Disclaimer

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

• a bank, insurance company, registered investment company, business development company, or small business investment company;
• an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
• a charitable organization, corporation, or partnership with assets exceeding $5 million;
• a director, executive officer, or general partner of the company selling the securities;
• a business in which all the equity owners are accredited investors;
• a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
• a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
• a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Affiliate

An affiliate of, or person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

Associate

A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These very small companies typically involve speculative investments and often fall within the SEC’s definition of penny stocks or are considered microcap stocks.

Because of the nature of blank check companies, the SEC does not allow them to use some of the exemptions from the registration requirements when selling their securities.

Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.

Form D

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read read Rules 504, 505 and 506 of Regulation D.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a Form D after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

If you are thinking about investing in a Reg D company, you should access EDGAR Company Search to determine whether the company has filed Form D. If the company has filed a Form D, you can request a copy. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900.

Equity Security

The term equity security means any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust; any security future on any such security; or any security convertible, with or without consideration into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any put, call, straddle, or other option or privilege of buying such a security from or selling such a security to another without being bound to do so.

Filing and Registration Fees

The SEC collects fees under various provisions of the securities laws, including the following:

• Section 6(b) of the Securities Act of 1933 (for registrations of securities);

• Section 13(e) of the Securities Exchange Act of 1934 (for specified repurchases of securities);

• Section 14(g) of the Securities Exchange Act of 1934 (for proxy solicitations and statements in corporate control transactions); and 

• Section 31 of the Securities Exchange Act of 1934 (for securities transactions on the exchanges and certain over-the-counter markets).

For current rates for fees under Section 6(b), Section 13(e), Section 14(g), or Section 31, please visit the Division of Market Regulation’s Frequently Requested Documents webpage, and click on the most recent Fee Rate Advisory under “Section 31 Fees.” You’ll also find Fee Rate Advisories in the Press Releases section of our website. For official Commission Orders concerning fee rate adjustments, please visit the Other Commission Orders, Notices, and Information section of the SEC website.

An annual report that gives a comprehensive summary of a public company's performance. The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries and audited financial statements.

Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded.

In addition to the 10-K, which is filed annually, a company is also required to file quarterly reports on 10-Q. In case of a significant event, such as a CEO departing or bankruptcy, a Form 8-K must be filed in order to provide up to date information.

Form S-1 is used by public companies to register their securities with the SEC. The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering (IPO). Form S-3 may only be used by companies that have been required to report for a minimum of twelve months.

Form SB-1, SB-2

An SEC form used by small businesses to register offerings of up to $10 million of securities, provided the company has not registered over $10 million in securities offerings during the preceding 12 months. Form SB-2 may be used by "small business issuers" to register securities to be sold for cash. This form requires less detailed information about the issuer's business than Form S-1.

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

The term microcap stock applies to companies with low or micro capitalizations, meaning the total value of the company's stock. Microcap companies typically have limited assets. Microcap stocks tend to be low priced and trade in low volumes.

NASDAQ

The NASDAQ (acronym of National Association of Securities Dealers Automated Quotation System) is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,200 companies, it has more trading volume per day than any other stock exchange in the world.

OTC

Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via corporate-owned facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

In the U.S., over-the-counter trading in stocks is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote and the OTC Bulletin Board.

Penny Stock

Pink Sheets

Pink Quote, informally known as the Pink Sheets, is an electronic quotation system that displays quotes from broker-dealers. Market makers and other brokers can use Pink Quote to publish their bid and ask quotation prices. Starting in 1913, and prior to the creation of the electronic system in 2000, these quotes were printed on pink colored paper.

The Pink Sheets is not stock exchange. To be quoted in the Pink Sheets, companies do not need to fulfill any requirements (e.g. filing financial statements with the SEC). Companies quoted in the Pink Sheets tend to be closely held, extremely small and thinly traded. Most do not meet the minimum U.S. listing requirements for trading on a stock exchange such as the New York Stock Exchange. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies.

For these reasons the SEC views companies listed on Pink Sheets as "among the most risky investments" and advises potential investors to heavily research the companies in which they plan to invest.

Promoter

Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

Prospectus

A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.

The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

An exemption from the registration of small securities offerings. Limited to public offerings not exceeding $5 million in any 12-month period. If you choose to rely on this exemption, your company must file an offering statement, consisting of a notification, offering circular, and exhibits, with the SEC for review.

Regulation A offerings share many characteristics with registered offerings. For example, you must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not "restricted," meaning they are freely tradeable in the secondary market after the offering. The principal advantages of Regulation A offerings, as opposed to full registration, are:

• The financial statements are simpler and don't need to be audited;
• There are no Exchange Act reporting obligations after the offering unless the company has more than $10 million in total assets and more than 500 shareholders;
• Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document; and
• You may "test the waters" to determine if there is adequate interest in your securities before going through the expense of filing with the SEC.

All types of companies which do not report under the Exchange Act may use Regulation A, except "blank check" companies, those with an unspecified business, and investment companies registered or required to be registered under the Investment Company Act of 1940.

If you "test the waters," you can use general solicitation and advertising prior to filing an offering statement with the SEC, giving you the advantage of determining whether there is enough market interest in your securities before you incur the full range of legal, accounting, and other costs associated with filing an offering statement. You may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and you deliver prescribed offering materials to investors.

