Now That You’re Public
BASTA HOLDINGS, CORP.
ONGOING COMPLIANCE WITH UNITED STATES SECURITIES LAWS
Sichenzia Ross Friedman Ference LLP
Table of Contents
Short Guide to Ongoing Compliance Requirements Under United States Securities Regulations
Basta Holdings, Corp. – 1934 Act Filing Calendar
Summary: Sources of the Company’s Legal Obligations in the United States.
Potential Liabilities under United States Securities Laws
Statement of Company Policy Regarding Confidentiality and Security Trades by Company Personnel
Memorandum Regarding Section 16 of the Exchange Act of 1934 Restrictions on Short Swing Transactions
- Short-Swing Profit Rule 16 (b) Checklist
- Insider Trading Reminders
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Floor New York NY 10006
Tel 212.930.9700 Fax 212.930.9725
May 7, 2015
Basta Holdings, Corp.
1111 Kane Concourse, Suite 518
Bay Harbor Islands, FL 33154
Attn: David Gitman
Re: Ongoing Compliance with United State Securities Laws
Dear Mr. Gitman:
This memorandum provides a short guide to the ongoing compliance requirements of the Securities and Exchange Commission (“SEC” or the “Commission”) for Basta Holdings, Corp. (the “Company”).
The laws and regulations discussed below are complex and subject to amendment and reinterpretation. Accordingly, this memorandum should be used only as a reference guide to help determine when to consult with Sichenzia Ross Friedman Ference LLP (“SRFF”), rather than as a definitive answer to any questions that might arise.
We suggest that this memorandum be copied and distributed among Company personnel with responsibilities that might have implications for compliance with the SEC.
Also included is a statement of policy regarding trading in the Company’s securities that you may consider adopting and a memorandum regarding Section 16 compliance for officers and directors.
OVERVIEW OF APPLICABLE LAWS AND OBLIGATIONS
There are three principal sources of legal obligations in the United States that result from registering securities with the SEC. First, the Securities Act of 1933, as amended (the “Securities Act”) regulates offerings of securities in the United States. Second, the Securities Exchange Act of 1934, as amended (the “Exchange Act”) establishes ongoing reporting requirements for companies that have securities listed on a United States securities exchange. Third, the Financial Industry Regulatory Authority (“FINRA”) has a set of rules that apply to companies with securities listed on the OTC Markets Group. The Sarbanes-Oxley Act of 2002 significantly amended sections of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder. This memorandum incorporates relevant implications of these amendments to date.
REPORTING REQUIRED BY THE SEC
(A) Annual Reports of Form 10-K.
The Exchange Act requires that the Company, as a smaller reporting company, file an annual report on Form 10-K with the SEC within ninety (90) days of the end of its fiscal year. The purpose of the filing on Form 10-K is to provide the SEC with a thorough annual update of the information that was presented in the registration of the initial offering of shares of common stock.
The disclosure requirements of Form 10-K relate to the business, results of operations and financial condition of the Company. Specifically, the Form is structured in four parts:
- Part I contains the detailed disclosure requirements relating to business, risk factors, unresolved SEC staff comments, properties, and legal proceedings;
- Part II contains market information and related stockholder matters, selected financial data, management’s discussion and analysis of financial conditions and results of operations, quantitative and qualitative disclosures about market risk, financial statements and supplementary data, a description of changes in and disagreements with accountants on accounting and financial disclosure, controls and procedures and other information;
- Part III consists of the proxy disclosure information that relates to directors, executive officers, and corporate governance, executive compensation, beneficial ownership of securities, related party transactions, director independence and principal accountants’ fees and services; and
- Part IV contains requirements for financial statement schedules and standardized requirements for exhibits.
Form 10-K is the core document for ongoing compliance with the United States securities laws. As such, it requires attention by the highest levels of management as early as possible each year. The Company’s CEO and CFO are required to certify that the information contained in the Company’s Form 10-K does not contain an untrue statement of a material fact and that the financial information in the report accurately presents the financial condition of the Company. Every year, preparation of the Form 10-K will require careful review to ensure that material events that occurred during the year are adequately disclosed. Significant penalties may be imposed for any officer who certifies (up to $1,000,000, 10 years in prison, or both) or who willfully certifies (up to $5,000,000, 20 years in prison, or both) a Form 10-K when that certifying officer knows the reported financial condition and results of operation of the Company are false.
In the Form 10-K, the Company’s CEO and CFO must also certify that (i) they have designed internal controls to ensure material information is made known to them and that they have disclosed in the report their conclusions as to the effectiveness of such controls, (ii) they have disclosed information to the Company’s auditors and the audit committee of the board of directors about the internal controls, and (iii) they have disclosed in the report any significant changes in the internal controls since the most recent evaluation. In addition, the Company must maintain, and regularly evaluate the effectiveness of disclosure controls and procedures to ensure that the information disclosed in reports field with the SEC is recorded, processed, summarized, and reported on a timely basis.
The process of preparing the Form 10-K on an ongoing basis will take a number of weeks and will require participation by personnel of the Company and SRFF.
(B) Quarterly Reports on Form 10-Q For Financial Information and Other Material Events
The federal securities laws require publicly traded companies to disclose information on an ongoing basis. There is a policy influencing this requirement as material changes relating to critical accounting estimates may occur from fiscal period to fiscal period. Accordingly, if material changes have occurred that would render the critical accounting estimates disclosure in the Company’s latest report materially out of date, or otherwise materially misleading, those changes and their effect must be described in the quarterly report.1
The Exchange Act requires that the Company, as a smaller reporting company, file quarterly reports on Form 10-Q with the SEC within forty five (45) days after the end of the fiscal quarter for which the report is being filed.
Form 10-Q will be used to file the Company’s interim financial statements, as well as information regarding material events. Preparation of the Form 10-Q will require careful review to ensure that material events, which occurred during the quarter, are adequately disclosed. The Company’s CEO and CFO are required to certify that the information contained in the Company’s Form 10-Q does not contain an untrue statement of a material fact and that the financial information in the report accurately presents the financial condition of the Company. Significant penalties may be imposed for any officer who certifies or who willfully certifies a Form 10-Q when that certifying officer knows the reported financial condition and results of operation of the Company are false.
In Form 10-Q the Company’s CEO and CFO must also certify (i) they have designed internal controls to ensure material information is made known to such officers and that they have disclosed in the report their conclusions as to the effectiveness of such controls, (ii) they have disclosed information to the Company’s auditors and the audit committee of the board of directors about the internal controls, and (iii) they have disclosed in the report any significant changes in the internal controls since the most recent evaluation.
Turning to the more specific content of the disclosure, issuers are required to disclose, among other things, the total number of shares repurchased during the past quarter, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the maximum number (of approximate dollar value) of shares that may yet be purchased under the plans or programs. The aforementioned disclosures would provide investors with useful information about the level, frequency and purpose of such activity by an issuer and its affiliates.2
Lastly, it should be considered that the materiality threshold for the 10-Q might be different; something not material to the Company’s full-year might be material in the quarterly discussion. In response, we recommend a disciplined and pro-active management structure within the Company, the sole function of which is disclosure.
(C) Current Reports on Form 8-K of Material Events.
In order to increase the level of information that public companies disclose to investors,3 public companies are required to make current report filings on Form 8-K upon the occurrence of certain events. These events are material enough that the SEC believes immediate disclosure is important and cannot wait until a company needs to make its next quarterly or annual filing.
Under the Form 8-K requirements, the following events may, by way of example and under certain circumstances, trigger a reporting obligation to your listing exchange and/or to the SEC on Form 8-K within four (4) business days of the occurrence. If any of the following events take place involving the Company, SRFF should be informed and, where appropriate, copies of related material should be sent to SRFF as soon as possible.
