Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Friday, May 31, 2013

Due Diligence in the SEC Registration Statement Process

Private companies in going public transactions that intend to be quoted on the OTCMarkets OTCQB must first become reporting with the Securities and Exchange Commission (the “SEC”).  This is typically accomplished by filing a Form S-1 registration statement under the Securities Act of 1933, as amended (the “Securities Act”).
 
Form S-1 is the most common registration statement used in going public transactions.
The information required in a registration statement is expansive and must be complete and accurate.  The information found in a registration statement is relied upon by investors in making investment decisions.
 
Registration Statement Liability in Going Public Transactions
The Securities Act not only imposes liability for misstatements on the issuer filing the registration statement but imposes liability on individuals who assist in the preparation of the registration statement on the issuer’s behalf.
 
Registration Statement Liability
Section 11(a) of the Securities Act, 15 U.S.C. Section 77k(a), imposes liability in the event of a material misstatement or omission in a registration statement and provides that an investor may sue:
 
Officers, directors or other members of management of the issuer;
Persons who sign the registration statement;
Persons who assist in the preparation of the registration statement; and
Underwriters with respect to the security being registered.
 
Registration Statement Misstatements and Omissions
Only an issuer can register securities on a registration statement.  An issuer can register securities in a primary offering on its own behalf or in a secondary offering on behalf of its existing shareholders.
 
Liability of Issuers in Going Public Transactions
Every issuer in an offering registered under the Securities Act is required by Securities Act, Section  6(a), Section 77k(a),  to sign the registration statement. The issuer is absolutely liable under Section 11(a) of the Securities Act for material misstatements or omissions in the registration statement, regardless of its good faith or exercise of due diligence.
 
Liability of Officers and Directors in Going Public Transactions
The issuers principal executive officers, principal financial officer and principal accounting officer or comptroller as well as a majority of its board of directors, must sign a registration statement filed under the Securities Act.
The entire board of directors (not just those signing), principal executive officers, principal financial officer and principal accounting officer are subject to potential civil liability under Section 11(a) of the Securities Act for material misstatements or omissions in the registration statement. Additionally, any other person who controls the issuer is subject to such liability.
 
Liability of Shareholders in Going Public Transactions
Shareholders who hold securities registered in a  registration statement under the Securities Act may under some circumstances be held liable for any material misstatements or omissions in the registration statement.
 
Liability of Underwriters in Registered Securities Offerings
Underwriters involved in a registered securities offering is subject to liability for material misstatements or omissions in a registration statement.
 
Liability of Experts
Experts, such as accounting firms, are subject to potential liability for material misstatements or omissions in any part of a registration statement purporting to be based on their authority as an experts. Experts can be held liable only if they are named as an expert with their consent in the registration statement as having prepared or certified any part of the registration statement or any report or valuation mentioned therein.
 
Liability of Securities Attorneys
Securities attorneys typically coordinate the going public process including the preparation of the registration statement.  The issuer’s securities attorney assists management in preparing the registration statement and performing due diligence. Absent actual knowledge of misstatements or omissions, securities attorneys do not become liable for  the accuracy or completeness of the registration statement.
 
Due Diligence in the SEC Registration Statements Process
Directors, officers and control persons can mitigate liability by performing appropriate due diligence during the going public process if they demonstrate that after a reasonable investigation they had a reasonable basis for their belief that the registration statement was accurate and complete.  Private companies in going public transactions should engage competent securities counsel to guide them through the SEC registration statement process and related due diligence.

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