In January 2011, Craig blogged on the proposed changes to the definition of accredited investor.  His blog entry can be found here.

Most of us have been using the new definition since January 2011, but on December 21, 2011, the SEC adopted the final rules.  Under the new definition, the value of a person’s primary residence is not treated as an asset for purposes of determining whether the person qualifies as an accredited investor on the basis of having a net worth in excess of $1 million. Correspondingly, borrowing secured by such primary residence, up to the estimated fair market value of the primary residence at the time of the calculation, is not treated as a liability in the net worth calculation. However, any debt secured by a primary residence in excess of the estimated fair market value of the property at the time of the calculation is treated as a liability in the net worth calculation.

The only significant change from the January 2011 proposed rules is that the final rules include a provision addressing the treatment of incremental debt secured by the primary residence that is incurred in the 60 days before the sale of securities to the investor.  If the investor borrows against the primary residence in the 60 days preceding the purchase of securities in the exempt offering, and the borrowing is not in connection with the acquisition of the primary residence, the debt will be treated as a liability in the net worth calculation.

We will be modifying our subscription agreements accordingly.

I have thus far resisted blogging on Facebook’s IPO, but I came across a story that I found interesting and relevant to discussions we have with our public (or about to be public) clients.  The issue is whether or not Mark Zuckerberg should maintain voting control of Facebook after it is a public company.

An article and discussion on the topic can be found here.

Pro-shareholder groups will argue no, that the capital structure of FB was manipulated so that public shareholders have no (or very little) say in who manages the company in which they invest.

Pro-management groups will argue yes, that he is the founder, the vision, and that nobody else is more qualified to be in control than Zuckerberg.  Besides, if you don’t like it, don’t invest.

This ties into a recent decision by the NYSE to limit the agenda items that brokers can vote on without seeking approval from their underlying shareholders.  This is an age old practice, designed to simplify the time and cost associated with obtaining shareholder approval for otherwise routine agenda items at shareholder meetings.  The NYSE is attacking this process by limiting the list of routine items.  Two of these limitations caught my attention:

• majority voting in the election of directors;
• providing for the use of written consent.

 A full discussion of the NYSE rule change can be found here.

What is best?  That is open for discussion.  In our experience, for smaller reporting companies, the time and cost associated with not having a concentration of voting power in the hands of management is viewed as a negative, and we have a variety of structures that we recommend to facilitate the ease with which controlling parties can exercise that power, while still acting in the best interests of their investors.

Often, smaller public companies want to take advantage of majority written consent of their shareholders, and the corresponding use of a Schedule 14C Information Statement, rather than a proxy solicitation and corresponding Schedule 14A Information Statement.  This can be done when one party, or a small number of parties, owns enough voting securities of the issuer to approve the desired action.  There are significant benefits to doing so, not the lease of which is time and cost.

But how many shareholders can an issuer approach, and ask to approve the pending corporation action, before it becomes a solicitation?  There is no published guidance from the SEC as to the number of people that may be contacted by management before such contact is considered a solicitation.  However, in the past, we have successfully argued the following:

1.  Rule 14a-2(b)(2) sets forth an objective number of contacts in the context of solicitations other than on behalf of the issuer, and indicates that not more than ten (10) is an appropriate number.  This number may be analogous to the situation described above.

2.  The relationship between the consenting shareholders and management of the issuer.  If the shareholders are in regular communication with management, and have access to management to ask questions, then contact between the two would not necessarily be only to seek approval for the contemplated action.

3.  The number of shareholders consenting as a percentage of the number of overall shareholders can be a factor.

What is the maximum number that is allowed?  Like many things, it depends.

We have written and blogged extensively about the increased scrutiny being put on broker-dealers when acting as a placement agent for Regulation D offerings.  See here.  We recently completed an assignment as due diligence counsel for a broker-dealer, and I am very pleased with the outcome.  We improved the offering by identifying several red flags that the issuer subsequently addressed, and ultimately both the issuer and our client were more comfortable, and dare I say more confident, in the quality of the offering.  I don’t have a way to measure this, but I suspect that the increased confidence will be reflected in the investor meetings, and may help the offering be more successful.  We start another similar assignment this week.