- entering into a material definitive agreement;
- terminating a material definitive agreement;
- entering into any bankruptcy or receivership proceedings;
- completion of an acquisition or disposition of a significant amount of assets not in the ordinary course of business;
- the publication of, or press releases regarding, quarterly, semiannual and annual financial information;
- any change in financial condition or results of operations including any press release regarding such change;
- creation of any direct financial obligation that is material or any obligation under an off-balance sheet arrangement;
- the occurrence of any event that accelerates or increases any direct financial obligation that is material or any obligation under an off-balance sheet arrangement;
- a commitment to any exit or disposal plan, including disposing of long-lived assets or termination of employees that results in material charges;
- the Company determines a material charge for impairment to one or more assets is required;
- receipt of notice of delisting of common stock from, or failure to satisfy a continued listing standard on any exchange or national service;
- unregistered sale of equity securities (this is the issuance of most kinds of securities);
- a material modification to rights of security holders in any instruments defining the rights of the holders of any class of registered securities;
- any change in your independent certified public accounting firm;
- either the Company determines, or is notified by its independent certified public accounting firm, that previously issued financial statements can no longer be relied upon;
- change in control of the Company;
- a director resigns or a new director is appointed to the board, an officer resigns, a new CEO, President, CFO or COO is appointed, or the Company enters into or amends a compensatory agreement (written or oral) with an executive officer;
- the Company amends its Articles of Incorporation or Bylaws or changes its fiscal year end;
- temporary suspension of trading under a Company employee benefit plan;
- amendment of the Company’s code of ethics, or waiver of a provision of the code of ethics;
- change in shell company status;
- any matter that was submitted to a vote of security holders through the solicitation of proxies or otherwise;
- any Regulation FD disclosure; or
- any other disclosure, while not required, that the Company believes is important to security holders.
Notwithstanding the above, it is still important to remember that for certain disclosure requirements, there is a need to use traditional materiality concepts for presumptively material events. The materiality standard applicable to this requirement is the same one applicable to the filing of exhibits under Forms 10-K and 10-Q.
The SEC imposes a uniform four business day filing deadline. However, for disclosures regarding the submission of matters to a vote of security holders, the four business day period begins to run on the day on which the meeting ended. Further, the SEC has approved a limited safe-harbor from liability that will be available to companies that fail to file in a timely fashion reports on Form 8-K required by certain of the disclosure obligations. Specifically, companies are entitled to a limited safe-harbor under Exchange Act Section 10(b) and Rule 10(b)(5) for those events that require a “greater degree of analysis” than other Form 8-K items, including assessments as to the materiality of events. However, the safe-harbor will not apply to material misstatements in or omissions from the filing.
Reporting companies should consider how to best integrate these new requirements into their disclosure controls and procedures to ensure that events triggering Form 8-K obligations are referred to the Company’s appropriate SEC compliance personnel.
(D) Section 16 of the Exchange Act.
Section 16 of the Exchange Act limits trading in and requires public disclosure of trades made in Company shares, by direct or indirect beneficial shareholders of more than 10 percent of the Company’s stock and by Company officers and directors. This group constitutes the “statutory insiders.” The purpose of Section 16 is to discourage trading by statutory insiders on nonpublic information relating to the Company.
Under Section 16(a) of the Exchange Act, statutory insiders’ initial ownership of and subsequent transactions in Company shares must be reported to the SEC and national stock exchange. The information is reported on the SEC’s Form 3, Form 4 or Form 5.
- A Form 3 must be filed by a person who becomes an officer, director, or 10% stockholder of the Company within 10 days after such person becomes an officer or director of the Company, whether or not such person then owns any securities.
- Thereafter, the individual must report changes in beneficial ownership on Form 4 within two (2) business days of acquiring or disposing beneficial ownership of Company securities (including purchases, sales and grants of stock, options, warrants and other securities of the Company.4
- A Form 5 must be filed within 45 days after the end of the Company’s fiscal year by any officer or director of the Company whose holdings and transactions involving securities have not been reported previously on Forms 3, 4 or 5. However, officers and directors of the Company need not file a Form 5 if there were no holdings or transactions involving securities of the Company unreported on Forms 3, 4 or 5 during the last fiscal year. Such officers and directors should represent such fact in the annual directors’ and officers’ questionnaire.
Even after officers or directors leave the Company, such persons will be required to file Form 4 for transactions which occur within 6 months after their last transaction while still an officer or director of the Company and a Form 5 for the fiscal year in which they ceased to be an officer or director of the Company. Such persons should be sure to check the “exit” box on each Form 4 or 5 filed indicating that they have ceased to be an officer or director of the Company.
Officers, directors, and 10% stockholders of the Company must file Forms 3, 4 and 5 electronically with the SEC on EDGAR. Also, if the Company maintains an Internet website, the Company will have to post Forms 3, 4 and 5 on the website within one day after a form is filed with the SEC. The website posting requirement can be satisfied with a properly constructed hyperlink to the EDGAR database of the SEC website.
Late filings, or a failure to file a Form 3, 4 or 5, must be disclosed in the Company’s Annual Report on Form 10-K (including through incorporation by reference to its proxy statement). The SEC can use these disclosures to pursue delinquent filers, and may seek civil monetary penalties and even a court order barring a delinquent statutory insider from serving as a director or officer of a public Company. 5
Under Section (16) of the Exchange Act, any officer, director, or 10 percent stockholder of the Company is prohibited from selling and then buying, or from buying and then selling, securities of the Company in such a manner that a profit is generated (as defined under the rule) within any six (6) month period. 6
Section 16(c) of the Exchange Act prohibits short sale trading by statutory insiders. Statutory insiders may not sell any equity security of the Company (other than an exempted security), if they do not own the security, or, if they own the security, fail to make timely delivery as defined in Section 16(c).
Section 16 is enforced (1) by the SEC through civil and administrative action, (2) by the Justice Department through criminal actions, and (3) by investors through private actions. The enforcement of these restrictions is strict. Section 16 rules are enforced regardless of actual intent, knowledge or injury.
(E) Rule 144 of the Securities Act
Rule 144 regulates the public sale of Company securities by “affiliates” who are likely to be the Company’s directors and senior officers (i.e., controlling persons). Under the Securities Act, an affiliate of the Company may not sell securities of the Company unless the sale of such securities has been registered under the Securities Act or is made pursuant to an exemption from the registration requirements. The usual exemption relied on is Rule 144 under the Securities Act.
Rule 144 applies to two classes of persons: (i) affiliates, such as directors, executive officers and significant stockholders of the Company, and (ii) stockholders who have acquired shares of common stock directly from the Company or from a Company affiliate in a private transaction (such shares are designated as “restricted securities”). All of an affiliate’s shares of the Company’s common stock, whether or not they are restricted securities, are subject to Rule 144. Non-affiliates are subject to Rule 144 only with regard to their restricted securities.
While the general rule is that a director, executive officer or 10% or greater stockholder will be considered an affiliate, whether a person is an affiliate is a question of fact. Non-officer or non-director owners of more than 5% are generally presumed to be affiliates. Owners of less than 5% are generally presumed not to be affiliates.
Turning to the substance of the Rule, the provisions of Rule 144 specifically relate to:
- the amount of unregistered securities that an affiliate may sell publicly in a three-month period;
- the manner of sale;
- the requirement that notice on Form 144 must be filed with respect to most sales;
- the availability of adequate current public information; and
- in certain circumstances, a required holding period.
Amount of Securities Sold. The amount of stock of the Company that may be sold by an affiliate in any three-month period is the greater of: (i) the average weekly trading volume of such stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the filing of Form 144, or (ii) one percent of the outstanding stock of the class sold, as shown by the most recent reported or statement published by the Company.
