Anthony LG LLC Corporate and Securities Law Firm
Equity and Debt Instruments by Laura Anthony Esq

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An Equity Instrument can be titled common stock, preferred stock, LLC membership interest or LLC Membership Unit (or Unit for short), warrant or option, each having a particular meaning and not being interchangeable.

LLC Membership interest or LLC Membership Unit

An LLC Membership Unit is the broad title of equity in a limited liability company. Through an operating agreement, LLC Members delineate classes of equity and the rights and preferences associated with each class. The LLC structure is entirely flexible, and classes of equity can have any of the rights or preferences, both financial and non-financial available for common or preferred stock.

Common Stock

Common stockholders are behind preferred stockholders in the rights to receive dividends and behind both preferred stockholders and creditors in the rights to receive payments upon liquidation. Common stock is the most “common” type of equity security. Although common stock is usually voting, especially in publicly traded equity markets, it can be designated as either voting or non-voting. There is no fixed dividend or other fixed or special rights or preferences associated with common stock.

Preferred Stock

Preferred stock is the most commonly used investment vehicle due to its flexibility. Preferred stock can be structured to offer all the characteristics of equity as well as of debt, both in financial and non-financial terms. Preferred stock can be structured in any way that suits a particular deal. The following is an outline of some of the many features that can be included in a preferred stock designation:

Dividends

A dividend is a fixed amount agreed to be paid per share based on either the face value of the preferred stock or the price paid for the preferred stock (which is often the same); a dividend can be in the form of a return on investment (such as 8% per annum), the return of investment (25% of all net profits until the principal investment is repaid) or a combination of both. Although a dividend can be structured substantially similarly to a debt instrument, there can be legal impediments to a dividend payment and a creditor generally takes priority over an equity holder. The ability of an Issuer to pay a dividend is based on state corporate laws, the majority of which require that the Issuer be solvent (have the ability to pay creditors when due) prior to paying a dividend. Accordingly, even though the Issuer may have the contractual obligation to pay a dividend, it might not have the ability (either legally or monetarily) to make such payments.

 

  1.  As a dividend may or may not be paid when promised, a dividend either accrues and cumulates (each missed dividend is owed to the preferred shareholder) or not (we didn’t get the dividend this quarter, but hopefully next).
  2. Although a dividend payment can be structured to be paid at any interval, payments are commonly structured to be paid no more frequently than quarterly, and often annually.
  3. Dividends on preferred stock are generally preferential, meaning that any accrued dividends on preferred stock must be fully paid before any dividends can be paid on common stock or other junior securities.

 

Voting Rights

Preferred stock can be set up to establish any level of voting rights from no voting rights at all, voting rights on certain matters (sole vote on at least one board seat; voting rights as to the disposition of a certain asset but otherwise none), or super voting rights (such as 10,000 to 1 or 51% of all votes).

Liquidation Preferences

A liquidation preference is a right to receive a distribution of funds or assets in the event of a liquidation or sale of the company Issuer. Generally creditors take precedence over equity holders; however, preferred stock can be set up substantially similar to a debt instrument whereby a liquidation preference is secured by certain assets, giving the preferred stockholder priority over general unsecured creditors vis-à-vis that asset. In addition, a liquidation preference gives the preferred stockholder priority over common stockholders and holders of other junior equities. The liquidation preference is usually set as an amount per share and is tied into the investment amount plus accrued and unpaid dividends.

  1. In addition to a liquidation preference, preferred stockholders can partake in liquidation profits (for example, the preferred stockholder gets the entire investment back plus all accrued and unpaid dividends, plus 30% of all profits from the sale of the company Issuer; or the preferred stockholder gets the entire investment back plus all accrued and unpaid dividends and then participates pro rata with common stockholders on any remaining proceeds (known as a participating liquidation preference) ).

Conversion or exchange rights

A conversion or exchange right is the right to convert or exchange into a different security, usually common stock.

  1. Conversion rights include a conversion price which can be set as any mathematical formula, such as a discount to market (75% of the average 7 day trading price immediately prior to conversion); a set price per share (preferred stock with a face value of $5.00 converts into 5 shares of common stock thus $1.00 per share of common stock); or a valuation (converts at a company valuation of $30,000,000).
  2. Conversion rights are generally at the option of the stockholder, but the Issuer can have such rights as well, generally based on the happening of an event such as a firm commitment underwriting (Issuer has the right to convert all preferred stock at a conversion price of $10.00 per share upon receipt of a firm commitment for the underwriting of a $50,000,000 IPO).
  3. The timing of conversion rights must be established (at any time after issuance; only between months 12 and 24; within 90 days of receipt of a firm commitment for a financing in excess of $10,000,000).
  4. Conversion rights usually specify whether they are in whole or in part, and for public companies limits are often set (conversion limited such that they cannot own more than 4.99% of outstanding common stock at time of conversion).

