The going public process involves a number of steps that vary depending on the characteristics of the private company wishing to go public, and whether it will subject to the reporting requirements of the Securities and Exchange Commission (“SEC”). Even companies that are not subject to SEC reporting requirements must meet certain requirements to have their shares publicly traded. One requirement is that the issuer obtain sufficient stockholders to establish a trading market. These initial investors are commonly referred to as “Seed Stockolders” or “Seed Shareholders”.
Seed Stockholders Requirements in Going Public Transactions
The first step in agoing public transactionis most often obtaining the number of Seed Stockholders required by theFinancial Industry Regulatory Authority(“FINRA”). The shares issued to them must be unrestricted at the time of the filing of theForm 211withFINRA, so that a public float will exist when the company’s stock begins trading. Generally, shares in the public float must either be subject to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) or an exemption from such registration must be available.
Rule 144 is a common resale exemption sometimes relied upon by Seed Shareholders to resell their shares. If a company is subject to SEC reporting requirements, the holding period under Rule 144 is 6 months assuming the other requirements of the rule are met. If not, the holding period is at 12 months. If the private company is an SEC reporting company because it filed a Form 10orForm 8A, the holding period is 6 months so long s it has never been a shell company.
While FINRA does not specify the number of Seed Stockholdersit requires in going public transactions, in most cases 20 Seed Stockholders who paid cash consideration for their securities are sufficient to obtain a ticker symbol assignment for anOTC Marketslisting.
When more Seed Stockholders are required, most often it isn’t becauseFINRArequired more shareholders. It is because the sponsoring market maker’s firm requires a certain number of shareholders in order to sponsor an issuer’sForm 211application.
Using the Rule 506(c) Accredited Crowdfunding Exemption for Seed Stockholders in Going Public Transactions
Regardless of whether the issuer is relying upon the resale provisions of Rule 144 or a registration statement to create unrestricted securities, it must have an exemption from registration in order to make the initial offer and sell its securities to seed shareholders. The crowdunding exemptions from SEC registration provided several exemptions from SEC registration. The most commonly used is Rule 506(c) of Regulation D of the Securities Act. Changes to Rule 506 under the JOBS Act allow issuers to engage in general solicitation and advertising of their offering offering as long as sales are only made to accredited investors. The rule makes obtaining seed shareholders much easier in going public transactions.
Rule 506does not limit the amount of money that issuers can raise and it does not limit the number of investors who can participate in an offering. It is available to both private and public companies regardless of whether they are reporting with the SEC. It is also available to both domestic and foreign issuers.
Accredited Investors l Rule 506(c) l Going Public Transactions
There are no document delivery requirements in Rule 506(c) offerings if offers and sales are only made to accredited investors, but all transactions are subject to the anti-fraud provisions of the securities laws.
Tradability in Rule 506(c) Offerings
Securities sold inRule 506(c) offerings are restricted securities. As such, the shares must be subject to an effective registration statement under most circ*mstances or exempt from registration.
Form D
While companies using the Rule 506(c) exemption do not have to register their securities, they must file a “Form D” with theSEC within 15 days of the first sale of their securities. Form D is a brief notice filing that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company. The Form D should be amended every 12 months.
Share Concentration l Going Public Transactions
The distribution of share ownership of the unrestricted shares in a going public transaction should be fairly even. While the shareholders do not have to hold the same amount there should not be large discrepancies in ownership unless the shares are subject to a leak-out agreement.FINRAhas identified concentration of an issuer’s public float as a red flag indicator of pump and dump schemes.
Hamilton & Associates will design the appropriate going public transaction for your company using an SEC registration statement.Securities Attorneys can guide you through the complex process of going public and assist you with the extensive disclosure required in registration statements filed with theSEC.If you are going to offer and sell securities, or go public using anSECregistration statement you will need the assistance of an experienced securities law firm like Hamilton& Associates to help you navigate through theSECregistration statement process to ensure all required disclosures are made.
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