Made Easy – SEC Registration
note well – this is only a summary of the relevant
securities laws. It is an attempt to give you what you need to
know in a simple, readable format. You must consult qualified
securities attorneys that are experienced in this niche of the
there came the Securities
Act if 1933 which provided that all new issues of securities
have to be registered (with certain exemptions) and created the
SEC, the Securities and Exchange Commission. The Securities
Exchange Act of 1934 was then enacted to cover trading in the
under the Securities
Act of 1933, if you are going public, you have to register
with the Securities and Exchange Commission.
you were already trading, you filed disclosure statements of what
is going on in the company with the SEC under the Securities
and Exchange Act of 1934.
if you merge your company with a company that is already trading,
in other words make a reverse merger with a public shell, you
originally did not have to register.
some unscrupulous people used this to get around making disclosure
so they could fleece investors, the SEC came out with a rule
providing that if you are going to merge with a public company
registered with the SEC, you have to make a filing right away that
makes essentially the same disclosure as you would if you were
filing originally with the SEC.
that file with the SEC generally require two years of audited
financial statement certified by an accountant registered with the
Public Company Accountancy Oversight Board (PCAOB).
that are filing with the SEC trade in the recognized stock
exchanges or in the OTC BB. However, there is also a market for
companies that do not file with the SEC, the Pink Sheets.
above covers companies that file with the SEC. However, some small
companies do not have to file with the SEC. They trade in market
known as the Pink Sheets.
rules of the Pink Sheets encourage, but do not require, them to
make disclosures but many do not. This lack of disclosure allows
abuses and makes this a very risky market.
that do not file with the SEC can use Regulation
D, Rule 504 to raise money privately. The stock sold under the
rule is only allowed to trade in certain very limited
circumstances. Purchasers of this private stock generally will
look to sell their stock under Rule 144. (See below).
that want immediate trading for their stock can merge with Pink
Sheet shells, but they should be advised the SEC can stop trading
in their stock if it feels that the lack of disclosure is
A of the Securities Act of 1933 allows small companies to raise up
to $5 million without audited financial statements. The stock can
trade in the Pink Sheets. The company files with the SEC and while
the SEC can decline to review the filing, it generally reviews it
in the same fashion as if it were a regular filing to go public.
Your Stock Trading -- FINRA, Form
211 and Market Makers
If you do not merge
with an already trading shell, to get your stock trading, no
matter how you became public, you have to get the stock quoted on
the Pink Sheets, OTCBB markets or on a stock exchange. For small
companies this means getting the stock trading on the Pink Sheets
To have a trading market you need one or more
market makers. This market maker must be a broker-dealer who is a
member of FINRA and registered with the SEC.
trading, one market maker must file a Form
211 with the Financial Industry Regulatory Authority, FINRA,
and make a market in your stock.
A FINRA rule says that
market makers are not supposed to charge any fee for filing a
Form 211. We polled all the market makers listed on Pink Sheets
last year and all of them but one wanted a $10,000 “due
diligence” fee or some such to file the Form 211. Given the
expense and time involved, and the likelihood that filing for a
fraudulent company is a bad reflection on them, we can hardly
blame them for wanting to do due diligence. Other than that, we
believe a market maker should be willing to file a Form 211 if it
believed that substantial business would develop in trading the
stock. Market makers make money mainly on volume.
processes the Form 211 and requires that there be enough
non-affiliated shareholders with free trading stock to make
trading in the stock possible. They do not want this stock to be
concentrated in a few hands.
You will have to document in
detail how this stock was offered and sold and prove that this
was in full compliance with all the securities laws and rules of
the the SEC and the states. This stock has to bought in a bona
fide transaction for investment and not simply gifted to the
You will have to prove that your
company is not a shell as defined in Rule 144. You will have to
show that you are in a bona fide business with assets and at
least be a development stage company.
You will have
to produce a shareholder list from your transfer agent clearly
showing free trading stock and an opinion of your securities
lawyer that this stock is in fact free trading stock and not
FINRA may stop the Form 211 if you have
any connection with unsavory characters or if there is anything
else they do not approve of.
If FINRA does not approve
your Form 211, you have the right to appeal to the SEC. We would
expect that any such appeal is likely to be unsuccessful.
right documentation, getting a proper list of shareholders, and
selecting a market maker are important steps in the process.
144 is a rule that allows investor who have held fully paid for
stock for six months for registered companies (12 months for Pink
Sheet companies) to sell their stock in the public market subject
to certain conditions and restrictions.
you buy a shell company that has ever been a shell under Rule
144, you cannot use Rule 144.
a merger with a company that is not considered a shell company for
purposes of Rule 144 is much preferred. If you are stuck with
stock in a shell company where you cannot use Rule 144, you may
not be able to market your stock.
is further discussed in my blog posting, What
is a Shell Company?
here for the next important section, Self-Registration