Reg D - 502

If the issuer sells securities under Rule 505 or Rule 506 to any purchaser that is not an accredited investor, the issuer shall furnish the information to such purchaser a reasonable time prior to sale. The issuer is not required to furnish the specified information to purchasers when it sells securities under Rule 504 or to any accredited investor.

Offerings up to $2,000,000. The information required in Regulation S-X except that only the issuer's balance sheet, which shall be dated within 120 days of the start of the offering, must be audited.

Offerings up to $7,500,000. The financial statement information required in Form S-1 for smaller reporting companies. If an issuer, other than a limited partnership, cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer's balance sheet, which shall be dated within 120 days of the start of the offering, must be audited. If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of Federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant.

Offerings over $7,500,000. The financial statement as would be required in a registration statement filed under the Act on the form that the issuer would be entitled to use. If an issuer, other than a limited partnership, cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer's balance sheet, which shall be dated within 120 days of the start of the offering, must be audited. If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of Federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant.

Except as provided in Rule 504, neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising provided, however, that publication by an issuer of a notice in accordance with Rule 135c shall not be deemed to constitute general solicitation or general advertising.

Except as provided in Rule 504, securities acquired in a transaction under Regulation D cannot be resold without registration under the Act or an exemption therefrom.

Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive restricted securities, meaning that they may not sell the securities without registration or an applicable exemption.

Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met:

• The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
• A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or
• The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to accredited investors.

Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a Form D after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

If you are thinking about investing in a company making a Rule 504 offering, you should access EDGAR Company Search to determine whether the company has filed Form D. If the company has filed a Form D, you can request a copy. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws.

You should always check with your state securities regulator to see if it has more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900.

Reg D - 505

To qualify for this exemption, offers and sales must satisfy the terms and conditions of Rule 501 and 502. In addition, the aggregate offering price for an offering of securities cannot exceed $5,000,000 and the issuer cannot sell to more than 35 purchasers.

Reg D - 506

Offers and sales of securities by an issuer shall be deemed to be transactions not involving any public offering if there are no more than 35 purchasers and each purchaser who is not an accredited investor has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.

In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:

• a description of the company's properties and business;
• a description of the security to be offered for sale;
• information about the management of the company; and
• financial statements certified by independent accountants.

• private offerings to a limited number of persons or institutions;
• offerings of limited size;
• intrastate offerings; and
• securities of municipal, state, and federal governments.

"Restricted" securities are securities acquired in an unregistered, private sale from an issuer or from an affiliate of the issuer. They typically bear a legend clearly stating that you may not resell them in the public marketplace unless the sale is exempt from the SEC’s registration requirements.

Rule 144 under the Securities Act of 1933 provides the most commonly used exemption for holders of restricted securities. To take advantage of this rule, you must meet several conditions, including a one-year holding period.

Even if you’ve met all the conditions of Rule 144, you still cannot sell your restricted securities to the public until you’ve had the legend removed from the certificate. Only a transfer agent can remove a restrictive legend. But the transfer agent won’t remove the legend unless the issuer consents—usually in the form of an opinion letter from the issuer’s counsel to the transfer agent.

If you want to remove the restrictive legend, you should contact the company that issued the securities—or the transfer agent for the company’s securities—to ask about the procedures for removing a legend. If you have a broker, you may want to ask your broker to help you.

If a dispute arises about whether a restricted legend can be removed, the SEC will not normally intervene. The removal of a legend is a matter solely in the discretion of the issuer. State law, not federal law, covers disputes about the removal of legends.

Reverse Merger, Reverse Shell

In a reverse merger, the shareholders of a private company sell all their shares in the private company to a public company. The public company, then issues a large number of shares, which are acquired by the former shareholders of the private company. The public company is finally merged with the private company. In this way, the private company ends up controlling the public company.

As soon as the reverse merger process is completed, two tasks are performed:

1. The private company gives its name to the newly formed public company.
2. An information statement called 8-K, which includes the information about the newly formed company, its new officers and directors and its stocks, and a full description of its business and financial statements audited to US GAAP standards, is filed within 4 days of the merger.

The company can use SB-1, SB-2, or Form 10 for registration. After about three to four months, SEC will declare the registration statement effective and thereafter, the new public company will become a reporting company.

The newly formed public company, which is also a reporting company, must also have a symbol. To obtain the symbol, the company would have make an application to the NASD, which requires filling of Form 15c211. Only a market maker who is the member of the NASD can fill Form 15c211.

Although there are no stringent financial requirements to be listed on the OTC/BB, it is recommended that there are at least 40 to 50 shareholders and sufficient float before approving Form 15c211.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of the auditing profession.

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:

• require that investors receive financial and other significant information concerning securities being offered for public sale; and
• prohibit deceit, misrepresentations, and other fraud in the sale of securities.

With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, and American Stock Exchange are SROs. The National Association of Securities Dealers, which operates the NASDAQ system, is also an SRO.

The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.

The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Share

A share of stock in a corporation or unit of interest in an unincorporated person.

Shelf Registration

A registration of a new issue which be prepared up to two years in advance, so that the issue can be offered quickly as soon as funds are needed or market conditions are favorable.

Shell company

A registrant that has no or nominal operations; and either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets.

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.

Underwriting Fees

The portion of the gross underwriting spread that compensates the securities firms that underwrite a public offering for their services.