The Other Side of the Table

Almost every securities enforcement matter I worked on at the Commission had a moment in its history, usually months or years before anyone in my office had heard the company's name, when a single phone call would have changed the outcome.

The call did not happen.

The chief executive was not sure whether the new customer contract was material, so the company did not file an 8-K. The founder was excited about the raise and mentioned it on a podcast, and nobody told him that the offering had been structured on the assumption that he would not. The company needed money quickly, signed a convertible note with a floating conversion price, and did not understand what it had agreed to until the stock price had fallen ninety percent. A promoter was paid in shares, and nobody asked what he was saying to the public or how.

I spent nine years in the Division of Enforcement at the U.S. Securities and Exchange Commission's Southeast Regional Office, and for three of those years I also served as a Special Assistant United States Attorney in the Southern District of Florida, prosecuting securities-related financial crimes. I have seen what these matters look like from the other side of the table, after they have gone wrong. What struck me then, and still strikes me now after more than twenty-five years in private practice, is how few of them began with someone deciding to break the law.

They began with someone deciding not to ask.

This book is written for the people who should be asking: the founders, chief executives, chief financial officers, directors, and in-house lawyers of companies that raise capital, go public, or already report to the SEC. It is also written for the advisors around them, the accountants, bankers, and consultants who are often the first to see a problem forming.

It is not a treatise. It does not attempt to cover every rule, and it is not a substitute for advice on your facts. What it tries to do is something narrower and, I think, more useful. It tries to show you how the SEC staff reads what you file and what you say, so that you can see your own disclosure the way a regulator would see it before a regulator does.

That perspective is the entire basis of my practice. When I review a registration statement, a periodic report, or an investor deck, I am not consulting a checklist. I am applying the same analytical framework I used at the Commission to decide whether a filing would attract scrutiny, draw a comment letter, or escalate into a formal investigation. The chapters that follow are that framework, written down.

A word about how to use this book. Each chapter stands on its own. If you are about to raise money privately, start with Part Two. If you are deciding whether and how to go public, start with Part Three. If you are already a reporting company, Part Four is yours. Part One underlies all of it, and I would ask every reader to begin there.

And one word about tone. Securities law has a reputation for being dry, and much of it is. But the consequences are not dry. They are personal. Officers are barred. Directors are sued. Founders lose the companies they built. Investors lose money they could not afford to lose. The rules exist because those things happen. Understanding them is not a compliance exercise. It is how you protect the company, the people who run it, and the people who trust it with their capital.

Before any rule, a way of reading. The staff reads what you file, what you say, and what you leave out, and it reads each against everything else you have said.

An enforcement case is assembled largely from documents the company created voluntarily.

Most executives imagine an SEC investigation beginning with a dramatic event: a whistleblower, a collapse, a headline. Sometimes it does. More often it begins quietly, with a piece of information that makes someone at the Commission look twice.

Where the Information Comes From

The staff learns about potential violations from many directions. Investors complain. Employees and former employees submit tips, and the whistleblower program gives them a financial reason to do so. Market surveillance flags unusual trading ahead of an announcement. FINRA refers matters it has identified. The Division of Corporation Finance, reviewing a company's filings, notices something that looks less like a disclosure question and more like a conduct question. Another agency, a state regulator, or a news report points in the same direction. An existing investigation into one person turns up the names of others.

What matters for an issuer is this: many of these sources are generated by the company's own public record. The filings, press releases, social media posts, promotional materials, and trading records are all visible. A company that is inconsistent with itself, that says one thing in a press release and another in its 10-Q, is creating the raw material of an inquiry.

From Inquiry to Investigation

An enforcement matter typically moves through stages. At the first stage, the staff is gathering information informally. It may review public materials, look at trading data, or contact the company and ask for documents voluntarily. The request may be polite and brief. It should never be treated casually.

If what the staff sees justifies more, the matter can become a formal investigation, in which the Commission authorizes the staff to issue subpoenas for documents and testimony. From there, if the staff concludes that violations occurred, it may notify the prospective defendants through what is called a Wells notice, which gives them an opportunity to make a written submission explaining why an action should not be brought. The Commission then decides whether to authorize an enforcement action, which may be filed in federal court or brought as an administrative proceeding. Many matters are resolved by settlement.

Each of those stages is a point at which the record already made determines the outcome. By the time a company receives a subpoena, the facts that matter most, what was disclosed, when, and by whom, have already happened. Counsel can explain them. Counsel cannot change them.

What the Staff Is Actually Looking For

At the Commission I worked on matters involving insider trading, accounting fraud, market manipulation, misleading disclosures, and failures to file required reports. Across all of them, the staff was trying to answer a few recurring questions.

Was there a material misstatement or omission? Materiality is the question of whether a reasonable investor would consider the information important to an investment decision, viewed in light of the total mix of information available. It is not limited to numbers. A change in a key relationship, a regulatory problem, or a conflict of interest can be material even when the financial statements are unaffected.

