Tag Archives: securities lawyer

SEC Exchange Act Filings for Foreign Private Issuers After Going Public in the US

A Foreign Private Issuer (“FPI”) that has registered securities under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) or is required to file under Section 15(d) of the Exchange Act after completing its F-1 Registration Statement is required to file the following reports with the SEC:

Annual Report for Foreign Issuers on SEC Form 20‐F

SEC Form 20‐F is only filed by foreign issuers and can be used as an Annual Report, just like a Form 10‐K would be filed by domestic United States domiciled issuers. The information required to be disclosed in an SEC Form 20‐F includes the same information that would be found in a 10-K for a United States domestic issuer:

  1. operating results;
  2. liquidity and capital resources;
  3. trend information;
  4. off‐balance sheet arrangements;
  5. consolidated statements and other financial information;
  6. significant business changes;
  7. selected financial data;
  8. risk factors;
  9. history and development of the issuer;
  10. business overview; and
  11. organizational structure.

Foreign Issuers Filing SEC Reports on Form 6‐K

In addition to an Annual Report on Form 20-F, an FPI must also file Form 6‐K with the SEC. Form 6‐K generally takes the place of both the 10‐Q and the 8-K that US domestic issuers are required to file with the SEC.   When filed in order to provide the information contained in a 10-Q, Form 6-K will include financials. In other instances, the Form 6-K will include timely disclosure of material events, which would be filed in an 8-K by US domestic issuers.

However, unlike in an 10‐Q or 8‐K, there are no specific disclosures required by Form 6‐K for foreign issuers. Instead, an FPI must file a 6‐K with the SEC promptly whenever the following occurs:

  1. The foreign issuer makes information public pursuant to the laws of its home domicile or the laws in the jurisdiction in which it is incorporated; or
  2. The foreign issuer is required to file information with a stock exchange on which its securities are traded and which was made public by that exchange; or
  3. The foreign issuer is required to distribute information to its shareholders.

US Securities Lawyer for Foreign Companies Going Public in the United States

Foreign companies going public on the OTC Bulletin Board or OTC Markets in the United States, or those seeking to dual list their securities in the US markets like the NASDAQ can contact securities attorney Matt Stout for a no cost consultation at (410) 429-7076 or mstout@otclawyers.com.

Matheau J. W. Stout, Esq. works with foreign management of US companies and foreign domiciled corporations to help them go pubic in the US via F-1 Registration Statement and filing the Form 20-F.

What is a Resale S-1 Registration Statement?

In a Resale S-1 Registration Statement, securities previously acquired privately are registered for resale to the general public.

Who are the Selling Shareholders in a Resale S-1?

In a typical example, investors in a company’s Private Placement (“PPM”) are told that their shares will be “registered for resale” at a later date.  In a Resale S-1, these investors are referred to as “Selling Shareholders”, and their names are listed in a table, along with the number of shares, and an explanatory note detailing the method and date of purchase.  The PPM Offering Documents, including a Subscription Agreement, are usually included in the Resale S-1 as Exhibits.

In another example, shares previously awarded to consultants, founders or employees for services can also be registered for sale in a Resale S-1.  The supporting documentation showing the origin and history of those shares would likewise be included as Exhibits.

All of this Selling Shareholder documentation is reviewed by the company’s PCAOB auditor so that the cost basis, and value of consideration is included in the audit.

What Makes a Resale S-1 Different?

The main difference in a Resale S-1 is when the Selling Shareholders sell their shares, they keep all of the money from the sale,  and the company does not receive any funds.   Even so, the company typically pays for the cost of the Resale S-1 Registration Statement, including the audit.

How Does a Company Benefit from a Resale S-1?

One way a company benefits from a Resale S-1 is by demonstrating to future PPM investors that the company keeps its promise to later register shares.   It also benefits the company by creating a “Float.”  The Float is the block of non-affiliate, free trading shares available to trade “on the market.”

In order to justify the expense of preparing a Resale S-1, a company will typically also register a certain number of new S-1 shares itself.  When the company sells these newly registered S-1 shares to the public, the company keeps those funds.

Private Placement followed by IPO and Resale S-1 Combination

One of the most common strategies for going public on the OTC Bulletin Board or OTC Markets via S-1 Initial Public Offering (“IPO”) is to file a new S-1 Registration Statement following a Private Placement Offering.  This S-1 registers both new shares for the company to sell, and also includes Selling Shareholders who bought stock in the Private Placement (“PPM”).

