BASTA HOLDINGS, CORP.
ONGOING COMPLIANCE WITH UNITED STATES SECURITIES LAWS
Sichenzia Ross Friedman Ference LLP
The Multijurisdictional Disclosure System (“MJDS”) adopted by the Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators provides Canadian issuers a streamlined opportunity to more easily gain access to U.S. Capital Markets for both financing needs and other strategic reasons, including the opportunity for Canadian issuers to be listed on a U.S. securities exchanges such as the Nasdaq Stock Market (“NASDAQ”) or New York Stock Exchange (“NYSE”).
On March 30, 2021, the New York State Assembly and State Senate approved the Marijuana Regulation and Taxation Act (MRTA) legalizing, taxing, and regulating recreational marijuana in New York State. The following day, the Governor signed MRTA into law, marking the end of the battle between lawmakers over recreational cannabis in New York, and setting the stage for the emergence of a multi-billion dollar industry. MRTA reforms New York’s criminal laws pertaining to cannabis and directs the reinvestment of substantial portions of tax revenues to communities disproportionally affected by previous drug laws, and also sets forth specific procedures and regulations concerning the impending licensure of persons and organizations to cultivate, process, distribute, and sell cannabis for recreational use by persons aged twenty-one (21) and older.
The Office of Cannabis Management (OCM) & Cannabis Control Board:
MRTA establishes the Office of Cannabis Management, an independent entity within the Division of Alcoholic Beverage Control, comprised and governed by a five-member Cannabis Control Board. The Cannabis Control Board shall have the authority to prescribe forms of applications, licenses and permits, as well as the discretion to make the preliminary determinations on the issuance of more than ten (10) different types of cannabis licenses.
Recreational Cannabis Market Structure & Types of Licenses:
MRTA establishes a tiered market structure for recreational cannabis, modeled after the state’s alcohol industry. License categories for adult-use include cultivation, processing, distribution, retail dispensaries, registered organizations certified for medical use, consumption sites, and delivery. There will also be a Cooperative License category that will authorize groups of individuals to cultivate and process cannabis products; a Nursery License to allow for immature plants to be grown and sold to other licensees; and a Microbusiness License to allow the holder to cultivate, produce, and retail their own cannabis products in limited size quantities.
See the below chart highlighting certain features of each category of adult-use recreational licenses classified by MRTA.
|ADULT-USE LICENSE TYPE:||AUTHORIZES:||FEATURES/RESTRICTIONS:|
|Cultivator License||Acquisition, possession, distribution, cultivation, and sale of cannabis to licensed processors||May apply for and obtain ONE processor’s license and ONE distributor’s license solely for the distribution of their own Products.
Cannot hold a retail dispensary license.
|Registered Organization Adult-Use Cultivator Processor Distributor Retail Dispensary License||Certified for medical use and includes the same authorizations and conditions as adult-use cultivator, adult-use processor, adult-use distributor and adult-use retail dispensary licenses||Location of dispensaries shall be limited to only three of the organizations medical dispensaries’ premises and facilities.
May only distribute its own products
May not also hold another retail dispensary license.
|Registered Organization Adult-Use Cultivator, Processor and
|Certified for medical use and includes the same authorizations and conditions as an adult-use cultivator, processor, and distributor licenses.||Does not qualify such organization for any other adult-use license and may only authorize the distribution of the licensee’s own products.|
|Processor License||Acquisition, possession, processing and sale from cultivators to processors or distributors||License may authorize processing activities at multiple locations if authorized by Board.|
|Cooperative License||Acquisition, possession, cultivation, processing, distribution, and sale to distributors, on-site consumption sites, registered organization and/or retail dispensaries, but NOT directly to consumers.||Must be comprised of residents of state of New York as LLC of LLP. LLC and LLP must adhere to various other organizational structure requirements.|
|Distributor License||Acquisition, possession, distribution and sale from cultivator, processor, cooperative, microbusiness, or registered organizations to retail dispensaries and onsite consumption sites||Cannot have direct or indirect economic interest in microbusiness, retail dispensary, on-site consumption, or registered organization. In the event of direct or indirect interest in cultivator or processor licensee, can only distribute products cultivated or processed by such licensee.|
|Retail Dispensary License||Acquisition, possession, sale and delivery license shall authorize the acquisition, possession, sale, and delivery from licensed premises to cannabis consumers.||No person can have a direct or indirect interest in more than three retail dispensary licenses, and cannot hold a cultivation, processor, microbusiness, cooperative, or distributor license, or be registered as a registered organization. Must be owner of premises in which retail license is applied for or demonstrate possession of premises within thirty days of final approval through lease, management agreement, or other agreement for duration of license period.|
|Microbusiness License||Limited cultivation, processing, distribution, delivery, and dispensing of their own cannabis and cannabis products||May not hold a direct or indirect interest in any other license. Size scope, and eligibility criteria shall be determined in regulation by the board.|
|Delivery License||Delivery of cannabis and cannabis products independent of another cannabis license||Limited to no more than 25 individuals or equivalent thereof in providing full-time paid delivery services to consumers.|
|Nursery license||Production, sale, and distribution of clones, immature plants, seeds, and other agricultural products used specifically for the planting, propagation, and cultivation of cannabis.||May apply for one nursery license to sell directly to other cultivators, cooperatives, microbusinesses, or registered organizations.|
|On-Site Consumption License||Areas licensed solely for the purpose of recreational cannabis use.||Cannot hold interest in more than three on-site consumption licenses. Must be owner of premises in which retail license is applied for or demonstrate possession of premises through lease for duration of license period unless leased from gov’t agency. Cannot hold any other cannabis licenses.|
The Cannabis Control Board is granted the discretion to prescribe the form of applications, licenses, and fees. It may also limit the number of registrations, licenses and permits of each class to be issued within the state or any political subdivision thereof, in a manner that prioritizes social and economic equity applicants with the goal of awarding fifty percent to such applicants. It also aims to consider small business opportunities and concerns, avoid market dominance in sectors of the industry, and reflect the demographics of the state. At this time, the form of the application and associated fees for licensing have not yet been promulgated, but we expect the application decision-making criteria to include a wide range factors unique to each class of license.