For the purposes of determining the amount of stock that may be sold during a three-month period, all sales by the following persons during such period must be included: (i) any spouse or relative sharing the same home as the affiliate; (ii) any trust or estate in which the affiliate or any of such relatives collectively own 10 percent or more of the total beneficial interest or serve as trustee, executor or in a similar capacity; and (iii) any other corporation of which the affiliate and any of such relatives are the beneficial owners collectively of 10 percent or more of any class of stock.
In addition, if the affiliate disposes of the Company’s stock by gift, for two years thereafter the amount of such stock sold by the donee during any three-month period must be included in determining the amount of stock, which may be sold by the affiliate in such period.
Conditions. Generally, Rule 144 contains five conditions, which must be met in order for you to sell shares of common stock in open market transactions:
- The Company must have filed all reports required to be filed with the SEC;
- Restricted securities must have been held and fully paid for by you for a period of six months prior to your sale, other than those issued pursuant to employee stock options of the Company, which shall have been registered under the Securities Act in a registration statement on Form S-8. In certain cases, such as those involving gifts or purchases in private transaction from non-affiliates, the holding period of the person whom you acquired the shares can be combined with, or “tacked” to, your holding period.
- The number of shares of common stock which you can sell during any three-month period cannot exceed the greater of (i) 1% of the outstanding shares of common stock, and (ii) the average weekly trading volume of such stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the filing of Form 144.
- The shares must be sold in unsolicited broker’s transactions or directly to a market maker.
- You must file a notice of the proposed sale on Form 144 with the SEC at the time you place your order to sell with your broker, unless the amount to be sold neither exceeds 5,000 shares nor involves sale proceeds greater than $50,000 during any three-month period.
Manner of Sales Restrictions. Sales under Rule 144 may be made only in ordinary brokerage transactions (or in transactions with market makers). In this regard, the seller’s broker may do no more than execute orders to sell stock as his or her agent and may receive no more than the customary brokerage commission. Neither the seller nor the broker may directly or indirectly solicit the buy side of the order, although there are limited exceptions to this rule in the case of certain previous expressions of interest by other brokers and customers.
Filing Form 144. Concurrently with placing an order to sell the Company’s stock with a broker, the affiliate is required to send the SEC one electronic copy or three-signed paper copies of Form 144, containing certain information relating to the affiliate, the Company, and the stock being sold. A copy of such notice must also be sent to the exchange on which the Company’s stock is listed.
However, such notification is not required if the amount of stock to be sold by the affiliate (and by all persons whose stock is attributable to the affiliate) during any three-month period does not exceed 5,000 shares and the aggregate sale price of such stock does not exceed $50,000.
No notice is required in the case of gifts. However, if the donee sells the stock publicly, then the donee, unless certain conditions are met, must comply with Rule 144 and (for sales that exceed 5,000 shares or $50,000) file a Form 144.'
Current Public Information. Sales may be made under Rule 144 only if there is adequate current public information available on the Company. This requirement is met if the Company has filed all reports under the Exchange Act. All quarterly and annual reports filed by the Company with the SEC should contain a statement indicating that the Company has complied with the requirement. An affiliate will be allowed to rely on such statement, or on a separate written statement from the Company, unless he or she knows or has reason to know that the Company has in fact not complied.
Required Holding Period. Rule 144 also applies to “restricted securities,” i.e., securities acquired directly or indirectly from the issuer or an affiliate of the issuer in a private transaction. If the issuer is subject to the reporting requirements of the Securities Exchange Act of 1934, then the affiliate must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then the affiliate must hold the securities for at least one year. Such securities must be held for one year before they can be sold under Rule 144. If at least one year (with “tacking” permitted in most cases) has elapsed since the date restricted securities were acquired from the issuer or any affiliate, such securities may be sold without compliance with Rule 144 restrictions, by persons who have not been affiliates for at least three months.
Note that Rule 144 discussion in this memorandum is a simplified summary of complex and detailed provisions. These provisions, and others not summarized in this memorandum, may vary as they affect individual stockholders. Any affiliate or any stockholder holding restricted securities should consult with SRFF prior to engaging in any transaction related to his or her individual public sale of the Company’s common stock.
(F) Rule 16(c) & 16(b)(Short Sales & Short Swing Profit Rules).
Under Section 16(c) of the Exchange Act, insiders are prohibited from effecting “short sales” of the Company’s equity securities. A “short sale” is one involving securities which the seller does not own at the time of sale, or, if owned, are not delivered within 20 days after the sale or deposited in the mail or other usual channels of transportation within five days after the sale.
Under Section 16(b), any profit realized by an insider on a “short-swing” transaction (i.e., purchase and sale, or sale and purchase, of the Company’s equity securities within a period of less than six months) must be disgorged to the Company upon demand by the Company or a stockholder acting on its behalf. By law, the Company cannot waive or release any claim it may have under Section 16(b), or enter into an enforceable agreement to provide indemnification for accounts recovered under the Section. It makes no difference how long the shares being sold have been held, or that one of the two matching transactions occurs after you are no longer a Section 16 insider or before the Company went public. Moreover, the highest priced sale will be matched with the lowest priced purchase without regard to the order in which they occurred.
Federal securities laws, and most company insider trading policies, prohibit transactions in company stock at a time when the investor may be in possession of material information about the company, which has not been publicly disclosed. This also applies to members of the investor’s household as well as all others whose transactions may be attributable to the investor. As a general rule, all transaction in Company stock by an officer, director or 10% stockholder (or any member of his or her immediate family) must be pre-cleared by contacting the Chief Financial Officer.
OTHER REQUIREMENTS OF SARBANES-OXLEY
(A) Prohibition on Director and Officer Loans
Pursuant to Section 402, the Company is prohibited from directly or indirectly extending, maintaining, or arranging for the extension of credit in the form of a personal loan to its executive officers and directors. However, Section 402 does not preclude any home improvement and manufactured home loans, consumer credit, or any extension of credit under an open-end credit plan or a charge card, or within other narrow exceptions.
(B) Trading Restrictions during Pension Plan Blackout Periods
Regulation BTR prohibits officers and directors from trading in the Company’s stock during a pension plan blackout period. A pension plan blackout period generally occurs if at least 50 percent of all participants in the 401(k) and other “individual account” pension plans of the Company and its 80 percent-related affiliates are precluded from trading the Company’s stock for more than three consecutive business days. This restriction applies to equity securities the director or officer has received in connection with service or employment as a director or officer of the Company.
(C) Audit Committee Requirements
The term ‘audit committee’ means a committee established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer. The Company generally must have an audit committee composed entirely of “independent” directors within the meaning of Rule 10A-3(b). If the Company does not have an audit committee, the independence requirement applies to the entire board of directors. Companies that are not listed on a national exchange or market are not subject to this requirement. Also, there is an exemption from the independence requirement for companies seeking an initial listing on a United States securities exchange and for companies with overlapping board memberships.
The audit committee must (i) be directly responsible for the appointment, compensation and oversight of external audit work done for the Company, (ii) establish procedures for receiving, processing, and retaining complaints received by the Company regarding accounting or audit matters, (iii) establish procedures for the confidential, anonymous submission of complaints by the Company’s employees regarding questionable accounting or audit matters, (iv) be granted the authority to engage independent advisors to assist the committee in meeting its obligations, and (v) be provided “appropriate” resources to pay its independent advisors. United States securities exchanges will prohibit the listing of a Company’s securities if the audit committee requirements are not met.
(D) Disclosure of Changes in Beneficial Ownership of Company Equity Securities
The Exchange Act imposes a two business day Form 4 filing requirement for any changes in beneficial ownership of Company equity securities. This filing requirement applies to all Section 16 reporting persons (including family members and others in your household). In addition to purchases and sales, the two-day requirement applies to any changes in ownership, including gifts, stock and option grants, and other transfers. Any late Form 4 filings are required to be reported in a proxy statement in a separate captioned section. Additionally, the Act also imposes disclosure obligations on all public companies that maintain a corporate Web site. Each Company will be required to post on its website all statements of changes of beneficial ownership of securities filed for that Company, on Form 4, no later than the end of the business day following the filing.