Many companies use the strategy of filing a quick PPM for friends and family before filing an S-1 Registration Statement as way of obtaining some of the 35 non-affiliate shareholders Market Makers are looking for prior to sponsoring the company for a ticker symbol under 15c211.  This also helps to defray some of the administrative costs associated with going public.

In order for this strategy to be effective, the PPM documents and consideration needs to be in order so that the company’s PCAOB auditor can efficiently include the Selling Shareholders into the S-1 audit.  An experienced OTC securities attorney can help companies do both a PPM and a Resale S-1 from start to finish.

Securities Attorney for Private Placements and S-1 Resale Registrations

Matt Stout is a securities attorney focused on taking companies public on the OTC Bulletin Board and OTC Markets.   When companies engage Matt Stout as securities counsel, the PPM to S-1 process is handled efficiently and all representation is under an agreed-upon flat fee, which includes responding to all SEC Comment Letters.

Companies interested in learning more about Private Placement Offerings and S-1 Registration Statements can contact Matheau J. W. Stout, Esq. for a no cost consultation at (410) 429-7076 or mstout@otclawyers.com.

Broker and Finder Registration Under the Securities Act

Many transactions in the OTC Markets involve the work of Brokers, Finders and other Intermediaries serving as Consultants.  Microcap companies often engage consultants to assist in marketing, investor relations, raising capital and introducing or closing M&A transactions.

Most often, consultants are not registered broker-dealers with the SEC.  In many cases, registration as a Broker is not required.  However, depending on the language of the agreements, how consultants are paid, and the actual work performed, there may be occasions when SEC registration is either advisable or mandated under the Securities Act.

Who Must Register with the SEC as a Broker?

Section 3(a)(4)(A) of the Securities Act of 1933 defines a “Broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.”

Examples of Persons Who May Need to Register as a Broker

In its Guide to Broker Dealer Registration, the SEC provides examples of certain individuals or businesses that may need to register under the Securities Act.  In typical microcap OTC Markets transactions, these may include “Finders” or “Consultants” if their activities include the following:

  1. Finding investors or clients for registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
  2. Making referrals to registered broker-dealers, investment companies, etc., or splitting commissions with them;
  3. Finding investment banking clients for registered broker-dealers;
  4. Finding Investors for “Issuers”, even in a consulting role;
  5. Engaging in, or finding investors for, venture capital or “angel” financing rounds, including private placements (PPMs);
  6. Finding buyers and sellers of businesses in reverse merger or acquisition transactions when the sale of securities (debt or equity) is involved;
  7. Acting as “Placement Agents” for private placements of securities;

How to Tell if a Finder Should Be Registered as a Broker with the SEC

If consultant fits into one of the examples above,  the SEC looks at the actions or duties the person or business actually performs to determine if registration as a Broker is necessary.  Some of the questions the SEC considers when examining the conduct of Finders or consultants include:

  1. Does the consultant participate in the solicitation, negotiation, or execution of the securities transaction?
  2. Does the consultant’s compensation depend upon, or is it determined by the outcome or size of the transaction or deal?
  3. Does the consultant receive trailing commissions, such as 12b-1 fees?
  4. Does the consultant receive any other transaction-related compensation?
  5. Is the consultant engaged in the business of effecting or facilitating securities transactions or is this a one-time deal?
  6. Does the consultant handle the securities or funds of others in connection with securities transactions?

According to the SEC’s compliance guidelines, if a consultant answers “yes” to any of these questions, they may need to register as a Broker.

Brokers Generally Must Register with the SEC under Section 15(a)(1)

Section 15(a)(1) of the Securities Act generally makes it unlawful for any Broker to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that Broker or dealer is registered with the SEC under Section 15(b) of the Securities Act.

Microcap Securities Attorney Matt Stout

OTC Bulletin Board and Pink Sheet Issuers and Consultants seeking compliance with SEC guidelines can contact securities regulation lawyer Matt Stout for a review of business practices, as well as existing contracts and agreements to determine if registration as a Broker under Section 15(b) is necessary at (410) 429-7076 or mstout@otclawyers.com.

 

Anatomy of an S-1 Registration Statement

All US companies seeking to go public on the OTC Markets may use SEC Form S-1 to conduct an initial public offering (“IPO”).  S-1 Registration Statements can be filed efficiently by an experienced OTC securities attorney and if the S-1 follows a standard procedure using best practices, this helps the SEC review and approve an S-1 in a timely fashion.