Update:  On November 2, 2011, the House passed H.R. 1070 by an overwhelming 421-1 vote.  The bill has been referred to the Senate.

As many practitioners know, one of the problems with a Regulation A offering is that you not only have to submit to a review of your offering materials by the SEC, but you also have to submit to a review of your offering materials by every state in which you intend to offer the securities.  Some states are competent and helpful, while others are….not.  In our experience, state review (coupled with a relatively small offering limit of $5 million) has historically made Reg A offerings unattractive.

That may be changing.  As many of you know, in March, Rep. Schweikert (AZ) introduced H.R. 1070, the Small Company Capital Formation Act of 2011.  The bill is most widely known for its proposed increase in the offering limit for Reg A offerings from $5 million to $50 million.  A summary of the original proposal can be found here.  But, of recent note, in June the bill underwent a markup session in the House, and a new proposed section 6 was introduced as follows:

‘‘(6) EXEMPTION FROM STATE REGULATION.— Any securities exempted under this subsection that are offered by any means other than through a broker or dealer shall not be covered securities with in the meaning of section 18(b) or exempt from State regulation under section 18(a).’’.

The proposed section 6 would presumably treat Reg A offerings just like Rule 506 offerings are treated at the state level.  States can’t regulate them, they can only require notice and collect a fee.  As you might imagine, state regulators do not favor section 6.  See here, and here.

The bill is pending a vote by the House Committee on Financial Services.  We will continue to keep you updated.

FINRA Rule 6490 requires that corporations whose securities are trading on the over the counter market (OTCQX, OTCQB, OTCBB or PinkSheets) timely notify FINRA of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes.  The Rule grants FINRA discretionary power when processing documents related to the announcements, and implements fees for these services. 

On November 11, 2011, Brian blogged about the fact a great deal of uncertainity (and delay) had entered the FINRA Rule 6490 process and that more was unknown about the FINRA review process than was known.  This week Brian spent about 15 mintues taking with a FINRA “analyst” about the 6490 review process and here is what we learned:

1)  The analyst does an initial review of the paperwork, requesting additional documentation when necessary.  This process typically take about 1-2 weeks after the 6490 application is submitted. 

2)  From there, the file goes to a legal review (this is new) and they look for anything and everything about the issuer from all available sources.  This review includes Google searches of the company, its management, chat rooms, the company’s web site, a review of trading activity, a review of all recent press releases for false statements, etc.  Basically, asking for any corporate action (name change, stock split, etc.) you are opening yourself up for a full review of anything to do with the company’s trading market.   

3)  After the legal review, they may have questions, or request additional documents, etc.  And you go back and forth until you satisfy them.  There are no guaranteed timelines, and no guarantee that anything gets approved. 

Not learned from the telephone call, but from recent experience, is that this process is now taking several weeks, and many times months, and the coordination between the issuer’s filing of their amended or restated Articles of Incorporation with their state of incorporation and the FINRA approval timeline is becoming increasing difficult, if not impossible, to properly coordinate leaving many companies with a corporate action effectuated with the state, but not with FINRA, which can cause confusion.  There are some things that can be done to coordinate the process so make sure you have competent legal counsel and plan ahead accordingly.

Rule 6490 (Processing of Company Related Actions), was approved by the SEC and effective on September 27, 2010.  The rule requires that corporations whose securities are trading on the over the counter market (OTCQX, OTCQB, OTCBB or PinkSheets) timely notify FINRA of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes.  The Rule grants FINRA discretionary power when processing documents related to the announcements, and implements fees for these services.

I first blogged on this in July 2010, and provided an update in August 2010 after I had successfully completed a corporate action in a reasonable period of time.   My blog can be found here.  Times have changed.

