Guide to Going Public and Uplisting for Companies
This guide outlines the steps and requirements for a company to go public and uplist, including SEC filings, shareholder requirements, and compliance with the Investment Company Act. It also covers the use of subsidiary entities to shield liability. Disclaimer: Information provided for informational purposes only.
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Steps and Requirements for a Company to Go Public and Uplist; Related Rules and Investment Company Act Issues DAVID M. LOEV, THE LOEV LAW FIRM, PC DECEMBER 15, 2018
2 Disclaimer This information is provided for informational purposes only by David M. Loev, of The Loev Law Firm, PC. This presentation shall not constitute legal advice, nor does it create an attorney-client relationship. The laws referenced in this presentation may have changed or could be affected by case law developments. Neither Mr. Loev, nor The Loev Law Firm, PC, warrants this information for any purpose. Do not rely on this presentation or your interpretation of same for any purpose. If you have a legal question you should consult with The Loev Law Firm, PC, directly, or another properly licensed lawyer.
3 Summary of Issues Presented This presentation briefly summarizes: The steps and requirements necessary for a corporation to become publicly traded; The steps and requirements for such issuer to then uplist to a higher exchange or Nasdaq; The forms/reports SEC reporting companies and their affiliates are required to file; What causes an issuer to become subject to the Investment Company Act of 1940, as amended; and The use of subsidiary entities to shield liability.
4 Steps and Requirements Necessary for a Corporation to Become Publicly Traded
5 Requirements/Steps To be Publicly Traded Obtain at least 35 shareholders; Obtain an audit of the issuer: Typically two years of audited financials are required, plus interim financial statements through the date of filing of a Registration Statement (see below) Draft and file a Registration Statement with the Securities and Exchange Commission (SEC or Commission): Form S-1 Registration Statement (resale or underwritten IPO); or Form 10 Registration Statement.
6 Requirements/Steps To be Publicly Traded Important Information: It is important to keep in mind that all securities of U.S. companies (and other companies sold in the U.S.) are restricted, unless registered prior to issuance, and cannot be resold except pursuant to an effective registration statement or an exemption from registration thereto. Separately, all securities sold/issued by an issuer in the U.S. must either be registered or there must be an exemption from registration available for the sale/issuance of such security.
7 Requirements/Steps To be Publicly Traded Form S-1 Registration Statement Registers securities which have either been already issued (resale) or are proposed to be issued (IPO underwritten or best efforts offering), including where applicable, warrants, units, preferred stock or other convertible securities. A Form S-1 Registration Statement includes a significant discussion of, and disclosures regarding, the issuer, including, but not limited to, its past history, a description of its business operations, properties, share structure, beneficial owners, management and related party transactions, audited financial statements by a PCAOB auditor, and must also include risk factors and copies of all material filings and agreements.
8 Requirements/Steps To be Publicly Traded Form S-1 Registration Statement Legal counsel preparing the Form S-1 Registration Statement will need to review information regarding the issuer s (and it s subsidiaries ): formation, prior issuances of securities, prior material agreements, acquisitions and loans; information regarding outstanding debt, assets and intellectual property; information and officer and director questionnaires for all management and directors; share ownership/beneficial ownership of shareholders; related party transactions; and other information.
9 Requirements/Steps To be Publicly Traded Form S-1 Registration Statement After preparing the Form S-1 Registration Statement (which can be up to several hundred pages long) and filing the initial Form S-1 Registration Statement with the SEC, the SEC has 30 days to review the filing and provide comments. The SEC will generally have comments/questions which will need to be addressed and updated in an amended filing. The SEC can, and often does, go back and forth with comments on each amended draft and it can take a number of months to clear comments and have the registration statement declared effective by the SEC.
10 Requirements/Steps To be Publicly Traded Form S-1 Registration Statement During the review period, the issuer is required to update its Registration Statement filing to address SEC comments, for new events which occur and to update financial statements which go stale typically 135 days after each calendar quarter. Once the registration statement is declared effective , the issuer is (at least for the first year after filing and thereafter subject to certain requirements) required to: File periodic reports (Quarterly Reports on Form 10-Q due each quarter and Annual Reports on Form 10-K due at the end of each fiscal year); and File current reports on Form 8-K (due four (4) business after the occurrence of certain material events).
