Anthony LG LLC Corporate and Securities Law Firm
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Regulation A+ IPO by Laura Anthony Esq

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Introduction

A recent article in the Wall Street Journal by Ruth Simon revealed that, “Roughly a year after the passage of new rules making it easier for fledgling businesses to tap U.S. capital markets, just a handful of them have succeeded in doing so. A Phoenix-based startup that makes three-wheeled vehicles raised roughly $17 million through one such mini-IPO, in which small companies can raise as much as $50 million by issuing securities. Two other companies together have raised nearly $70 million for real estate investments, while a community bank with operations in three Southern states has issued stock for a merger deal.”

It seems that even though smaller companies have been afforded a tremendous financing opportunity by the passage of Regulation A+ few have taken full advantage of the “mini-IPO.” According to MS. Simon, small companies still face several obstacles when raising investor capital; a weak market for initial public offerings, insufficient marketing abilities to attract investors, overoptimism when calculating the minimum amount of money needed to complete the offering, and the JOBS Act’s limited progress in achieving its objectives.

The most prevalent hurdle is also ironically the simplest to overcome; attorneys and broker-dealers do not fully understand Regulation A+ and are consequently still not comfortable with the new fund-raising option.

Attorney Laura Anthony, founding partner of the corporate law firm Anthony L.G., PLLC, joined Andy Kyzyk, Vice President of Advisor Relations for OTC Markets Group, to host a panel discussion on Regulation A+. The Mini-IPO Investor Webinar was presented by VirtualInvestorConferences.com, created by BetterInvesting (NAIC) and PRNewswire. The purpose of the webinar was to elaborate on how Regulation A+ works and what issuers, investors, attorneys and broker-dealers really need to know.

What is Regulation A/A+?

Good morning. I’m attorney Laura Anthony, founding partner of Anthony L.G., PLLC, a corporate and securities law firm with an active Regulation A+ practice. I understand that many of you here today are retail investors and are probably wondering: What is Regulation A or A+?

Regulation A+ is simply a legal process allowing companies to file a registration statement with the SEC that in turn can be used to sell debt or equity securities to the masses to raise capital.

To be clear, it is just a legal process that allows some neat benefits to companies raising capital, such as active advertising and solicitation including through social media. There is no pool of funds to tap into; it is not a line of credit; it is just another process that companies can use to reach out to you, the investing public, and try to convince you to buy stock in, or lend money to, their company.

Like any registered securities, securities sold in a Regulation A+ transaction are not restricted and so they are available to create a secondary market and be traded such as on the OTC Markets or a national exchange.

History of Regulation A+; Goals and Purpose

I keep saying Regulation A+, which as many of you are aware is a relatively new term. The original Regulation A was adopted in the 1960s as a sort of short-form registration process with the SEC. However, since Regulation A still required a lengthy and expensive state review and qualification process, known as “blue sky registration,” over the years it was used less and less until it was barely used at all. Literally years would go by with only a small handful, if any, Regulation A filings; however, the law remained on the books and the authors and advocates behind the JOBS Act saw potential to use Regulation A to democratize the IPO process by implementing some changes.

Without going down a rabbit hole on “blue sky laws” from a high level, in addition to the federal government, every state has its own set of securities laws and securities regulators. Unless the federal law specifically “pre-empts” or overrules state law, every offer and sale of securities must comply with both the federal and the state law. There are 54 U.S. jurisdictions, including all 50 states and 4 territories, each with separate and different securities laws. Even in states that have identical statutes, the state’s interpretations or focus under the statutes differs greatly. On top of that, each state has a filing fee and a review process that takes time to deal with. It’s difficult, time-consuming and expensive.

Title IV of the JOBS Act that was signed into law on April 5, 2012, set out the framework for the new Regulation A and required the SEC to adopt specific rules to implement the new provisions, which it did. The new rules quickly became known as Regulation A+ and came into effect on June 19, 2015. As I’ll discuss further, Regulation A+ has a path to pre-empt state law, and allows for unlimited marketing – as long as certain disclaimers are used, and of course, subject to antifraud laws – you have to be truthful.

