Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Tuesday, June 25, 2013

Five Charged by SEC in Venezuelan Fraudulent Bond Kickback Scheme

In June 12, 2013, the Securities and Exchange Commission (“SEC”) brought an action against an additional defendant for his role in a fraudueltn kickback scehme involving the payment of millions of dollars in bribes to a Venezuelan finance official in order to obtain the bond trading business of a state-owned Venezuelan bank, the Banco de Desarrollo Económico y Social de Venezuela (“BANDES”).
In its latest SEC action, the SEC charged Ernesto of Miami, the former head of the Miami office of Direct Access Partners. The four original defendants named in the SEC’s action last month were Tomas Alberto Clark Bethancourt, a resident of Miami and an executive vice president of broker-dealer Direct Access Partners (“DAP”), Iuri Rodolfo Bethancourt, a resident of Panama and presumed relative of Tomas Clarke, José Alejandro Hurtado, a naturalized U.S. citizen who lives in Miami and works in DAP’s back office, and Haydee Leticia Pabon, a resident of Miami and Hurtado’s wife.
According to the SEC action, the conspirators began working their scheme in October 2008, and continued until at least June 2010.  BANDES was a new customer of DAP, having been brought in with the help of Hurtado. Hurtado acted as the intermediary between the brokerage and María de los Ángeles González de Hernandez, Vice President of Finance at BANDES.

The Kickback

In return for BANDES’s custom, González demanded large amounts of money. The SEC charges allege that the perpetrators went to great lengths to conceal payment of the kickbacks to González, using internal wash trades, routing some trades through another brokerage and back to them, and engaging in massive round trip trades to beef up their revenue.  In January 2010, they and González arranged two round trips with BANDES as both buyer and seller. They cost BANDES a cool $10 million in fees to DAP.  Some of that money went to González.
For their part, Clarke and Hurtado often told González that DAP’s fees were lower than was actually the case, and kept the difference for themselves.
Iuri Bethancourt’s role was to launder the bribes paid to González through the account of the Panamanian shell company he controlled.  Haydee Pabon received fabricated finder’s fees in the amount of $8 million.  All told, the amount of DAP’s fees was $66 million.
In its amended complaint, the SEC alleges that Ernesto Lujan, the head of DAP’s Miami office was fully aware of his employees’ shenanigans from the start.  They SEC investigation revealed that his share of the loot was more than $11.5 million.
 ”These traders triggered a fraud that was staggering in audacity and scope,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “They thought they covered their tracks by using offshore accounts and a shadow accounting system to monitor their illicit profits and bribes, but they underestimated the SEC’s tenacity in piecing the scheme together.”
For now, only the SEC is involved in a civil action, but it would be surprising if this securities fraud and kickback scheme were to escape the notice of the Department of Justice.

Penny Stock CEO and Co-Conspirator Convicted of Securities Fraud

On May 3, 2013, in connection with an action that went unnoticed by most penny stock observers, the U.S. Attorney’s Office for the District of Massachusetts announced that John C. Jordan, of Cameron Park, California, and James Prange, of Greenbush, Wisconsin, had been found guilty of conspiracy to commit securities fraud, and of the commission of mail and wire fraud.
Jordan is the CEO of Vida Life International, Ltd. (VILF); Prange is a self-described consultant to microcap companies.  Prange also provided his dubious services to two other companies involved in the prosecution, China Wi-Max Communications, Inc. (CHWM), and the Small Business Company, Inc. (SBCO).  The CEOs of the latter two issuers, along with a China Wi-Max director, pleaded guilty last month to conspiracy to commit securities fraud.
The three companies, all of them fully reporting to the Securities and Exchange Commission (“SEC”), were far from successful.  Illiquid and low-priced, they had few buyers.  When Prange offered management a way to attract the interest of a supposed penny stock investment fund representative, they couldn’t resist.  Prange explained that management would be expected to pay kickbacks to the representative from any stock purchases made by the fund.  Still, the CEOs didn’t hesitate.  They went ahead with the deal, concealing the kickbacks by using sham consulting agreements and other cooked-up documents.
 Unfortunately for them, the “fund representative” turned out to be an undercover FBI agent.  Once the perpetrators had paid their first kickbacks, they were arrested and charged.
“Boston FBI agents initiated an undercover operation purposefully aimed at identifying corporate insiders engaged in the illegal manipulation of stock prices,” said Richard DesLauriers, Special Agent in Charge of the FBI’s Boston Division. “These convictions send a message that no one who is engaged in illegal activity while participating in the markets, including CEOs, traders, fund managers, equities analysts, lawyers and publicists, is exempt from justice.”
The maximum penalty for the securities fraud conspiracy charges are 25 years in prison and a $250,000 fine; the maximum penalty for mail and wire fraud are 20 years and a $250,000 fine.
Although the U.S. Attorney’s Office thanks the SEC and FINRA for their help with the investigation, neither regulator has brought an enforcement action against the culprits or the public companies.  VILF, CHWM, and SBCO continue to trade occasionally on the OTCMarkets’ Pink No Information tier, where, if the authorities aren’t careful, they could be spotted by a different kind of crook, who might use them in a corporate hijacking scheme.

