Tag Archives: S-1 Audit

What is a PCAOB Auditor?

Entrepreneurs seeking to go public via S-1 Registration Statement soon learn that their financials must be audited by a PCAOB Auditor.

Experienced OTC Markets securities lawyers like Matt Stout can make referrals to excellent PCAOB Auditors.

What is the PCAOB?

A PCAOB auditor is a public accounting firm registered with the The Public Company Accounting Oversight Board (“PCAOB”).   The PCAOB is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002.  The mission of the PCAOB is to oversee accounting professionals who provide independent audit reports for publicly traded companies.

Responsibilities of the PCAOB

  1. Register public accounting firms;
  2. Establish auditing, quality control, ethics, and independence standards and criteria relating to auditing public companies;
  3. Perform inspections and investigations;
  4. Conduct disciplinary proceedings of PCAOB registered accounting firms; and
  5. Enforce compliance with the Sarbanes-Oxley Act.

The SEC Has Authority Over the PCAOB

The SEC ultimately has the authority over the PCAOB and can do the following:

  1. Oversee the PCAOB’s operations;
  2. Appoint or remove PCAOB members;
  3. Approve the PCAOB rules and budget; and
  4. Hear appeals of PCAOB inspection reports and disciplinary actions.

Referrals to PCAOB Auditors for S-1 Registration Statements

Experienced securities attorney Matt Stout provides introductions and referrals to qualified PCAOB auditors to those going public via S-1.

PCAOB Auditors for Start Up and Development Stage Companies

OTCLawyers works with seasoned PCAOB auditors every day, including those who will audit start up and development stage companies who want to file an S-1 Registration Statement.

PCAOB Auditors for Foreign Management and Companies

Matt Stout, S-1 securities attorney, can refer foreign companies and Nevada corporations with foreign management to PCAOB Auditors, many of whom speak several languages.

We have worked with management in many countries.  Communication by email, teleconference and Skype make it possible for S-1 lawyers and PCAOB Auditors to efficiently work with Non US Management seeking an S-1 Registration Statement for foreign companies seeking an F-1.

S-1 Securities Lawyer Matt Stout

Entrepreneurs interested in going public via S-1 Registration Statement can contact OTC securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers for a flat fee quote and time line.


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.