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SEC Crackdown on Undisclosed Unregistered Offerings

November 7, 2014 By Andrew Abramowitz Leave a Comment

I blogged recently about an SEC crackdown on failure to make required filings under Sections 13 and 16 of the Exchange Act, and continuing with that theme, the SEC recently announced a enforcement program against several public companies for failure to disclose unregistered offerings of securities.

SEC Paternalism on equity crowdfunding rulesFirst, some background:  Any sale of securities by a company must either be registered under the Securities Act, or it must be sold under some exemption, such as a Regulation D private placement under Section 4(2) of the Securities Act.  The SEC’s concern is that all sales of any kind be effectively disclosed to the public, so investors are aware of dilution that may have recently occurred when making their investment decisions.  The public is aware of registered sales because the registration statement and prospectus filings are made via Edgar.  When the sales are unregistered, public companies are required to make a filing on a Form 8-K if the sale exceeds a certain threshold (5% of the outstanding common stock for smaller public companies), and otherwise on the next Form 10-Q or 10-K.

In the cases brought by the SEC, ten companies failed to report transactions on Form 8-K as required by these rules, and three of them also had faulty disclosure when they disclosed the transactions in a later report.  None of these companies is a household name.  The issue of disclosure of unregistered offerings is more likely to come up in the context of smaller public companies, since larger ones tend to have more flexibility to conduct registered offerings (takedowns from shelf registration statements, etc.), while their smaller counterparts rely on PIPEs and similar transactions, which trigger the disclosure requirement.  Often, these microcap public companies don’t rely on experienced or competent securities counsel in preparing their filings.  (Yes, that is a not-so-subtle pitch for my services.)

The broader point is that the SEC is well aware that certain of its disclosure requirements are not complied with religiously, and while the agency doesn’t have the budget to police each failure individually, it is attempting to send a message with these coordinated multi-company enforcement efforts that the rules shouldn’t be ignored.

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Related posts:

  1. Links to Some of My Greatest Hits
  2. At-the-Market (ATM) Offerings
  3. The SEC’s Concept Release on Exempt Offerings and Investment Limits

Filed Under: Financing Transactions/Securities Offerings, General/Miscellaneous

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"Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said every investor should approach a private placement skeptically." -- Paul Sullivan (New York Times)

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"If the goal [...] is to protect people from losing all of their money in an illiquid investment, the current standard fails on that count, too. Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said a better standard might be to limit how much of their net worth people can invest." -- Paul Sullivan (New York Times)

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