FINRA’s Prohibited Conduct by Broker-Dealers and Market Makers

The Financial Industry Regulatory Authority (“FINRA”) require that broker-dealers and market makers observe “high standards of commercial honor and just and equitable principles of trade.” FINRA rules also prohibit broker-dealers and market makers from “any manipulative, deceptive, or fraudulent actions.”
Prohibited Conduct l Broker-Dealers l Market Makers
As a warning to the public, FINRA has drawn up a list of specific examples of activities that constitute serious violations of its rules and regulations. These violations harm investors and jeopardize the integrity of the securities markets. Some of the examples used by FINRA are self evident and apply to all market participants, not just those regulated by FINRA.
These include knowingly spreading false and misleading information in the markets or providing incomplete information to mislead other persons about a security.
The SEC and FINRA developed the following set of rules applicable to broker-dealers and market makers.
Insider trading (SEC Rule 10b-5) l Broker-Dealers l Market Makers
It is illegal to use or pass on to others material, nonpublic information or enter into transactions while in possession of such information.
Backing away (NASD IM-3320) l Broker-Dealers l Market Makers
A market maker in a given security is obliged to honor the quoted bid and ask prices for a minimum quantity.
Trading ahead of customer limit orders (NASD IM-2110-2) l Broker-Dealers l Market Makers
FINRA members acting as market makers are prohibited from trading ahead of customer limit orders and must ensure that such orders are executed at the most favorable price possible under prevailing market conditions.
Front-running (NASD IM-2110-3) l Broker-Dealers l Market Makers
A broker/dealer is prohibited from buying or selling a security or an option on a security while in possession of material, non-public information concerning an imminent block transaction in the security or option on the security.
Trading ahead of research reports (NASD IM-2110-4) l Broker-Dealers l Market Makers
FINRA member firms are prohibited from trading activity that changes the firm’s position in a Nasdaq or other exchange-listed security traded in the third market, or in any derivative security based on or related to the underlying security, in anticipation of the issuance of a research report in that security.
Anti-Intimidation/Coordination (NASD IM-2110-5) l Broker-Dealers l Market Makers
A FINRA member firm may not coordinate its prices (including quotations), trades, or trade reports with any other member; direct or request another member to alter a price (including a quotation); or engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member. This includes any attempt to influence another member to adjust or maintain a price or quotation and refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participants.
Churning (NASD IM-2310-2) l Broker-Dealers l Market Makers
Frequent trading, or trading that is not consistent with the financial goals and risk tolerance of the customer, in a discretionary account (or an account over which the broker exercises de facto discretion) is an abuse of control over the customer’s account. Members who engage in this behavior can be found liable to their customers for damages and may be disciplined by FINRA.
Free-riding and withholding (NASD Rule 2110-1) l Broker-Dealers l Market Makers
New issues of securities that immediately begin trading at a higher price than originally offered must be distributed to the public. They may not be placed in the member’s account under any circumstances, and only under strict guidelines may they be placed in the accounts of financial services industry personnel or their immediate families.
Selling away (NASD Rule 3040) l Broker-Dealers l Market Makers
Selling securities without processing the order through the member’s firm and without the firm’s permission or knowledge is a violation of FINRA rules. Even products that an individual broker may not consider to be securities, such as leasing arrangements or promissory notes, may be securities under federal or state law. Members should check with their firm before engaging in any securities transactions for any purpose.
Conflicts of Interest l Broker-Dealers l Market Makers
Members must avoid even the appearance of conflict, let alone any actual conflict of interest, in transactions with customers. For instance, if a broker owns shares of a thinly traded stock in his personal account, his true motivation in recommending large purchases of those shares to his customers, when such a recommendation is likely to drive up the price of that stock, could be called into question.
Unauthorized Trading l Broker-Dealers l Market Makers
No matter how noble a member’s intentions may be, he must never enter an order without the express and detailed permission of the customer unless he and his firm have been granted written discretionary authority by the customer.
Parking Securities and Maintaining Fictitious Accounts l Broker-Dealers l Market Makers
Holding or hiding securities in someone else’s or a fictitious account is misleading and strictly prohibited.
Any investor who knows or believes his broker has been engaging in any of the prohibited behaviors described above should contact the firm’s Compliance office, or get in touch with FINRA or the SEC.

