above, I am of the opinion that the Information:

(a) constitutes “adequate current public information’” concerning the common stock of the Company quoted on the OTC Markets (“Securities”) and the Company itself, and “is available within the meaning of Rule 144(c)(2) under the Securities Act;

(b) includes all of the information that a broker-dealer would be required to obtain from the Company to publish a quotation for the Securities under Rule 15c2-11 under the Securities Exchange Act of 1934, as amended (“Exchange Act”);

(c) complies as to form with the OTC Markets’ Guidelines for Providing Adequate Current Information, which are located on the Internet at www.otcmarkets.com; and

(d) has been posted through the OTC Disclosure and News Service.

Matheau J. W. Stout, Esq. often represents Issuers seeking to become currently reporting on OTCMarkets.com.  The process of raising an Issuer’s status from Stop Sign, to Yield Sign, and eventually to Current Pink, involves the review and posting of not only Quarterly and Annual financials (balance sheet, profit & loss statement, and cash flow statement), but also OTCMarkets’ Information and Disclosure Statement.

Together, these documents make up the Alternate Reporting Standard and provide much the same information to Shareholders as the SEC 10-Q and 10-K forms do for SEC reporting companies.