Investor relations also known as stock promotion involves the publication of information about a public company to increase its stock price and trading volume. The person who publishes this information is sometimes referred to as a “Stock Promoter”. Stock Promoters use a variety of media including spam email, internet and direct mail newsletters, stock websites and press releases. While investor relations activities are not per se illegal, Stock Promoters are often the target of securities enforcement actions.
Due to recent increases in SEC enforcement actions against stock promoters, many promoters work closely with an securities lawyer in building an SEC Defense compliance strategy. These actions often stem from violations of Section17(b) and Section 5 of the Securities Act of 1933, (the “Securities Act”) and Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”).
Securities Act Section17(b)
Section17(b) is an anti-fraud statute that requires Stock Promoters as publishers of information to provide full disclosure of their compensation including:
♦ Type of compensation (securities or cash) received;
♦ If the compensation is in securities, whether the securities are restricted or unrestricted;
♦ Amount of securities or cash paid;
♦ Source of compensation (directly and indirectly) and if compensated by a third party shareholder or corporate entity, the shareholder or control persons of the entity must be identified by his or her individual name; and
♦ If a corporate entity is the publisher of the information, the control persons of the corporate entity must be disclosed.
17(b) also requires that the Publisher disclose his or her compensation in every press release, as well as other published documents, including emails or faxes. The disclosure must state the relationship of the payer to the issuer that the Stock Promoter is promoting. In the case of an SEC reporting company engaging a Stock Promoter, the issuer should disclose the terms of the Stock Promoter’s engagement including compensation in its periodic filings.
Section 5 of the Securities Act
Section 5 of the Securities Act makes it unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy any security, unless a registration statement has been filed as to such security.”
Stock Promoters are often paid for their services in securitiesof the public companies they promote. Stock Promoters receive free trading shares through a variety of methods; however, the shares are rarely issued in compliance with the securities laws. These methods include the issuance of free trading shares under Rule 504, transfers from third parties, debt and promissory note conversions. If an issuer participates in investor relations activity or arranges for a third party shareholder to pay for investor relations services with its shares, the shares are restricted securities. The issuance of shares to the Stock Promoter under these circumstances becomes an offering made on behalf of the issuer and unless the shares are registered, they are restricted securities. In the case of Stock Promoters paid in securities, they must either obtain registered stock or sell their shares in compliance with Rule 144.
Many stock promoters fail to recognize that Section 5 imposes strict liability for sellers of unregistered securities even where they have obtained a legal opinion from a securities attorney to opine their securities as “free trading”.
Section 15 requires a person acting as a “broker” or a “dealer” in securities transactions to register with the SEC. Both brokers and dealers are persons who are “engaged in the business” of buying and selling securities. Brokers arrange securities transactions for others, whereas, dealers purchase and sell securities for their own accounts. For purposes of the Exchange Act, persons are “engaged in the business” of buying and selling securities if they demonstrate a “regularity of participation” in securities transactions. Participation in a single, isolated transaction is insufficient to require registration. Nevertheless, the SEC and the courts interpret the phrase “engaged in the business” broadly.
In determining whether a person has acted as an unregistered dealer, the primary question is whether they receive securities as compensation as a regular part of their business. If the Stock Promoter receives stock compensation from their clients routinely in exchange for services, they are a dealer and subject to the broker-dealer registration provisions.
In determining whether a person has acted as an unregistered broker, other factors are considered, including whether the person:
♦ solicited investors;
♦ advised investors as to the merits of an investment;
♦ received commissions or transaction-based remuneration;
♦ is selling, or previously sold, the securities of the same or other issuers; and
♦ made investment recommendations.
If the Stock Promoter has any contact other than making an introduction to investors or broker-dealers, he risks being deemed an unregistered broker.
The failure to be properly registered as a broker-dealer may subject that person to potential liability, including criminal penalties, fines, suspension, and disbarment. The potential harm to the company includes investor rescission rights. Investors have a rescission right, meaning that they could demand repayment of their entire investment without setoff or deduction. The company could also be subject to sanctions and penalties from federal securities regulators as an aider and abettor of the activities of the unregistered broker-dealer including fines, prohibition on future securities offerings, and criminal actions.
This informational memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates Securities Lawyers. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers Brenda Hamilton, Securities Attorney 101 Plaza Real South, Suite 201 South Boca Raton, Florida 33432 Telephone: (561) 416-8956 Facsimile: (561) 416-2855 www.SecuritiesLawyer101.com