SEC Revokes Five Issuers to Prevent Reverse Merger Scams

On May 24, 2013, the Securities and Exchange Commission (“SEC”) revoked the registrations of Enercorp, Inc. (ENCP), FTS Group, Inc. (FLIP), Games, Inc. (n/k/a InQBate Corporation; INQB), Hartmarx Corporation (n/k/a XMH Corp. 1; (HTMXQ), and Penn Treaty American (PTYA) by default.
The SEC had suspended trading in the five companies on April 25, 2013 and initiated an administrative proceeding on the same day.  All were SEC reporting companies that had failed to file required financial reports for years, although they continued to trade as OTCMarket Pink issuers.
All five became dormant companies.  As such, they were vulnerable to attack from corporate hijackers, who track down state incorporation data for dead public shells and, if they find corporate status has been revoked, institute custodianship or receivership proceedings in a state court.  The perpetrators, often sleazy securities lawyers, then install themselves or their cronies as officers and directors.
The next step is to inform the transfer agent of a change of control, and begin updating filings at OTCMarkets or Edgar.
What follows is a reverse merger transactions involving the dormant public shell. Once this is complete is often a major promotion, in which stock price briefly soars until selling by insiders causes it to crash and burn.
Along the way, the scammers deceive the state judge by lying about the public shell.  Sometimes they claim an award of custodianship is appropriate because the company’s board of directors is “deadlocked.”  In many cases, there is no board of directors, or there is only one director, which would make a deadlock impossible.  In most if not all cases, their pleadings are fraudulent.
The SEC is concerned about corporate hijackings of dormant shells and the use of the dormant public shell in reverse merger transactions.  In the past two years, it has suspended trading in hundreds of companies that might become targets for unscrupulous stock manipulators planning fraudulent reverse mergers.  The agency calls this program Operation Shell Expel.  Once the suspensions end, the delinquent reporting companies will be subjected to administrative proceedings to revoke registration, which results in the deletion of their ticker symbols.  They will not trade again.  Non-reporting Pinks will resume trading on the Grey Market, an extremely illiquid venue from which they are unlikely to escape.
There’s no point in hijacking a company whose registration has been revoked.  The same is true for a former Pink that has been removed to the Greys.  Operation Shell Expel is an inexpensive and easy way to prevent fraud from happening particularly with the increase of fraudulent custodianship and receivership proceedings in recent years.
People considering an investment in a microcap stock should make an effort to determine that the company has active corporate status in its home state, and that it has not been recently reinstated and undergone a change in control through a custodianship or receivership proceeding.

Sunday, June 16, 2013

Form 10 l Exchange Act Registration

All public companies whose securities are registered on a national securities exchange, and generally issuers  whose assets exceed $10,000,000 with a class of equity securities held by 500 or more persons, must register a class of their securities under Section

http://www.securitieslawyer101.com/form-10-l-exchange-act-registration-statements/

OTCMarkets l Securities Lawyer 101 l Hamilton

http://www.securitieslawyer101.com/8504/

OTCQX Eliminates Admission of Penny Stocks l Securities Lawyer 101

Getting Current 101

Why Both Private and Public Companies Need a Securities Attorney

SEC & FINRA Warn About Spam & Dump Schemes

Form 10 l Exchange Act Registration Statements

Reverse Mergers l OTC Markets Pink Sheets

The Corporate Hijacking l Reverse Merger Epidemic

Reverse Mergers l The Corporate Hijacking Agenda

Registration Statements Pursuant to the Securities Exchange Act of 1934

Convertible Debt Crackdown l Ask Securities Lawyer 101

Wells Notice & Disclosure Obligations l Securities Lawyer 101

SEC Investigations 101 l Ask Securities Lawyer 101

Direct Public Offerings l Securities Lawyer 101 l Go Public Blog

Accredited Investor Requirements Of Rule 506 l Ask Securities Lawyer 101

SEC Confidential Submission of Registration Statements - Securities Lawyer 101- Go Public Blog

The Regulation D Exemption l Rule 506

Section 4(1) Exemption

Restrictive Legends 101

SEC Trading Suspensions 101 - Securities Lawyer 101 - Go Public Blog

Convertible Debt Crackdown - Securities Lawyer 101- Go Public Blog

Going Public l SEC Registered Offerings

Going Public l SEC Registered Offerings

Rule 144's Current Public Information Requirement

SEC Confidential Submission of Registration Statements - Securities Lawyer 101- Go Public Blog

Form 8K Reporting Of Reverse Mergers l Securities Lawyer 101

Form S-8 Registration l Securities Lawyer 101 l Go Public Blog

Regulation A - Securities Lawyer 101- Go Public Blog

Why Both Private and Public Companies Need a Securities Attorney

Smaller Reporting Company Status in Going Public Transactions

Due Diligence in the SEC Registration Statement Process

Ask Securities Lawyer 101 l Short Sale Question & Answer

Reverse Mergers l OTC Markets Pink Sheets

Pink Sheets Direct Listings l Using Rule 15c2-11 in Going Public Transactions

OTCMarkets Issuer Reporting Standards

OTCMarkets Rules of the Road

Spin-Offs 101- Securities Lawyer 101 - Go Public Blog

SEC Suspends Trading in the Securities of Polar Petroleum Corp.