As with all of the provisions in the JOBS Act, Regulation A+ was created to provide a less expensive and easier method for smaller companies to access capital. One of the biggest impediments to reaching potential investors has always been strict prohibitions against marketing offerings – whether the offerings were registered with the SEC or under a private placement. Historically, companies wishing to sell securities could only contact people they know and have a business relationship with – which was a small group for anyone. Even the marketing of non-Regulation-A-registered offerings and IPO’s has been strictly limited. The use of a broker-dealer would be helpful because a company could then access that broker-dealer’s client base and contacts, but broker-dealers are not always interested in helping smaller companies raise money.

The JOBS Act made the most dramatic changes to the landscape for the marketing and selling of both private and public offerings since the enactment of the Securities Act of 1933, one of which is the overhaul of Regulation A, which we are talking about today.

In essence, Regulation A+ has given companies a mechanism and tools to empower them to reach out to the masses in completing an IPO and has concurrently put protections in place to prevent an abuse of the process.

Specifics of Regulation A+ – How does it work?

The new Regulation A+ actually divided Regulation A into two offering paths, referred to as Tier 1 and Tier 2. Tier 1 remains substantially the same as the old pre-JOBS Act Regulation A but with a higher offering limit and allowing more marketing. The old Regulation A was limited to offerings of $5 million or less in any 12-month period. The new Tier 1 has been increased to up to $20 million. Since Tier 1 does not pre-empt state law, it is really only useful for offerings that are limited to one but no more than a small handful of states. Tier 1 does not require the company to include audited financial statements and does not have any ongoing SEC reporting requirements. Tier 1 will likely not be used for a going public transaction.

I don’t have a lot to say about Tier 1, except that as an investor, you need to be cognizant of the terms and foundation of any securities being offered to you. If the offering is Tier 1, you need to be aware that the company has no ongoing disclosure or reporting obligations to provide information to you, and be aware of what your exit strategy is since these offerings are not used to create a secondary trading market.

Tier 2 is where the fun is. Tier 2 allows a company to file a registration statement with the SEC to raise up $50 million in a 12-month period. Tier 2 pre-empts state blue sky law. The registration statement is a little less lengthy than a traditional IPO registration, the SEC review process is a little shorter, and a company can market in a way it cannot with a traditional IPO. The trade-off is that Regulation A+ is limited in dollar amount to $50 million, there are specific company eligibility requirements, and there are investor qualifications and associated per-investor investment limits.

Also, the process is not inexpensive. Attorneys’ fees, accounting and audit fees and, of course, marketing expenses all add up. A company needs to be organized and ready before engaging in any offering process, and especially so for a registered offering process. Even though a lot of attorneys, myself included, will provide a flat fee for the process, that flat fee is dependent on certain assumptions, including the level of organization of the company.

Now I’ll drill down on some of these points.

Eligibility

First, eligibility – or what companies are eligible to use Regulation A+ to raise capital? Only companies organized and operating in the United States or Canada are eligible to use Regulation A+. U.S. and Canadian companies are not prohibited from having some international subsidiaries or operations, but the company must be based in either the U.S. or Canada.

Also, hedge funds or similar funds that pool money to invest in other companies are not eligible. Likewise, companies with no particular business plan accept to acquire another company – commonly known as SPAC’s – cannot use Regulation A+. Companies offering fractional undivided interests in oil, gas or other mineral rights are not eligible. Unfortunately, in what is clearly a legislative miss, companies that are already publicly reporting – that is, are already required to file reports with the SEC – are not eligible. OTC Markets has petitioned the SEC to eliminate these eligibility criteria, and pretty well everyone in the industry supports a change here, but for now it remains.

Finally, a company that is disqualified under “bad actor” rules cannot use Regulation A+. The bad actor rules are there to protect investors and disqualify the company from using Regulation A+ if the company itself, its predecessor or an affiliate such as an officer, director, 20%-or-greater shareholder, promoter, broker or others directly involved in selling the offering have been subject to certain administrative orders, industry bars, injunctions involving certain securities law violations or certain specified criminal convictions all within the last 5 years or 10 years depending on the disqualifying event. Eligible companies can only offer debt or equity securities or securities convertible into debt or equity such as options and warrants.