Redemption/Put Rights

A redemption right in the form of a put right is the right of the Holder to require the Issuer to redeem the preferred stock investment (to “put” the preferred stock back to the Issuer); the redemption price is generally the face value of the preferred stock or investment plus any accrued and unpaid dividends; redemption rights generally kick in after a certain period of time (5 years) and provide an exit strategy for a preferred stock investor.

Redemption/Call Rights

A redemption right in favor of the Issuer is a call option (the Issuer can “call” back the preferred stock); generally when the redemption right is in the form of a call, a premium is placed on the redemption price (for example, 125% of face value plus any accrued and unpaid dividends or a pro rata share of 2.5 times EBITDA).

Anti-dilution protection – Anti-dilution protection protects the investor from a decline in the value of his or her investment as a result of future issuances at a lower valuation. Generally the Issuer agrees to issue additional securities to the Holder, without additional consideration, in the event that a future issuance is made at a lower valuation such as to maintain the investors overall value of investment; an anti-dilution provision can also be as to a specific percent ownership (Holder will never own below 10% of the total issued capital of the Issuer).

Registration rights

Registration rights refer to SEC registration rights and can include demand registration rights (the Holder can demand that the Issuer register his or her equity securities) or piggyback registration rights (if the Issuer is registering other securities, it will include the Holder’s securities, as well).

Transfer restrictions

Preferred stock can be subject to transfer restrictions, either in the preferred stock instrument itself or separately in a shareholder’s or other contractual agreement; transfer restrictions usually take the form of a right of first refusal in favor of either the Issuer or other security holders, or both.

Co-sale or tag along rights

Co-sale or tag along rights are rights of Holders to participate in certain sales of stock by management or other key stockholders.

Drag along rights 

Drag along rights are the rights of the Holder to require certain management or other key stockholders to participate in a sale of stock by the Holder.

Other non-financial covenants 

Preferred stock, either through the instrument itself or a separate shareholder or other contractual agreement, can contain a myriad of non-financial covenants, the most common being the right to appoint one or more persons to the Board of Directors and to otherwise assert control over management and operations; other such rights include prohibitions against related party transactions, information delivery requirements, non-compete agreements, confidentiality agreements, limitations on management compensation, limitations on future capital transactions such as reverse or forward splits, and prohibitions against the sale of certain key assets or intellectual property rights. In essence, non-financial covenants can be any rights that the preferred stockholder investor negotiates for.

Options/Warrants 

An option or warrant is the right to purchase equity, generally common stock, at a certain price during a certain period of time.

Debt Instruments

As mentioned above, a Debt Instrument can be titled a promissory note, note, or debenture, each having the same meaning and each term being interchangeable. Moreover, a debt instrument can either be convertible into equity or not convertible. Conversion is simply a form of payment: Instead of cash, the Holder is accepting an equity instrument as either whole or partial payment for the debt obligation.

The basic elements of a debt instrument are as follows:

Amount –

What is the amount of the debt in monetary terms?

Term –

When does the debt obligation become due; a date can be specified; the debt can be payable on demand by the Holder, or payable upon the happening of certain events with a backup term (the receipt of a firm commitment financing for $XX but in no event later than May 1, 2014) or the reaching of certain milestones (Issuer signs ABC Company as a client, but in no event later than May 1, 2014).

Interest rate –

What is the rate of interest being charged on the debt; is the interest compounded (i.e., do you pay interest on interest)?

Transferability or assignability –

Can one or both parties assign their rights and interests in the debt instrument to a third party?

Secured or unsecured –

Is the debt instrument secured by collateral generally consisting of real or personal property, but can also consist of other financial instruments (sometimes called a pledge agreement).

Guaranty –

Is a third party, such as a principal of the Issuer, guaranteeing the obligations in the debt instrument?

Prepayment rights –

Can the debt be prepaid in whole or in part?

