Kindly note well – this is only a summary of the relevant securities laws. It is an attempt to give you what you need to know in a simple, readable format. You must consult qualified securities attorneys that are experienced in this niche of the securities laws.

First, there came the Securities Act if 1933 which provided that all new issues of securities have to be registered (with certain exemptions) and created the SEC, the Securities and Exchange Commission. The Securities Exchange Act of 1934 was then enacted to cover trading in the markets.

Therefore, under the Securities Act of 1933, if you are going public, you have to register with the Securities and Exchange Commission.

If you were already trading, you filed disclosure statements of what is going on in the company with the SEC under the Securities and Exchange Act of 1934.

However, if you merge your company with a company that is already trading, in other words make a reverse merger with a public shell, you originally did not have to register.

As some unscrupulous people used this to get around making disclosure so they could fleece investors, the SEC came out with a rule providing that if you are going to merge with a public company registered with the SEC, you have to make a filing right away that makes essentially the same disclosure as you would if you were filing originally with the SEC.

Companies that file with the SEC generally require two years of audited financial statement certified by an accountant registered with the Public Company Accountancy Oversight Board (PCAOB).

Companies that are filing with the SEC trade in the recognized stock exchanges or in the OTC BB. However, there is also a market for companies that do not file with the SEC, the Pink Sheets.

Pink Sheets

The above covers companies that file with the SEC. However, some small companies do not have to file with the SEC. They trade in market known as the Pink Sheets.

The rules of the Pink Sheets encourage, but do not require, them to make disclosures but many do not. This lack of disclosure allows abuses and makes this a very risky market.

Companies that do not file with the SEC can use Regulation D, Rule 504 to raise money privately. The stock sold under the rule is only allowed to trade in certain very limited circumstances. Purchasers of this private stock generally will look to sell their stock under Rule 144. (See below).

Companies that want immediate trading for their stock can merge with Pink Sheet shells, but they should be advised the SEC can stop trading in their stock if it feels that the lack of disclosure is endangering investors.

Regulation A

Regulation A of the Securities Act of 1933 allows small companies to raise up to $5 million without audited financial statements. The stock can trade in the Pink Sheets. The company files with the SEC and while the SEC can decline to review the filing, it generally reviews it in the same fashion as if it were a regular filing to go public.

Getting Your Stock Trading — FINRA, Form 211 and Market Makers

Rule 144 is a rule that allows investor who have held fully paid for stock for six months for registered companies (12 months for Pink Sheet companies) to sell their stock in the public market subject to certain conditions and restrictions.

If you buy a shell company that has ever been a shell under Rule 144, you cannot use Rule 144.

Therefore, a merger with a company that is not considered a shell company for purposes of Rule 144 is much preferred. If you are stuck with stock in a shell company where you cannot use Rule 144, you may not be able to market your stock.

This is further discussed in my blog posting, What is a Shell Company?

Gypsy Swaps — Rule 144 Stock — Venture Funding -

 

Click here for the next important section, Self-Registration