S-1 Registration Statements have Two Main Parts

  1. Part I is the Prospectus.  The Prospectus is the legal “selling” document. In the Prospectus, the Issuer of the securities must describe, in easy to understand plain English, important facts about its business operations , financial condition, results of operations, risk factors, and management. It must also include audited financials. The Prospectus must be delivered to everyone who buys securities, and everyone who is offered the securities.
  2. Part II contains additional information that the Issuer is not obligated to deliver to Investors but must still file with the SEC, such as copies of material contracts and agreements.

Specific Disclosures About the Company Required in an S-1 Prospectus

All successful S-1 Registration Statements must include specified disclosures about the Issuer in the Prospectus, including:

  1. A description of the Issuer’s business, properties, and competition;
  2. A description of the risks of investing in the Company;
  3. A discussion and analysis of the Issuer’s financial results and financial condition as seen through the eyes of management (Management Discussion & Analysis or “MD&A”);
  4. The identity of the Issuer’s Officers and Directors, including their compensation;
  5. A description of material transactions between the Issuer and its Officers, Directors, and Affiliates;
  6. A description of material legal proceedings (litigation) involving the Issuer and/or its Officers and Directors; and
  7. A description of the Issuer’s material contracts and agreements, if any.

Other Disclosure Requirements in an S-1 Registration Statement

The S-1 must also disclose certain information about the offering, including:

  1. A description of the securities being offered;
  2. The plan for distributing the securities, including whether or non an underwriter is involved or commissions will be paid; and
  3. The planned use of the proceeds of the securities offering.

Regulation S-K Provides Guidelines for Non-Financial S-1 Disclosure

Regulation S-K provides guidance to Issuer’s on both the form and content rules for non-financial portions of S-1 Registration Statements.

Regulation S-X Provides Guidelines for Financial S-1 Disclosure

S-1 Registration Statements also must include financial statements that comply with the form and content requirements of Regulation S-X. For US domiciled companies seeking to go public on the OTC Bulletin Board or OTCMarkets OTCQB, these financial statements must be prepared according to GAAP.

S-1 Audited Financials Must Be Signed Off by a PCAOB Auditor

All S-1 Registration Statements also must include financial statements audited by a PCAOB Auditor, which an independent certified public accountant registered with the Public Company Accounting Oversight Board.

Securities Attorney for Going Public via S-1

Matheau J. W. Stout helps microcap companies go public on the OTC Bulletin Board and OTC Markets OTCQB via S-1 Registration Statement.  All legal work necessary is covered by an agreed upon flat fee.  We can introduce you to PCAOB auditors, Transfer Agents, EDGAR filers, and Market Makers as part of the S-1 process.  Contact securities lawyer Matt Stout for a free consultation at (410) 429-7076 or mstout@otclawyers.com.

What are the General Conditions for a Regulation S Offering?

What is Regulation S?

Under Regulation S, certain offers and sales of securities occurring outside of the United States are not subject to the registration requirements contained in Section 5 of the Securities Act of 1933 (“Securities Act”).

Regulation S sets forth some non-exclusive safe harbors for extraterritorial offers, sales, and resales of securities under Rules 903 and 904 of the Securities Act.

General Conditions of Regulation S Offerings

In general, an offering may qualify for an exemption from registration under Regulation S if it meets the following two conditions:

  1. The offer or sale is made in an “offshore transaction”; and
  2. There are no “directed selling efforts” in the United States.

What is an Offshore Transaction under Regulation S?

An Offshore Transaction under Regulation S is defined as one in which:

  1. The offer is not made to a person in the United States; and either
  2. The Buyer is outside the United States, or
  3. The Seller and any person acting on the Seller’s behalf reasonably believe that the Buyer is outside the United States; or
  4. The transaction is executed in, on or through a physical trading floor of an established foreign securities exchange that is located outside the United States; and
  5. Neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.

What are Directed Selling Efforts under Regulation S?

Under Regulation S, Directed Selling Efforts refers to any activity related to “conditioning the market” in the United States for any of the securities being offered in reliance on Regulation S.

An example of Directed Selling Efforts could include placing an advertisement in a publication “with a general circulation in the United States” that refers to the offering of securities being made in reliance upon Regulation S.

Another example of Direct Selling Efforts could be the use of a website directed to US Persons, which does not include express disclaimers stating that that Reg S Offering is not intended for or available to US Persons.

Regulation S Securities Attorney Matheau J. W. Stout, Esq.

Securities lawyer Matt Stout is available to answer questions regarding compliance with Regulation S Offerings and the process of clearing and depositing restricted stock sold under Reg S at (410) 429-7076 or mstout@otclawyers.com.