If you have any questions about MRTA and navigating this emerging landscape of recreational cannabis in New York, please do not hesitate to contact Marc J. Ross, Esq. at 212-398-5541, email@example.com, or Michael Cuttitta, Esq. at 212-981-6770, firstname.lastname@example.org.
 MRTA imposes a 9% state tax and 4% local tax for retail sales of cannabis. MRTA imposes an additional requirement that adult-use distributors remit taxes based on the per milligram amount of THC (0.5 cents for cannabis flower, 0.8 cents for cannabis concentrate, 3.0 cents for edibles).
 This chart is intended to highlight the main features of each category of license; it is not, nor is it intended to be, all-inclusive of every regulation and authorization pertaining to each category of license.
 This MRTA Alert is for general information purposes and is not intended to advertise our services, solicit clients or represent our legal advice.
In an effort to modernize its registration function, to better conform to the federal securities registration regime, to cure industry confusion as to certain registration requirements and to better track exam requirement compliance of thousands of investment adviser representatives (“IARs”) providing investment advice to New Yorkers, the New York Investor Protection Bureau of the Department of Law (“Department”) has proposed revisions to its current regulations.
Sichenzia Ross Ference has prepared a tax chart showing all proposed tax changes under Biden vs. current under Trump.
It is a downloadable PDF titled “2020 Income Tax Rates and Deductions” that you can access by clicking the link below.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on as, specific tax, legal or accounting advice. Each individual’s situation is unique and may require customized advice. We recommend that you consult your own tax and accounting advisors before engaging in any transaction. Please contact Robert M. Birnbaum, Esq., or Carolyn M. Glynn, Esq. if you are interested in learning more about this or other estate planning topics.
Whether you anticipate your income taxes to increase next year due to higher earnings or changes due to tax legislation, consider the following before December 31.
To offset capital gains:
Defer income and accelerate deductions:
Seize retirement planning opportunities and avoid missteps:
Gifting and charitable strategies:
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on as, specific tax, legal or accounting advice. Each individual’s situation is unique and may require customized advice. We recommend that you consult your own tax and accounting advisors before engaging in any transaction. Please contact Robert M. Birnbaum, Esq., or Carolyn M. Glynn, Esq. if you are interested in learning more about this or other estate planning topics
The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27, 2020 modifies the existing rules governing retirement accounts and helps taxpayers improve their cash flow. Here we highlight (1) the waiver of the 10% penalty applicable to early withdrawals, (2) the enhanced loan provisions, and (3) the suspension of the Required Minimum Distribution rules. Please consult with your tax advisor to determine how you may take advantage of these new rules.
There have been arguably few financial “silver linings” that we can point to in recent months, but there are two (2) opportunities at this time worth noting for wealthy clients interested in mitigating estate and gift taxes.
On June 5, 2019, the United States Securities and Exchange Commission (“Commission”) adopted Rule 15l-1 (“Regulation Best Interest” or “Reg. BI”) under the Securities Exchange Act of 1934 (“Exchange Act”), which has a compliance date of June 30, 2020. What broker-dealers and their compliance and supervisory personnel need to know and do to prepare for July 1, 2020 is priority number one. This second article in this series examining Reg. BI provides tips and tools for, in particular, independent broker-dealers to consider what needs to be done by July 1, 2020 and the balance of the year.
COVID-19 is a harsh reminder that life is fragile and unpredictable. The pandemic has caused many people to acknowledge their mortality and to reevaluate their financial circumstances and life goals. In these rather difficult and uncertain times, the importance of being prepared for a worst-case scenario and having certain essential estate planning documents in place is, unfortunately, paramount. At a minimum, every client should establish (or update) the following in order to protect themselves, their loved ones, and their legacy:
On June 5, 2019, the United States Securities and Exchange Commission (“Commission”) adopted Rule 15l-1 (“Regulation Best Interest”) under the Securities Exchange Act of 1934 (“Exchange Act”), which has a compliance date of June 30, 2020. Regulation Best Interest became effective September 10, 2019. Notwithstanding the host of issues arising from the global pandemic, an economic recession and significant market volatility across essentially every sector, the Commission has made clear that the deadline for compliance with Regulation Best Interest and the related Form CRS requirements will not be delayed or extended.
On March 25, 2020, the Securities and Exchange Commission (the “SEC”) issued new orders extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and also extended regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19.
Dear Clients and Friends,
With widespread government ordered shutdowns resulting from the COVID-19 pandemic, companies are understandably concerned with the interruption to their business operations as well as the financial and economic losses that are beginning to mount. In light of this, it is important that companies take the time to look at their existing insurance policies to examine what options are available to mitigate the impact of the COVID-19 pandemic. The viability of a claim for losses under your existing Property, Event and/or Comprehensive General Liability policies caused by a pandemic or “communicable or infectious diseases” will be largely subject to the specific provisions of your company’s insurance policies.