(E) Certification Requirements
There are two sections of the Sarbanes-Oxley Act which are of great significance to CEOs and CFOs. Section 906 of the Sarbanes-Oxley Act sets forth certification requirements, and contains a criminal, as well as a civil law provision. All public companies must file officer written certification with any periodic report containing financial statements filed with the SEC by the CEO and CFO. Specifically, the Section 906 certification must state (i) that the periodic report fully complies with the requirements of Section 13(a) and 15(d) of the Exchange Act, and (ii) the information contained in the report fairly represents, in all material respect, the financial condition and results of operations of the Company. Section 302 requires officers to certify the accuracy of periodic reports containing financial statements filed with the Combission.
The SEC’s Regulation FD – Fair Disclosure
Regulation FD (for “fair disclosure”), which became effective in October 2000, is intended to address what the Commission perceived to be the systemic problem of companies selectively disclosing material, nonpublic information to Wall Street insiders at the expense of individual investors, which in the Commission’s view, leads to a “loss of investor confidence in the integrity of our capital markets.” Specifically, Regulation FD provides that when an issuer, or a person acting on its behalf, selectively discloses material, nonpublic information to securities market professionals or holders of the issuer’s securities where it is reasonably foreseeable that the holders will trade on the basis of the information, then the issuer must make public disclosure of the information – simultaneously, if the disclosure was intentional, or promptly thereafter, if the disclosure was unintentional.
(II) Regulation FD
A. The Commission gave numerous reasons for adopting Regulation FD.
- Selective disclosure leads to a loss of investor confidence in the integrity and fairness of our capital markets.
- Certain releases use the example of an investor seeing dramatic changes in a stock price and “only later” learning of the information that was responsible for the change. To the Commission, this can result in investors questioning “whether they are on a level playing field with market insiders.” To others, it raises the issue of whether Regulation FD is intended to establish parity of information between Wall Street and Main Street.
- To the Commission, investors lose confidence in the fairness of the markets because of selective disclosure, which resembles insider trading. In both, an “unerodable information advantage” is gained from access to a corporate insider, rather than from hard work or analysis.
- The Commission believes that reports of companies selectively disclosing material information, which can lead to significant profit or loss avoidance for analysts and their clients, erodes investor confidence in the fairness of the market.
- Protection of investor confidence is important in today’s highly volatile markets. “[T]he impact of . . . selective disclosure appears to be much greater in today’s more volatile, earnings-sensitive markets.” The practice is reported to be widespread at small-growth companies, where companies break poor-performance news to analysts to prevent a sharp reaction by the volatile market. Then Chairman Levitt noted, “[w]e have placed such a premium on short-term results that even the most modest changes in earnings provokes a dramatic market response.”
- Material information is used to curry favor with analysts
- Regulation FD is designed to address another threat to the integrity of our markets: “the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors.” Likewise, there is the corresponding reaction that analysts may feel pressured to slant their analysis of a Company in order to ensure continued insider access. Then Chairman Levitt also expressed concern that companies use analysts to promote sales of stock. “[A]nalysts’ employers expect them to act more like promoters and marketers than unbiased and dispassionate analysts. Our review of the relationship between companies and the analysts who follow them indicates that analysts, all too often, are falling off that tightrope on the side of protecting the business relationship at the cost of fair analysis. We believe that these pressures would be reduced if issuers were clearly prohibited from selectively disclosing material information to favored analysts.”
- While an analyst may put himself or herself at risk of being cut-off from access to corporate officials or from conference calls if he or she is too negative toward the Company, most public companies believe analysts have the upper hand in the fencing match on the tightrope.
- As the fencing match between companies and analysts continues in the FD environment, new techniques, such as embargoes, may develop that comply with Regulation FD, yet nevertheless give analysts an advantage over the public.
B. Elements of Regulation FD
Regulation FD provides that when an issuer discloses material, nonpublic information to certain enumerated persons (in general, securities market professionals or holders of the issuer’s securities where it is reasonably foreseeable that the holders will trade on the basis of the information), then the issuer must make public disclosure of the information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or unintentional: for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for an unintentional disclosure, the issuer must make public disclosure promptly. Under Regulation FD, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
Regulation FD does not define “material.” The Release states that Regulation FD will rely on the “existing definition” of materiality established in the case law. The Supreme Court stated that a fact is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision, or if the fact would have “significantly altered the ‘total mix’ of information made available.” Materiality is determined from the viewpoint of the “reasonable investor,” and not of the analyst. The Commission underscores this point in affirming that the “mosaic” theory is alive under Regulation FD. An issuer may selectively disclose information that is immaterial to a reasonable investor but is significant to the analyst, whose “persistence, knowledge, and insight,” may enable her to use the information to complete a “mosaic” of information that, once completed, is material.
Faced with the practicalities of the real world and that senior management will talk to analysts, speak at industry conferences, and meet with institutional investors and major shareholders, we suggest that senior management and investor relations staff consider the following, some of which have been historically recommended “best practices” and some of which are prompted by Regulation FD.
- Centralize. Identify a small number of senior executives and investor relations personnel who will be the Company’s only designated spokespersons and see to it that these people understand the vagaries of corporate disclosure requirements, the elusive concept of materiality, and Regulation FD. The Company may wish to consider the Commission’s recommendations and formalize in a written manual the policies and procedures for press releases, analysts’ calls, periodic inquiries, industry presentations, and notifying the investor community about corporate development.
- Know What’s Public. Maintain a binder of all current, public material information about the Company including the most recent SEC filings, press releases, speeches by corporate executives, industry presentations and the like. The binder is not a collection of every public statement ever issued, but rather an evolving collection of items on which the public may reasonably be relying.
- Be Prepared. Prior to any analyst’s call or industry presentation, and even prior to a one-on-one session, the corporate spokesperson should take the time to identify what’s to be disclosed, anticipate the questions, and formulate answers. Then, the plan for the session should be vetted against the current disclosure binder to identify any material item that is not already public.
- Simultaneous Disclosure. Under Regulation FD, having concluded that some item of material, non-public information will be revealed at the upcoming session, the Company has two realistic choices – issue a press release simultaneously with the commencement of the session or invite the public to participate in the session through call-in facilities or a web-cast. Companies may find the latter approach preferable as it provides greater protection since it affords the public equal access to the information.
- Materiality Checklists. The following is a list of, and the SEC has identified in the adopting release for Regulation FD, certain types of information that is usually considered material:
significant merger, acquisition, tender offer, or joint venture;
significant new product or discovery or developments regarding customers or suppliers (such as the acquisition or loss of a significant contract);
change in control or a significant change in management;
change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report;
events surrounding the issuer’s securities: the public or private sale of a significant amount of additional securities; repurchase plans; stock splits, changes in the dividend;
purchase or sale of a significant asset; or
- bankruptcies or receiverships.
- One-on-One Session. One-on-one sessions with analysts or institutional investors should be handled similarly to analysts’ calls or industry presentations. Additionally, it has long been advised that someone from the Company’s investor relations department audit one-on-one sessions. In the absence of a second set of ears and eyes, an immediate debriefing of the senior management or corporate spokesperson is essential. If material, non-public information is disclosed in such sessions, Regulation FD requires prompt public disclosure.
- Confidentiality Agreements. Lastly, Regulation FD exempts disclosures made to “a person who expressly agrees to maintain the disclosed information in confidence.” An “express” confidentiality agreement need not be in writing and need not be obtained before making the disclosure. “An agreement obtained after the disclosure is made, but before the recipient of the information discloses or trades on the basis of it, will be sufficient. In this manner, if an issuer has mistakenly made a selective disclosure of material nonpublic information, it may try to avoid any harm resulting from the selective disclosure by obtaining from the recipient of that disclosure an agreement not to disclose or trade on the basis of the information.