11 Requirements/Steps To be Publicly Traded Once an issuer has had its Form S-1 Registration Statement declared effective by the SEC, if it doesn t meet the NYSE or Nasdaq listing criteria (discussed below) the issuer will typically first seek to have its common stock quoted on the OTCQB market operated by OTC Markets. In addition to the OTCQB market, OTC Markets offers quotations on the: OTCQX market (requires higher financial standards be met (including at least a $10 million market cap and other net income, net assets and/or revenue tests)) and OTC Pink market, which has less strict listing standards compared to the OTCQB market.
12 Requirements/Steps To be Publicly Traded In order to have its common stock quoted on the OTCQB, an issuer must: Meet a $0.01 bid requirement, not be in bankruptcy, and make various informational and financial statement filings with OTC Markets, which requirement is waived if the issuer is timely reporting with the SEC.
13 Requirements/Steps To be Publicly Traded In order to be quoted on the OTC Markets, a company, through a market maker, must file a 15c2-11 with the Financial Industry Regulatory Authority (FINRA). FINRA requires a minimum of 35 shareholders to allow any company s securities to be quoted, as well as certain other items, such as having a number of freely tradeable shares in order for a market maker to make a market in the stock and such shares not being concentrated in too few hands. The process to clear comments from FINRA on the 15c2-11 can take several months.
14 Requirements/Steps To be Publicly Traded Form 10 Registration Statement An alternative to a Form S-1 Registration Statement, is a Form 10 Registration Statement, which registers an entire class of securities (typically common stock) under the Securities Exchange Act of 1934, as amended (the Exchange Act ). A Form 10 Registration Statement is still subject to SEC review and comments; however, 60 days after filing the Form 10, the issuer becomes automatically subject to Exchange Act reporting (periodic reports, current reports and the required filing of beneficial ownership reports with the SEC). A Form 10 Registration Statement requires substantially similar due diligence and disclosures as a Form S-1 Registration Statement but it does not register shares of shareholders.
15 Requirements/Steps To be Publicly Traded If/when the issuer clears FINRA comments on the 15c2-11, the issuer is assigned a trading symbol and is eligible to have its securities quoted on the OTCQB market (subject to the OTCQB listing requirements above). Thereafter, an issuer s continued ability to quote its stock would be subject to its continued timely filing of periodic and current reports with the SEC.
16 Requirements/Steps To be Publicly Traded Alternatives to Self-Filings with the SEC Reverse Mergers into a public shell company. There are different types of public shells and the value of such public shell is dependent on various factors including if the company is fully reporting, if it is not currently a shell company and other factors.
17 Requirements/Steps To be Publicly Traded Alternatives to Self-Filings with the SEC Pros of a Reverse Merger : The issuer could become a publicly-traded company much quicker (as fast as a few weeks rather than a few months (at best)), and that the SEC and FINRA do not need to review or approve reverse merger transactions. Additionally, as a reverse merger company will have more than 35 shareholders already, the issuer would not need to obtain new shareholders to be listed. Cons of a Reverse Merger : More expensive - the cost of a reverse merger company can run between $200,000 and $350,000 or more depending on where the issuer is traded, compared to $50,000 to $100,000 in total cost for a self-registration filing (including legal and accounting fees); potential problems with the float of a reverse merger company; and unknown issues (un-booked liabilities, litigation or SEC comments).
18 Requirements/Steps To be Publicly Traded Shell Company Issues Separately, any company which at any time in its past would fall under the definition of shell company under Rule 405 of the Securities Act of 1933, as amended (the Securities Act ), has more stringent requirements for shareholders to sell its restricted shares. Instead of shareholders being able to sell restricted shares under Rule 144, six months after they are acquired by the issuer or an affiliate of the issuer, holders of restricted shares in shell companies have to wait for a year after the issuer ceases to be a shell company and otherwise complies with the shell company rules, and if at any time in the future such issuer ceases filing with the SEC, or is deficient in its filings with the SEC, Rule 144 (the most common resale exemption) is not available for such holders.
19 Requirements/Steps To be Publicly Traded Shell Company The term shell company means a registrant, other than an asset-backed issuer, that has: No or nominal operations; and Either: Assets consisting solely of cash and cash equivalents; or Assets consisting of any amount of cash and cash equivalents and nominal other assets.
