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Bull’s-Eye: Regulators Are Hunting.
Is Your Company A Target?
(Many Smaller Public Companies Feel As If Regulators are Breathing Down Their Necks, are They?)
As an attorney that works with many smaller public companies, and the providers that service them, I have a good feel for what concerns smaller public companies. Unlike in years past, many smaller public companies are feeling like targets, proverbial ducks in a pond, with regulators and others taking aim from close range to pick them off one at time by promulgating new regulations, regulatory warnings, or just flat out filing actions to deregister their securities, with the goal to rid the markets of certain types of smaller public companies. So, is this feeling based in fact or merely an over-active imagination? Well, unfortunately, like many nagging feelings, there is a reason some types of companies feel like they are being scrutinized and/or possibly being regulated out of existence – they are. This article explores the situations of three different types of companies that are feeling the heat by looking at the increased scrutiny and regulation they are facing. Please note, not all companies are the same and some companies that fit in one or more of these categories may not be feeling any of the heat felt by others, but this article is what the majority of the companies with the specific attributes listed below may be feeling based on my interactions with the companies and their service providers. Also, this article uses the terms regulators and regulations broadly. Technically some of the oversight entities are not regulators and the scrutiny being felt isn’t always technically a “regulation,” but instead a policy shift or merely intense scrutiny. However, what the three types of companies have in common is the need for qualified, experienced service providers (attorneys, auditors, IR/PR, etc.) advising the companies on the ins-and-outs of the different regulations and how to navigate the increased scrutiny successfully to obtain their objective.
Target 1: Shell Companies
Targeting shell companies is nothing new. Obviously shell companies have been around for decades, as have the regulations that govern them; however, in the past 2-3 years those regulations have greatly increased. In October last year I authored an article focusing on the new landscape facing shell companies and shell transactions (http://www.thelebrechtgroup.com/index.php/publications/tlg-publications/218-shell-transactions-revisited) but it is worth mentioning again the primary challenges facing shell companies from the SEC and others.
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Target 2: Reverse Mergers
Where to begin? It might be easier to list the agencies and authorities that are not targeting reverse merger transactions and companies rather than those that are. With the SEC, DTC, PCAOB, and clearing firms all targeting reverse merger companies in different ways the reverse merger process has become fraught with pitfalls. Finding qualified, experienced service providers to assist companies through this regulatory jungle is crucial.
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Target 3: Penny Stock Companies
This may seem like a broad category since technically a “penny stock” company is just a company whose stock price is less than $5 (a simplistic definition), but it is worth noting some of the changes in the industry are affecting all smaller public companies, regardless of size (at least that fall into the “penny stock” category). First, one need look no further than trying to deposit a stock certificate for a penny stock with a broker to see how much the industry has changed. You will quickly realize after receiving a 15 page application and a request for $300 to $500 to open an account (and possibly a legal opinion even though the stock has no restrictive legend) that things are not as easy as they once were in the penny stock world. Second, lengthy applications and broker fees are an understandable reaction to increased regulatory scrutiny, however, in June of this year, Penson, the clearing firm that services the majority of brokers that specialize in penny stock companies, announced a new policy that it would not process deposit requests from the brokers it services for any over-the-counter traded company whose stock trades at $0.10 or less, and it would not submit DTC-eligibility requests for any over-the-counter public company whose stock trades at $0.10 or less. The effect of this change is that it greatly limits the brokers where shareholders of penny stock companies that trade at $0.10 or less can deposit the stock of the company. This serves to not only greatly limit those companies ability to raise money, but also puts them in a bad light with their existing shareholders that have difficulty finding a broker to deposit their shares.
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