Sichenzia Ross Ference LLP recommends that all its clients carefully review their insurance policies, including without limitation their Property, Event and Commercial General Liability policies, to determine the scope of coverage for business interruption with particular focus on whether any of those policies include or exclude coverage for losses caused by a communicable or infectious disease such as COVID-19.
We, at Sichenzia Ross Ference LLP, continue to think about our clients and friends during these trying times, and, if there are any ways we might be able to help, ask that you contact us.
On April 15, 2019, the New Jersey Bureau of Securities, within the Division of Consumer Affairs, proposed a new state-level rule requiring all registered financial services professionals to act in accordance with the fiduciary duty to their customers when providing investment advice or recommending to a customer an investment strategy, the opening of or transfer of assets of any type of account, or the purchase, sale, or exchange of any security. Under the proposed rule, any conduct falling short of this fiduciary duty would constitute a “dishonest and unethical practice.”
Under current federal standards, only investment advisers subject to the Investment Advisors Act of 1940 and their representatives operate subject to a fiduciary duty standard. Among other differences from their investment adviser counterparts, broker-dealers and their associated persons typically receive only commissions for transactions they facilitate and for selling financial products – not compensation for financial planning, discretionary trading or investment portfolio advice and management. New Jersey proposes a substantial expansion of regulatory requirements on broker-dealers and their associated persons conducting business within the State of New Jersey.
The Proposed Rule
Dishonest or Unethical Practices
The proposed regulation, N.J.A.C. 13:47A-6.3 and N.J.A.C. 13:47A-6.4, seeks to impose a uniform, state-level duty of care and loyalty for both investment advisers and their representatives as well as broker-dealers and their associated persons doing business within the State. The State’s proposal is a product of its dissatisfaction with the pace of meaningful change to the federal regulatory framework following the United States Department of Labor’s failed Fiduciary Rule* and the scope of the United States Securities and Exchange Commission’s proposed Regulation Best Interest**, to promulgate a new, uniform federal interest ahead of the customer’s interest; (ii) act with diligence, care, skill and prudence; and (iii) disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with the recommendation. Regulation Best Interest does not apply a fiduciary standard to broker-dealers or its associated persons. In addition, Regulation Best Interest allows some duty of loyalty conflict of interests to be mitigated through disclosure to the customer.
Expanded Reach and Duration
As proposed, the fiduciary duty would apply to recommendations to purchase, sell or hold securities and to recommendations about investment strategy, the opening of an account or the transfer of assets to any type of account. Further, the new duty would also apply to contractual and discretionary fiduciaries in addition to investment advice fiduciaries. Moreover, if investment advice is provided, the new fiduciary duty rule would impose an ongoing fiduciary duty for the entire relationship. In other words, dual registered persons who provide both brokerage recommendations and investment advice to a retail customer would be subject to the fiduciary duty for the life of the relationship***
Creating New and Rejecting Old Presumptions
The proposed rule also creates a new presumption that the investment adviser, its representative, the broker-dealer or its associated person breaches the duty of loyalty for any recommendation concerning the opening of, or transfer of assets to a specific type of account, or the purchase, sale or exchange of a specific security “that is not the best of the reasonably available options.” According to the State, the payment of transaction-based fees to broker- dealers or associated persons will not itself be deemed a breach of fiduciary duty, however, so long as “the fee is reasonable and is the best of the reasonably available fee options and the duty of care is satisfied.”
The regulation, if adopted in current form, disallows a presumption that disclosing a conflict of interest satisfies the duty of loyalty.
The proposed regulation applies to retail customer only, i.e., not banks, savings and loan associations, insurance companies, investment advisers, broker-dealers, fiduciaries to employee benefit plans, its participants or beneficiaries, or individuals with at least $50 million in assets.
Books and Records Requirements
Ostensibly to avoid federal preemption, the State’s proposal does not require any new or additional capital, custody, margin, financial responsibility, making and keeping of records, bonding or financial or operational reporting requirements on broker-dealers beyond those already required by federal law.
If you have any questions about the issues addressed in this Broker-Dealer Regulation Alert, if you would like a copy of any of the materials mentioned in it or if you would like to continue to receive Broker-Dealer Regulation Alerts, please do not hesitate to call or email Securities and Commercial Litigation and Securities Regulatory Practice Partner Daniel Scott Furst at (646) 810-2185 or email@example.com ****
*The Department of Labor’s rule was to be implemented starting April 10, 2017, however, on or about June 21, 2018, the United States Fifth Circuit Court of Appeals vacated the rule, effectively killing it.
***Broker-dealer associated persons who act in a broker-only capacity, however, would be subject to the fiduciary duty only through the transaction’s execution.
**The final rulemaking of Regulation Best Interest was approved in a 3-to-1 vote by the Commission on June 5, 2019. Regulation Best Interest is effective 60 days after publication in the Federal Register, and the anticipated implementation date is June 30, 2020. Regulation Best Interest would create a national, heightened standard of conduct for broker-dealers. Regulation Best Interest provides that when a broker- dealer or its associated person recommends securities transaction or investment strategy, the broker-deal or associated person must: (i) act in the customer’s best interest, without placing its financial or other standard applicable to investment advisers and broker-dealers. Specifically, the proposed regulation would define a “dishonest or unethical practice” to include: recommending to a customer, an investment strategy, the opening of, or transfer of any assets to, any type of account, or the purchase, sale, or exchange of any security or securities without reasonable grounds to believe that such strategy, transaction, or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer’s investment objectives, financial situation, and needs, and any other relevant information known by the broker-dealer[.]