It has been commonly understood that an acknowledgment that the recipient of material, nonpublic information will not use the information in violation of the federal securities laws does not constitute an “express” confidentiality agreement under Regulation FD. Rather (and simply), the recipient must expressly agree to keep the information confidential.
If, for example, an analyst breaches the confidentiality agreement by disclosing the information to a client, the analyst may be liable for illegal tipping if the client trades.
It may be advisable to consider going a step further and creating a tailored list of non-public, current corporate information and developments that would reasonably be regarded as material.
This memorandum outlines the United States securities laws with which the Company must comply now that it has offered and sold its securities in the United States. The purpose of the memorandum is to alert you to steps the Company must take to comply with the United States Securities laws and outline certain legal implications of actions by the Company. This commentary is for general information purposes only. It should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Because this memorandum has necessarily been a summary, we encourage you to consult with SRFF on any questions you may have about specific elements of required compliance and about specific corporate actions that the Company might be contemplating.
Very truly yours,
SICHENZIA ROSS FRIEDMAN FERENCE LLP
BASTA HOLDINGS, CORP
1934 ACT FILING CALENDAR
as a smaller reporting company
ACTION TO BE TAKEN
File Annual Report on Form 10-K for the fiscal year ended October 31
File Quarterly Report on Form 10-Q for the first quarter period ending January 31
March 17 (March 16 on a leap year)
File Quarterly Report on Form 10-Q for the second quarter period ending April 30
File Quarterly Report on Form 10-Q for the third quarter period ending July 31
File Form 8-K
Please see Section 8-K of Memorandum
File Schedule 13-D
Within ten (10) days after acquiring five percent (5%) of the shares of the Company
File Schedule 13-G
On or before the forty fifth (45th) day after the calendar year end (february 14)
File Form 3
first time under Section 12 of the Exchange Act must file this Form no later than the effective date of the registration statement. If the issuer is already registered under Section 12, the insider must file a Form 3 within ten days of becoming an officer, director, or beneficial owner.
File Form 4
Changes in ownership must be reported to the SEC within two business days.
File Form 5
Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a Form must be filed, it is due on or before the forty-fifth (45th) day after the end of the issuer’s fiscal year - (December 31).
*If a due date falls on a non-business day, the filing will due on the next business day.
SUMMARY: SOURCES OF THE COMPANY'S
LEGAL OBLIGATIONS IN THE UNITED STATES
1. Securities Act of 1933
The Securities Act of 1933, as amended (the “Securities Act”) regulates offerings of securities in the United States. Often referred to as the "truth in securities" law, the Securities Act has two basic objectives: (a) require that investors receive financial and other significant information concerning securities being offered for public sale; and (b) prohibit deceit, misrepresentations, and other fraud in the sale of securities.
A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors to make informed judgments about whether to purchase a Company's securities. In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts, including:
- 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.
Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database accessible at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements. Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:
- private offerings to a limited number of persons or institutions;
- offerings of limited size;
- intrastate offerings; and
- securities of municipal, state, and federal governments.
2. Exchange Act of 1934
The Securities Exchange Act of 1934, as amended (the “Exchange Act”) establishes ongoing reporting requirements for companies that have securities listed on a United States securities exchange. Most of the Company’s future compliance obligations are based on the Exchange Act.
3. Sarbanes-Oxley Act of 2002
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," also known as the PCAOB, to oversee the activities of the auditing profession.
NASDAQ/NYSE each has a set of rules that apply to companies with securities listed on the national securities exchange. In connection with the listing, the Company will have executed a Listing Agreement that obligates the Company to comply with these rules and enumerates specific obligations of the Company as a listed Company.
POTENTIAL LIABILITIES UNDER
UNITED STATES SECURITIES LAWS
Part I of this memorandum summarizes the potential liabilities that arise in the context of a registered public offering of securities in the United States. Part II summarizes the potential liabilities associated with a OTC QB quotation and the ongoing reporting requirements under the U.S. securities laws which arise as a result thereof.
Commission enforcement actions (generally seeking injunctive relief, cease and desist orders and fines) and criminal penalties are possible sanctions for violations of the Exchange Act and the Securities Act, but are less common than civil actions by investors. Section 10 (Rule 10b-5) and Section 18 of the Exchange Act provide the principal foundation upon which plaintiffs will base securities claims relating to the secondary trading of securities listed on U.S. securities exchanges, while Section 11 of the Securities Act provides the principal foundation upon which plaintiffs will base securities claims when securities are to be offered by way of a registered public offering.
Statutory Liabilities Associated With a Public
Offering of Securities in the United States
In connection with a public offering of securities in the United States, the potential liabilities are considered to be substantial. In addition to the Company, the Directors are exposed to potential liability based on the disclosure document utilized to sell the securities.
1. Civil Liabilities
Section 11 of the Securities Act provides the statutory basis for a purchaser of securities to recover damages for untrue statements of material facts and for omissions to state material8 facts in the registration statement at the time it becomes effective under the Securities Act. In general, damages are recoverable from the issuer, every person who signs the registration statement (including the issuer’s authorized U.S. representative and officers signing the registration statement), every director of the issuer (whether or not the registration statement is signed by or on behalf of such director), the accountants who prepared the financial statements included or incorporated by reference in the registration statement, and every underwriter of the securities offered. A plaintiff’s damages are measured by the difference between the price paid for his securities and either their value at the time of the lawsuit or the price at which he sold the securities.
Any of the persons identified above (other than the issuer itself) can avoid liability under Section 11 by establishing that he made a reasonable investigation of the information contained in the registration statement and that, based on that investigation, he had reasonable grounds to believe and did believe that the statements were accurate and complete at the time the registration statement became effective or, in the case of liability in respect of a portion of the registration statement included on the authority of an expert (such as an accountant), by establishing that he had no reason to believe and did not believe that the registration statement was inaccurate or incomplete. In determining what constitutes reasonable investigation and reasonable belief, the standard is that required of a prudent man in the management of his own property.
The type and extent of the investigation necessary to establish the due diligence defense described above varies depending on the individual's function in the registration process. Directors who are not otherwise active in the business except as directors ("non-executive" or "outside" directors) may delegate their duty to investigate, but they may be held liable if those to whom they delegate this duty do not make a sufficiently thorough investigation. There is no substitute for individual review, however; and non-executive directors should at least be given the opportunity to read, and ask questions about, a registration statement before it is filed. "Executive" or "inside" directors (those who are active in the management or are also officers or employees), officers who sign the registration statement, and underwriters must show that they themselves took reasonable steps to verify the accuracy of the registration statement in order to avoid Section 11 liability.
Consistent with practice, such verification may take the form of relying on information provided by other employees of the Company, provided that such reliance is, in all the circumstances, reasonable (for example, such information is derived in the ordinary course of business and is received from duly qualified and knowledgeable persons within the Company who are typically responsible for such information). Experts, such as accountants, are held liable only for those portions of the registration statement that were prepared under their authority as such.
The only defense available to the issuer, which is available to all other defendants as well, is that at the time the plaintiff purchased the securities the plaintiff knew of the misstatement or omission on which the suit is based. This defense is more theoretical than real, however, since it is extremely difficult to prove as to any single plaintiff and virtually impossible to prove in connection with a “class action” brought on behalf of a group of plaintiffs.9
The Securities Act, in Section 12(2), also provides a cause of action for any person purchasing a security against his seller for untrue statements of material facts or omissions to state material facts, whether written or oral (provided that the purchaser did not know of the untruth or omission). "Seller" has been defined by the courts to include not only the party from whom the purchaser takes title, but also anyone who directly solicits and has a pecuniary interest in the sale. The seller may defend against such liability by proving that it did not know, and in the exercise of reasonable care could not have known, of such untruths or omissions. A successful plaintiff in a suit under Section 12(2) may obtain rescission of the sale (with interest) if he still owns the security, or, if he no longer owns the security, damages.
