Tag Archives: Pink Current

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.

 

Pink Sheets and the Current Public Information Requirement of Rule 144(c)(2)

One of the requirements of Rule 144 is that current information about the Issuer must be publicly available before the sale.

SEC Filers Must Have Audited Financials to Be Current

For SEC reporting companies, this means that the Issuer is current in its reporting obligations under the Securities Exchange Act of 1934, which includes audited financials on forms 10-K, and 10-Q.  Without “current information” an SEC filer will be marked “delinquent” and its Shareholders will not be permitted to use the abbreviated Six (6) Month Holding Period for removing restricted legends on their OTC stock.

Non-Reporting Issuers Do Not Need Audited Financials to Be Marked Pink Current

Non-reporting companies, and voluntary SEC filers, are not eligible for the Six (6) Month holding period even if they are “current” since they are not “subject to” the Exchange Act.

For non-reporting Pink Sheets, being current under the Alternative Reporting Standard means filing an up-to-date Information and Disclosure Statement and either the latest Quarterly Report or Annual Report on OTCMarkets.com.

Together, these OTC Markets filings contain information regarding the nature of the Issuer’s business, its officers and directors, and its financial statements, similar to what would be found in a Form 211 filed under 15c211.

Non-Reporting Pink Sheets are not required to have audited financials in order to meet the current reporting requirement under Rule 144(c)(2).

Securities Attorney for OTC Bulletin Board and OTC Markets Filers

Securities lawyer Matt Stout works with public companies that are delinquent in SEC and OTC Markets filings in order to help them become “current.”   In this context, he can review or draft SEC filings and issue OTC Markets Current Information Legal Opinions for those Issuers filing on OTCIQ.   Matt Stout, securities attorney can be reached 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 Beneficial Ownership Under SEC Rule 144?

Beneficial Ownership under Rule 144 essentially means that although a Shareholder doesn’t legally own the Shares in his or her own name, the Shareholder can nevertheless exercise control over them.

Affiliates Are Those Who Beneficially Own Greater Than 10%

Rule 144 considers Shareholders who “beneficially own” greater than 10% of an Issuer’s outstanding stock, of any class, to be an Affiliate, or Control Person, which subjects them to volume trading limitations.

Being an Affiliate means that the Shareholder must file Form 144 every time he or she sells securities, and worse still, that the Affiliate may not sell more than 1% of the Issuer’s issued and outstanding shares during any three month period.

How to Avoid Being Classified as an Affiliate

With that in mind, many large Shareholders wonder how they can avoid being classified as an Affiliate.  The answer is clear under Rule 144.

Affiliates are those who occupy positions of control in an Issuer, such as an officer or director, and those who beneficially own greater than 10% of the issued and outstanding.

So the key, then, is to ensure that the Shareholder does not beneficially own greater than 10%.  This sounds simple, but in practice is often difficult for many Shareholders, especially those who may exercise debt conversions that inadvertently bring their ownership above 10% by not including “blocker” provisions.

Beneficial Ownership Under Rule 144 is a Test of Substance Over Form

To say that the concept of beneficial ownership is a matter of substance over form, means that the SEC cares about who actually controls the Shares rather than who might appear to control them. For this reason, it is much better to own 9.99% than to try and hide ownership through relatives or corporate entities.

Owning Shares in the Names of Corporate Entities and Relatives?

Many insiders of OTC public companies own shares not only in their personal names, but for estate planning purposes might also hold shares in the names of trusts, corporations, and LLCs, not to mention the names of spouses and other relatives.  There is nothing inherently wrong with this as long as this is disclosed by an Affiliate.   Rule 144 looks at all of this beneficial ownership to see who really owns greater than 10%.

Examples of Affiliate Status By Beneficial Ownership

So if a Shareholder owns 3% in his own name, controls 5% in a family trust, and owns another 3% in an LLC…the Shareholder is an Affiliate…in the aggregate.   3+5+3 = 11

If a Shareholder owns 8% and his mother owns 3%, the Shareholder might be an Affiliate….if his mom lives in the same household.   If the Shareholder does not live with Mom, he’s not an Affiliate.   This is checked against the Transfer Agent’s Shareholder List, which shows the addresses of residence.

Finally, if a Shareholder owns 5% in his own name, and his brother (who lives in another household) owns 6%, neither one of them is automatically an Affiliate.  But if the two of them formed an LLC that owned all 11% they would both end up classified as Affiliates.   Sound confusing?

A Special Caveat to Holders of Convertible Notes Without Blocker Clauses

Here is the most important example: if a Shareholder owns 9.99% in his own name, he is not an Affiliate.   And if that Shareholder sells stock this month, and then later converts more debt such that he replenishes what was sold….but never goes over the 9.99%, he is not an Affiliate, unless the Note from which he is converting does not contain a “blocker” clause which would prohibit conversion beyond 9.99%.

If a “blocker” clause is not inserted into the Note, a circumstance could potentially arise under § 240.13d-3 whereby the Shareholder would theoretically become the “beneficial owner” of greater than 10% even if he does not exercise his right to convert.   Specifically, paragraph (d)(1)(i)(B) states, in relevant part, that

A person shall be deemed to be the beneficial owner of a security, subject to the provisions of paragraph (b) of this rule, if that person has the right to acquire beneficial ownership of such security, as defined in Rule 13d-3(a) (§ 240.13d-3(a)) within sixty days, including but not limited to any right to acquire: (A) Through the exercise of any option, warrant or right; (B) through the conversion of a security;

What does this mean?   If a Note, for example, becomes “due on demand” and does not contain a “blocker” clause which prevents the Note Holder from converting beyond 9.99% ownership, then it would seem arguable that the Note Holder “has the right to acquire”….”within sixty days”….greater than 10%.

So by this reading, it is not enough for a Shareholder to simply pay attention to Rule 144 and make sure that he stays in compliance–the Note also needs a “blocker” clause, just in case the Issuer’s stock price drops enough that in theory it would be possible for the Note Holder to exercise a conversion taking stock ownership beyond 10%.

Beneficial Ownership Under Rule 144 Is a Broad Concept

Beneficial ownership includes not only those Shares held in the Shareholder’s own name, but also those in the name of a trust, corporation or LLC that the Shareholder controls, and Shares in the name of his or her spouse, and other relatives living in the same household. The list can also include those Shares owned by corporate entities controlled by the Shareholder’s spouse and other relatives living within the same household.   That is quite a long list.

Pink Sheet Issuers Must Disclose Owners of Greater Than 5%

Pink Sheet Issuers who want to maintain the OTC Markets Pink Current designation must disclose in their filings the names and addresses of all parties that “beneficially own” greater than 5% of their Shares, even though these Shareholders are not considered Affiliates under Rule 144 unless they own greater than 10% of the issued and outstanding.

With this in mind, large Shareholders that would rather not have their names and addresses in an OTC Markets Information and Disclosure Statement should stay at 4.99%.   Likewise, those who do not wish to provide the SEC with notice of their beneficial ownership, must also stay at 4.99%.

Affiliates of OTC Bulletin Board (OTCBB) and OTC Markets OTCQB, OTCQX and Pink Sheet Issuers with questions on Affiliate sales of stock under Rule 144, or how to draft debt conversion documents with “blocker” clauses to ensure that a Shareholder does not inadvertently go over 9.99% (or 4.99%) can contact Matt Stout, securities lawyer at (410) 429-7076.

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.

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.