Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Tuesday, December 17, 2013

There are several methods a private company may use in a going public transaction. Filing a registration statement with the Securities and Exchange Commission (“SEC”) subjects the company to the reporting requirements of the Securities Act of 1933, as amended (“Securities Act”), depending on the form chosen.  One method of going public is by conducting an Initial Public Offering (“IPO”).  The traditional IPO is rarely used by small companies as most will not  meet the eligibility requirements to trade on a national securities exchange such as  the New York Stock Exchange (“NYSE”) Euronext, NASDAQ, or NYSE MKT (formerly Amex). Moreover, traditional IPO process takes time and money most small companies are unable or unwilling to commit.
For the many private companies seeking to go public that don’t qualify for listing on a national stock exchange, the OTCMarkets offers several alternatives that provide the issuer with the benefits public company status offers.

Quotation on the OTCMarkets

Choosing the method it feels is most suitable, a private company will typically seek to have its shares quoted on the OTCMarkets OTCQB or OTCQX if it is subject to the Exchange Act’s reporting requirements.  If not, it will seek to list on the OTCMarkets OTCPink Sheets.  Either way, the private company going public must locate a sponsoring market maker to submit a Form 211 to the  Financial Industry Regulatory Authority (“FINRA”).

Traditional Initial Public Offerings

In a traditional initial public offering (“IPO”), a private company will engage an underwriter to sell shares to the public as part of its going public transaction.  In order to do so it must file a registration statement under the Securities Act with the SEC. The SEC will review and render comments in most instances. Once the SEC has completed its review, and all comments have been answered to its satisfaction, the company will file a request for acceleration to allow the registration statement to be deemed effective quickly. Once the SEC files a Notice of Effectiveness, the shares registered can be offered to the public. Companies that qualify will seek to  have their shares listed on a national securities exchange, such as the NYSE Euronext, NASDAQ, NYSE and NYSE MKT.

Selling Shareholder l Resale Registration Statement

One method of going public is through a selling shareholder or resale registration statement that registers securities held by the company’s existing stockholders. These shares are typically issued in exempt offerings under Regulation D, Rule 504 or Rule 506. Under a selling shareholders registration statement, the private company will file a Form S-1 with the SEC. Once the S-1 is declared effective, the private company can file its Form 211 with FINRA. The selling shareholder registration statement allows the stockholders whose shares were registered to sell them publicly.  Upon effectiveness of the Form S-1, the private company becomes subject to the reporting requirements of the Exchange Act under Section 15(d). When the stock is assigned a ticker and begins to trade, the selling shareholders may sell their shares publicly. Exceptions to that are officers, directors, and affiliates, who are bound by Rules 144′s volume limitations, which stipulates that those persons- individually, not as a group-may sell no more than the equivalent of 1% of the shares outstanding every quarter.

Direct Public Offering l Company Registration Statement

Like an IPO, a direct public offering involves the filing of a registration statement with the SEC. The direct public offering is conduct by the company on its own behalf without the assistance of an underwriter.  Like a resale registration statement, Form S-1 is typically used. Upon the SEC declaring the registration statement effective, the Company may sell its shares to the public, thereby raising capital that can be used in a variety of ways to help the company grow. Unlike a traditional IPO, in a direct public offering using a company registration statement an underwriter will not be engaged; instead, the company’s officers and directors will offer its shares, or the securities registered will be offered and sold through a placement agent such as a FINRA licensed broker-dealer. As with a selling shareholders registration statement, the effectiveness of the company registration statement will subject the company to the reporting requirements of the Exchange Act.

The Form 10 Registration Statement

Unlike a traditional IPO, selling shareholders or direct public offering registration statement, a Form 10 registration is a registration statement under the Exchange Act,  rather than the Securities Act.
Form 10 is the most recognized registration statement under the Exchange Act. It is frequently used by issuers voluntarily seeking to file reports with the SEC. It is the general form used by a domestic issuer for registration of a class of securities pursuant to Section 12(b) or (g) of the Exchange Act when no other registration statement form is prescribed. Unlike a selling shareholders or company registration statement under the Securities Act, a Form 10 registration statement automatically becomes effective 60 days after it is filed, whether the SEC has completed the comment process or not. After this 60 day period, the issuer’s reporting obligations under the Exchange Act begin.
A Form 10 registration statement registers a class of securities and not a securities offering.  As a result, a company that goes public using a Form 10 registration statement, must have shareholders able to rely upon Rule 144 for the resale of their shares in order to create free trading stock.