Section 15 of the Securities Act imposes "controlling person" liability on a joint and several basis to the same extent as any controlled person is liable under Sections 11 or 12 of the Securities Act, unless the controlling person had no knowledge of or had reasonable grounds to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
In an underwritten offering, the issuer would have potential liability to the underwriters to whom it sells the securities for damages caused by material misstatements or omissions under the securities laws or based on the representations, warranties, and indemnities in the underwriting agreement that will be used in connection with the sale of the Company's securities. If a director or officer solicits, or otherwise contributes in a "major" or "substantial" way to the sale of a security, he may also be held to be a "Seller" for purposes of determining liability under Section 12(2).
In addition to potential liabilities under the Securities Act in connection with the registration process, liabilities may also be incurred under the Exchange Act as described above. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder render unlawful the failure to disclose material facts or the use of false or misleading statements or any other manipulative or deceptive practices or devices in connection with the purchase or sale of any security. As noted above, such liability under Section 10(b) requires a finding of "scienter," which generally requires intent to deceive, manipulate or defraud or reckless disregard for the truth.
Where the directors are not directly involved in the sale of the securities and proof of scienter is missing, they would not be subject to liability under Section 10(b) for inaccuracies in a registration statement or other offering document.
Where a Section 10(b) violation has occurred, a director could also be subject to liability under theories of (i) conspiracy (where there is an agreement between the director and the wrongdoer in furtherance of the wrongful act) or (ii) “controlling person” liability under Section 20 of the Exchange Act (this liability may also attach to principal stockholders who are held to be controlling persons).
Statutory Liabilities Associated With Listing
and Ongoing Reporting Requirements
The Company must register a class of securities (equity or debt) under Section 12 before it lists that class on a national securities exchange and it is advisable to do so if the Company’s shares are traded on the OTC QB. As a result of such registration, the Company will become obligated to comply with the ongoing reporting and disclosure requirements of the Exchange Act (including the obligation to file an annual report on Form 10-K, quarterly reports on Form 10-Q and, in certain circumstances, to furnish certain interim reports on Form 8-K). The Company will have potential liabilities associated with these reports and disclosure obligations.
The Exchange Act imposes liability for misstatements or omissions in the Company's Exchange Act reports or any manipulative or deceptive practices relating to the purchase or sale of the Company's securities. The Company’ CEO and CFO are required to certify that the information contained in the Company’s Form 10-K and Form 10-Q does not contain an untrue statement of a material fact and that the financial information in the report accurately presents the financial condition of the Company. Significant penalties may be imposed for any officer who certifies (up to $1,000,000, 10 years in prison, or both) or who willfully certifies (up to $5,000,000, 20 years in prison, or both) a Form 10-K or Form 10-Q when that certifying officer knows the reported financial condition and results of operation of the Company are false. Sections 10(b) and 18 of the Exchange Act are the principal (but not the only) provisions which impose civil liability in connection with Exchange Act reports and the purchase and sale of common shares through secondary trading on OTCBB.
Section 10(b) (and Rule 10b-5 promulgated thereunder) renders unlawful the failure to disclose material facts or the use of false or misleading statements or any other manipulative or deceptive practices in connection with the purchase or sale of any security. Trading on inside information, for example, would constitute a manipulative or deceptive practice. Liability under Section 10(b) requires a finding of "scienter," which generally encompasses intent to deceive, manipulate or defraud or reckless disregard for the truth.
Under Section 18 of the Exchange Act, any person who makes or who causes to be made a false or misleading statement in any report filed under the Exchange Act will be liable for damages to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement, purchases or sells a security at a price that was affected by such statement. Section 18(a) provides a complete defense to the extent that the defendant acted in good faith and had no knowledge that the statement was false or misleading.
The Exchange Act, under Section 20, also imposes "controlling person" liability on a joint and several basis to the same extent as any controlled person is found liable under the provisions described above. A controlling person can raise as a defense that it acted in good faith, was not reckless and did not directly or indirectly induce the act or acts constituting the violations. Controlling persons may include stockholders, officers and directors.
BASTA HOLDINGS, CORP.
STATEMENT OF COMPANY POLICY
REGARDING CONFIDENTIALITY AND SECURITIES
TRADES BY COMPANY PERSONNEL
1. CONFIDENTIALITY OF INSIDE INFORMATION
1.1 Directors, officers, employees and consultants (“Company Personnel”) of Basta Holdings, Corp. (the “Company”), who come into possession of material non-public information concerning the Company must safeguard the information and not intentionally or inadvertently communicate it to any person (including family members and friends) unless the person has a need to know the information for legitimate, Company-related reasons. This duty of confidentiality is important both as to the Company’s competitive position and with respect to the securities laws applicable to the Company as a public company.
1.2 Consistent with the foregoing, all Company Personnel should be discreet with inside information and not discuss it in public places where it can be overheard such as elevators, restaurants, taxis and airplanes. Such information should be divulged only to persons having a need to know it in order to carry out their job responsibilities. To avoid even the appearance of impropriety, Company Personnel should refrain from providing advice or making recommendations regarding the purchase or sale of the Company’s securities.
2. TRADING ON INSIDE INFORMATION
2.1 Prohibition of Insider Trading
If a director, officer, employee or consultant has material non-public information relating to the Company, it is our policy that neither that person nor any related person may buy or sell securities of the Company or engage in any other action to take advantage of, or pass on to others, that information. This policy also applies to information relating to any other company, including our customers or suppliers, obtained in the course of employment.
Transactions that may be necessary or justifiable for independent reasons (such as the need to raise money for an emergency expenditure) are no exception. Even the appearance of an improper transaction must be avoided to preserve our reputation for adhering to the highest standards of conduct.
Twenty-Twenty Hindsight. If your securities transactions become the subject of scrutiny, they will be viewed after-the-fact with the benefit of hindsight. As a result, before engaging in any transaction you should carefully consider how regulators and others might view your transaction in hindsight.
Transactions By Family Members. The very same restrictions that apply to you also apply to your immediate family members and others living in your household. Employees are expected to be responsible for the compliance of their immediate family and personal household.
Tipping Information to Others. Whether the information is proprietary information about our Company or information that could have an impact on our stock price, Company Personnel must not pass the information on to others. Insider trading penalties apply to a tipper, whether or not such individual derives any benefit from another’s actions.
2.2 Definition of Material Non-Public Information
Definition. Material non-public information is any information which has not been publicly disseminated that a reasonable investor would consider important in a decision to buy, hold or sell stock. In short, material non-public information is any information which, if publicly disclosed, could reasonably affect the price of the stock.
Examples. Common examples of information that will frequently be regarded as material are: projections of future earnings or losses; current financial performance; news of a pending or proposed merger, acquisition or tender offer; news of a significant sale of assets or the disposition of a subsidiary; significant product development; changes in divided policies or the declaration of a stock split or the offering of additional securities; changes in management; significant new products; impending bankruptcy or financial liquidity problems; and the gain or loss of a substantial customer or supplier. Either positive or negative information may be material.
2.3 The Consequences of Violations
The consequences of insider trading violations can be staggering.
For individuals who trade on inside information (or tip information to others):
- A civil penalty of up to three times the profit gained or loss avoided;
- A criminal fine (no matter how small the profit) of up to $5 million; and
- A jail term of up to twenty years.
For a company (as well as possibly any supervisory person) that fails to take appropriate steps to prevent illegal trading:
- A civil penalty not exceeding the greater of $1 million or three times the amount of the profit gained or loss avoided as a result of a violation; and
- A criminal penalty of up to $25 million.