OTC Bulletin Board and OTC Markets Issuers seeking advice on a Regulation S Private Placement directed to Non US Persons can contact Matheau J. W. Stout, Esq. for a free consultation to discuss best practices for the PPM.

How are Free Trading Shares Issued Under 3(a)(10)?

Creditors of OTC Markets companies often contact securities lawyer Matheau J. W. Stout, Esq. with questions about exchanging bona fide claims for free trading stock under 3(a)(10).   OTC Bulletin Board and Pink Sheet Issuers also have questions about how they can clear debt and payables from their balance sheets using 3(a)(10).

In many respects, 3(a)(10) is easy to understand, but there are certain rules that must be followed in order for the stock issued to be eligible for the 3(a)(10) exemption from registration.

What Makes 3(a)(10) Advantageous to Creditors?

3(a)(10) permits claims arising from legitimate and documented unpaid invoices or contracts to be exchanged for free trading stock, which helps creditors that did not receive a promissory notes from the Issuer.

3(a)(10) also provides a Court Order to a successful Plaintiff which is binding on the Issuer.  This makes future conversions of the Claim Amount easier, since the Issuer cannot later refuse to honor the Settlement Agreement reached in the 3(a)(10) case.

3(a)(10) transactions are by their nature a matter of public record, such that the entire claim settlement process and the issuance in accordance with the 3(a)(10) exemption from registration are done transparently.  This transparency has an inherent advantage to creditors holding 3(a)(10) claims under the Court Order, making it easier to obtain opinions, and clear stock later.

Why is 3(a)(10) Advantageous to Issuers?

An OTC company with debt and mounting accounts payable clogging its balance sheet is unlikely to attract new investors or lenders unless the balance sheet can be cleaned up.

3(a)(10) provides an opportunity for an Issuer to settle multiple claims within one lawsuit, often at a discount, limiting the expense and time associated with litigation, and providing the certainty of a Court Order which specifies the criteria under which shares will be issued.

The transparency of a 3(a)(10) lawsuit, settlement and Court Order also benefits the Company by providing certainty to its shareholders and would-be financial partners.  There is no guess work as to the Company’s liability to issue shares under a 3(a)(10) settlement, and no question as to the Court Order.

What is a Bona Fide 3(a)(10) Claim?

Bona fide means “genuine” or “real.”  The claim holder has the responsibility for documenting the bona fide nature of the monies owed, and copies of the unpaid invoices, contracts or other correspondence are attached to the Complaint in a 3(a)(10) lawsuit.

Documentation is easier when the debts or claims are in SEC filings or OTC Markets reports. Email correspondence evidencing services provided, monies owed and collection activities are also helpful in proving the bona fide nature of a 3(a)(10) claim.

Of course, promissory notes and wire transfer confirmations evidencing loans to an OTC Bulletin Board or OTC Markets Pink Sheet Issuer also can prove a debt is bona fide.

Requirements for the Section 3(a)(10) Exemption from Registration

Section 3(a)(10) of the Securities Act of 1933 (the “Act”) provides an exemption from the registration of securities under the following criteria:

  1. The securities must be issued in exchange for a bona fide claim; and
  2. The terms of the issuance and exchange must be found by a court to be “fair” to those receiving shares; and
  3. Notice of the Fairness Hearing must be provided to those to receive shares and they must be afforded the opportunity participate in a Fairness Hearing; and
  4. The issuer must advise the court prior to a Fairness Hearing that it intends to rely on the exemption provided in Section 3(a)(10) of the Act; and
  5. There cannot be any impediments to the appearance of interested parties at the Fairness Hearing.

What is Not Allowed in a 3(a)(10) Transaction?

Aside from the need to document the bona fide nature of the claims exchanged in a 3(a)(10) transaction, the main pitfall all creditors and Issuers need to be wary of is the temptation to secretly funnel money to the Issuer or its Affiliates.

In some cases, the SEC has found that claims were fabricated by insiders.  The claims were for services which were not provided, or were actually fake invoices from companies secretly controlled by Affiliates.  This is prohibited.

In other cases, plaintiffs in 3(a)(10) cases were secretly sending an Issuer’s Affiliates a percentage of monies made when the free trading stock was sold.  This is prohibited.

3(a)(10) should be used as a transparent exchange of bona fide claims for securities only.  The fact that an Issuer’s balance sheet will be cleared of old debt is in itself a clear benefit to the Issuer and this should result in future financing opportunities without the need for any surreptitious kickbacks.