****This Broker-Dealer Regulation Alert is for general information purposes only of interest to New Jersey broker-dealers and is not intended to advertise our services, solicit clients or represent our legal advice.
Please find below an overview of California Senate Bill 826 (the “Bill”) which requires publicly held domestic and foreign corporation with principal executive offices located in California to include women on their boards of directors (the “Female Director Requirement”).
Federal Reserve Chairman Jerome Powell, while testifying before Congress yesterday, Tuesday, February 26, 2019, explicitly acknowledged the uncertainty and tension surrounding the access of a company engaged in marijuana or marijuana-related business to banking because of conflicting state and federal laws. When asked about the topic, the Chairman said, “I think it would be great to have clarity,” adding, “Financial institutions and their regulators and supervisors are in a difficult position with marijuana being illegal under federal law and legal under some state laws.”
Further, last week, the House Financial Services Committee made history by holding its first ever hearing on marijuana and financial services. Up for discussion at that hearing was a new draft of the Secure and Fair Enforcement (SAFE) Banking Act. Last year, Congress introduced the SAFE Act of 2017, which stalled and went nowhere. Colorado Rep. Ed Perlmutter, a prime sponsor of the bill, has been introducing a version of this bill for almost six years, but has failed to get a hearing until now. This year, not only is the bill going to be discussed, but the bill is even more robust, specifically adding protections for ancillary businesses providing products and services to marijuana-related businesses.
As Treasury Secretary Steven Mnuchin made clear while testifying before Congress last year, he too would like to see marijuana businesses able to access banking services. “I assure you that we don’t want bags of cash,” he said before a House Committee last year. “We want to find a solution to make sure that the businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”
Today, while 10 states and the district of Columbia have legalized recreational marijuana, marijuana remains illegal on the federal level, listed as a Schedule 1 drug, along with heroin and LSD. And, while an increasing number of financial institutions are willing to bank marijuana and marijuana-related businesses, there still is a predominant, industry-wide reluctance to get involved, whether because of the added compliance that is required, or because of the unclear restrictions that are promulgated, by the Department of the Treasury.
The long-awaited resurgence of the Agriculture Improvement Act of 2018, colloquially referred to as the 2018 Farm Bill, became more promising yesterday as its latest iteration received overwhelming bipartisan approval as it decidedly passed through the Senate on Tuesday, by a vote of 87-to-13, and easily passed through the House of Representatives, by a vote of 369-to-47. Now, the reality of the 2018 Farm Bill awaits the hand of President Donald Trump, who is expected to sign it into law before the end of the month.
Most notable, the 2018 Farm Bill is set to legalize hemp, a plant that’s nearly identical to marijuana and is a key source of the highly popular health and wellness ingredient cannabinoid, or CBD. If signed into law, the 803-page Bill would be the most significant change to the Controlled Substances Act (the “CSA”) since 1971, which is illustrative of the federal government’s recognition that outdated federal regulations do not sufficiently distinguish between hemp, including CBD derived from hemp, and CBD derived from marijuana.
In contrast to its predecessor, the voluminous 2018 Farm Bill expressly and unambiguously provides that the definition of “marihuana” under the CSA would be amended to exclude “hemp”, which, in turn, is defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” Succinctly, if signed into law, the 2018 Farm Bill would be the first piece of federal legislation that explicitly carves out certain permutations of CBD containing tetrahydrocannabinol (“THC”), the active ingredient that causes the psychoactive effect of marijuana, from the CSA.
Against this backdrop, financial institutions that have been reluctant to establish relationships with hemp-related business because of the inclusion of “hemp” in the CSA’s definition of “marihuana” and the February 14, 2014 guidance from the Department of the Treasury Financial Crimes Enforcement Network, may now turn a new leaf and embrace the estimated $1 billion industry.
Relatedly, and in furtherance of the federal government’s progressive initiative toward the proliferation of the rapidly increasing hemp market, the 2018 Farm Bill also places far-reaching limitations on the States’ abilities to prevent the transport of hemp across interstate commerce. Specifically, the 2018 Farm Bill states, in relevant part, that “No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products,” so long as such hemp or hemp products are produced in accordance with discrete guidelines set forth elsewhere in the 2018 Farm Bill.
Notwithstanding, this monumental shift in cannabis reform should not be misconstrued as a blanket legalization of hemp at the state level. Conversely, the 2018 Farm Bill provides a roadmap for states and Indian tribes to become the “primary regulators” of hemp production by submitting “a plan under which the State or Indian tribe monitors and regulates” the production of hemp within its borders. In this regard, those interested in getting involved in the hemp industry, in any capacity, are cautioned to review the applicable state law, which may carry more stringent restrictions than the 2018 Farm Bill, as well as any other pertinent federal authority.
Finally, it is worth noting that nothing in the 2018 Farm Bill implicates the status quo of marijuana or CBD derived from marijuana, both of which remain illegal under federal law. And while the legal landscape remains somewhat hazy, bipartisan agreement of the 2018 Farm Bill marks a long-overdue, massive step forward for the U.S. hemp industry.
