Securities Regulation and Compliance Q&A

1.What is an Accredited Investor?

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, excluding the value of the primary residence of such person;
  • 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.

2. What is an IPO?

  • The initial sale of securities to the public, i.e. an initial public offering.

3. What is a Market Maker?

  • Broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. The market maker buys and sells a particular security for its own account.

4. What is a Merger?

  • The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

5. Is net worth the same as profit?

  • Net worth is the amount in which assets exceed liabilities. Profits on the other hand are generally the difference between revenue and expenses.

6. What are Penny Stocks?

  • Speculative equity securities (excluding options and investment company shares) with prices under $5 per share. Usually do not meet the listing requirements for NASDAQ or the exchanges. Their sale through broker/dealers is subject to certain rules as to approval of customers, maintenance of information to support quotations, distribution of account statements, and disclosure of risk, quotations, and compensation.

7. What is a Private placement?

  • Securities offered pursuant to an exemption to the registration requirements in the Securities Act of 1933. The most common private placements are completed under Regulation D, rules 506(b) and 506(c).

8. What are Regulation A offerings?

  • Regulation A is an exemption for public offerings not exceeding $5 million in any 12-month period.

9. What does a Reg D entail?

  • The federal regulation pertaining to private placements of offerings to a limited number of people meeting certain suitability standards.

10. How does one perform a Reverse Spilt?

  • A reverse split is completed by combining multiple stock shares into one share such that the stockholder’s equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds fewer shares worth more each.

11. What is Rule 144?

  • The Securities Act of 1933 (“Securities Act”) Rule 144 sets forth certain requirements for the use of Section 4(a)(1) for the resale of securities. Section 4(a)(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.”

12. How does one perform a Stock Split?

  • Divide stock shares into multiple shares such that the stockholder’s equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds more shares worth less each.

13. Are Pinksheets the same as OTCQX Securities?

  • Over the past years, the historical “pinksheets” underwent major changes, including the creation of certain “tiers” of issuers and a new name for the Inter-dealer quotation system – the OTC Link. The OTC Link divides issuers into three (3) levels: OTCQX, OTCQB, and pinksheets.

14. What is Venture Capital?

  • Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies.

15. What is the JOBS Act?

  • On April 5, 2012, President Obama signed the Jumpstart our Business Startups Act (“JOBS Act”) into law. The JOBS Act requires the SEC to write rules and issue studies on capital formation, disclosure and registration requirements.

16. What is the Dodd-Frank Act?

  • The Dodd–Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was written to promote the financial stability of the United States by improving accountability and transparency in the financial system.

17. What does the Sarbanes-Oxley Act of 2002 (SOX) protect?

  • SOX was written to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.

18. When does one have to report to the SEC?

  • A company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”).

19. When must one file a Form 10-K?

  • A Form 10-K must be filed within 90 days of end of a reporting company’s fiscal year.

20. Can you have an Extension on the Form 10-K?

  • An extension of up to 15 calendar days is available for a Form 10-K.

21. When must one file a Form 10-Q?

  • A Form 10-Q must be filed within 45 days of the end of each of a reporting company’s fiscal quarters.

22. When must One file a Form 8-K?

  • A Form 8-K must be filed within four (4) business days after the occurrence of the event being disclosed. No extension is available for an 8-K.

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