Securities Lawyer With Expertise in 3(a)(10) Matters

Experienced securities attorneys like Matt Stout perform due diligence on aged debt, promissory notes and invoices to confirm their bona fide nature in preparation for 3(a)(10) transactions.

3(a)(10) securities lawyer Matt Stout represents both OTC Markets companies and their debt holders with bona fide claims in 3(a)(10) settlement agreements and drafts legal opinions for clearing restricted stock under 3(a)(10).

Securities Law Opinion Letters Under Rule 144 and 4(1)

Legal Opinions for OTC Markets Issuers and Shareholders

A large part of Matheau Stout’s securities law practice includes the research and drafting of legal opinions for the sale of restricted stock of Issuers listed on the OTC Bulletin Board, Pink Sheets and OTCMarkets.

Rule 144 Opinion Letters

The most common type of securities opinion letter is known as the 144 Letter, or Rule 144 Legal Opinion.   144 Letters are used by Transfer Agents when removing restricted legends from OTC stocks. Most brokerages specializing in OTC Bulletin Board and Pink Sheet stocks will not accept deposits of certificates without a Rule 144 legal opinion drafted by an experienced securities attorney like Matt Stout.

Section 4(a)(1) Legal Opinion Letters

When Rule 144 is not available because the OTC Markets company is a current or former shell, experienced securities attorneys like Matheau J. W. Stout, Esq. can review certificates and documentation to see if Section 4(a)(1) can apply.

Section 4(a)(1) is also known commonly as Section 4-1, and is available only if the securities in question are greater than Two (2) Years old, and the Shareholder is not an Issuer, Underwriter or Dealer.

OTC Markets Securities Lawyer Matt Stout

Shareholders and Brokers can request SEC Rule 144 opinions from Matt Stout, Securities Lawyer by calling (410) 429-7076 or via email, at mjwstout@gmail.com or mstout@otclawyers.com.

More information on clearing restricted stock using Rule 144 and Section 4(a)(1) is available at securities law blogs published by Matheau J. W. Stout including 144letters.net144-Opinions.comRestrictedStock.co, andRestrictedStockOpinion.net.

S-1Registration Statements

We File S-1 Registration Statements

We represent OTC Bulletin Board and OTC Markets Pink Sheet public companies in the preparation and filing of S-1 Registration Statements with the SEC.

This includes private companies seeking to “go public” via S-1 and those established OTCBB, OTCQB and Pink Sheet companies that are registering a class of securities previously sold through a private placement.

PCAOB Auditors

We work closely with several PCAOB Auditors and can recommend an auditing firm to prepare financials to accompany the S-1 when needed.

If an Issuer already has an auditor, we can work with that firm to prepare the S-1 filing, and to coordinate the timing of the S-1 with the completion of the audit.

Market Makers

We work alongside several market makers that sponsor microcap companies which seek to “go public” through the filing of an SEC S-1 Registration Statement.

In these cases, in order to obtain a trading symbol, and become DTC eligible, the company will need a relationship with a broker-dealer acting as a “market maker” that will complete Form 211 on the company’s behalf.

If a company already has a market maker lined up, chances are good we have worked with the broker-dealer before, and that I can assist with due diligence and issue the legal opinion which accompanies the 15c2-11.

Business Plan

Sometimes companies seeking to file an S-1 worry too much about polishing their “business plan” and would do well to get the process of preparing their S-1 started before the business plan presentation is polished and SEC ready.

This is because PCAOB audits take time, and these S-1 audits should be addressed first.   Until the auditor has been provided with all of the financials needed to complete the SEC audit, the clock has not started ticking on the S-1.

The business plan can be polished while the auditor is at work and when needed we can refer management to specialists who edit business plans for S-1 filings.

We help Coordinate the S-1 Process

We help coordinate the S-1 process by serving as a liaison between the company, its auditors and the market maker, and in the meantime, I can assist with the review of the company’s business plan.

As a practical matter, because the format of an S-1 Registration Statement demands answers to specific questions, the very process of beginning the S-1 will help management complete the business plan.

Matt Stout, OTC securities lawyer, welcomes inquires from both current and future OTC Bulletin Board and OTC Markets Pink Sheet companies with questions on the S-1 process at (410) 429-7076 or mstout@otclawyers.com.

What is an SEC Comment Letter?