About the authors
On August 31, 2018, the California State Senate passed novel legislation, Senate Bill 1235, which requires new disclosures for certain commercial financing, such as loans, factoring transactions, and, potentially, merchant cash advances (MCAs). California Governor Jerry Brown has until September 30 to sign this legislation, and it appears likely that he will. continue reading >>
In an August 2017 posting we reported that the U.S. Tax Court had held that, notwithstanding an IRS revenue ruling to the contrary, the sale by a foreign partner of his interest in a U.S. partnership was not a taxable transaction to him (assuming he was not otherwise a U.S. taxpayer), just as the sale of stock in a U.S. corporation is not a taxable transaction to a foreign shareholder. (“Tax Court: Foreign investors not taxable on sales/liquidations, of U.S. partnership interests.”)
Press Release – New York, NY – July 26, 2017 – Jodi B. Zimmerman, Esq. of Sichenzia Ross Ference Kesner LLP participated in a Q&A blog post hosted by eSignatureGuarantee Group, to share “What You Should Know About Creating A Last Will & Testament.” The Q&A outlines the reasons for planning ahead, what to be aware of, and most importantly — the impact on your family and community.
Marc J. Ross, Esq. (Partner) and A.R. John Hitchings, Esq. (Associate)
What is the Defense Trade Secrets Act (DTSA)?
What do employers need to do to take advantage of this new federal statute?
Jay Kaplowitz, Cass Sanford, Tessa Patti
BASTA HOLDINGS, CORP.
ONGOING COMPLIANCE WITH UNITED STATES SECURITIES LAWS
Sichenzia Ross Friedman Ference LLP
On January 13, 2016 the SEC approved interim final rules implementing two provisions of the Fixing America’s Surface Transportation (FAST) Act, adopted by Congress in December, that revise financial reporting forms for emerging growth companies* and smaller reporting companies.** continue reading >>
President Obama signed the Fixing America’s Surface Transportation Act, or FAST Act, into law on December 4, 2015. The FAST Act, which is aimed at improving the country’s surface transportation infrastructure, also contains several sections that amend securities laws to ease regulatory burdens for smaller companies.
Improving Access to Capital for Emerging Growth Companies, or EGCs continue reading >>
December 9, 2015 – Sichenzia Ross Friedman Ference founding partner Gregory Sichenzia appears on Lawline, continue reading >>
November 30, 2015
Crowdfunding continues to garner more and more attention as the SEC pushes forward implementing the 2012 JOBS Act. continue reading >>
Under the Securities Act of 1933, as amended (the “Securities Act”), any public securities offering must be registered with the Securities and Exchange Commission (the “SEC”). In a follow-on public offering, a publicly reporting company offers securities to the public in an offering registered with the SEC subsequent to the completion of the issuer’s initial public offering.
Form S-3 and Rule 415 Eligibility
The general form for registration of securities under the Securities Act is Form S-1. A filing made on Form S-1 must include extensive disclosure regarding the issuer and the offering, including, among other things, audited financial statements, a description of the issuer’s business and properties, management’s discussion and analysis of financial condition and results of operations, identification of and certain information regarding officers and directors of the issuer and its principal stockholders, the terms of the offering, and risk factors and plan of distribution (such as underwriting arrangements) for the offering.
As an alternative to the filing of a Form S-1, issuers that meet the requisite conditions may register offerings on Form S-3, a “short-form” registration pursuant to which certain information about the issuer may be incorporated by reference from previous and future filings made by the issuer with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It should be noted that Form S-1 also allows incorporation by reference under certain conditions, but only to prior filings made under the Exchange Act. By incorporating by reference future filings made by the issuer under the Exchange Act, a Form S-3 registration statement obviates the need to file post-effective amendments when, for example, the issuer’s financial statements included in the initial registration statement are no longer deemed current, or there are otherwise material changes that have occurred to the issuer that are disclosed in filings made with the SEC.
Accordingly, issuers seeking to do a follow-on public offering will, subject to eligibility, file a Form S-3 rather than a Form S-1. To be eligible to file a registration statement on Form S-3, an issuer must meet the following conditions:
(i) the issuer is organized under the laws of, and has its principal business operations, in the United States (or files the same reports with the SEC as a domestic issuer subject to the Exchange Act);
(ii) the issuer has a class of securities registered pursuant to Section 12(b) or 12(g) under the Exchange Act, or is required to file reports under Section 15(d) under the Exchange Act;
(iii) the issuer has been subject to the requirements of Section 12 or 15(d) of the Exchange Act and has filed all the material required to be filed pursuant to the Exchange Act for a period of at least twelve calendar months immediately preceding the filing;
(iv) the issuer has filed in a timely manner all reports required under the Exchange Act during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement, other than a Current Report that is required solely pursuant to certain specified 8-K Items; and
(v) the issuer has not, since the end of the last fiscal year for which its audited financial statements were included in a report filed pursuant to the Exchange Act: (a) failed to pay any dividend or sinking fund installment on preferred stock; or (b) defaulted (i) on any installment or installments on indebtedness for borrowed money, or (ii) on any rental on one or more long term leases, which defaults are material to the financial position of the issuer.
