By: Brenda Hamilton l Securities Attorney l Hamilton & Associates
Many private companies that go public are opting for the listing on the OTCMarket's Pink Sheets due to the increased costs and more stringent regulations associated with Securities and Exchange Commission ("SEC") reporting. Rule 15c2-11 ("SEC Rule 15c2-11") of the Securities Exchange Act of 1934 (the "Exchange Act") can be used by a private company seeking to go public without an SEC registration statement by a sponsoring market maker submitting a Form 211 with the Financial Industry Regulatory Authority ("FINRA").
This enables the company to be quoted on OTCMarkets Pink Sheets quotation system. In order to go public in this manner, the private company must meet certain requirements discussed below.
The OTCMarkets Quotation System l OTC Pink Sheets
The OTCMarkets Group operates an electronic inter-dealer quotation system called OTC Link, which broker-dealers use to trade securities not listed on a national securities-related exchange. OTCMarkets categorizes issuers in tiers based upon the level of disclosure the company provides.
As discussed below, companies who go public using Form 211 qualify for the "OTC Pink Current Information" tier. The Pink Current Information tier is available to issuers who do not file reports with the SEC, but voluntarily provide specific disclosures required by OTCMarkets.
Requirements to use Form 211 l 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.
The Role of the Market Maker l Submitting Form 211
In order to use Rule 15c-211 to go public, the private company must locate a sponsoring market maker to submit the Form 211 application to FINRA on its behalf. FINRA may render comments to the Form 211 application which the sponsoring market maker and private company must respond to.
Once FINRA is satisfied that the disclosures satisfy the requirements of Rule 15c2-11, it will assign a trading symbol and the Market Maker can quote the company's securities. Once this occurs, the securities of the private company going public are quoted by the OTCMarkets on the OTC Pink Sheets. Once the sponsoring market maker has published quotations for the company's securities for at least 30 days, other market makers can publish quotations for the security.
Market Maker Fees l Form 211 in Going Public Transactions
The market maker chosen by the company to file the Form 211 is not permitted to accept payment for his or her services.
15c-211 Disclosures l Going Public Transactions
Rule 15c-211 requires that the company have current public information available before the market maker can quote the security. The information required in the Form 211 satisfies the current public information of Rule 15c-211. Form 211 requires, among other things, the following disclosures:
● Detailed description of the issuer's business, products/services offered, assets and sources of revenue;
● Description of the company's facilities including the location, square footage and whether owned or leased;
● Identification of officers, directors and holders of more than 5% of the company's securities;
● Certificate of Incorporation and bylaws including any amendments;
● Current transfer agent generated shareholder list, indicating name and address of each shareholder, the number of shares owned, date of share ownership, and whether the shares are restricted, control, or free trading;
● Description of the company's free-trading shareholder base, including a description of exemptions from registration under the Securities Act;
● Agreements creating restrictions, liens or encumbrances on, or relating to, the transfer or voting of shares;
● Agreements evidencing stock rights, warrants or options;
● All stock purchase or asset purchase agreements for last five (5) years;
● Disclosure of whether the company has entered into any discussions or negotiations concerning a potential merger or acquisition candidate;
●Merger and/or consolidation agreements;
● Partnership and/or joint venture agreements;
● Unaudited financial statements for the last 2 fiscal years and interim periods;
● Details of all private offerings including who solicited investors, how they were known to the solicitor, and how many individuals were solicited, and whom did not purchase;
● One full copy of the subscription agreement executed by each investor and copies of all checks from the subscribers or other proof of payment;
● Copies of Form D filed with the SEC;
● Description of all relationships among and between every shareholder and the issuer, its officers and directors, and other shareholders;
● A statement indicating whether any person or entity has control, written or otherwise, of the sale, transfer, disposition, voting or any other aspect of the shares listed on the shareholders list other than the shareholder;
● Whether any officer or director of the issuer had any regulatory action taken against him/her by the SEC, NASDAQ, NYSE or other securities-related regulatory agency and whether any officer or director of the issuer has been convicted of any felony charges within the last 5 years;
● A detailed business plan, which includes a detailed chronological account of each and every step the issuer has taken in furtherance of its stated objective since inception;
● A description of the steps the Company plans to take during the next year in furtherance of its business plan, including the activities in which the Company plans to engage, the names of the persons who will conduct these activities, and the expected dates of these activities;
● A description of any future financing plan;
● Any material agreements or letters of intent entered into by the Company;
● Schedule of all material patents, trademarks, trade names, service marks, and copyrights; and
● Legal opinion from company's securities lawyer as to tradability of the free trading shares.
Going Public on the OTC Pinks l Rule 144
Private companies that go public using 15c2-11 rely on the availability of the safe harbor of Rule 144 of the Securities Act of 1933 (the "Securities Act") to create their free trading shareholder base. Rule 144 is not available for private companies that have ever, at any time, been a shell company, or "blank check company." If a private company was once a shell company it must file a registration statement with the SEC in order to go public without a reverse merger. Generally, for shareholders of private companies that have never been shells, Rule 144 is available 12 months after the payment of consideration so long as the shareholder is not an affiliate of the company.
