After your S-1 Offering has cleared the SEC and your 15c2-11 has cleared FINRA and you receive your Symbol, and the company is quoting on the OTCQB and/or the OTCBB, there is much that the officers of the company need to be aware of in order to abide by all of the SEC rules and regulations and stay out of trouble. IT IS ALWAYS WISE TO HAVE A GOOD SEC EXPERIENCED ATTORNY TO GUIDETHE COMPANY.
Filing the necessary annual and quarterly reports ( the “10K” and “10Q”) on time, is, of course. a must. These documents must be correct and meet all of the requirements of each filing.
Other filings with the SEC could be filings that reflect any major change in the company such as new officers, signing of contracts, change of control, anything negative that might have happened to the company, the sale of un-registered securities, etc. Numerous activities of the company could require an 8-K or another type of filing. If in doubt, always consult your attorney
Filing Reports to the SEC – Forms 10K, 10-Q, 8-K - A negative of being a public company is the time and cost incurred in filing the required reports and Forms that are required by the SEC. While we will address here only three of the types of filings that are required of a public company, there are many more. Consult you legal counsel about required filings.
Every public company that quotes on an exchange or quoting service, except for the Pink Sheets must file a Form 10K report for their year end and a Form 10Q report quarterly with the SEC. These reports are usually completed and filed by the corporate attorney, and are posted on EDGAR (see “EDGAR”)
The purpose of these filings is so that investors can have accurate and current information on the company. The 10K is much more in depth, with more information about the company and must have audited financial statements. The Form 10-Q contains a lot less information and need not have audited financial statements.
There are other documents containing information about actions of the company that might need to be filed with the SEC. It is vital that a public company has counsel that is experienced in making such filings and will see that the documents are filed accurately and on time. Late filings can cause the company difficulties, including being kicked off of the OTCBB and OTCQB into the Pink Sheets. Most, but not all documents that are required to be filed with the SEC will be placed on EDGAR.
Another filing that may be required is the 8-K, which only covers specific information about the company that has recently happened.
FORM 10-K - Form 10-K is an annual report that is required by the SEC to be filed at the fiscal year end of a reporting company. The 10-K contains a more comprehensive summary of the company’s activities over the past year. A 10-K is called an annual report, however, it is not the same as an annual report that might be printed by the Company and distributed to shareholders. As is all other Forms filed with the SEC, the 10-K is posted on EDGAR for the whole world to view. The 10-K includes such information as company history, organizational structure, executive compensation, equity, subsidiaries, audited financials, any sale of securities, and other pertinent information. Some 10-Ks contain risk factors. The accuracy of the Form 10-K and Form 10-Q must be certified accurate by the principal executive officers of the company. An attorney with strong experience in such filings should be the one to prepare the filing of the 10-K. Also an experienced and qualified accountant should do the audits for the company and, after approval of the company of the audits, submit the financials to the legal counsel for submission into the 10K. It should be noted that all of the financials mentioned in the 10-K must be XBRL tagged. (see “XBRL”)
FORM 10-Q - While the Form 10-K is filed one time in the year, (after the fiscal year end of the company) the Form 10-Q is filed for each quarter of the year, (based on the fiscal year end of the company)
The 10-Q contains certain information on the company showing the company’s performance and other information, but not near as much as the 10-K. The 10-Q contains un-audited financial statements. The 10-Q is due 45 days after each of the first three fiscal quarters of the company. There is no filing of the 10-Q after the fourth quarter because the 10-K will be filed then. The 10-Q is also filed on EDGAR for all to see. The financial information in the 10-Q must also be XBRL tagged.
Form 8-K - The Form 8-K has broad uses but is primarily used to notify investors of any material event that is important to shareholders or to the SEC. The Form 8-K is one of the most common forms filed with the SEC. The Form 8-K will discuss any significant happenings of the company, such as bankruptcy or the departure of an executive officer or election of a director. Some other things that could trigger a 8-K might be asset movement, delisting or transfer exchange notices, sale of unregistered stock by the company, and the change of the company accountant. There are many other situations that require a filing of the Form 8-K.The company attorney should always be informed about any significant happenings of the company.
It is important to note that a Form 8-K is required to be filed with the SEC by a public company within four business days of the event.