Moreover, if an employee violates the Company’s insider trading policy, Company imposed sanctions, including dismissal for cause, could result from failing to comply with the Company’s policy or procedures. Needless to say, any of the above consequences, even an SEC investigation that does not result in prosecution, can tarnish one’s reputation and irreparably damage a career.
2.4 When Information is Public
It is also improper for an officer, director, employee or consultant to enter a trade immediately after the Company has made a public announcement of material information, including earnings releases. Because the Company’s stockholders and the investigating public should be afforded the time to receive the information and act upon it, as a general guide such an individual should not engage in any transactions until the third business day after the information has been publicly released.
2.5 Additional Prohibited Transactions
Because the Company believes it is improper and inappropriate for any Company Personnel to engage in short-term or speculative transactions involving Company stock, it is the Company’s policy that Company Personnel should not engage in any of the following activities with respect to securities of the Company:
(1) Trading in securities on a short-term basis. Any Company stock purchased in the open market must be held for a minimum of six months and ideally longer. (Note that the SEC’s short-swing profit rule already prevents certain officers and directors from selling any Company stock within six months of a purchase. We are simply expanding this rule to all employees.)
(2) Purchase of Company stock on margin.
(3) Short sales.
2.6 Company Assistance
Any person who has any questions about specific transactions may obtain additional guidance from the Chief Financial Officer’s office. However, the ultimate responsibility for adhering to the Policy Statement and avoiding improper transactions rests with the individual.
2.7 Pre-Clearance Of All Trades By Directors, Officers, And Other Key Personnel; Blackout Period
To provide assistance in preventing inadvertent violations and avoiding even the appearance of an improper transaction (which could result, for example, where an officer engages in a trade while unaware of a pending major development), the Company is implementing the following procedures and restrictions:
(1) All transactions in Company securities (acquisitions, dispositions, transfers, etc.) by directors, officers, managers and all accounting and administrative personnel, must be pre-cleared by the office of the Chief Financial Officer. The subject individuals should contact the Chief Financial Officer in advance. This requirement does not apply to stock option exercises, but would cover market sales of option stock.
(2) Such persons are required not to make trades in Company securities in the period commencing 15 days prior to the end of each quarter and ending on the third business day after results for the quarter are publicly released (the “Blackout Period”). The Company may notify such persons of other Blackout Periods when necessary.
Employees will be required to certify their understanding of and intent to comply with this Policy Statement. Officers, directors and other key employees may be required to certify compliance on an annual basis.
2.9 Prohibitions of Officers Directors and 5% Stockholders
Officers Directors and holders of 5% or more of the Company’s securities (“Insiders”) have a special fiduciary responsibility to other holders of the Company’s securities who cannot exert influence over the day to day operations of the Company. Therefore, persons or entities that fall within one of these categories should refrain from certain activity and adhere to certain procedures so as to avoid any appearance of impropriety. Specifically:
(1) Insiders must not accept remuneration or other consideration from third parties for activities and accomplishments done or achieved for the benefit of the Company. In other words, Insiders cannot enrich themselves at the expense of the Company or receive “kickbacks” from third parties for activities undertaken for the benefit of the Company.
(2) In an instance where an Insider enters into a transaction with the Company (i.e., if the Insider owns property that the Company leases or lends or borrows money from the Company) such transaction must be made on commercially reasonable terms and must be approved by a majority of the disinterested board of directors.
(3) If an insider is to receive special compensation from the Company for a particular accomplishment, such compensation must first be approved by the compensation committee who must immediately inform the full board of directors of the terms. The disinterested board members must ratify any such special compensation package.
UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS
BASTA HOLDINGS, CORP
The undersigned, being the sole member of the Board of Directors of Basta Holdings, Corp., a Nevada corporation (the "Corporation"), does hereby consent to the adoption of, and hereby approves and adopts, the following resolutions, effective as of _____________, 2015:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby approves the “Statement of Company Policy and Policy Regarding Confidentiality and Securities Trades by Company Personnel” (the “Policy”) by unanimous written consent without a meeting, which resolutions shall be valid and effective Policy in the form attached hereto.
IN WITNESS WHEREOF, the undersigned has executed this Written Consent as of the date first written above. ____________________________
BASTA HOLDINGS, CORP
MEMORANDUM REGARDING SECTION 16 OF THE10
EXCHANGE ACT OF 1934 – RESTRICTIONS ON
SHORT SWING TRANSACTIONS
1. APPLICABILITY - DIRECTORS, CERTAIN OFFICERS AND 10% PLUS STOCKHOLDERS
Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) applies to directors and certain officers of the Company and to any person owning more than 10% of any registered class of the Company’s equity securities (collectively referred to below as “insiders”). The officers subject to Section 16 include the president, the chief financial officer, the controller, any vice president in charge of a principal business unit, division or function, any other officer who performs a significant policy-making function and any other person who performs similar policy-making functions for the Company. The purpose of Section 16 is to prevent insiders from misusing confidential information about their companies for personal trading gain. The general effect of Section 16 is to restrict the trading activities of insiders with respect to the securities of their companies by requiring public disclosure under Section 16(a) of their trades, permitting the recovery under Section 16(b) of any profits realized by them on purchase and sale transactions occurring within a period of less than six months, and prohibiting them under Section 16(c) from engaging in short sales.
2. RECOVERY OF SHORT-SWING PROFITS
2.1 Application of Section 16(b)
General Rule. Under Section 16(b), any profit realized by an insider on a “short-swing” transaction (i.e., a purchase and sale, or sale under and purchase, of the Company’s equity securities within a period of less than six months) must be disgorged to the Company upon demand by the Company or a stockholder acting on its behalf. By law, the Company cannot waive or release any claim it may have under Section 16(b), or enter into an enforceable agreement to provide indemnification for accounts recovered under the section.
Strict Liability Provisions. Liability under Section 16(b) is imposed in a mechanical fashion without regard to whether the insider intended to violate the section. Good faith, therefore, is not a defense. All that is necessary for a successful claim is to show that the insider realized profits on a short-swing transaction. When computing recoverable profits on multiple purchases and sales within a six month period, the courts maximize the recovery by matching the lowest purchase price with the highest sales price, the next lowest purchase price with the next highest sales price, and so on. The use of this method makes it possible for an insider to sustain a net loss on a series of transactions while having recoverable profits. The order of the transactions is also disregarded in applying Section 16(b).
Definition of Terms. The terms “purchase” and “sale” are construed under Section 16(b) to cover a broad range of transactions, including acquisitions and dispositions in tender offers and certain corporate reorganizations. Moreover, purchases and sales by an insider may be matched with transactions by another person in whose securities the insider is deemed to have a “pecuniary interest”. A pecuniary interest exists when an insider has the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction. An indirect pecuniary interest may include (although is not limited to) an interest in securities held by: (i) members of a person’s immediate family sharing the same household (broadly defined to include multiple generations, in-laws and siblings); (ii) partnerships where the insider is a general partner; and (iii) trusts of which the insider is a trustee, trustor or beneficiary.
Derivative Securities For purposes of Section 16(b), ownership of a derivative security (which includes options, warrants and convertible securities) is deemed to be ownership of the related or underlying equity security. Therefore, the purchase or sale of a derivative security can be matched against the purchase or sale of the underlying equity security (e.g., common stock in the case of a stock option), as well as the purchase or sale of the derivative security itself, or vice versa.
Attached is a checklist which should be helpful in considering the applicability of Section 16(b) to basic transactions in the Company’s securities by an insider. Insiders are reminded that the Company’s Policy re Confidentiality and Securities Trades by Company Personnel requires that all such transactions be pre-cleared by the Chief Financial Officer’s office.