Payment Preferences/Subordination/Senior debt –

The debt instrument can contractually require that it will be paid prior to other debts incurred either before or after the debt date. A right to receive payment in advance of other obligations is a payment preference, which is often referred to as “senior debt,” whereas the debt that is below the senior debt is often referred to as “subordinated debt.”

Convertibility –

A debt can be convertible into an equity instrument either in whole or in part. If convertible into an equity instrument, the conversion price must be decided (for example, $1.00 of debt for each share of common stock) and the type of equity (see discussion on types of equity instruments); the term “mezzanine debt” is often used to refer to convertible debt instruments, or the concurrent issuance of a combination of debt and equity (for example, mezzanine financing may involve a $1,000,000 convertible senior loan together with 250,000 warrants for the purchase of common stock).

Default provisions –

Default may be monetary or non-monetary; generally a debt accelerates and becomes due and payable in full upon default.

Non-Financial covenants –

Any of the non-financial covenants discussed under preferred stock can be attached to a debt instrument.

Inquiries of a technical nature are always encouraged. Contact us now.

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Laura Anthony, Founding Partner

Contact ALG Founder

Anthony LG LLC Corporate and Securities Law Firm

Going Public vs. Reverse Merger

Going Public Via Reverse Merger

A reverse merger transaction is one in which a private operating entity merges with a public shell company, resulting in the private operating company becoming public. Generally, the shareholders of the private operating company will exchange their ownership in the private company for a majority stake in the public shell company. A “shell company” is an entity that has no or nominal operations and no assets or assets consisting solely of cash and cash equivalents. A reverse merger is an alternative method of going public (as opposed to an IPO, DPO or private placement followed by the registration process).

A reverse merger is often structured as a reverse triangular merger. In that case, the public shell forms a new subsidiary which new subsidiary merges with the private operating business. At the closing, the private company shareholders still exchange their ownership for shares in the public company and the private operating business becomes a wholly owned subsidiary of the public company. The primary benefit of the reverse triangular merger is the ease of shareholder consents. That is because the sole shareholder of the acquiring entity is the public company. The directors of the public company can approve the transaction on behalf of the acquiring subsidiary, avoiding the necessity of meeting the proxy requirements of the Securities Exchange Act of 1934.

The advantages of a reverse merger revolve around time. A reverse merger transaction can be completed very quickly and efficiently. The disadvantages of a reverse merger generally revolve around undisclosed prior issues or liabilities with the public shell, including issues that could affect DTC eligibility. This primary disadvantage can be addressed by hiring competent securities counsel to assist with the due diligence process. Another disadvantage involves cost; a reverse merger transaction, although substantially quicker than an IPO, can cost substantially more. In addition to legal and accounting fees, a private entity must purchase the public shell itself.

Like any transaction involving the sale of securities, the issuance of securities to the private company shareholders must either be registered under Section 5 of the Securities Act or by subject to an available exemption from registration. Generally, shell companies rely on Section 4(2) or Rule 506 of Regulation D under the Securities Act for such exemption.

A reverse merger is a going public transaction but not a capital raising transaction.  Generally companies completing a reverse merger simultaneously complete a private placement transaction for fund raising.

Your Going Public Transaction with Us

In an initial public offering (IPO), a company goes public directly by filing an S-1 registration statement for the public sale of its stock. That sale of stock can be by the company using an underwriter, which is known as an IPO. Alternatively, many issuers are choosing to self-underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). But of course, the process is highly regulated and without experienced legal counsel can be difficult, expensive and time-consuming.

Pursuant to Section 5 of the Securities Act of 1933, as amended (“Securities Act”), it is unlawful to “offer” or “sell” securities without a valid effective registration statement, unless an exemption is available. Companies desiring to offer and sell securities to the public must file with the SEC and provide prospective investors all material information concerning the company and the securities offered. The Securities Act sets forth in-depth rules on what constitutes material information, and on what forms and in what format that material information must be disclosed.

Rule 404(a) of the Securities Act sets forth the basic requirements for a registration statement. Rule 404(a) reads in part:

“A registration statement shall consist of the facing sheet of the applicable form; a prospectus containing the information called for by Part 1 of such form; the information, list of exhibits, undertakings and signatures required to be set forth in Part II of such form; financial statements and schedules; exhibits; any other information or documents filed as part of the registration statement; and all documents or information incorporated by reference in the foregoing.”