I have heard from several issuers in the last week who are embroiled in a 6490 review, and I’m involved in one myself.  FINRA is taking a very long time to review corporate actions, and is providing very little information to issuers about the timetable or status.  My current client provided full and complete documentation over 3 weeks ago, and I have heard horror stories of issuers in review for months.  The customary email message seems to be:

“This file has been escalated for further review by management pursuant to Rule 6490. I will provide a status update when applicable. At this point I have no further information to provide.  Thank you for your patience during this review process.”

and the following footer in emails:

“Please be advised that FINRA Rule 6490 (Processing of Company-Related Actions) has been approved by the Securities and Exchange Commission.  The Rule clarifies FINRA’s scope of authority when processing documents related to Announcements for Company-Related Actions for Non-Exchange Listed Securities and to implement fees for such services. Additional information regarding this rule can be found on the following links:

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9364

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p121988.pdf“

Unfortunately for issuers, the timeline to complete a name or symbol change, or stock split, is now more unknown than known.

UPDATE:  My clients name change went effective 76 days after we first filed our 6490 filing.

Form 15 is a simple form.  It’s one page, and requires only that the issuer check at least one of the five boxes.  However, there are complicated conditions to the use of Form 15, and the consequences of the filing are often misunderstood.

Background

           For a variety of reasons, many issuers no longer want to be a reporting company, subject to the requirements of the ’34 Act.  Most issuers, their management, and their counsel are aware that filing a Form 15 is a common way of exiting the system.

Form 15 serves two distinct purposes.  Its title is

CERTIFICATION AND NOTICE OF TERMINATION OF REGISTRATION UNDER SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR SUSPENSION OF DUTY TO FILE REPORTS UNDER SECTIONS 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

           The form can be used to either as a (a) certification and notice of termination of registration under Section 12(g) of the Securities Exchange Act of 1934, or as a (b) suspension of duty to file reports under Sections 13 and 15(d) of the Securities Exchange Act of 1934.

Section 15(d) Filers

           There are two common scenarios whereby an issuer begins filing ‘34 Act reports with the SEC.  One is pursuant to Section 15(d), which applies when an otherwise non-reporting issuer files a ‘33 Act registration statement.

           The following is a quote from SEC Staff Legal Bulletin No. 18:

When an issuer’s registration statement under the Securities Act of 1933 becomes effective, Section 15(d) requires the issuer to file the reports required by Section 13(a) of the Exchange Act with respect to each class of securities covered by the registration statement. As the Commission has explained, the purpose of periodic reporting under Section 15(d) is “to assure a stream of current information about an issuer for the benefit of purchasers in the registered offering, and for the public, in situations where Section 13 of the Exchange Act would not otherwise apply.” The issuer must continue to file these reports until the Section 15(d) reporting obligation for each class of securities is suspended.

The Section 15(d) reporting obligation is suspended while a class of securities is registered under Section 12 of the Exchange Act. In addition, there are two other ways in which a Section 15(d) reporting obligation may be suspended. First, Section 15(d) provides for an automatic statutory suspension of this reporting obligation if, on the first day of any fiscal year other than the fiscal year in which a Securities Act registration statement became effective, there are fewer than 300 record holders of the class of securities offered under the Securities Act registration statement. Second, an issuer may seek to avail itself of the suspension provided by Rule 12h-3 at any time during the issuer’s fiscal year if it meets the conditions of the rule.

In order to rely on Rule 12h-3, the issuer:

• must be current in its Exchange Act reporting obligations;
• must have (1) fewer than 300 record holders of the class of securities offered under the Securities Act registration statement; or (2) fewer than 500 record holders and its assets must not have exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years; and
• must not have had a Securities Act registration statement relating to that class of securities become effective in the fiscal year for which the issuer seeks to suspend reporting, or have had a registration statement that was required to be updated by Section 10(a)(3) of the Securities Act during the fiscal year for which the issuer seeks to suspend reporting, and, if the issuer is relying on the fewer than 500 record holder and $10 million in assets threshold noted above, during the two preceding fiscal year.