The Process/Who Can Invest

Next, I’ll touch on the process. A company using the Regulation A+ process must file a registration statement with the SEC on a Form 1-A. The offering statement contains information about the company and the offering, including, for example, material risks; plan of distribution; use of proceeds; description of the business operations; discussion of financial condition and results of operations (MD&A); disclosure about directors, executives and key employees; executive compensation; beneficial security ownership information; related party transactions; and two years of financial information. For a Tier 2 offering, that financial information must be prepared in accordance with U.S. GAAP and audited by a PCAOB licensed auditor.The registration statement must include information to confirm that the company is eligible to use Regulation A, including that there are no bad actor issues. The registration statement will also have numerous exhibits, such corporate records and material contracts and agreements.

Of course, the particulars of the offering, such as what is being sold and at what price, need to be included. Key to this information is a reasonable valuation and rational use of proceeds. A company should demonstrate value through its financial statements and disclosures and establish that the intended use of proceeds will result in moving the business plan ahead and hopefully create increased value for the shareholders. Investors want to know that their money is being put to the highest and best use to result in return on investment. Repayment of debt or cashing out of series A investors is generally not a saleable use of proceeds. Looking for $50 million for 30% of a pre-revenue start-up just isn’t going to do it! The company has to be prepared to show you, the investor, that it has a plan, management, vision and ability to carry out the business proposition it is selling.

Like all offerings, the registration statement is subject to the federal antifraud provisions. The federal law prevents a person or company from making an untrue statement of a material fact or omitting a material fact in connection with the purchase or sale of a security. The ultimate goal of the registration process is transparency and disclosure, and you, the investor, have the right to receive adequate information to make an informed investment decision.

Once the registration statement is filed with the SEC, a comment and review process will begin. The SEC will issue comments to the company and the company will, in turn, answer those comments and file amendments to the original Form 1-A, making changes required by the SEC comments. After a few rounds, the SEC will have no further comments and the registration statement can be declared “qualified,” meaning sales can commence.

Although plenty of marketing can occur before the registration is declared qualified – which I’ll talk about next – no actual sales can be made until it is qualified. That is, no money can change hands until the SEC says you’re good to go. The time from the filing of the initial registration through qualification by the SEC is generally two to three months.

Once money can change hands, you, the investor, can buy into the offering; however, there are limitations on how much you can buy. If you are an accredited investor – which generally means you have a net worth of greater than $1 million, not including your primary residence, or you make $200,000 a year or more or $300,000 together with your spouse, and have made that much for the last two years and expect to continue to do so – you can invest as much as you want – no limit. However, if you are not accredited, you cannot invest more than 10% of the greater of your annual income or net worth. Like the bad actor rules, this is an investor protection.

Regardless of your investment ability, remember, these are risky investments by nature. Offering materials should be scrutinized. The SEC does not pass on the merits of an offering – only its disclosures. The fact that the registration statement has been qualified by the SEC has no bearing on the risk associated with or quality of the investment. That is for each investor to decide, either alone or with advisors, and requires really reviewing the offering materials and considering the viability of the business proposal. At the end of the day, the success of the business, and therefore the potential return on investment, requires the company to perform – to sell their widgets, keep ahead of the competition, and manage their business and growth successfully.

Marketing Differences from the Traditional IPO and Testing the Waters

Other than the investment limits, anyone can invest in a Regulation A+ offering, but of course, they have to know about it first – which brings us to marketing. As I’ve mentioned several times already, one of the most important aspects of Regulation A+ is the ability to market the offering, which is also one of the fundamental differences between a Regulation A+ offering and a traditional IPO – the other fundamental difference being that a traditional IPO still requires state blue sky registration.

Regulation A+ allows for marketing of the offering at any time during the process and by any means. A company can use social media, Internet websites, television and radio, print advertisements, and anything they can think of. Marketing can be oral or in writing, with the only limitations being certain disclaimers and truth. This is serious stuff. Although a company can and should be creative in its presentation of information, there are laws in place with serious ramifications requiring truth in the marketing process. Investors should watch for red flags, such as clearly unprovable statements of grandeur, obvious hype or any statements that sound too good to be true – as they are probably are just that.