Restricted Securities - Selling Under Rule 144 Restricted Securities are securities (stock) that has not been registered through some form of registration statement filed with the Securities and Exchange Commission (SEC) and therefore cannot be sold “over the counter”.
A restricted security (the stock certificate) will usually have a “legend” stamped or printed on it that states that the security has not been registered and can only be sold by complying with Rule 144 of the Securities Act of 1933.
However, restricted securities may have the legend removed and the stock can then be sold over the counter under certain circumstances.
One factor might be that a security has been held by the owner for at least one year, provided that the issuer of the securities satisfies the “current public information” requirements (the company filed reports with EDGAR) of the Rule. Also that and no more than 1% of the outstanding securities of the issuer are sold in any three month period and the seller does not arrange or solicit buyers for the securities in anticipation of or in connection with the sale transactions. The seller may not make any payment to anyone in connection with the sales transaction except the broker dealer who executes the trade or trades of the securities. The shares must also be sold in a “brokers” transaction only, and the seller file a notice on Form 144 with the Securities and Exchange Commission at or prior to the sales transaction. The seller must have a bona fide intent to sell the securities within a reasonable period of time of the filing.
After a two year period of time has lapsed, assuming the holder of the securities is not an “affiliate of the issuer, unlimited number of sales can be made without further compliance within the provisions of Rule 144.
There are other restrictions on selling unregistered stock under Rule 144. For example, the Securities and Exchange Commission issued a letter in 2000 that basically stated that any securities issued when a company was a “blank check” company cannot be considered “free trading” without registration. (see “Worm-Wulff Letter”)
Stock Power –A “Stock Power” is a power of attorney, signed by the owner of the stock, which allows the current owner of a stock to transfer ownership to another party. An owner of a stock can transfer ownership to another person, a bank, brokerage firm, or a business. A stock power may also be used if a stock is pledged as collateral for a loan.
A stock power must have the signature of the owner of the stock with the signature guaranteed. Usually, in the United States, the signature guarantee is done with a Medallion Guarantee. (see “ Medallion Guarantee)
A sample of a stock power is below. The information underlined is what is usually filled in. Note that some lines are usually left blank to be filled in by the Transfer Agent.
For Value Received, John C. Jones does hereby sell, assign and transfer unto _________________________________________________________________ and/or assigns, Five Hundred (500) shares of Common Stock of , Acme Widget Company, Inc. (Acme Widget Company, Inc.) standing in the name of John C. Jones on the books of said Corporation, represented by Certificate No. 412.. John C. Jones herewith and does hereby irrevocably constitute and appoint ____________________________________________________________________ Attorney, to transfer the said stock on the books of the within named Company with full power of substitution in premises. Dated _______________________________________ John C. Jones
Signature _____________________________________ Important - Read Carefully This Stock Power must have a Medallion Guarantee.
Medallion Guarantee – A “Medallion Guarantee” tells a transfer agent that the signature on a stock certificate or stock power is indeed that of the owner of the stock.
A medallion guarantee is usually issued by a bank sometimes a credit union or a stockbroker. Because of the liability in issuing a medallion guarantee is normally only issued to customers of the bank. If your bank does not issue the medallion guarantee, it may be difficult to get one. If you have a need to produce a Stock Power, you should check with your bank to see they will issue the Medallion Guarantee.
The medallion guarantee is backed by a bond and protects the issuer of the security and their Transfer Agent from fraudulently transferred securities.
Therefore, if a company has shareholders in other countries that desire to sell their stock, they must produce a stock power with a signature guarantee that will be accepted by the Transfer Agent. Each country does have their particular agency that can guarantee a signature. It could be something similar to what is equivalent to a Notary public, or justice of the piece in the U.S..
NOBO List - A “NOBO” list is a list of beneficial shareholders of a corporation that will show the Non-Objecting shareholders of a corporation that is held in “street Name”. Beneficial shareholders are broken into two categories. These are Objecting Beneficial Owners (OBOs) and Non-Objecting Beneficial Owners (NOBOs). The NOBO list would show those shareholders that do not object To the issuer knowing their name, mailing address and number of shares they own. The NOBO is usually produced by the brokerage firm that holds the shares of the shareholders in “street name” or in the name of the brokerage firm.