FINRA Investor Alert l Alternative Funds Not Typical Mutual Funds

Going Public Question & Answer l Ask Securities Lawyer 101

OTCQX Eliminates Penny Stocks l Securities Lawyer 101

Foreign Private Issuers l Choice of SEC Registration Statement

FINRA Investor Alert l Alternative Funds Not Typical Mutual Funds

SEC & FINRA Warn About Spam

Getting Current l SEC Filings l Securities Lawyer 101

Going Public Question & Answer l Ask Securities Lawyer 101

SEC Suspends Polar Petroleum Corp

SEC Suspends Polar Petroleum Corp

Sunday, June 9, 2013

Foreign Private Issuers l Choice of SEC Registration Statement

The securities laws provide numerous benefits to issuers who qualify as foreign private issuers including but not limited to reduced disclosure obligations and relaxed financial statement requirements. Qualification as a foreign private issuer is not determined by the issuer

http://www.securitieslawyer101.com/foreign-private-issuers-registration-statement/

Raising Capital l Regulation S l Foreign Private Issuers

Ask Securities Lawyer 101 l Regulation S The Regulation S Exemption l Securities Act Registration Foreign private issuers may raise capital in the U.S.  using an offering registered on a registration statement under the Securities Act or by selling securities that are

http://www.securitieslawyer101.com/raising-capital-l-regulation-s/

Raising Capital l Regulation S l Foreign Private Issuers

How FINRA Rule 6490 lmpacts Reverse Mergers

Posted by Brenda Hamilton, Securities Attorney FINRA Rule 6490, has evolved since it was enacted over two years ago. For some time, FINRA has required that issuers provide expansive disclosures and supporting documentation not only for the corporate change subject

http://www.securitieslawyer101.com/6490-reverse-merger/

Foreign Private Issuers l Choice of SEC Registration Statement

Saturday, June 8, 2013

How FINRA Rule 6490′s lmpacts Reverse Mergers

Posted by Brenda Hamilton, Securities Attorney FINRA Rule 6490, has evolved since it was enacted over two years ago. For some time, FINRA has required that issuers provide expansive disclosures and supporting documentation not only for the corporate change subject

http://www.securitieslawyer101.com/6490-reverse-merger/

How FINRA Rule 6490's lmpacts Reverse Mergers

How FINRA Rule 6490's lmpacts Reverse Mergers

http://www.securitieslawyer101.com/6490-reverse-merger/

Reverse Mergers l The Corporate Hijacking Agenda

Reverse Mergers l The Corporate Hijacking Agenda

http://www.securitieslawyer101.com/reverse-merger-hijacking/

Reverse Mergers l Corporate Hijackings

Reverse Mergers l Corporate Hijackings

http://www.securitieslawyer101.com/reverse-merger-hijacking/

Benefits of Foreign Issuer Status in Going Public Transactions

Benefits of Foreign Issuer Status in Going Public Transactions

http://www.securitieslawyer101.com/foreign-issuer-go-public/

Benefits of Foreign Issuer Status in Going Public Transactions

Benefits of Foreign Issuer Status in Going Public Transactions

http://www.securitieslawyer101.com/foreign-issuer-go-public/

Due Diligence in the SEC Registration Statement Process

Due Diligence in the SEC Registration Statement Process

http://www.securitieslawyer101.com/registration-statement-going-public/

Due Diligence in the SEC Registration Statement Process

Due Diligence in the SEC Registration Statement Process

http://www.securitieslawyer101.com/registration-statement-going-public/

Going Public Options for Foreign Companies

Going Public Options for Foreign Companies

http://www.securitieslawyer101.com/foreign-issuer/

Securities Registration in Going Public Transactions

Going Public on the OTCMarkets Pink Sheets

Going Public on the OTCMarkets Pink Sheets

http://www.securitieslawyer101.com/going-public-pink-sheets/

Ask Securities Lawyer 101 l Rule 144 Non-Affiliate Question & Answer

Ask Securities Lawyer 101 l Rule 144 Non-Affiliate Question & Answer

http://www.securitieslawyer101.com/ask-securities-lawyer-101-l-rule-144-non-affiliate-question-answer/

Friday, June 7, 2013

FINRA Granted Authority to Initiate Trade & Quotation Halts

FINRA Granted Authority to Initiate Trade & Quotation Halts

http://www.securitieslawyer101.com/finra-6440/

SEC Charges Laidlaw and Its CEO for Securities Violations

On June 5, 2013, the Securities and Exchange Commission charged penny stock issuer, Laidlaw Energy Group.   According to the SEC, Laidlaw and its CEO, Michael B. Bartoszek sold more than two billion unregistered and non-exempt shares of Laidlaw’s common stock in

http://www.securitieslawyer101.com/sec-charges-laidlaw-and-its-ceo-for-securities-violations/

OTCQX and OTCQB Recognized as Established Public Markets

On May 16, 2013 the Securities and Exchange Commission (the

http://www.securitieslawyer101.com/established-market/

Ask Securities Lawyer 101 l Rule 506 Question and Answer

Ask Securities Lawyer 101 l Rule 506 Question and Answer

http://www.securitieslawyer101.com/rule-506-2/

Ask Securities Lawyer 101 l Rule 506 Question and Answer

Ask Securities Lawyer 101 l Rule 506 Question and Answer

http://www.securitieslawyer101.com/rule-506-2/

Ask Securities Lawyer 101 l Short Sale Question & Answer

Wednesday, June 5, 2013

Ask Securities Lawyer 101 l OTC Pink Current Disclosures

Ask Securities Lawyer 101 l OTC Pink Current Disclosures

http://www.securitieslawyer101.com/otc-pink-current/

Market Makers & Going Public Transactions

The last step in going public transactions is most often obtaining a stock trading or ticker symbol from the Financial Industry Regulatory Authority (“FINRA”). For a company to obtain a ticker, a market maker must submit a Form 211 on the issuer’s behalf to the Finance Industry Regulatory Authority (“FINRA”).
 