Over the years the SEC has created and eliminated various registration forms. Currently all domestic issuers must use either form S-1 or S-3. Form S-3 is limited to larger filers with a minimum of $75 million in non-affiliate public float, among other requirements. All other issuers must use form S-1.

S1 Regulations

There are four primary regulations governing the preparation and filing of Form S-1:

(i) Regulation C – contains the general requirements for preparing and filing the Form S-1. Included within Regulation C are regulations and procedures related to (a) the treatment of confidential information; (b) amending a registration statement prior to effectiveness; (c) procedures to file a post-effective amendment; and (d) the “Plain English” rule

(ii) Regulation S-T – requires that all registration statements, exhibits and documents be electronically filed through the SEC’s EDGAR system and must include interactive data using the XBRL process.

(iv) Regulation S-K – sets forth, in detail, all the disclosure requirements for all the sections of the S-1. Regulation S-K is the who, what, where, when and how requirements to complete the S-1.

(v) Regulation S-X – sets forth the requirements with respect to the form and content of financial statements to be filed with the SEC. Regulation S-X includes general rules applicable to the preparation of all financial statements and specific rules pertaining to particular industries and types of businesses.

Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) provide remedies to investors in the IPO and DPO process. The basic premise of such liability is that either an investor was not given an opportunity to review investment disclosure documents prior to making the investment, or such disclosure documents contained inaccurate information or failed to contain material information. The bottom line is that if an officer or director signs a registration statement which is filed with the SEC and which contains misstatements or fails to contain material information, they may be subject to liability on two fronts – from the SEC in an enforcement proceeding, and from individuals and entities in a private civil claim.

Private Placement

Private Placement Followed by Registration of Securities

A public company, by definition, has public shareholders. Reverse mergers, IPO’s and DPO’s all result in a public shareholder base. Another option for a company going public directly is to complete a private placement; selling shares to unaffiliated third parties and then filing an S-1 resale registration statement as to those shares. Each of these options results in an unaffiliated public shareholder base. Simply stated, all of these aforementioned processes result in a company going public.

The S-1 resale registration statement filed on behalf of selling shareholders contains substantially the same required information as an S-1 registration statement filed on behalf of the company itself.

The main benefit to a private company going public through the filing of an S-1 Registration Statement as opposed to a reverse merger is that the company does not have to be concerned about undisclosed, potential or contingent liabilities.  Moreover, the SEC rules relating to shell companies (such as Rule 144 and Rule 145) prevent the operating company’s shareholders from selling stock using the Rule 144 exemption for twelve months following the completion of the merger. Furthermore, companies completing a reverse merger may face reputational challenges.  Finally, if not completed correctly, the newly merged entity may face trading difficulties with either or both FINRA and DTC.

Listing on a National Exchange

Listing on a National Exchange

There are currently registered stock exchanges in the United States, however, the most common exchanges for small cap and middle market companies are the NYSE including the NYSE American and NASDAQ.  Both exchanges have quantitative and qualitative listing standards and ongoing corporate governance requirements for listed companies.  For a complete list of NYSE American listing requirements see my blog on the topic HERE and for a complete list of NASDAQ listing requirements see by blog HERE.  The attorneys at Anthony L.G. assist companies with the preparation for and application process to list on an exchange as well as compliance with ongoing listing requirements.

Finra and DTC

FINRA and DTC

For companies going public on the OTC Markets, following the effectiveness of the S-1 registration statement, the company will need to engage the services of a market maker to file a 15c2-11 application with FINRA to obtain permission to quote and trade the stock and to receive a trading symbol. FINRA is the self-regulatory body which overseas trading on the over-the-counter market. On the most basic level, FINRA issues trading symbols to company’s trading on the over-the-counter market (including the Pink Sheets, OTCQB and OTCQX).

The Depository Trust Company (DTC) provides the clearing and settlement services for all the electronic trading of securities in the United States. Over the past year, DTC eligibility has become a concern for many OTC issuers. The DTC has become active in reviewing the securities of issuers and requiring that an issuer be able to prove, to the DTC’s satisfaction, that all shares trading electronically are indeed legally entitled to do so. This includes shares that may have been issued in a predecessor company many years before and for which records may not be available.

Obtaining and maintaining eligibility is of the utmost importance for the smooth trading of an issuer’s float in the secondary market. Moreover, DTC eligibility is a prerequisite for OTC issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name.

