Alternatives To Going Public – Private Company Financing Options
Many companies seek to go public as a source of obtaining capital financing. In order to make the most intelligent decision private financing options should also be considered.
Section 4(2) of the Securities Act of 1933, as amended (Securities Act) provides a broad based exemption for “transactions not involving any public offering.” The SEC has promulgated several Safe Harbor rules under Section 4(2) the most well known being Regulation D. The three private placement exemptions in Regulation D are Rule 504, 505 and 506, the difference being based on the size of the offering, the number and qualification of investors and restrictions on advertising and resale of the securities. Other than in certain instances under Rule 504, securities issued in a private placement are restricted and may not be resold unless they are registered or an exemption exists (such as Rule 144).
Briefly, Rule 504 allows a non-reporting public or private company to raise up to $1,000,000 from any number of individuals, which individuals do not need to be accredited. Rule 504 requires that the Issuer comply with applicable state law regarding the exemption. Each states rules and regulation vary widely and accordingly, relying on this exemption is only cost effective if the offering is limited to one or a small number of states.
Rule 505 allows an Issuer to raise up to $5,000,000 in a 12 month period, from up to 35 unaccredited investors and an unlimited number of accredited investors. Like Rule 504, an Issuer must comply with a complex and varying set of different state laws when relying on this exemption. Over the years this exemption has been used rarely.
Rule 506 allows an Issuer to raise an unlimited amount of capital form any number of accredited investors and no more than 35 unaccredited “sophisticated” investors. Sophisticated, in this case, means that the investor must have adequate experience in financial and business matters to understand the investment being made and the risk involved. Rule 506 offerings are guided by federal law which federal law pre-empts individual state requirements. However, individual states can require that an Issuer make minimal filings (a copy of the Form D filed with the SEC and a consent to service of process) and can require the payment of a fee.
Section 3(1)(11) of the Securities Act and Rule 147 promulgated thereunder provides an exemption from registration of securities as long as the Issuer is incorporated in the state where it offers the securities; conducts a significant amount of its business in that state; and makes offers and sales only to residents of that state. Federal law imposes no limits on the size of the offering, or the number or qualification of the investors, however, an Issuer must abide by the laws of the particular state it is making the offering in, which laws may impose such restrictions.
Regulation A is promulgated under Section 3(b) of the Securities Act, which Section allows the SEC to formulate exemptions for small public offerings under $5,000,000. Like a larger public offering, the Issuer must file a prospectus with the SEC and clear comments prior to embarking on the offering. However, unlike a larger public offering, following the effectiveness of the registration statement, the Issuer is not subject to any ongoing reporting requirements. Moreover, the Issuer has the option of remaining “private” or seeking to have their securities traded on the over the counter market.
There are many venture capital firms, angel investors, and private investor groups looking for ground floor opportunities with new business ventures. However, generally these investors seek large equity positions with a Company and often participate in management and operations of the Company.
This type of financing is more typical and similar to bank financing with higher costs and interest rates.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance, LLC for a free initial consultation or second opinion on an existing matter.
« The End Of An Era; The OTCBB Has Been Replaced By The OTCQB Potential Liabilities In The IPO Process »
The End Of An Era; The OTCBB Has Been Replaced By The OTCQB
A few months ago I wrote an article predicting that the new “OTC Markets,” formerly known as the Pink Sheets, and it’s OTCQX and OTCQB quotation tiers were replacing the antiquated, formerly FINRA-run OTCBB. Current events add further evidence to this view. Recently, more than 1000 Companies which were trading on both the OTCBB and OTCQB were delisted from the OTCBB and now trade exclusively on the OTCQB tier of the OTC Markets. These entities are quickly becoming known by their new moniker, OTCQB Companies.
The Investment Banking firm of Rodman & Renshaw acquired the OTCBB from FINRA last year.
An OTCBB By Any Other Name
For more than a year leading up to this large scale, mass delistment, it has been impossible to decipher between an OTCBB Company and a Reporting Pink Sheet Company when viewing the OTC Markets website. Both entities appeared under the heading of “OTCQB.” It was essential to reference other source material in order to make the distinction.
The now privately owned and operated OTCBB quietly delisted approximately 1,000 fully reporting and current, public companies from its quotation medium, initially citing “failure to comply with Rule 15c2-11”. Subsequent delistments cited “Ineligible for quotation on OTCBB due to quoting inactivity under SEC Rule 15c2-11.”
Delistments Means Little to Nothing
Most, if not all, of these companies did not receive notice of their “delisting”. Moreover, most, if not all, of these companies still do not know that they are no longer OTCBB quoted companies. In fact, the change has had little if no impact on these companies and will likely not have future impact. Each of these companies continue to be quoted on the OTCQB on the website for OTC Markets.
Issuer Reporting Obligations
Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC. Although the entire Over the Counter is regulated by the SEC and FINRA, the OTC Markets and the OTCBB are both now privately owned and merely serve as quotation mediums. However, and most importantly, the OTC Markets is more user friendly and factually up to date and accurate than the website for the OTCBB. So, if all Over the Counter quotes can be found at www.otcmarkets.com and companies trading on the OTCQB have the exact same standards as the OTCBB, and FINRA is no longer directly associated with the OTCBB, is there any reason for the OTCBB to even exist?
The fact sheet on www.otcmarkets.com has this to say regarding OTCQB quoted securities:
“With over 94% of all market maker quotes in OTC securities published on OTC Markets Group’s platform vs. 6% on the FINRA BB, it is important that OTC Markets Group provide a separate designation to identify OTC-traded companies that are U.S. registered and reporting. OTC Markets Group has launched the OTCQBtm marketplace to help investors easily identify SEC reporting companies and regulated banks that are current with their disclosure obligations.”
In summary, the curtains have closed on the OTCBB in name only and its business as usual for the new OTCQB.
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance. LLC for a free initial consultation or second opinion on an existing matter.
Alternatives To Going Public – Private Company Financing Options »