Tag Archives: OTCBB

What is the S-1 Quiet Period?

The S-1 “Quiet Period,” starts when a company files an S-1 Registration Statement with the SEC and ends when the SEC staff declares the S-1 “Effective.”

During the S-1 Quiet Period, the federal securities laws place certain limitations on what information a company can release to the public. Companies that fail to comply with S-1 Quiet Period may be found to be “gun-jumping.”

Well-Known Seasoned Issuers and the S-1 Quiet Period

Well-known seasoned issuers, (“WKSI”) include those household names every investor recognize trade on the NYSE or NASDAQ.  They are in the regular habit of releasing news anyway and are thus permitted anytime to use oral and written communications, including a “free writing prospectus,” subject to enumerated conditions (including, in some cases, filing with the Commission).  WKSI are eligible to file a Form S-3 rather than an S-1.

No OTC Markets or OTC Bulletin Board company is going to fall under the category of a Well-Known Seasoned Issuer, and all Issuers with stock quoted on the over-the-counter markets should be especially careful with all communications during the S-1 Quiet Period.

SEC Reporting Issuers and the S-1 Quiet Period

All SEC reporting issuers are permitted to continue publishing or posting regularly released factual business information and forward-looking information.  This applies to those already public companies that are filing an S-1 Registration Statement after already having a trading symbol or “ticker” and after already being subject to the reporting requirements of Section 12 of the Securities Exchange Act of 1934.

This would not apply to a company which is doing its “IPO” or initial public offering, since by nature that company is private, and not yet “fully reporting” under the Securities Exchange Act of 1934.  That is, the Company is not yet releasing 10-K, 10-Q, and 8-K filings as required under the 34 Act.

Non-Reporting Issuers and the S-1 Quiet Period

Non-reporting issuers include both private companies filing an S-1 Registration Statement in order to “go public” on the OTC Bulletin Board (“OTCBB”) or OTCQB and those already public voluntary filers, Pink Sheet or Gray Sheet companies that are not SEC filers under the 34 Act.

These Non-Reporting companies can, at any time, continue publishing factual business information that is regularly released and intended for use by persons other than in their capacity as investors or potential investors.

Companies going public on the OTCBB or OTCQB by filing an S-1 Registration Statement should carefully consider the content and tone of all communications, whether they are news releases or simply posts on their blog or website.  Any reference to the the pending S-1 Registration Statement, the prospectus, or the offering, is a bad idea during the S-1 Quiet Period and may be considered “gun jumping.”

If Non-Reporting companies feel compelled to release any news during the S-1 Quiet Period they should have such news or press releases reviewed by experienced securities legal counsel prior to such releases.  S-1 lawyer Matt Stout can review news releases before they are posted.

Permitted Communications and the S-1 Quiet Period

The key issue to the S-1 Quiet Period is timing.   Communications by all Issuers more than 30 days before filing an S-1 Registration Statement will be permitted by the SEC so long as they do not reference a securities offering that is the subject of a pending or contemplated S-1 Registration Statement.

Companies planning to file an S-1 Registration Statement should review all of their past communications to see if they may have inadvertently run afoul of this 30 day guideline, and if so, should consult with an experienced S-1 lawyer like Matheau J. W. Stout, Esq. to decide when the file their S-1 Registration Statement.

S-1 Lawyer Matt Stout Can Advise Companies on the S-1 Quiet Period

Companies interested in going public via S-1 or those public Issuers planning a resale S-1 to register securities already sold in a Private Placement can contact S-1 securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.


What is a Spin Off?

Why Would a Public Company Spin Off a Subsidiary?

A public company may choose to  “spin off” a subsidiary when the sub’s operations or assets and liabilities are inconsistent with its target business model.  A spin off is also commonly used as a way to create a new public company with a built in shareholder base.

The Mechanics of a Spin Off

Technically, a spin off is when a parent company distributes shares of its subsidiary to the parent company’s shareholders.  The result is the subsidiary becoming a separate, stand-alone company completely independent of its parent.

The shares in the subsidiary are typically distributed on a pro-rata basis to each shareholder of the parent. The resulting new company then has the same shareholders as the parent, and if that shareholder base is large, it may be easier to attract market makers for the new stock.

Certain states of incorporation and the rules of stock exchanges may require a company to receive majority shareholder approval before a spin off can be executed.

Can a Pink Sheet Use S-8 Shares to Compensate Consultants Who Raise Capital?

Exchanging Services for Rule 144 Restricted Stock is Common

Among OTCMarkets public companies, it is commonplace for Issuers to pay for consulting services using restricted shares of common stock.   For non-reporting companies, such as Pink Sheets, the usual way is for the CEO and the consultant to enter into a Consulting Agreement which specifies a certain number of shares for a specific scope of work.

This restricted stock is then held for the standard 12 month holding period under Rule 144 before being sold on the market.  Many times, the type of work for which restricted stock is awarded does include activities associated with raising capital, but Rule 144 is the mechanism for clearing the stock, not S-8.