3. PROHIBITION OF SHORT SALES
Under Section 16(c) of the Exchange Act, insiders are prohibited from effecting “short sales” of the Company’s equity securities. A “short sale” is one involving securities which the seller does not own at the time of sale, or, if owned, are not delivered within 20 days after the sale or deposited in the mail or other usual channels of transportation within five days after the sale.
4. DISCLOSURE REQUIREMENTS
Under Section 16(a) of the Exchange Act, the Company’s insiders must file with the SEC public reports disclosing their holdings of, and transactions in, the Company’s equity securities.
Form 3. Form 3, which is filed when a person first becomes an insider subject to Section 16, discloses all Company securities beneficially owned by the insider at that time and must be filed (received by) the SEC within ten calendar days of assuming the position.
Form 4. A Form 4 must be filed whenever there is any change in beneficial ownership of the Company’s equity securities. Reporting of certain transactions which are exempt under Rule 16b-3, like the granting of stock options, may be deferred until end-of-the-year reporting on Form 5 (see below). Such transactions may, however, be voluntarily reported on Form 4. Exercises or conversions of derivative securities, like warrants or options to purchase or sell securities, whether or not exempt from Section 16(b), must be reported on Form 4. Form 4 must be filed by the end of the second business day after the transaction. In addition, officers and directors (but not ten percent owners) must report any changes which occur within six months prior to their becoming an insider or within six months after they are no longer insiders, if the change takes place within six months of any transaction (whether or not matching) while an insider.
Form 5. Form 5 must be filed each year (within forty-five days after the end of the Company’s fiscal year) by insiders to report any exempt transactions, including employee stock plan acquisitions during the year, and any failures to file previously due reports. At year-end, officers and directors who have no Form 5 items to report will be required to provide the Company with a written representation that no Form 5 is due (i.e., that there are no unreported transactions).
4.2 Disclaimer of Beneficial Ownership
Section 16(a)’s reporting requirements, as with Section 16(b)’s restrictions on short-swing transactions, apply to all securities of the Company in which the insider has a direct or indirect pecuniary interest. For purposes of Section 16(a), an insider is deemed to be the beneficial owner of all securities in which he or she has such an interest. Please be aware, however, that an insider is free to disclaim beneficial ownership of any securities being reported if he or she believes he or she has a reasonable basis for doing so.
4.3 Consequences of Failure to Comply With Section 16(a)
It is important that insiders prepare their reports under Section 16(a) properly and file them on a timely basis. There is no provision for an extension of the filing deadlines, and the SEC can take enforcement action against insiders who do not comply fully with the filing requirements. The consequences of a late filing or a failure to file are significant:
Public embarrassment to the individual and the Company from the required disclosures of non-filing or late filing in the Company’s proxy statement and annual report on Form 10-K; and possible fines of up to $100,000 per day for violation of a cease-and-desist order by an insider (and up to $500,000 for violations by companies) under the Securities Enforcement Remedies Act.
4.4 Filing Responsibilities
The filing of Forms 3, 4 and 5 is the sole responsibility of the insider. However, the Company will assist all directors and officers with the completion and filing of the required Forms. Such assistance is available through the Chief Financial Officer’s office.
Since the laws relating to the purchase and sale of stock are complex, you should consult with your counsel and tax adviser with respect to all such transactions. This memorandum is intended to provide general information to assist in this process and to describe Company policies with respect to these transactions. However, the memorandum cannot deal adequately with all of the specifics of the applicable rules and regulations. It is your responsibility to obtain adequate independent advice prior to engaging in these transactions.
SHORT-SWING PROFIT RULE 16(b) CHECKLIST
Note: ANY combination of non-exempt PURCHASE AND SALE OR SALE AND PURCHASE within six months of each other results in a violation of 16(b) and the “profit” must be recovered by the Company. It makes no difference how long the shares being sold have been held - or that one of the two matching transactions occurs after you are no longer a Section 16 insider or before the Company went public. And, the highest priced sale will be matched with the lowest priced purchase without regard to the order in which they occurred.
If a sale is to be made by an officer, director or 10% stockholder (or any member of his immediate family):
- Have there been any purchases by the insider (or family members) within the past six months?
- Are any purchases anticipated or required within the next six months?
- Has the person responsible for preparing the Form 4 been advised?
Note: If an affiliate, has a Form 144 been prepared and has the broker been reminded to sell pursuant to Rule 144?
If a purchase is to be made:
- Have there been any sales by the insider (or family members) within the past six months?
- Are any sales anticipated or required within the next six months (such as tax-related or year-end transactions)? Note, even though an option exercise is not considered a purchase, a sale of option stock is still matchable against other purchases within six months before or after the sale.
- Has the person responsible for preparing the Form 4 been advised?
SHORT-SWING PROFIT RULE 16(b) CHECKLIST
Before engaging in any transaction in Company stock, please read the following:
Both the federal securities laws and the Company’s insider trading policy prohibit transactions in Company stock at a time when you may be in possession of material information about the Company which has not been publicly disclosed. This also applies to members of your household as well as all others whose transactions may be attributable to you.
Material information, in short, is any information, which could affect the stock price. Either positive or negative information may be material. Once a public announcement of material non-public information has been made, you should wait until the third business day before engaging in nay transactions.
For further information and guidance, please refer to our Policy Statement on Securities Trades by Company Personnel, and do not hesitate to contact the Chief Financial Officer’s office.
DO NOT FORGET: ALL TRANSACTIONS IN COMPANY STOCK MUST BE PRE-CLEARED BY CONTACTING THE CHIEF FINANCIAL OFFICER’S OFFICE
¹ SEC Release No. 33-8098, May 10, 2002. Rule Proposal: Disclosure in Management’s Discussion and Analysis about the Application of Critical Accounting Policies. Attachment A: Critical Accounting Policies.
2 SEC Release No. 33-8335, November 10, 2003. B-1: Purchases of Certain Equity Securities by the Issuer and Others. Attachment B: Equity Purchases.
3 Including a “real time disclosure” mandate in the Sarbanes-Oxley Act of 2002.
4 Exceptions from the “two-day” rule are available for transactions pursuant to a pre-existing arrangement to buy or sell securities under Rule 10(b)(5)(c) and for discretionary transactions involving an employee benefit plan, providing that, in both cases, the individual does not select the date of execution. In each case, an individual must report the transaction on Form 4 before the end of the second business day following notification of the acquisition or disposition, provided that the notification is given no later than the third business day following the transaction. Section 16 does not presently apply to Basta but may in the future and must do so if a listing on Nasdaq is sought.
5 Indeed, the SEC has been granted broad authority by the legislation to seek “any equitable relief that may be appropriate or necessary for the benefit of investors” for violations of any provisions of the securities laws.
6 This is the so-called “short swing profit” rule and applies to public reporting companies.
7 By exempting many small offerings from the registration process, the Commission seeks to foster capital formation by lowering the cost of offering securities to the public.
8 The United States Supreme Court has defined “material” to include “those matters as to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.”
9 The issuer can reduce its exposure under Section 11 somewhat by making generally available to its security holders earnings statements (which need not be audited) covering a period of at least twelve months after the effective date of the registration statement (or any post-effective amendment thereto). Section 11 requires a plaintiff who purchased securities after such earnings statements had been made generally available to prove that in purchasing the securities he had relied on the alleged misstatement or relied upon the registration statement without knowledge of the alleged omission. If such earnings statements have not been made generally available as indicated, proof of reliance is generally not required.
10 Again, Basta is not subject to Section 16 at present, but may well be in the future.
Visit SRF's LinkedIn page
Latest posts by Sichenzia Ross Ference LLP (see all)
- Client Alert: U.S. Senate and House of Representatives Approve 2018 Farm Bill - December 13, 2018
- Associate Attorney - December 6, 2018
- Sichenzia Ross Ference LLP Represents A.G.P/Alliance Global Partners in $10 Million Public Offering for Creative Realities, Inc. - November 19, 2018