It is this last requirement, contained in Rule 12h-3(c), that has prompted issuers to seek no-action relief from the staff.

In order to avail itself of the suspension provided by Rule 12h-3, the issuer must also file a certification of termination on Form 15. If the certification of termination on Form 15 is subsequently withdrawn or denied, the company must file all reports that would have been required if the Form 15 had not been filed. Similarly, if in the future the issuer no longer satisfies the requirements under which it was able to cease reporting under Section 15(d), the suspension ends and the reporting obligation returns without any action by the issuer.

           Therefore, if an issuer is filing ‘34 Act reports with the SEC because it had a ‘33 Act registration statement declared effective at some point in the past, that has not been suspended, and thus is required to continue to file ‘34 Act reports under Section 15(d), then yes, the issuer must be current in its ‘34 Act filings before it can be relieved of that duty by filing a Form 15.  In this scenario, the issuer is relying on Rule 12h-3 and should check the corresponding box on the Form 15.

           The issuer’s ‘34 Act filing obligations are suspended immediately upon filing the Form 15, but if for some reason the Form 15 is denied by the SEC, the issuer has 60 days to file with the Commission all reports which would have been required if such certification had not been filed.

Rule 12(g) Filers

           The second common scenario is when an issuer voluntarily files ‘34 Act reports pursuant to Section 12(g).  This arises, for example, when an issuer has filed a Form 10 registration statement that has been declared effective at some point in the past.  This also arises when, following the effectiveness of a ‘33 Act registration statement, the issuer files a Form 8-A, which bridges the gap between Section 15(d) and Section 12(g).

           Note that there are situations where an issuer is required to file ’34 Act reports pursuant to 12(g), the commonly known “500 shareholders and $10 million in assets” rule.  If an issuer is required to file ’34 Act reports because of this rule, then they are not eligible to file a Form 15 at all.

           Therefore, if an issuer is filing ‘34 Act reports with the SEC pursuant to a Section 12(g) obligation, then no, the issuer is not required to be current in its ‘34 Act filings before it can be relieved of that duty by filing a Form 15.  In this scenario, the issuer is relying on Rule 12g-4 and should check the corresponding box on the Form 15.

           The issuer’s ‘34 Act filing obligations are suspended immediately, but the Form 15 doesn’t actually take effect until 90 days after it is filed.  This means that the issuer is still subject to Section 12(g), and thus is a reporting company, during those 90 days.

15(d) or 12(g)?

           How do you know if an issuer is filing ’34 Act reports under Section 15(d) or Section 12(g)?  The easiest way is to review the issuer’s edgar filing history and look for registration statements.  If there are ’33 Act registration statements (such as an SB-2 or S-1), but no ’34 Act registration statements (such as a Form 10 or 8-A), then the issuer may be filing pursuant to Section 15(d).  If there is a Form 10 or 8-A, then the issuer is likely filing pursuant to Section 12(g).  The other way to tell is by the issuers filing number.  A filing number that starts with “33” is a ’33 Act number, and means the issuer is probably filing pursuant to Section 15(d).  In the alternative, a filing number that starts with “000” is a ’34 Act number, and mean the issuer is probably filing pursuant to Section 12(g).

 * * *

           The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate and securities law matters.  Please contact us if you have any questions.

           Brian A. Lebrecht, Esq. is an attorney with The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah.  He can be reached at (801) 983-4948 or via e-mail at blebrecht@thelebrechtgroup.com with questions or comments.  Please visit our website at www.thelebrechtgroup.com for future updates and other information.

We are pleased to announce that The Lebrecht Group, APLC has been selected to be included in the 2011 – 2012 U.S. News – Best Lawyers^® “Best Law Firms” rankings.  TLG will be included in the 2012 edition, in Tier 2, in the specialty of Securities and Capital Markets Law.