Anthony L.G. stays current with all DTC issuer requirements to assist clients in avoiding unnecessary disruptions to their stocks trading activity and to remove DTC chills and locks whenever possible.

OTCQX Listing Requirements

The OTCQX listing requirements necessitates that a company meets the following:
  • A transfer agent that participates in the Transfer Agent Verified Shares Program.
  • Comply with SEC Reporting (Exchange Act reporting standard or Regulation A), International Reporting, Bank Reporting, or OTC Alternative Reporting Guidelines.
  • Audited financial statements that comply with US GAAP (for International and Alternative Reporting Companies listed on a Qualified Foreign Exchange, a valid auditing opinion) with a Balance Sheet dated within 15 months by a PCAOB auditor.
  • Have proprietary quotes by at least one Market Maker in OTC Link ATS (companies filing Form 211 shall have 3 business days to meet this requirement)
  • Have a minimum bid price of $0.25 per share and $10 million market capitalization on each day for the first 30 consecutive calendar days preceding Application Day. (exemptions for companies submitting Form 211 applications)
  • Have on-going operations and not be a shell company.
  • Not going through bankruptcy or reorganization.
  • Have at least 50 round-lot beneficial shareholders (each owning at least 100 shares).
  • Have a freely traded Public Float of 10% or more of total outstanding shares.
  • Obtain an OTCQX Sponsor
  • For International Reporting, comply with OTCQX Rules and publish required disclosures in English, as specified in 12g3-2(b).
  • Publish Annual reports, call reports and other disclosures required by bank regulators.

Corporate Governance requirements:

  • Have a board of directors with 2 independent directors
  • Have an audit committee with the majority being independent director
  • For further information view our page on OTCQX Requirements and application process.

    NASDAQ Capital Market Listing Requirements

    5505. Initial Listing of Primary Equity Securities

    A Company applying to list its Primary Equity Security on the Capital Market must meet all of the requirements set forth in Rule 5505(a) and at least one of the Standards in Rule 5505(b).

    (a) Initial Listing Requirements for Primary Equity Securities:

    (1) (A) Minimum bid price of $4 per share; or

    (B) Minimum closing price of $3 per share, if the Company meets the requirements of the Equity or Net Income Standards under Rules 5505(b)(1) or (b)(3), or of $2 per share, if the Company meets the requirements of the Market Value of Listed Securities Standard under Rule 5505(b)(2), provided that in either case the Company must also demonstrate that it has net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2 million, if the issuer has been in continuous operation for at least three years; or net tangible assets in excess of $5 million, if the issuer has been in continuous operation for less than three years; or average revenue of at least $6 million for the last three years. A security must meet the applicable closing price requirement for at least five consecutive business days prior to approval.

    For purposes of this paragraph (B), net tangible assets or average revenues must be demonstrated on the Company’s most recently filed audited financial statements filed with, and satisfying the requirements of, the Commission or Other Regulatory Authority, and which are dated less than 15 months prior to the date of listing.

    (2) At least 1,000,000 Unrestricted Publicly Held Shares;

    (3) (i) At least 300 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2;

    (4) At least three registered and active Market Makers;

    (5) If the security is trading in the U.S. over-the-counter as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

    (6) In the case of ADRs, at least 400,000 issued.

    (b) Initial Listing Standards for Primary Equity Securities:

    (1) Equity Standard

    (A) Stockholders’ equity of at least $5 million;

    (B) Market Value of Unrestricted Publicly Held Shares of at least $15 million; and

    (C) Two year operating history.

    (2) Market Value of Listed Securities Standard

    (A) Market Value of Listed Securities of at least $50 million (current publicly traded Companies must meet this requirement and the price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value of Listed Securities Standard);

    (B) Stockholders’ equity of at least $4 million; and

    (C) Market Value of Unrestricted Publicly Held Shares of at least $15 million.

    (3) Net Income Standard

    (A) Net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

    (B) Stockholders’ equity of at least $4 million; and

    (C) Market Value of Unrestricted Publicly Held Shares of at least $5 million.

    NYSE LISTING REQUIREMENTS

    Have at Least 400 Shareholders

    To qualify for NYSE listing, a company must have at least 400 shareholders who own more than 100 shares of stock, have at least 1.1 million shares of publicly traded stock and have a market value of public shares of at least $40 million. The stock price must be at least $4 a share. Initial public offerings, spin-offs from existing companies or affiliates need a market value of at least $100 million.