20 Steps and Requirements for an Issuer to Uplist to a Higher Exchange or Nasdaq?
21 Uplisting Rules/Requirements The requirements to uplist to a higher exchange or Nasdaq depend on which tier of the exchange/Nasdaq that an issuer desires to uplist to. For the NYSE, that includes (a) the NYSE; (b) the NYSE American; and (c) the NYSE Arca (an all-electronic exchange). The NYSE American has lesser listing standards than the NYSE. For Nasdaq, those include (a) the Nasdaq Global Select Market; (b) the Nasdaq Global Market; and (c) Nasdaq Capital Market, in order of decreasingly difficult listing requirements.
22 Uplisting Rules/Requirements For the purposes of this presentation, we will focus on the The NYSE American; and the Nasdaq Capital Market, the lowest listing tiers of the NYSE and Nasdaq for public companies.
23 Uplisting Rules/Requirements
24 Uplisting Rules/Requirements As shown above, there are five different ways to meet the NYSE American uplisting criteria. In evaluating listing eligibility, the NYSE/Nasdaq also considers qualitative factors such as the nature of a company s business, market for its products, reputation of its management, historical record and pattern of growth, financial integrity, demonstrated earnings power, and future outlook.
25 Nasdaq Capital Market
26 Uplisting Rules/Requirements * Companies qualifying solely under the Market Value Standard must meet the $50 million Market Value of Listed Securities and the applicable bid price requirement for 90 consecutive trading days before applying. ** To qualify under the closing price alternative, a company must have: (i) average annual revenues of $6 million for three years, or (ii) net tangible assets of $5 million, or (iii) net tangible assets of $2 million and a 3 year operating history, in addition to satisfying the other financial and liquidity requirements listed above.
27 What Forms/Reports Are SEC Reporting Companies and their Affiliates Required to File?
28 Forms and Filings All SEC registered companies are required to file: Form 10-Qs; and Form 10-Ks; and Form 8-Ks, with the SEC, however, Exchange Act registered companies are also required to comply with the proxy rules of the Exchange Act, which require the filing of an information statement or proxy statement for each annual meeting of shareholders, and also require the filing of beneficial ownership reports (discussed below).
29 Forms and Filings Form 10-K - An annual report filed with the SEC: Includes a discussion of the issuer s business, business plan, results of operations, risk factors, properties, management and related party transactions. Also includes a Management s Discussion and Analysis of Financial Condition and Results of Operation ( MD&A ) section. Typically due 90 days after the issuer s fiscal year end. Form 10-K includes the full audited financial statements for the year under report (and the prior year).
30 Forms and Filings Form 10-Q A quarterly report to the SEC Contains unaudited financial data as well as an MD&A section. If certain types of nonrecurring events occur during the period, such as commencement of significant litigation, these events must be reported also on Form 10-Q. This report is typically due 45 days after the end of each of the first three fiscal quarters.
31 Forms and Filings The timing of required Form 10-Q and Form 10-K filings depends on the issuer s public float (shares not held by officers, directors or greater than 10% shareholders), as summarized below: Category of Filer (Public Float) Deadlines For Filing Periodic Reports Form 10-K Deadline Form 10-Q Deadline 60 days 40 days Large Accelerated Filer ($700MM or more) 75 days 40 days Accelerated Filer ($75MM or more and less than $700MM) 90 days 45 days Non-accelerated Filer (less than $75MM)
32 Forms and Filings Form 8-K - A report that is filed only when a reportable event occurs. The form specifies particular items to be reported. Generally, they are events or transactions of major significance (see below). Form 8-K reports are due within four (4) business days after the occurrence of the reportable event.
33 Forms and Filings Form 8-K reportable events include: entries into material definitive agreements and terminations of material definitive agreements, unregistered sales of securities, amendments made to the issuer s articles of incorporation and bylaws, changes in control of the issuer, material acquisitions or dispositions of assets, changes in the issuer s certifying accountant, and resignations of directors or refusal to stand for re-election as a result of disputes.
34 Forms and Filings Beneficial Ownership Reports Section 16(a) of the Exchange Act requires the filing of three basic reports by officers, directors and those persons holding 10% of more of an Exchange Act reporting issuer s securities. Each of Form 3, 4 and 5 (described below) must be filed in electronic format via the Commission s Electronic Data Gathering Analysis and Retrieval System (EDGAR).