Follow-on offerings are typically conducted under Rule 415 under the Securities Act, which allows for an “offering to be made on a continuous or delayed basis in the future”. Thus, under Rule 415, an issuer may, at its convenience, file a “shelf” registration statement which includes a “base” prospectus, have the registration statement declared effective by the SEC, and subsequently, when it deems conditions suitable, conduct an offering by taking securities down “off the shelf.” The shelf registration statement will specify a maximum dollar amount, and the type of securities (for example, common stock, preferred stock, warrants, debt securities and/or units consisting of some combination of the foregoing), that may be offered, but will not include specific offering terms. To take securities “off the shelf,” the issuer will file a prospectus supplement which sets forth the specific terms of the offering (for example, underwriting arrangements, and price, number and type of securities). Unlike the original “base” Form S-3 filing, the prospectus supplement does not need to be declared effective by the SEC. The issuer can conduct multiple offerings on a single Form S-3 shelf registration statement, for a period of up to three years from when the shelf Form S-3 was declared effective, by filing a prospectus supplement for each such offering, up to the maximum dollar amount initially registered on the shelf registration statement (subject to any “baby shelf” limitations as discussed below), so long as the issuer remains S-3 eligible (which is determined on an annual basis when the issuer files its Annual Report on Form 10-K). Primary offerings made pursuant to Rule 415 must be made on (or be eligible for) Form S-3 and thus are typically registered on Form S-3.
“Baby Shelf” Offerings and Calculating “Public Float”
In addition to the issuer meeting the requirements for the filing of a Form S-3 specified above, primary offerings of common equity for cash made under Form S-3 must also meet the following conditions:
(i) the aggregate market value of the issuer’s common equity held by non-affiliates of the issuer (sometimes referred to as the “public float”) is $75 million or more; or
(ii) under what is known as a “baby shelf” offering, for an issuer which has a public float of its common equity of less than $75 million, (a) the aggregate market value of securities sold by the issuer under Instruction I.B.6 of Form S-3 (for primary offerings for cash) during the period of 12 months immediately prior to, and including, the sale is no more than one-third of its public float, (b) the issuer has not been a shell company for more than 12 months, or if it has been a shell company at any time previously, has filed current “Form 10 information” (which includes similar disclosure as required by a Form S-1 registration statement) with the SEC at least 12 months prior thereto, and (c) the issuer has a class of equity securities listed on a national securities exchange.
Thus, to conduct a “baby shelf” offering, an issuer must have a class of equity securities listed on a national securities exchange, such as the New York Stock Exchange or the Nasdaq Stock Market. This requirement does not apply to companies that have a public float of at least $75 million, which may conduct unlimited “shelf” offerings (subject to meeting the other conditions set forth above). The availability of “baby shelf” offerings to companies with less than $75 million in their public float, which has existed since amendments to Form S-3 were effected in January 2008, has provided an additional incentive for small companies to seek a listing on a national securities exchange while providing such companies with greater opportunities to conduct primary public offerings.
“Common equity” is defined for purposes of S-3 eligibility as any class of common stock or any equivalent interest and may include non-voting common stock. The calculation of the public float for purposes of determining whether the “baby shelf” limitations apply is based on the price at which the common equity was last sold, or the average of the bid and asked prices of such common equity, for such common equity as of any date within 60 days prior to the date of filing of the shelf Form S-3, multiplied by the number of shares of common equity held by non-affiliates. Non-affiliates are generally presumed to include shareholders other than officers, directors and shareholders who beneficially own 10% or more of the outstanding common equity. An issuer may use the highest such closing price within such 60 day period, multiplied by the number of shares held by non-affiliates as of the date of filing (or the number of shares held by non-affiliates as of any day within such 60 day period, which need not be the same date as the date used for the price of the common equity), to determine whether the “baby shelf” limitations apply or whether the issuer can sell an unlimited amount of securities off the shelf Form S-3. If the public float exceeds $75 million as of the date of the filing of the shelf Form S-3, calculated based on the 60 day lookback period described above, and subsequently falls below $75 million, the issuer will nonetheless not be subject to the “baby shelf” limitations until the issuer files its next Annual Report on Form 10-K, at which time such eligibility is reassessed.
Similarly, if an issuer is subject to the “baby shelf” limitation of selling only one-third of its public float over a one year period, the amount of securities an issuer may sell under a “baby shelf” offering will be equal to one-third of the public float as determined based on the price at which the common equity was last sold, or the average of the bid and asked prices of such common equity for such common equity as of any date within 60 days prior to the date of sale, multiplied by the number of shares of common equity held by non-affiliates. The date used for the price of the common equity and the date used for the number of shares held by non-affiliates do not need to be the same. For example, if, as of October 20, 2015, the highest closing price of an issuer’s common stock within the past 60 days was $3.00 which occurred on September 10, 2015, and the issuer has 10,000,000 shares of common stock held by non-affiliates as of October 20, 2015, the issuer may calculate its public float as of October 20, 2015 to be equal to $30,000,000 (notwithstanding that there may have been fewer than 10,000,000 shares held by non-affiliates as of September 10, 2015), and may sell up to $10,000,000 of common stock under Instruction I.B.6 of Form S-3 during the one year period ending on October 20, 2015. Further, if the issuer’s public float was less than $75 million as of the date of the filing of the shelf Form S-3, but subsequently, while the Form S-3 is effective, the public float exceeds $75 million, such “baby shelf” limitations will no longer apply. The value of securities underlying warrants included in a “baby shelf” offering will also count towards the “baby shelf” limitations.
The information in this article is for general, educational purposes only and should not be taken as specific legal advice.
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On August 6th, 2015, the SEC responded to letter a from Citizen VC, Inc. continue reading >>
August 19, 2015 — Sichenzia Ross Friedman Ference LLP Sports and Entertainment Chairman Ed Schauder, Esq. was interviewed this week by Professional Sports and the Law continue reading >>
In our last blog post covering international tax planning, we focused on the unique tax traps related to international acquisitions. In our final installment, we discuss the tax considerations for foreign businesses looking to acquire companies in the U.S.