The term SEC Comment Letter generally refers to correspondence from the Securities and Exchange Commission (“SEC”) staff to public companies which are SEC filers.  An SEC Comment Letter is sent by the SEC to an Issuer when an Issuer’s SEC filing needs further clarification.

SEC Comments on an S-1 Registration Statement

One example of an SEC Comment Letter is in response to an Issuer’s filing of an S-1 Registration Statement.  An S-1 Comment Letter is sent by SEC staff who review the disclosures set forth in an S-1 when there are questions that need to be answered or typos which need to be corrected.  There may be a series of SEC Comment Letters and Issuer response letters that go back and forth until the S-1 is finalized and declared effective by the SEC staff.

SEC Comment Letters on 10-K, 10-Q, Reg A, and 8-K Filings

The SEC can also issue an SEC Comment Letter in response to disclosures made in a public company’s 10-K, 10-Q, Regulation A, or 8-K, or in any other SEC filing, such as a Form 10.

SEC Comment Letters are Searchable in EDGAR

SEC comment Letters and the responses by Issuers or their securities lawyers are contained in the SEC’s EDGAR database as “correspondence.” The SEC made this correspondence public record in 2005 for filings made after August 1, 2004 which were reviewed by the SEC staff.

SEC Comment Letters Can Address Questions of Disclosure

SEC Comment Letters usually ask for additional information so the SEC staff can understand the Issuer’s disclosure.  Sometimes the SEC requests that an Issuer revise disclosures in a document already filed with the SEC if the facts and circumstances warrant such a change.  In other cases, the SEC will allow prior filings to remain, but request that the Issuer provide additional or different disclosures in future SEC filings.

Are SEC Comment Letters Legally Binding?

There are often several rounds of letters between the SEC and an Issuer’s securities attorney  until the SEC is satisfied with the information provided and changes made. SEC Comment Letters provide SEC staff positions on the issues discussed but are not an official or legally binding statement of the SEC’s views on the particular issues. SEC Comment Letters are expressly limited to the specific facts and circumstances of the named filing in question and do not automatically apply to other filings or to other SEC filers.

Experienced Securities Lawyers Can Respond to SEC Comment Letters

OTC public companies that received an SEC Comment Letter in response to an S-1 Registration Statement or to any other disclosure in an SEC Filing can contact securities attorney Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

 

What is the Penny Stock Rule?

SEC Penny Stock Rule

The Penny Stock Rule refers to the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”), under which broker-dealers must follow a series of compliance measures in order to effect transactions in penny stocks.

The term “penny stock” usually refers to a security issued by a very small company trading at less than Five Dollars ($5.00) per share.

Penny stocks are sometimes known as OTC Markets stocks and are typically quoted over-the-counter on OTCMarkets.com  operated by OTC Markets Group, Inc. or on FINRA’s Bulletin Board (“OTCBB”).

Section 15(h) of the Exchange Act

Because of the inherently speculative characteristics of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Exchange Act, which states that broker-dealers  must

  1. approve the customer for the specific penny stock transaction and receive a written agreement to the transaction;
  2. furnish the customer with a disclosure document describing the risks of investing in penny stocks;
  3. disclose to the customer the current market quotation, if any, for the penny stock;
  4. disclose to the customer the amount of compensation the firm and broker will receive for executing the trade; and
  5. after executing the trade, a broker-dealer must send to its investing customer monthly account statements that show the market value of all penny stock held in the customer’s account.

Transactions Exempt from the Penny Stock Rule

Some transactions in penny stocks are exempt from the Penny Stock Rule. Examples of exempt transactions are those with an established customer, who has either done business with the brokerage for greater than one year, or who has made at least three penny stock purchases.  Likewise, transactions with institutional investors may also be exempt.

Some Companies with Low Stock Prices are Not Penny Stocks

Companies quoted on the OTCQX, the highest market tier of OTCMarkets.com, are not considered Penny Stocks even if they have low stock prices because they must meet one of the exemptions to the Penny Stock Rules involving minimum net tangible assets or revenue.

Brokerages Specialize in OTC Markets Penny Stocks

An experienced securities attorney like Matheau J. W. Stout, Esq. can refer shareholders to one of the few brokerage firms which specialize in OTC Markets stocks.

These OTC brokers have streamlined the process of opening accounts for penny stock investors.  Their compliance and legal departments are familiar with penny stocks and the Rule 144 legal opinions needed to deposit OTC stocks.

Interested OTC stock shareholders can review SEC Schedule 15g for further information or contact Matt Stout, microcap securities attorney at (410) 429-7076 or via email at mstout@otclawyers.com.