I continue to concentrate on Tier 2 offerings, but just a reminder, Tier 1 offerings do not pre-empt state law, so any marketing of a Tier 1 offering needs to consider and comply with state law – which can be tricky where the advertisement can be seen by potential investors in other states, such as on a website. In a Tier 1 offering, website advertisements usually have big, bold disclaimers that investments can only be made by persons in a particular state.

When marketing before the registration statement is filed and during the review process, the company is just gathering indications of interest as no sales can be completed – this process is called “testing the waters.” After the registration is qualified, marketing is designed to result in “buy now” solicitations.

When using “test the waters” or pre-qualification marketing, a company must specifically state whether a registration statement has been filed and if one has been filed, provide a link to the filing. Also, the company must specifically state that no money is being solicited and that none will be accepted until after the registration statement is qualified with the SEC. Any investor indications of interest during this time are 100% non-binding – on both parties. That is, the potential investor has no obligation to make an investment when or if the offering is qualified with the SEC, and the company has no obligation to file a registration statement or, if one is already filed, to pursue its qualification. In fact, a company may decide that, based on a poor response to its marketing efforts, it will abandon the offering until some future date or forever.

Once an offering is qualified with the SEC, the marketing is designed to elicit a “buy now” response from investors. The actual purchase of the securities is based on a contract between the company and the investor – usually called a subscription agreement. Subscription agreements are usually written to be irrevocable by the investor – even if the money is in escrow and even if there are still conditions to the ultimate closing of the offering, such as the company reaching a minimum investment amount. Investors need to understand that once they sign the subscription agreement and deposit funds, they are committed. At that point the only way the investment will not proceed is if the company terminates the offering before it closes.

Even though the investor is committed, it is important to read and understand closing conditions and the use of escrow agents. Many offerings are structured with a minimum amount needed to be raised before a closing. In those cases, the funds are usually held in safekeeping by a third-party escrow agent, and the investors should be informed when the minimum is achieved and the investment closed. If the minimum is not achieved and the investment closed in the time specified in the offering documents, all money will be returned and the offering will have failed. This hard fact is a reminder that Regulation A is still just a legal process and ultimately the company has to get out there and sell its securities.

Since the Regulation A+ process is not inexpensive – again, think attorneys’ fees, audit fees, SEC filing fees, and all that marketing – companies should take a hard look at where they are in their business life cycle before deciding to go down this path.

Also, experience has shown that testing the waters doesn’t provide a firm indication of whether an offering will be successful or not. The conversion rate from indications of interest to actual sales is very low – some say as low as 5%. On the other side, a very negative response to test the waters efforts should be taken as a strong indication that the offering, at least as planned at that time, is not a great idea.

The Offering Is Closed – What Now?

Once an offering is closed, a company must file a document with the SEC summarizing the offering, including final sales figures. For a Tier 1 offering, this form is called an exit report and is the last report they must file.

For a Tier 2 offering, the company has ongoing SEC reporting obligations – that is, they have an ongoing obligation of transparency and to provide information to its shareholders and the marketplace. A company that completes a Tier 2 offering must file an annual report with the SEC, including annual audited financial statements and a semiannual report with unaudited financial statements. Both of these reports must contain updated information on the company and progress on its business plans. Also, a company must file periodic reports upon the happening of certain material events.

The annual report must be filed within 120 calendar days of fiscal year-end. The semiannual report must be filed within 90 calendar days after the end of the semiannual period. These Regulation A+ reports are less demanding and intensive than standard 10-Q, 10-K and 8-K reports filed by fully reporting public companies – but from a regulatory perspective, no less important. The SEC has recently closed down an offering by a company that failed to file its annual report.

A company that files Regulation A+ reports can qualify to become publicly traded on the OTC Markets.

A company also has the option of filing a short two-page Form called an 8-A, concurrently upon having its registration statement qualified with the SEC. This Form 8-A will take the company from being a Regulation A+ reporting company to a full SEC reporting company. The company would then have to file full reports on Forms 10-Q and 10-K. A company that intends to seek a listing on a national securities exchange as part of its Regulation A+ IPO must use this option and become subject to the full SEC reporting requirements of a public company as a precondition to qualifying to trade on an exchange.

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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.

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.

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.

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

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.

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.

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.

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.

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.

    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.

    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.

    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.

    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.

    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.

    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.