A company that receives a notification of deficiency, Staff Delisting Determination, or Public Reprimand Letter from Nasdaq is required to make a public announcement disclosing receipt of the notification and the rule(s) upon which the deficiency is based, and describing each specific basis and concern identified by Nasdaq in reaching its determination. Nasdaq allows notice to be made by either an 8-K or press release, but since Item 3.01 of Form 8-K requires an 8-K filing related to the receipt of a notice of delisting or listing deficiency, most companies only file the 8-K. However, if the notice resulted from the failure to file a periodic report required by the Securities Exchange Act, Nasdaq rules require both an 8-K and press release. The public notice must be provided to Nasdaq Market Watch 10 minutes before dissemination. #SecuritiesLawBlog #NASDAQ #AnthonyLG
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On August 19, 2024, the SEC announced the settlement of a “dealer” enforcement proceeding against GHS Investments and its principals prompting Commissioner Uyeda to issue a statement. Commissioner Uyeda points out that the proposed Rule 144 amendments would achieve the unspoken policy objective regarding convertible, variable rate notes. However, without the final rule, the SEC continues to regulate the issue by enforcement. #SecuritiesLawBlog #SEC #ALCLAW
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The numerous and prolific convertible note investors into small-cap exchange traded companies have yet to face enforcement proceedings. Presumably that is because most of those investments are registered and the national exchanges require a floor price on the conversion price. However, there is nothing in the dealer statute, rules, guidance, interpretations or the like that distinguishes between registered or unregistered deals or conversion prices. #SecuritiesLawBlog #SEC #ALCLAW
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There is no precedent for the theory that if you trade in convertible notes instead of open market securities, private placements instead of registered deals, bonds instead of stock, or warrants instead of preferred stock, etc., you either must be licensed as a dealer or are exempt. Likewise, there is nothing in the broker dealer regime that suggests that if you invest in penny stock issuers vs. middle market or exchange traded entities you need to be licensed as a dealer. #SecuritiesLawBlog #SEC #ALCLAW
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So far, the SEC has only filed actions for unlicensed dealer activity against investors that invest specifically using convertible notes in penny stock issuers. Although there is a long-standing legal premise that a dealer in a thing must buy and sell the same thing (a car parts dealer is not an auto dealer, an icemaker is not a water dealer, etc.), there is nothing in the broker-dealer regulatory regime or guidance that limits broker-dealer registration requirements based on the form of the security being bought, sold or traded or the size of the issuer (i.e. penny stocks). #SecuritiesLawBlog #SEC #ALCLAW
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Nothing in the prior SEC rule making, interpretive guidance, or enforcement actions foresaw the current dealer litigation issue. The SEC litigation put a chill on convertible note investing and has left the entire world of hedge funds, family offices, day traders, and serial PIPE investors wondering if they can rely on previously issued SEC guidance and practice on the dealer question. #SecuritiesLawBlog #SEC #ALCLAW
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The primary defense to the slew of SEC cases claiming unlicensed dealer activity by convertible note investors, has been that the enforcement actions are an arbitrary and capricious interpretation of the dealer statute and that the defendant’s had no reasonable grounds in which to conclude their activity could require licensing as a dealer. #SecuritiesLawBlog #SEC #ALCLAW
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Since 2017, the SEC has filed numerous cases with the sole allegation being that the investor acted as an unregistered dealer. In each case, the investor entity purchased convertible promissory notes from micro-cap OTC Markets issuers (or other existing note holders), which, after the applicable Rule 144 holding period, were converted into shares of common stock and sold on the open market. As the securities were generally low priced, the conversions resulted in large quantities of additional shares being sold into the marketplace. #SecuritiesLawBlog #SEC #ALCLAW
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In November 2017 the SEC shocked the industry when it filed an action against Microcap Equity Group, LLC and its principal alleging that its investing activity required licensing as a dealer under Section 15(a) of the Exchange Act. #SecuritiesLawBlog #SEC #ALCLAW
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On August 19, 2024, SEC Commissioner Mark T. Uyeda published a statement regarding one of the numerous defendants in SEC initiated enforcement proceedings claiming unlicensed dealer activity. The statement resonates with the sentiments of most of my colleagues, peers and clients. #SecuritiesLawBlog #SEC #ALCLAW
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Revisions to the definition of securities held of record also remain on the proposed list. Any proposal would relate to the definition for purposes of Section 12(g) of the Exchange Act. #SecuritiesLawBlog #SEC #ALCLAW