Only a Market Maker can submit a Form 211 to obtain a ticker symbol assignment.  An issuer cannot submit the form itself.  As such, the sponsoring market maker plays an important role in the going public process.
 
What is a Market Maker?
A market maker is a FINRA registered broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Broker-dealers must register with FINRA to act as a market maker of a security.
 
Market Maker Regulation
Market Maker activities are regulated by the Securities and Exchange Commission (“SEC”) as well as by FINRA. FINRA oversees registration, education and testing of market makers, broker-dealers and registered representatives. FINRA rules governing market makers in going public transactions involve a variety of criteria.
 
Market Maker Compliance with SEC Rule 15c2-11 in Going Public Transactions
SEC Rule 15c2-11 requires that current public information be made available to investors. This information is initially provided in going public transaction by the market maker when it submits a Form 211 and 15c2-11 application with FINRA for a ticker symbol assignment. FINRA and SEC Rule 15c2-11 require that the market maker has a reasonable basis for believing that the information provided by the company in its Form 211 is accurate and from reliable sources.
 
FINRA Comment Process in Going Public Transactions
SEC Rule 15c2-11 l Form 211 Application

In a going public transaction, a market maker must submit a Form 211 application to FINRA to apply for the company’s trading symbol. FINRA may render comments to the application to which the sponsoring market maker and company must respond. Once FINRA is satisfied that the disclosures meet the requirements of SEC Rule 15c2-11, a trading symbol is assigned and the Market Maker can quote the company’s securities. Once this occurs, the securities of the private company going public will be quoted by the OTCMarkets on the OTCPink Sheets and investors can purchase the company’s securities through their brokers.
 
Form 211 Exclusivity Period for Sponsoring Market Maker
For the first 30 days after a ticker symbol assignment in a going public transaction, only the sponsoring market maker who filed the Form 211 can publish quotes of the company’s securities. Thereafter, other market makers can publish their own quotes.
 
Market Maker Fees For 211 Filings

Market makers generally earn money by buying stock at a lower price than the price at which they sell it, or selling the stock at a higher price than they purchase it back. FINRA prohibits them from charging issuers fees for filing a Form 211. Despite the foregoing, unscrupulous market makers frequently find ways to circumvent FINRA’s requirements, sometimes by funneling fees for 211 filings through transfer agents they control or by cooking up sham consulting agreements. Engaging in such activities compromises the entire going public transaction and places the company as well as the sponsoring market maker at risk for enforcement action.
 
FINRA l Market Maker l Shareholder Requirements
The private company seeking to go public must have enough shareholders to demonstrate that an active trading market can be established. This means that prior to filing a Form 211 the company should have 30 or more non-affiliate shareholders who paid cash consideration for their shares, and have owned those shares for at least 12 months. The private company seeking to go public should have at least 1 million shares outstanding, of which at least 250,000 are free trading shares.

Notice under Rule 144

Rule 144 requires that a “Notice of Sale” on Form 144 be filed by any person for whose account the securities are being sold if the person is an affiliate at the time of sale, or was an affiliate during the 90 days preceding the sale, and is selling more than 5,000 shares or the shares being sold have an aggregate sale price of more than $50,000.
 
Public Availability of the Form 144 Notice Filing
Form 144 is publicly available upon filing through the SEC’s EDGAR database.  Rule 144(h) states that Form 144 must be filed only by the person for whose account a sale is being made under the rule.

Bona Fide Intent to Sell and Form 144
A person filing a notice on Form 144 is required to have the bona fide intention to sell the securities set forth in the form within a reasonable time after filing the notice on Form 144.

Filing Procedures for Form 144
Rule 144(h)(1) requires the filing of three copies of the notice on Form 144 with the SEC, and one copy with the principal exchange on which the securities are traded.
Rule 144 requires that the seller file Form 144 concurrently with either placing an order to sell the securities with a broker or executing the sale directly with a market maker.
 
Amendment of Form 144
An amendment is required for any material changes to the information provided. Form 144 can be corrected without penalty by filing an amended Form 144. The filing of an amended Form 144, however, does not cure any deficiencies regarding sales made after filing the initial form and before filing the amended form.
An  amendment to a previously filed Form 144 is not required to report the following events:
• The failure of a seller to sell the securities set forth in the Form 144;
• The listing of the issuer on a national securities exchange;
• A stock split by the issuer; or
• The number of shares allocated to each of two brokers for sale under Rule 144.
An amendment to Form 144 is required where a seller changes brokers to effect a sale under Rule 144.
 
Form 144 Representations
Form 144 sets forth that the person for whose account the securities are being sold represents by signing the form that he or she “does not know of any material adverse information in regard to the current or prospective operations of the issuer” that hasn’t been publicly disclosed.
 
Penalties for Misstatements in Form 144
Form 144 contains a statement warning persons filing the form that criminal liability under 18 U.S.C. § 1001 can result if intentional misstatements or omissions are made in the form.
 