    Meet the Basic Earnings Standard

    In order to order to get listed on the NYSE, a company also must be profitable and it has to meet one of two basic earnings standards. The first is aggregate pre-tax income of $10 million for the previous three years, with at least $2 million in each of the two most recent years. An alternate is $200 million in global market capitalization. In each case, the company still has to meet the shareholding threshold.

    Global Considerations

    The NYSE has stricter standards for worldwide trading. The $4 share price and $100 million market value apply, but a company must have at least 2.5 million shares outstanding and 5,000 public shareholders. In the case of a non-American company whose home market does not have “registered” shareholders, the NYSE requires that a member brokerage firm attest to the depth of market and liquidity of the company’s stock.

    File an Application

    Assuming as company meets the required standard, getting listed on the NYSE is simply a case of filing an application with an agreement to meet NYSE guidelines and requirements. That also must include the articles of incorporation, company by-laws and resolutions, and information on the organization, including contact details for key executives and affirmation that none has a felony conviction. NYSE also requires a letter from security underwriters that the company meets listing standards.

    NYSE Can Reject Unsuitable Companies

    The NYSE has broad discretion in listing companies and will list only shares it deems suitable for the market’s auction trading process, in which buy and sell orders are matched on the exchange floor. It can apply more stringent criteria, even if a company meets the basic securities and financial criteria. A company that is accepted for listing can expect trading of shares to start in four to six weeks.

    OTCQB Listing Requirements

    Eligibility Standards

    To be considered for admission to OTCQB, a Company shall meet all the following conditions:

    1) Audited Financials. Audited annual financial statements must be prepared in accordance with U.S. GAAP or, for International Reporting Companies or Alternative Reporting Companies listed on a Qualified Foreign Exchange, IFRS or an IFRS equivalent

    2) Current Disclosure: Make current disclosure available pursuant to one of the qualified listed reporting standards: 

    3) Bid Price of $0.01. Have a primary class of securities with proprietary priced quotations published by a Market Maker in OTC Link ATS with a closing bid price of at least $0.01 a) on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQB

    4) An exemption from Section 1.1(3) of these OTCQB Standards may be granted by OTC Markets Group in its sole and absolute discretion. Have at least 50 Beneficial Shareholders, each owning at least 100 shares.

    5) Have a freely traded Public Float of at least 10% of the total shares issued and outstanding of the class of security to be traded on OTCQB., exemption may be granted by OTC Markets Group in its sole and absolute discretion.

    6) Not be subject to any Bankruptcy or reorganization proceedings.

    7) Be duly organized, validly existing and in good standing under the laws of each jurisdiction in which the Company is organized or does business.

    8) Transfer Agent. A company incorporated in the U.S. or Canada must retain a transfer agent that participates in the Transfer Agent Verified Shares Program.

    Corporate Governance (Required for Alternative Reporting Standard Only).

    • Have a board of directors that includes at least two Independent Directors; and
    • Have an Audit Committee, a majority of the members of which are Independent Directors. 
    • At least two members of the Board of Directors and a majority of the members of the Audit Committee must satisfy the independence requirement within the later of 90 days after the Company begins trading on OTCQB or the time of the Company’s next shareholder meeting.

    Financial Reporting Requirements: a. SEC Reporting Companies must have filed all reports required to be filed on EDGAR. b. Regulation A Reporting Companies must have filed all reports required to be filed on EDGAR.

    OTC PINK Listing Requirements

    Requirements to use Form 211 | Going Public OTC Pink Sheets

    In general, a private company can go public if:

    • The private company has at least 25 non-affiliate shareholders who paid cash consideration for their shares at least 12 months prior to the Form 211 filing date;
    • The private company must have at least 1 million shares outstanding, of which at least 250,000 are free trading shares;
    • The private company must never have been a shell company; and
    • The private company has current public information available.

    NYSE ARCA Listing Requirements

    The NYSE ARCA caters to small, medium, and large cap companies, as well as Exchange-Traded Products (ETPs). The ETPs that the exchange supports includes: Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange Traded Vehicles (ETVs). They NYSE ARCA currently represents over 90% of all ETPs traded in the U.S.