S-8 Can Only Be Used By SEC Reporting Companies

Most Pink Sheets are not SEC filers, but are instead under the OTCMarkets’ Alternative Reporting Standard.  (Due to a recent change in OTCMarkets’ policies governing its OTCQB market tier, many SEC filers saw their OTCQB status change to Pink Sheet when their share price dropped below a penny.)   Because of this distinction, consultants providing services in exchange for true Pink Sheet stock are awarded Rule 144 restricted stock with a 12 month holding period, not S-8 stock, which is free trading.

S-8 Cannot Be Used for Capital Raising Activities

Even if a Pink Sheet was allowed to use S-8, the capital raiser would still be out of luck because stock issued to consultants in exchange for work associated with capital raising cannot be cleared using S-8.  There are no exceptions for this.  In fact, there are 8 requirements for an SEC reporting company to be able to use S-8, and all of them must be met.

How Do Stock Splits and Reverse Splits Affect Trading Volume Under Rule 144?

Affiliates of OTC Issuers Can Sell 1% Every 3 Months under Rule 144

Under Rule 144, Affiliates of OTC Bulletin Board (“OTCBB”) and OTC Markets OTCQB, OTCQX and Pink Sheet Issuers are only allowed to sell 1% of the total issued and outstanding shares during any 3 month period.

Affiliates of Exchange Listed Issuers Have a Choice Under Rule 144(e)

Affiliates of Issuers listed on national exchanges like the NASDAQ or NYSE MKT are allowed to sell either

  1. 1% percent of the issued and outstanding shares; or
  2. The average weekly trading volume during the 4 weeks before the Affiliate filed Form 144.

Stock Splits Do Not Affect the Affiliate’s Percentage of Ownership

Whether the Issuer is quoted on the Over-the-Counter markets or listed on a stock exchange, neither forward stock splits nor reverse stock splits will affect the trading volume limitations under Rule 144(e) since a forward or reverse split would not change the percentage of the Issuer’s stock that the Affiliate is allowed to sell during the time period chosen.

Calculate Available Volume Under Rule 144 Following a Stock Split

To calculate available trading volume following a forward stock split or reverse stock split, an Affiliate should measure the trading volume as if the split had occurred on the 1st day of the 3 month period, even if it occurs at some later point during the 3 months.

Affiliates of OTC, NASDAQ and NYSE MKT Issuers with questions regarding selling restricted stock under SEC Rule 144 can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

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.

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.

What Is the Holding Period Under Rule 144 for Affiliates?

An Affiliate under Rule 144 is typically an officer, director, or large shareholder of an OTC public company who is in a “relationship of control” with the issuer.  Before an Affiliate may sell restricted securities under SEC Rule 144, he or she must hold them for a certain period of time, depending on whether the issuer is an OTC Bulletin Board, or an OTC Markets Pink Sheet.

Holding Period for SEC Reporting Companies and Pink Sheets

If the Issuer is an “SEC reporting company” under the Securities Exchange Act of 1934, such as an OTCBB, OTCQB, or OTCQX, then the Affiliate must hold the securities for a minimum of six (6) months before resale.

If the Issuer of the securities is a Pink Sheet, and thus not subject to SEC reporting requirements, then the Affiliate must hold the securities for at least one (1) year before resale.

Holding Period Begins When Shares Are Paid For

Either holding period begins when the securities are purchased and fully paid for or earned (if acquired for services). It is important to remember that the holding period (and Rule 144 in general) only applies to restricted securities.

If Affiliates purchase securities in the public markets, these shares are free trading, and not restricted, so there would technically be no holding period under Rule 144.

However, this is often difficult to document, especially if the shares are intermingled or held at the same broker.  Affiliates wishing to purchase securities of the Issuer in the public markets would do well to keep good records, since it may become necessary to trace these non-restricted shares back to their source to prevent them from unduly being classified by the Transfer Agent or clearing firm as restricted.

Affiliates Should Wait Greater Than Ninety Days After Resigning

If an Affiliate purchases additional stock from the Issuer, this will not affect the holding period of earlier purchased stock of the same class.  However, Affiliates who sell stock to Non-Affiliate Shareholders can inadvertently cause those shares to be considered Affiliate Shares unless greater than 90 days has past since the Seller has ceased to be an Affiliate.

In practice, it is best for Affiliates of OTC Bulletin Board and OTC Markets Pink Sheet companies to fully document their holding period, and especially to document when they cease to be an officer, director, control person or 10% holder of the Issuer’s stock.

Likewise, it is important for investors purchasing stock privately from “former” Affiliates to review the Issuer’s Board Resolutions and filings to determine when the Seller officially ceased to be an Affiliate, since the Transfer Agent, broker and clearing firm will want to know these details.   An OTC Securities Lawyer like Matheau J. W. Stout can provide legal advice to the purchasers of Affiliate stock and draft 144 legal opinion letters that detail the origin, history and affiliate status of the shares.

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.


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.