Failure to File 144
A failure to file Form 144 when required to do so will render the Rule 144 unavailable. Since  Rule 144′s preliminary note requires that all of the conditions of the rule be satisfied in order for the safe harbor of Rule 144 to be available, the failure to file a Form 144 will render the rule unavailable.

The Role of the Transfer Agent in the Going Public Process

A transfer agent plays an important role in the going public process.  The transfer agent is the record keeper for a company’s securities. Share ownership is reflected on the issuer’s shareholder list.  In addition, transfer agents issue and cancel certificates to reflect changes in ownership of securities and act as an intermediary for the company.
 
In going public transactions, transfer agents provide a shareholder list which the Financial Industry Regulatory Authority (“FINRA”) reviews and relies upon when issuing ticker symbols to companies in going public transactions. Transfer agents confirm the number of shares outstanding and the identity, tax id number, address and holdings of record owners entitled to vote. Because transfer agents are intermediaries between public companies and their shareholders, it is critical in the going public process that transfer agent operations are efficient and their records are accurate.
 
Transfer Agents Functions
The typical functions performed by transfer agents include but are not limited to the following:
♦ Maintaining an official record of securities issued and outstanding;
♦ Maintaining shareholder account information such as name and address;
♦ Handling shareholder requests;
♦ Effecting transfers of ownership;
♦ Issuing and canceling certificates representing shares;
♦ Transferring shares to and from shareholders to their broker-dealer;
♦ Distributing dividends;
♦ Tax reporting;
♦ Performing annual meeting services;
♦ Performing special meeting services;
♦ Vote tabulation in connection with annual or special meetings; and
♦ Searching for lost shareholders.
 
SEC Regulation of Transfer Agents
Transfer agents are regulated by the Securities and Exchange Commission (“SEC”). SEC regulations are designed to ensure that transfer agents act promptly and accurately. Transfer agents for corporations listed on some stock exchanges must meet additional requirements.
The SEC’s Division of Trading and Markets regulates transfer agents under Section 17A(c) of the Securities Exchange Act of 1934, as amended.
Section 17A(c) establishes:
♦ Performance standards for issuing new certificates and related record keeping and reporting rules.
♦ Prompt and accurate creation of security holder records.
♦ Safeguarding of securities and funds.
Under Section 17A(c)(1) of the Exchange Act, a transfer agent cannot perform any transfer agent function without being registered with the SEC. A qualifying security is any security registered under Section 12 of the Exchange Act.
 
DTC and Transfer Agents
The Depository Trust & Clearing Corporation (“DTCC”), through its subsidiary, Depository Trust Company (“DTC”) provides clearing, settlement and information services for the securities of publicly traded companies. DTC is the only securities depository for securities in the U.S. Most large U.S. broker-dealers and banks are DTC participants who deposit securities with, and hold those securities through DTC. There are approximately 400 DTC participants in the country. Shares held by DTC are reflected in the shareholder records in the name of its nominee, Cede & Co.
 
How Shares are Held
Security Ownership is represented one of three ways:
Physical Certificate: Certificates issued and registered in the shareholder’s name that reflect the number of shares held.
Street nameSecurities are registered in the shareholder’s broker-dealer or bank’s street name. The broker or bank issues account statements to the shareholder and pays any dividends or interest declared by the issuer, and also arranges for the mailing of proxy materials or other communications;
Direct registrationSecurities are registered directly on the transfer agent’s books without a physical certificate. The shareholder receives a statement of ownership.
It is critical for all public companies and private companies seeking to go public to have a qualified and compliant transfer agent . Issuers should, at a minimum, undertake due diligence of their transfer agent and its owners.
 
The following are some of the red flags private companies seeking to go public should look for when interviewing a transfer agent. Issuers should avoid:
Transfer Agents that are owned or controlled by persons who are PCAOB registered auditors;
Transfer Agents owned by persons who are securities attorneys;
Transfer agents that are controlled by persons who buy and sell shells or take over public companies, especially in state court receivership or custodianship proceedings. (Often times the companies being taken over are public companies that did not pay inflated transfer agent bills);
Transfer agents who charge astronomical termination fees. (Yes, there are actually transfer agents who charge issuers to fire them. The price to terminate their services can be as high as $5000); and
Transfer agents who have former or present principals that have been the subject of SEC enforcement actions.
 
Private companies seeking to go public should engage securities counsel to review any transfer agent agreement prior to execution. For years transfer agents were virtually unregulated despite their essential position in the securities markets. More recently, the SEC’s Division of Enforcement has brought numerous cases against transfer agents and their principals for violations of the securities laws, primarily involving transfer agents involved in the penny stock market. These violations have included actions for record keeping problems, as well as fraud in connection with counterfeiting securities, the sale of unregistered securities sales and corporate hijackings.
Before any issuer going public engages its transfer agent for its going public transaction it should determine if the candidate will meet its operational requirements including participation in DTC’s FAST (Fast Automated Securities Transfer/Direct Registration System) program, which permits direct registration by shareholders who choose that option. Issuers using smaller transfer agents should inquire as to ownership of the transfer agency, and whether the transfer agent has sufficient internal controls in place to facilitate accurate securities issuances, transfers and cancellations . The issuer should also become familiar with the transfer agent’s fees and services, with attention paid to whether:
♦ fees are flat or transaction based;
♦ fees are non-refundable;
♦ charges include purchase, sale and transfer of their shares;
♦ if the issuer participates in DTC’s FAST program; and
♦ there is any charge to terminate the transfer agent’s services.
 