Footnote 32 – Footnote 32 is part of the Securities and Exchange Commission (SEC) rule making that was passed in 2005. The rule involved shell companies and provided a clear definition of a shell company. The rule defined a shell company as one with no or minimal operations and/or nominal assets (other than cash). (see “Shell Company”)
The SEC sometimes looks at shell companies as those created to bypass the SEC’s Rule 419 that places restrictions on public offerings of shell stocks.
The major problem exists involving Footnote 32, when a company filed a registration statement with the SEC, became a public company, and while the company declared in the registration statement that they had a business or a business plan and was not a shell, the company does nothing whatsoever toward their proposed business, but perhaps immediately after becoming publically traded, seeks a merger of their company with a private company. It is therefore possible that since the company declared to the shareholders in their offering memorandum that that the company was going to do a particular business and did nothing whatsoever toward that business, that that they, in fact, lied to the shareholders. This situation can cause the SEC to take various and serious actions, including stopping trading on the stock of the company. More serious action may be taken against the officers of the company.
"We have become aware of a practice in which the promoter of a company and/or affiliates of the promoter appear to place assets or operations within an entity with the intent of causing that entity to fall outside of the definition of blank check companies in Securities Act Rule 419. The promoter will then seek a business combination transaction for the company, with the assets or operations being returned to the promoter or affiliate upon the completion of that business combination transaction.
"It is likely that similar schemes will be undertaken with the intention of evading the definition of shell company that we are adopting today. In our view, when promoters (or their affiliates) of a company that would otherwise be a shell company place assets or operations in that company and those assets or operations are returned to the promoter or to its affiliates (or an agreement is made to return those assets or operations to the promoter or its affiliates) before, upon completion of, or shortly after a business combination transaction by that company, those assets or operations would be considered 'nominal' for purposes of the definition of shell company."
“Street Name” – “Street Name” refers to stock that is held electronically in the name of a stock broker or a bank account rather in the name of the individual owner of the shares. The individual owner of the stock is referred to as the “beneficial owner”. If you take a stock certificate to a broker to be sold, that broker transfers the paper certificate into an electronic form and is referred to as being held in “street name”. The broker may not even hold the physical certificate, but hold them in electronic form.
Three main reasons that this is done:
1. Convenience – in order for the securities to be easily and readily transferred between parties, it is much more convenient for brokers to carry securities in their name. Thus, the broker does not have to locate the exact certificates that you desire to sell and deliver to the buying party who would then have to send the stocks back to the company to have the name on the certificates changed to the new owners’ names. By doing so electronically, the broker saves a great deal of time and effort and expedites the payment for the shares. Holding the shares in “street name” allows the broker to avoid most delays associated with the transfer of ownership and quickly settle trades.
2. Safety – There is always the possibility that if a broker is holding the physical certificates, of the certificates being damaged, lost or stolen. By holding the stock in “street name” brokerages are able to retain the securities electronically, effectively reducing the probability of anything bad occurring.
3. Secrecy - Because the shares are held in the name of the stockbroker, (“street name”) the name of the beneficial owner does not appear on the share register held by the transfer. This, no one except the stockbroker can identify the actual owner of the shares. Any notices or correspondence that would usually be mailed to shareholders are sent to the stockbroker. The stockbroker may be holding shares for a number of clients, and it is the responsibility of the stockbroker to forward any notices or correspondence to the beneficial owner. Most often, the shares in street name are held by Cede & Co.
Cede & Co. is the nominee name for the Depository Trust Company, a large clearing house that holds shares in its name for brokers, banks and institutions in order to expedite the sale and transfer of stock.. (see ”Depository Trust Company”)
Lost Certificate Afidavit –If a stock certificate is lost, stolen or destroyed, the owner of that certificate must then get an “Affidavit for Lost Certificate”, have it notarized, and send it to the Transfer Agent of the Company, along with the proper letter stating that the particular certificate has been lost, stolen or destroyed, and request to have a new certificate issued. The Affidavit must be completed and then have the signature notarized. Upon receipt of the Lost Certificate Affidavit, and the satisfaction that the information is correct, the Transfer Agent will then cancel the lost certificate on the records of the corporation and issue a new certificate to the owner.
Upon the cancellation, of the lost certificate, if that certificate turns up it will have no value and cannot ever be sold or sent to the Transfer Agent for reissue.