    The listing standards for the NYSE ARCA are as follows:

    Basic Listing Standards

    • At least 500,000 publicly held shares and a market value of at least $3,000,000.
    • At least 800 public beneficial holders if the issuer has at least 500,000 and less than 1,000,000 shares publicly held, or a minimum of 400 public beneficial holders if the issuer has either:
      • At least 1,000,000 shares publicly held; or
      • At least 500,000 shares publicly held and average daily trading volume in excess of 2,000 shares for the six months preceding the date of application.
    • Net worth of at least $4,000,000.
    • Pre-tax income from continuing operations of at least $750,000 in the last fiscal year or two of the last three fiscal years.
    • The maintenance of at least $5 per share closing bid price for a majority of business days for the most recent six-month period prior to the date of application by the issuer. To meet this price requirement, the bid closing price must be at or above $5 per share at the time of application.

    Alternative Listing Standards

    • At least 1,000,000 publicly held shares and a market value of at least $15,000,000.
    • At least 400 public beneficial holders.
    • Net worth of at least $12,000,000.
    • The maintenance of at least $3 per share closing bid price for a majority of business days for the most recent six-month period prior to the date of application by the issuer. To meet this price requirement, the bid price must close at or above $3 per share at the time of application.
    • An operating history of at least three continuous years.

    NYSE American Listing Requirements

    Companies must meet minimum listing requirements that include a specific financial liquidity and corporate governance criteria. NYSE American also maintains the right to deny an application if they believe it is necessary to protect investors, even if all of the technical requirements have been met. Typically, the NYSE American would reject an application for the nature of the company’s business, regulatory history and future projections, and reputation of management. As one of the most prestigious exchanges to be listed on, the NYSE American affords its patron companies many opportunities not found elsewhere. To gain an initial listing, companies must meet one of the following standards: (variations for Standard 1, 2, 3 ,4a , 4b) Standard 1 :
    1. Pre-tax income of at least $750,000
    2. Market Value of Public Float of at least $3 Millions
    3. Stockholders Equity of $4Million
    4. Minimum Price of 3$
    Standard 2 :
      1. Market Value of Public Float of at least $15 Million
      2. Stockholders Equity of $4Million
      3. Minimum Price of 3$
      4. Operating History of 2 years
    Standard 3 :
      1. Market Cap of at least $50 Million
      2. Market Value of Public Float of $15 Million
      3. Stockholders Equity of $4 Million
      4. Minimum Price of 2$
    Standard 4 (a) (b) :
      1. Market Cap (a) $75 Million
      2. Total Assets and Total Revenue (b) of $75 Million
      3. Market Value (a/b) of $20 Million
      4. Minimum Price (a/b) of $3
    Companies are also required to meet one of the following standards: Public Sharelholder of  (option 1)800, (options 2)400,  (option 3) 400 Public Float of (option 1) 500,000, (options 2) 1,000,000 or (option 3) 500,000 or Daily Trading Volume 6 months prior (option 3 ) 2000 shares

    NASDAQ Global Select Listing Requirements

    Initial Listing Requirements for Primary Equity Securities

    For inclusion in the Global Select Market, a Company must meet all requirements in Rule 5315(e), all applicable requirements of Rules 5315(f)(1), 5315(f)(2) and 5315(f)(3) and all applicable requirements in the Listing Rules.

    However, if a Company is a closed end management investment company registered under the Investment Company Act of 1940, it must meet all requirements in Rule 5315(e), all applicable requirements in each of Rules 5315(f)(1) and 5315(f)(2), but not requirements of 5315(f)(3).

    (c) A closed end management investment company that is listed concurrently with other closed end management investment companies that have a common investment adviser or whose investment advisers are “affiliated persons” as defined in the Investment Company Act of 1940 (a “Fund Family”) shall be eligible if:

    (1) the total Market Value of Unrestricted Publicly Held Shares in such Fund Family is at least $220 million;

    (2) the average Market Value of Unrestricted Publicly Held Shares for all funds in the Fund Family is $50 million; and

    (3) each fund in the Fund Family has a Market Value of Unrestricted Publicly Held Shares of at least $35 million.

    (d) A business development company as defined in Section 2 of the Investment Company Act of 1940 must meet all requirements in Rule 5315(e), and all applicable requirements in each of Rules 5315(f)(1) and 5315(f)(2), but not the requirements in 5315(f)(3). In lieu of meeting Rule 5315(f)(3), a business development company must have a Market Value of Listed Securities of at least $80 million.