 

FINRA seeks Access to Facebook Accounts

On April 2, 2013, the SEC released a report on the use of social media by public companies, in which it clarified that public companies may use social media such as Twitter and Facebook to announce information in compliance with Regulation FD if they tell investors and shareholders ahead of time which social media they will use to disseminate that information.
 
The Financial Industry Regulatory Authority (FINRA), which regulates broker-dealers, has been concerned about the pervasive influence of the social media for some time.  In 2011 it compiled a “Guide to the Web for Registered Representatives” that enumerated and explained compliance requirements for its members.
 
Now it’s gone a step further, insisting that brokers’ postings in social media such as Twitter and Facebook must be monitored to ensure that they comply with its rules.  The regulator has sent letters to about 10 states in which existing or proposed legislation would prohibit such monitoring, asking that broker-dealers be exempt from those prohibitions.
 
FINRA has not provided information on whether it intends to monitor all or selected member accounts or about how the monitoring would be accomplished.
 
If brokers use social media to communicate about stocks, FINRA believes that as their regulator it should have access to those accounts.  Access, they say, is necessary to prevent abuses that could harm investors.
 
Registered reps should assume that if FINRA gets its way, the SEC will also have access to their Facebook and Twitter accounts. The concern of civil libertarians is that they might eventually be able to extend that access to family photos, private email, and much more.
 
 
 
 

SEC Settles Charges against Chinese Reverse Merger Company, Rino International

On May 15, 2013, Dejun “David” Zou and Jianping “Amy” Qiu settled the enforcement action brought by the Securities and Exchange Commission stemming from their alleged looting of Chinese reverse merger company, RINO International Corp.  According to the SEC,  Rino overstated its revenues by hundreds of millions of dollars. Zou and Qiu respectively the company’s CEO and chairman of the board, diverted $3.5 million in offering proceeds to buy personal items including a home, cars and designer clothing.  The pair are married, and divide their time between China and Los Angeles.
 
The SEC suspended trading of RINO’s securities on the Nasdaq in April 2011, citingquestionable accounting practices and conflicting disclosures in its SEC filings. RINO’s common shares were listed on the NASDAQ in October 2007 as the result of a reverse merger transaction with a public shell; they subsequently traded as high as $20.74 per share.  In December 2010, NASDAQ announced its intention to delist the company; that was accomplished by the end of the month.
 
Along the way, RINO completed a public offering that raised almost $100 million from investors. According to the SEC, Zou and Qiu deposited $10 million in a U.S. bank account after sending the rest to China.  They then spent $3.5 million on a luxury home. The happy couple didn’t stop there. They used their corporate credit cards to purchase two Mercedes-Benzes and clothing from swanky boutiques, including Chanel and Valentino, in Beverly Hills. Worse yet, the SEC alleges that RINO kept two sets of books and records, one for China and one for the U.S. The U.S. books and records failed to disclose the Zou and Qiu spending sprees and grossly inflated RINO’s revenues.
 
Antonia Chion, Associate Director of the SEC’s Enforcement Division, stated, “When making their investment decisions, RINO’s investors did not have the benefit of knowing that Zou and Qiu were diverting money and the company’s revenues were greatly exaggerated”.
 
The settlement stipulated that Zou and Qiu be barred from serving as officers or directors of a public company for 10 years. The pair agreed to pay penalties of $150,000 and $100,000, respectively, without admitting or denying the agency’s allegations. In a related class action settlement, they disgorged $3.5 million to RINO investors.
 
 
 
 

Dead Stock Walking Chinese Reverse Merger Series l Update 2013

In late 2010, allegations of securities fraud involving Chinese reverse merger companies began to mount.  By December 31 2012, the auditors of at least 67 China-based U.S. public companies had resigned, and 126 China- based public companies had either been delisted from U.S. securities exchanges or had ceased filing reports with the SEC.  Stockholders have lost billions in investor funds and the remaining China-based companies listed in the U.S. have had lost market value and investor confidence.   Reverse mergers with U.S. public shell companies are the common factor linking most of the securities frauds involving smaller Chinese companies.
 
According to the Public Company Oversight Accounting Board (“PCOAB”) between January 1, 2007 and March 31, 2010, 159 Chinese companies entered the U.S. securities markets using reverse mergers.
 
According to the PCOAB’s report these companies generated market capitalization of $12.8 billion.  During this same period, three times more Chinese companies were listed on U.S. markets through reverse mergers than through initial public offerings.  The report said Chinese companies accounted for a surprising 26% of all U.S. reverse merger deals signed during this period.  The PCOAB also notes that 74% of these Chinese reverse merger companies were audited by U.S.-based accounting firms.
 
Since 2010, Chinese reverse mergers have been the subject of numerous class action suits, SEC enforcement actions and SEC investor bulletins.  The SEC actions have targeted the Chinese issuers, their management, outside advisors such as attorneys, auditors and consultants as well as investors and hedge fund managers.
 