Spin-Offs l Form 10 l S-1 Registration Statement

A spin-off  involves a transaction in which a parent company distributes shares of its subsidiary to the parent’s shareholders so that the subsidiary becomes a separate, independent company.
The shares are usually distributed on a pro-rata basis. State corporate law and the rules of stock exchanges determine if shareholder approval is required for a spin-off.
The spin-off company does not have to file a registration statement under the Securities Act if it meets certain conditions, including that the parent company provide adequate information about the spin-off to its shareholders and the trading markets.
If it does not, a Form 10 registration statement is typically filed. In these situations, the SEC’s Division of Corporation Finance may examine the registration statement to determine whether it complies with the SEC’s disclosure requirements.

Legal Bulletin No. 4 l Spin-offs

The SEC has taken the position that as long as the conditions of Staff Legal Bulletin No. 4, set forth below, have been satisfied, the spin-off of the subsidiary’s shares by the parent will not require a registration statement under the Securities Act. Additionally, as long as the foregoing conditions are met, the securities distributed to the subsidiary’s shareholders are not restricted securities.
In Staff Legal Bulletin No. 4, the SEC sets forth the criteria required for a parent to spin-off a subsidiary without filing a registration statement with the SEC. All five conditions below must be complied with in order to avoid registration:
♦ the shareholders of the parent do not provide consideration for the spun-off subsidiary shares; the spin-off shares are distributed pro-rata to the Parent shareholders;
♦ the parent provides adequate information about the spin-off and its subsidiary to its shareholders and to the trading markets;
♦ the parent has a valid business purpose for the spin-off; and
♦ if the parent spins-off restricted securities not registered with the SEC, the parent has held the securities for at least one year.

Considerations For Spin-Offs

In order for the spin-off to be exempt, the parent cannot provide consideration for the shares in the subsidiary the parent’s shareholders will receive. If consideration is tendered, then a “sale” has occurred and a registration statement under Section 5 of the Securities Act is required, unless an exemption is available. In a spin-off, an exemption from registration is rarely available because of the number of shareholders receiving the Subsidiary’s shares.

Pro-Rata Requirement l SEC Registration Statement Requirements

In a spin-off exempt from registration requirements, the spin-off shares must be distributed pro-rata to the subsidiary’s shareholders, meaning that the parent shareholders must hold the same percentage of the parent and subsidiary after the spin-off. If a spin-off is not pro-rata, the shareholders’ proportional holdings change and a registration statement under the Securities Act is required.

Adequate Public Information

In order for a spin-off to be exempt, the SEC requires that the parent provide adequate information to its shareholders and the public markets.  This is often provided on Form 10.

Reporting Parent and Non-Reporting Issuer

If the subsidiary is a non-reporting issuer, it can satisfy this requirement by providing the same information that would be found in a proxy statement under the Securities Exchange Act. This information must be provided prior to or contemporaneously with the creation of the spun-off shares. Additionally, a non-reporting subsidiary must file a Form 10 registration statement. The Form 10 may be filed after the spin-off but must occur prior to the subsidiary’s securities trading. A reporting subsidiary is deemed to have satisfied its information requirements as long as it is current in its reporting obligations and has provided all relevant material information about the spin-off.

Non-Reporting Parent and Non-Reporting Issuer

When both the parent and subsidiary are non-reporting, the adequate information requirement is satisfied if prior to the spin-off:
♦ the parent provides the shareholders with an information statement which satisfies the Section 14 proxy rules of the Exchange Act;
♦ the shares are restricted securities until such time as the subsidiary files a Form 10 registration statement; and
♦ the transfer restrictions are enforced such as by means of stop transfer instructions to the transfer agent.

Valid Business Purpose for Spin-Off Required

In order to be exempt from securities registration under the Securities Act, the spin-off must have a valid business purpose other than to create a public vehicle.
The SEC considers the following to be valid business purposes:
♦ allowing management of the parent and of the subsidiary to be separate and allowing each to focus solely on the relevant entity’s business;
♦ providing incentives to employees of each business linked solely to his or her respective employer;
♦ increasing potential funding opportunities by allowing investments into each business separately; and
♦ enabling the separate entities to do business with each other’s competitors.

Holding Period for Spin-Off Shares

Lastly, the parent must have held the shares of the subsidiary for at least twelve months. This is so the receiving shareholder may tack with the parent’s holding period and thereby satisfy the holding period requirements of Rule 144.
If you are going to engage in a spin-off you will need the assistance of an experienced securities lawyer familiar with the SEC’s disclosure requirements, including the Proxy Statement requirements to ensure all required disclosures are provided.
For further information about SEC registration statements and spin-offs, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at or visit This memorandum about SEC registration statements and spin-offs 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, Rule 144, 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 at (561) 416-8956 or by email a 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 202 N
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

No comments:

Post a Comment