    (e) The Primary Equity Security shall meet all of the following:

    (1) If the Company is not listed on the NGM, a bid price of at least $4 per share;

    (2) At least 1,250,000 Unrestricted Publicly Held Shares;

    (3) Market Makers

    A Company that meets the requirements of the NGM Income Standard ( Rule 5405(b)(1)) or the NGM Equity Standard ( Rule 5405(b)(2)) shall have at least three registered and active Market Makers. Otherwise, a Company shall have at least four registered and active Market Makers;

    (4) If the security is trading in the U.S. over-the-counter market as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

    (5) In the case of ADRs, at least 400,000 issued.

    (f)

    (1) Ownership Requirement

    The Primary Equity Security shall meet no less than one of the following:

    (A) At least 550 Total Holders and an average monthly trading volume over the prior 12 months of at least 1,100,000 shares per month; or

    (B) At least 2,200 Total Holders; or

    (C) (i) A minimum of 450 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2.

    (2) Market Value Requirement

    The Unrestricted Publicly Held Shares shall meet one of the following:

    (A) A Market Value of at least $110 million; or

    (B) A Market Value of at least $100 million, if the Company has stockholders’ equity of at least $110 million; or

    (C) A Market Value of at least $45 million in the case of: (i) a Company listing in connection with its initial public offering; and (ii) a Company that is affiliated with, or a spin-off from, another Company listed on the Global Select Market; or

    (D) A Market Value of at least $70 million in the case of a closed end management investment company registered under the Investment Company Act of 1940.

    (3) Valuation Requirement

    A Company, other than a closed end management investment company, shall meet the requirements of sub-paragraph (A), (B), (C), or (D) below:

    (A) (i) Aggregate income from continuing operations before income taxes of at least $11 million over the prior three fiscal years, (ii) positive income from continuing operations before income taxes in each of the prior three fiscal years, and (iii) at least $2.2 million income from continuing operations before income taxes in each of the two most recent fiscal years; or

    (B) (i) Aggregate cash flows of at least $27.5 million over the prior three fiscal years, (ii) positive cash flows in each of the prior three fiscal years, and (iii) average market capitalization of at least $550 million over the prior 12 months and total revenue of at least $110 million in the previous fiscal year; or

    (C) (i) Average market capitalization of at least $850 million over the prior 12 months, and (ii) total revenue of at least $90 million in the previous fiscal year; or

    (D) (i) Market capitalization of at least $160 million, (ii) total assets of at least $80 million, and (iii) stockholders’ equity of at least $55 million.

    NASDAQ Global Market Listing Requirements

    Initial Listing Requirements and Standards for Primary Equity Securities

    A Company applying to list its Primary Equity Security on the Global Market shall meet all of the requirements set forth in Rule 5405(a) and at least one of the Standards in Rule 5405(b).

    (a) Initial Listing Requirements for Primary Equity Securities:

    (1) Minimum bid price of at least $4 per share;

    (2) At least 1,100,000 Unrestricted Publicly Held Shares;

    (3) (i) At least 400 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2;

    (4) If the security is trading in the U.S. over-the-counter market as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

    (5) In the case of ADRs, at least 400,000 issued.

    (b) Initial Listing Standards for Primary Equity Securities:

    (1) Income Standard

    (A) Annual income from continuing operations before income taxes of at least $1,000,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

    (B) Stockholders’ equity of at least $15 million;

    (C) Market Value of Unrestricted Publicly Held Shares of at least $8 million; and

    (D) At least three registered and active Market Makers.

    (2) Equity Standard

    (A) Stockholders’ equity of at least $30 million;

    (B) Two-year operating history;

    (C) Market Value of Unrestricted Publicly Held Shares of at least $18 million; and

    (D) At least three registered and active Market Makers.

    (3) Market Value Standard

    A Company listed under this paragraph does not also need to be in compliance with the quantitative criteria for initial listing in the Rule 5500 series.

    (A) Market Value of Listed Securities of $75 million (current publicly traded Companies must meet this requirement and the $4 bid price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value Standard);

    (B) Market Value of Unrestricted Publicly Held Shares of at least $20 million; and

    (C) At least four registered and active Market Makers.

    (4) Total Assets/Total Revenue Standard

    A Company listed under this paragraph does not also need to be in compliance with the quantitative criteria for initial listing in the Rule 5500 series.

    (A) Total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the three most recently completed fiscal years;

    (B) Market Value of Unrestricted Publicly Held Shares of at least $20 million; and

    (C) At least four registered and active Market Makers.