In December of last year, the SEC charged the Chinese affiliates of the big four accounting firms of violating U.S. securities laws because of their refusal to produce audit work papers and other documents subpoenaed in connection with its investigations of Chinese reverse merger auditing firms. The auditors claim they cannot comply with the SEC’s request because to do so would be s violation of Chinese laws that prohibit sharing state secrets.   According to the PCOAB, it has been negotiating with China to conduct joint inspections with the China Securities Regulatory Commission of China-based auditors of U.S. listed companies; however, no inspections have been allowed to date.
 
Realities for Investors in Chinese Reverse Merger Companies
Even when SEC enforcement actions and/or private civil actions are successful, in most instances, assets will be located  outside the U.S., making enforcement of judgments and recovey of investor losses difficult.  Plaintiffs’ attorneys are seeking recovery of investors’ losses from Chinese companies and their advisors. In 2012, one in four federal securities class action lawsuits involved Chinese reverse mergers with public shell companies.  Plaintiffs’ lawyers are even pursuing middlemen in reverse merger transactions–such as Westpark Capital and Rodman & Renshaw–for their roles in enticing Chinese firms into reverse mergers with public shell companies.
 
 

Benefits of Foreign Issuer Status in Going Public Transactions

A private foreign company seeking to go public may be classified as a U.S. domestic issuer or a non-U.S., foreign private issuer under SEC rules. The status as a foreign private issuer holds many benefits for foreign companies seeking public company status. These benefits include less stringent narrative and financial statement disclosure in public offering documents making the SEC registration process less burdensome.
 
Upon completion of a going public transaction, foreign companies become subject to less stringent SEC periodic reporting requirements. Additionally, upon obtaining public company status, foreign companies are not subject to the proxy rules which impose disclosure and procedural obligations for companies who solicit shareholder votes.
 
The term “foreign private issuer” is not determined by solely where an issuer is incorporated or domiciled. Instead it is defined under the securities laws.

Qualification as a Foreign Issuer

An foreign companies qualification as a foreign private issuer is determined initially as of a date within thirty days prior to its filing with the SEC of an initial registration statement for its initial public offering in a going public transaction or listing in the U.S on a securities exchange.  After completion of its going public transaction, the foreign company’s status as a foreign issuer is determined annually on the last business day of its second fiscal quarter. If a company ceases to be a foreign private issuer, then it must comply with the requirements of a U.S. issuer beginning on the first day of the fiscal year following the determination date.
 
Under U.S. securities laws a foreign issuer is any foreign entity that does not meet the conditions below:
 
(1) more than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the U.S. residents.; and
(2) any of the following:
(i) the majority of the issuer’s executive officers or directors are U.S. citizens or residents;
(ii) more than 50 percent of the issuer’s assets are located in the U.S.; or
(iii)   the issuer’s business is administered principally in the U.S.
Under the above definition, a foreign company domiciled outside the U.S. will be deemed a foreign private issuer if more than 50 percent of its voting securities are held by non-U.S. residents (without considering the three tests in (2) above). Even where 50% of a foreign company’s equity securities are held by U.S. residents, it will be treated as a foreign private issuer, so long as it does not satisfy any of the three tests above.
 
 

The Securities Laws that Impact Going Public Transactions

A private company going public is subject to three federal securities laws, each with its own unique requirements.  The three laws are the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (”Sarbanes-Oxley”).  In addition to the federal securities laws, companies going public are subject to state securities regulation of their securities public and private offerings.  The Securities Act sets forth the regulations that govern the offer and sale of securities by an issuer and certain shareholders.
The Securities Act governs both private offerings such as those conducted under Regulation D and public offerings such as those registered on Form S-1, Form S-8 or Form S-4.
 
Upon completion of a going public transaction, the Exchange Act imposes periodic reporting obligations including the filing of Form 10-K, 10-Q and 8-K. For issuers who register a class of securities under the Securities Exchange Act in connection with their going public transaction, the Exchange Act imposes proxy rules requiring certain disclosures be made on Schedules 14A or 14C and certain procedures for the solicitation of shareholder votes.
 
Lastly, for companies with a class of securities registered under the Exchange Act, the Company’s management and large shareholders must file beneficial ownership reports of their trading activities in the company’s common shares.
 
In addition to governing the disclosure obligations of public companies, Rule 15c-211 of the Exchange Act also regulates the disclosures public companies must provide in order for a market maker to enter quotations of their securities.  The disclosures required by Rule 15c-211 are provided
on Form 211. Form 211 disclosures also enable market makers to publish quotations in a company’s securities the secondary market after the going public process is completed.
 
The Sarbanes-Oxley Act of 2002 established corporate governance, corporate accountability and accounting oversight provisions for the federal securities laws that apply to publicly traded companies.

During and upon completion of its going public transaction, a company remains subject to the corporate laws of the state of its incorporation.   The state securities laws of the individual states also regulate private and public securities offerings unless the offering is preempted under federal law. Even where offerings are preempted under federal law, states may impose filing fees and notice filing requirements which is common in Rule 506 offerings under Regulation D.