The U.S. is still the big apple for most foreign businesses, but deciding how to get a bite of it requires careful tax planning.
This article is meant to address the commitments a Chinese entrepreneur interested in accessing the US capital markets should be prepared to make. continue reading >>
A reverse merger is a common method by which private companies go public.
Companies appreciate this method because it is generally quick, though the process is comparatively expensive to other ways of going public. continue reading >>
From a tax standpoint international acquisitions – whether starting your own subsidiary or buying a foreign company — require special attention. continue reading >>
Why Go Public?
“There was a time a few years ago when the United States was spoken of in the plural number.
Men said ‘the United States are’ — ‘the United States have’ — ‘the United States were.’ But the war changed all that.” The Washington Post, April 24, 1887. The phrase “United States” became a singular noun after the Civil War. continue reading >>
On January 14, 2015, the House of Representatives passed H.R. 37, a bill that would continue reading >>
January 29, 2015
An issuer organized outside of the United States may seek to be classified as a foreign private issuer (“FPI”) in order to benefit from certain accommodations that may not be available to domestic issuers under Nasdaq Stock Market (“NASDAQ”) and New York Stock Exchange (“NYSE”) rules. continue reading >>
New York, NY – January 9, 2015 – Press Release – Marc J. Ross is a leading authority involving the issues surrounding the marijuana legalization debate and the developing, yet still conflicting, laws across the U.S. concerning marijuana and marijuana-related businesses. continue reading >>
Stock options are a popular method of providing executive compensation for start-up or young companies. They don’t cost the company any cash and they give the employees an incentive to make the company succeed. But stock options come in different forms, and the form you choose can have a big impact on the tax consequences to your employees. continue reading >>
December 4, 2014: In Atalese v. U.S. Legal Servs. Group, the Supreme Court of New Jersey recently held an arbitration clause unenforceable where the provision did not contain an express waiver of the consumer’s right to sue in court. The Court found that, continue reading >>
The resolution of tension between two desires of a subset of powerful investors—to sell, and to govern well—is the impetus behind the affiliate sale provisions as drafted in the amended Rule 144.
Rule 144 is the main avenue open to affiliates to sell un-registered securities in the public market. An “affiliate” of an issuer is defined as a “person” who directly or indirectly controls the issuer, generally any executive officer, director or shareholder beneficially-owning 10% or more of the issued and outstanding shares. Volume limitations, reporting obligations and manner of sale provisions, as well as a definition of “person” that responds to the concept of “indirect control,” are among the measures incorporated into Rule 144, in view of the SEC’s understanding that, absent limitations, those in control of a company could be liable for significant abuses in sales of un-registered securities.
Affiliates should know who they are, and what their obligations under the rule are in order to plan efficient sales with reduced liability potential. Additional benefits may be gained at the point of negotiating director or officer compensation. Negotiators may better gauge the value of un-registered compensation shares if they understand the workings of the Rule 144 affiliate sale process.
The navigation of affiliate sale requirements begins with a substantive analysis: Is a given security-holder an “affiliate” for the purpose of Rule 144? The answer is complicated by the broad definition of “person,” which responds to the possibility of “indirect control” of an issuer.
As stated above, an affiliate is defined as a person who directly or indirectly controls the issuer. “Indirect control” is determined in courts through a facts and circumstances analysis—it is a “know-it-when-we-see-it” idea. A director’s wife, for example, may exert indirect control on a company through influence, though she holds no formal position and may not own many shares. When does an ordinary filial relationship become a control relationship with the issuer? The question becomes more involved when determining when percentage-ownership, perhaps by an otherwise ordinary public investor, translates to having “control” of a company. Courts consider 10% beneficial ownership indicative of a control relationship, but not dispositive.
Rule 144 gets in front of these questions by counting a range of people, entities and donees related to an individual security-holder as one “person.” Individuals or entities that constitute one affiliated “person” are individually subject to the affiliate sale rules, and their sales will be considered cumulatively as if they were one seller. An analysis of affiliate status can be done on a case-by-case basis where circumstances are vague or there are countervailing factors weighing against otherwise suspicious relationships. For this reason, determining whether one is an affiliate can be a rigorous point of investigation, and it must be done before sales can be planned.
Rule 144 permits sales where an affiliate did not acquire shares with the intent to profit by distributing them, possibly at the expense of the issuer or the investing public. Volume limitations, manner of sale provisions and an obligation to report sales of a certain size, are factors the SEC believes demonstrate an affiliate assumed the economic risk of investment. Assumption of economic risk cleanses an affiliate’s intent in the eyes of the authorities.
Volume limitations control the rate at which securities may be sold. Quarterly sales of shares in an exchange-listed issuer are limited to the greater of 1% of the issued and outstanding shares of the same class being sold, or the average weekly trading volume during the preceding four weeks. An affiliate in a non-exchange listed issuer (such as an OTC Bulletin Board or OTC Markets company) must use the 1% measurement. Volume limitations present a significant, though straightforward, control on affiliate sales, and affiliates should consider them when planning sales on a timeline.
Manner of sale provisions prescribe the appropriate relationship between an affiliate and a broker. They prevent sales from taking on the semblance of distributions, through commission structures or otherwise. Affiliates must sell equity securities in unsolicited broker’s transactions directly with a market maker, or in riskless principal transactions. A broker must do no more than execute an order to sell the securities as agent for the affiliate, and may receive no more than customary commission. Solicitation for buy orders is generally inappropriate. The SEC has cited the “gatekeeper” role of the broker to ensure compliance with Rule 144. By turn, affiliates should select brokers with care and construct healthy sale relationships with them in view of the manner of sale provisions.