35 Forms and Filings Beneficial Ownership Reports Form 3 - Initial Statement of Beneficial Ownership of Securities. Required to be filed by each covered person within 10 days after a person attains the status of an officer, director or 10% shareholder, even if such person owns no securities of the issuer. Form 4 - Statement of Changes of Beneficial Ownership of Securities. Required to be filed before the end of the 2nd business day following the day on which a transaction resulting in a change in beneficial ownership has been executed. Form 5 - Annual Statement of Beneficial Ownership of Securities. Form 5 must be filed within 45 days after the end of the issuer s fiscal year.
36 Forms and Filings Schedule 13D or 13G Under Rule 13(d) of the Exchange Act, any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to Section 12, and who is directly or indirectly the beneficial owner of more than Five percent (5%) of any such class, must file a statement on Schedule 13D or 13G with the Commission within ten days after such acquisition. A Schedule 13G (which requires less disclosure than a Schedule 13D) may be filed by any non officer or Director shareholder who owns between 5%-20% of an issuer s common stock, and is only a passive investor, and does not intend to exert control over the issuer. Amendments to Schedule 13D are required to be promptly filed whenever there is a material change in the facts set forth in the Schedule 13D, including wherever beneficial ownership changes by more than 1%.
37 What Causes an Issuer to Become Subject to the Investment Company Act of 1940, as Amended?
38 Investment Company Act Issues An investment company is an entity which: is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; is engaged or proposes to engage in the business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percent of the value of such issuer s total assets (exclusive of government securities and cash items) on an unconsolidated basis.
39 Investment Company Act Issues A company may have to preemptively register as an investment company before it even engages in investment company activities if it proposes to engage in such activity or proposes to acquire investment securities that might make up over 40% of the value of the company s assets. The Investment Act exempts from registration any issuer primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities , based on various common law tests.
40 Investment Company Act Issues The Investment Act provides Further exemptions, most of which are tailored for specific types of entities and situations. Some of the exempt persons include: Any issuer whose outstanding securities are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities (e.g., Hedge Funds); Any person primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, acting as broker, and acting as market intermediary;
41 Investment Company Act Issues Any bank or insurance company; any savings and loan association, building and loan association, cooperative bank, homestead association, or similar institution; Any entity whose business is confined to making small loans, industrial banking, or similar businesses; and Any person substantially all of whose business consists of owning or holding oil, gas, or other mineral royalties or leases, or fractional interests therein, or certificates of interest or participation in or investment contracts relative to such royalties, leases, or fractional interests.
42 Investment Company Act Issues If an Investment Company is: organized or otherwise created under the laws of the United States or of a State, meets the definition of an Investment Company, and cannot rely on an exception or an exemption from registration, generally it must register with the Commission under the Investment Act and must register its public offerings under the Securities Act.
43 Use of Subsidiary Entities to Shield Liability
44 Subsidiaries as Liability Shields Typically, public companies are operated as a holding company for many other subsidiary companies. Subsidiaries are often incorporated as, and operated as, limited liability companies, which provide state law liability shields which provide limited liability for owners and managers of such entities. Through this structure a parent company can own many different operating companies and segregate its liability, so under most normal situations, if one of the subsidiaries is subject to significant liability or forced into bankruptcy, the operations/liabilities of that subsidiary will not negatively affect any of the other subsidiaries or the parent as a whole.
45 Subsidiaries as Liability Shields For example General Electric is the parent (the entity which investor buys and sells shares in through the marketplace) of numerous other subsidiary companies including GE Capital (which holds GE s financial service operations); GE Appliances (which manufactures GE, Profile, Monogram and other appliances); and GE Power (a company which specializes in power generation techniques GE power plants currently produce 1/3rd of the world s electricity). When an investor purchases a share of GE, it is buying ownership in not only the parent company, but all of its subsidiaries.
46 Subsidiaries as Liability Shields This type of structure can be used to operate varying business operations on one parent company umbrella, including such differing operations such as real estate, investment companies, restaurants and others.
47 Questions? DOES ANYONE HAVE ANY QUESTIONS REGARDING THE MATTERS DISCUSSED?
48 Closing: For more information I can be reached at: David M. Loev The Loev Law Firm, PC 6300 West Loop South, Suite 280 Bellaire, Texas 77401 dloev@loevlaw.com (832) 930-6432