“This is the first year that our firm as a whole, rather than individual attorneys, received recognition in the Best Lawyers rankings,” said Brian A. Lebrecht, President of The Lebrecht Group, APLC.  “This ranking also recognizes our achievements in a second major area of practice, securities and capital markets, which adds to our prior recognition in mergers and acquisitions law.  These rankings are important to us, and our clients, because law firms are ranked based on feedback from clients and other lawyers.  Law firms can’t buy their way onto this list.”

In addition to this recognition, for seven consecutive years, Brian A. Lebrecht has been selected as one of the Best Lawyers in America in the specialty of Mergers and Acquisitions Law.

For the law firm rankings, clients were asked to provide feedback on firm practice groups, using a scale of 1 (weakest) to 5 (strongest), addressing expertise, responsiveness, understanding of a business and its needs, cost-effectiveness, civility, and whether they would refer another client to the firm.  Lawyers not associated with the firm voted on expertise, responsiveness, integrity, cost-effectiveness, whether they would refer a matter to a firm, and whether they consider a firm a worthy competitor.

The national first-tier rankings will be featured in U.S. News & World Report’s Money issue, on newsstands November 15, 2011; the national and metropolitan first-tier rankings are featured in the “Best Law Firms” standalone publication, which is being distributed to 30,000 general counsel and in digital format to 58,000 private practice lawyers worldwide; the rankings in their entirety are posted online at http://bestlawfirms.usnews.com.

Full data for the law firms that received rankings is available online, from the largest firms in the country to hundreds of one-person and two-person law firms, providing a comprehensive view of the U.S. legal profession that is unprecedented both in the range of firms represented and in the range of qualitative and quantitative data used to develop the rankings.  Achieving a high ranking is a special distinction that signals a unique combination of excellence and breadth of expertise.

The mission of “Best Law Firms” from the start has been to help guide referring lawyers and clients – from the country’s largest companies needing corporate legal advice to individuals needing to get a divorce or write a will – issues that have a bet-the-company implication (in the case of a corporation) or a potentially life-changing result (in the case of an individual).

“U.S News has more than two decades of experience in providing the public with the most accurate and in-depth rankings of a wide range of institutions, including our Best Law Schools rankings,” says Tim Smart, Executive Editor of U.S. News & World Report. “Law firms are an integral part of our rankings and a natural accompaniment to the law schools rankings.”

The Lebrecht Group, APLC is a corporate securities law firm with offices in both Irvine, California and Salt Lake City, Utah.  For additional information please visit the firm’s website at www.thelebrechtgroup.com.

In October 2001 I agreed to join Brian at The Lebrecht Group and take a run being a part of something big at a small firm.  At the time the firm was in its infancy with Brian having just founded the firm earlier in 2001.  At the time I joined the firm I had one client, the company I had just left to take my job at The Lebrecht Group.  The road to how I, and this firm, got to where we are today is filled with stories, companies, projects and people that, at times, defied belief.  Many of you wouldn’t believe me if I told you.  Suffice to say that the micro-cap world can have some very interesting people, companies and ideas.  Through it all I have learned a great deal about what makes a law firm successful for its employees, clients and other contacts; and, most importantly, what makes this firm what it is today.  There are many contributing factors, including Brian’s unrelenting and unmatched work ethic and desire to make this firm all it should be and more, a wealth of talented service providers that we share clients and projects with on a regular basis and graciously refer us their clients’ corporate and securities law matters, an unwavering ethical responsibility to serve our clients in the best manner possible (even if they don’t always like what we have to say), and more than a little bit of luck along the way.  However, even more important than those factors is the primary factor that has made this firm successful, and that is our clients.  Without those the other things are great ideological ways to run a firm but would fall on deaf ears as we would not be here without our clients who trust us to timely and skillfully navigate their various transactions and assist in planning their futures.  So it is with great thanks to our clients, referral sources, service providers, and many, many others that I can say – what a great 10 years and here is to next 10.