Finally, the SEC requests to be made aware of significant public securities transfers by affiliates. Affiliates must file Form 144 with the SEC in advance of sales of more than 5,000 shares or $50,000 aggregate dollar value. The sale must take place within three months of filing the form.
Officers, directors or large shareholders of an issuer should have a firm grasp of the affiliate sale rules under Rule 144, so they may plan sales efficiently, effectively and properly. This begins with knowing whether one is an affiliate, and how to count shares using the definition of “person” described above. Once affiliate status is determined, the obligation runs to sell in compliance with volume limitations, manner of sale provisions and Form 144 reporting. At the time of sale, this insulates affiliates from liability, and allows them to cultivate reputations as responsible controlling investors. At the time of employment contract negotiation, knowledge of the affiliate sale process can help an officer or director better gauge the value of compensation shares. Most importantly, being in compliance with Rule 144 enables an affiliate perform its duties to the issuer and the investing public, while participating actively in the market.
The information in this blog post is for general, educational purposes only and should not be taken as specific legal advice.
Written by Jennifer R. Rodriguez, Esq.
Entrepreneurs often choose limited liability companies to incubate their businesses. An LLC offers a simple entity structure, it lets the members claim start-up losses on their own tax returns, and it eliminates the double tax imposed on a corporate structure once the venture turns profitable.
But an LLC has a tax defect that its owners frequently don’t understand until it’s too late: because it is not a corporation an LLC cannot participate in a tax-free corporate reorganization. So when the owners sell their LLC interests to another company for stock, the transaction is a taxable event to them but they don’t get cash to pay the tax on any gain.
If the stock trades publicly the owners can sell some of it to raise cash for the taxes. But they may not want to do that, and there may be SEC- or deal-driven lockups that prohibit them from selling before the tax is due. If the stock doesn’t trade publicly, they may need to find cash somewhere else.
The buyer may have a number of reasons for wanting to acquire membership interests of an LLC using its stock as currency: it may not have the cash itself, or want to use it, or it may want the sellers to continue to have an equity interest in the company and be motivated to help it succeed. The buyer may propose a stock-for-stock exchange, a stock-for-assets exchange, or a merger. All of these transactions could be tax-free to the sellers who own the target – but only if the target is a corporation.
There are solutions to this problem, but each solution carries tax risks. The sellers can incorporate their LLC (or elect to have it treated as a corporation for tax purposes) before the acquisition and then exchange their stock in the new corporation for stock in the buyer. But this approach will usually generate a so-called “step-transaction” analysis: if the IRS decides that the conversion of the LLC into a “C” corporation and the subsequent stock exchange were all part of the same transaction, and that there was no non-tax reason for the conversion, it will disregard the first step – the conversion – and treat the transaction as a taxable sale of the LLC interests. The closer the conversion occurs to the acquisition, the more likely the step-transaction doctrine will be applied.
Another solution is to structure the exchange as a tax-free “Section 351 transfer”. Section 351 transfers can involve property (as opposed to just stock). In a section 351 transfer the seller contributes his LLC interests (or the LLC’s assets) to a new corporation, and the buyer contributes stock (or other property) to the new corporation, and if together the seller and the buyer control more than 80% of the new corporation, then the transfer is tax-free.
But this solution has its drawbacks, as well. For one thing the stock that the seller now owns is not stock in the buyer but in a corporation that is a subsidiary of the buyer. That stock probably won’t be sellable. After a decent interval (which could be as long as a year) the parties could liquidate the subsidiary into the buyer and distribute stock in the buyer, but if they do that too soon then — you guessed it — the step-transaction analysis is applied once again. And if the buyer uses treasury stock to capitalize the subsidiary, there is an unsettled legal question as to whether the transfer is still tax free to the seller. In any event, the section 351 transfer forces the buyer to hold the target’s business in a subsidiary company, something it may not wish to do.
There are also non-tax solutions: the deal might require the buyer to provide enough cash consideration for the seller to pay the tax, but then the amount of cash becomes a negotiating point and chances are the seller gives up something in return for it.
The best solution to the LLC problem is to plan ahead. Way ahead. Do you need an LLC in the first place – will the tax benefits of the losses justify the potential tax problem on a sale for stock? Would an S corporation serve as an alternative to an LLC? (It’s not an alternative if there are foreign, corporate or (in some cases) trust owners, more than 100 owners, or more than one class of equity.) If you plan to sell the business before it turns a profit (and then there would be no benefit to the tax flow-through) should you just start with a corporation in the first place? There are no boiler-plate answers to these questions; the alternatives need to be analyzed in the context of the business and the exit strategy.
If you already have an LLC and plan to sell, the best solution is still to plan ahead. If today you foresee a sale of your company in a year or so, now may be the time to convert it to a corporation. The further in advance of the sale that you do so, the more likely you are to avoid the step-transaction doctrine. (LLCs can usually be converted to corporations tax-free.) Again, there is no one-solution-fits-all, but you will have more options if you address the problem well in advance of the sale.
The corporate tax-free exchange rules of the tax laws are among the most complicated in the Internal Revenue Code, but people have been dealing with them for decades and a solution is often available, as long as you leave yourself enough time and flexibility to find it.
Written by Michael Savage, Esq.
The information in this article is for general, educational purposes only and should not be taken as specific legal advice.