Did anyone know, or should they have known? Some securities violations require proof of intent or recklessness. Others, including several provisions of the Securities Act, do not. A company can violate the law through negligence. That surprises people.

Who benefited? Enforcement matters follow money. Who sold shares? Who was paid? Who received stock at a discount? A disclosure failure that coincides with insider selling looks very different from one that does not.

Is there a pattern? A single late filing is a problem. A series of late filings, restatements, and changing auditors is a narrative. The staff notices narratives.

The Lesson for Issuers

The practical lesson is uncomfortable but simple. An enforcement case is assembled largely from documents the company created voluntarily. The best defense is a record that does not need defending: disclosure that is accurate when made, consistent across channels, updated when facts change, and supported by a file that shows how decisions were reached.

That is not a counsel of fear. It is a description of how disclosure works. Companies that build the right habits early spend very little time thinking about enforcement. Companies that do not spend a great deal of time, and money, thinking about nothing else.

Key Points

• Most investigations begin quietly: a tip, a trading anomaly, a referral, or an inconsistency in the company's own public record.
• Matters move from informal inquiry to formal investigation, Wells notice, and Commission action. The record that decides the outcome is fixed long before the subpoena.
• The staff keeps asking four questions: Was there a material misstatement or omission? Who knew? Who benefited? Is there a pattern?
• The best defense is a record that does not need defending.

Framing a present fact as a future possibility is a misleading statement.

When I review a client's disclosure, I read it the way I was trained to read at the Commission: not as the company's advocate, but as a skeptical examiner who does not yet know whether to believe it. Here is what that reading looks for.

Consistency Across Documents

The staff does not read your 10-K in isolation. It reads it against your prior 10-K, your 10-Qs, your 8-Ks, your press releases, your website, your investor presentations, and, increasingly, your executives' public statements. The first question is whether the company's story is consistent.

If a press release describes a "strategic partnership" and the 8-K describes a non-binding letter of intent, the staff will notice. If management's discussion describes revenue growth driven by a new product line and the segment data does not show it, the staff will notice. If risk factors warn that the company "may" face a problem that the company has already experienced, the staff will notice that most of all.

The Hypothetical Risk That Has Already Happened

This is one of the most common and most avoidable disclosure failures. A risk factor says that the company could lose a significant customer, could face supply interruptions, or could become subject to regulatory action. In fact, the company has already lost the customer, already faced the interruption, or already received the regulatory letter.

Framing a present fact as a future possibility is a misleading statement. Risk factors must be updated when the risk materializes. The fix is procedural: every time a periodic report is prepared, someone should read each risk factor and ask whether it is still hypothetical.

Boilerplate

Generic risk factors are a warning sign in themselves. A disclosure that says "we operate in a heavily regulated industry and changes in law could adversely affect our business" tells an investor almost nothing, and in industries the SEC watches closely, it is often insufficient. The staff expects disclosure that explains specific risks as they apply to this company: which regulations, which operations, and what happens if they change. Chapter 14 returns to this in detail for cannabis, artificial intelligence, and digital asset companies.

Management's Discussion and Analysis

MD&A is where the staff expects management to explain the numbers in its own words: what drove results, what trends and uncertainties are reasonably likely to affect the future, and how liquidity will be managed. It is also where companies most often say too little. A table of changes with a sentence restating each change is not analysis. The staff frequently asks companies to explain why something happened, not merely that it happened, and to quantify the factors they identify.

Related Parties and Control

The staff pays close attention to who controls the company and who transacts with it. Loans from officers, leases with entities owned by directors, consulting arrangements with family members, and shares issued to insiders at low prices all require clear disclosure. In smaller companies these relationships are common and often legitimate. Undisclosed, they look like self-dealing.

Going Concern and Liquidity

If the auditor has raised substantial doubt about the company's ability to continue as a going concern, the disclosure must say so plainly and explain management's plans. A company that highlights its growth prospects in the forepart of a filing and buries its going concern language in the notes has created a tension that the staff will ask about.

The Test I Apply

After reading a filing, I ask one question: if the company fails, or the stock falls sharply, or an investor sues, will this document read as an honest account of what management knew when it was written? If the answer is yes, the filing has done its job, whatever happens to the business. If the answer is uncertain, the filing is not finished.

Key Points

• The staff reads every document against every other. Inconsistency is the first flag.
• A risk factor that describes as possible something that has already happened is itself misleading. Re-read every risk factor each period.
• Boilerplate tells investors nothing. MD&A must explain why results changed, not merely that they did.
• The test: if the company fails, will this filing read as an honest account of what management knew?

If a statement cannot survive those questions, it should be changed before it is said, because afterward it cannot be unsaid.

Every issuer is entitled to describe its strengths. A company raising capital is selling something, and it would be strange if its materials were not hopeful. The securities laws do not prohibit optimism. They prohibit presenting optimism as fact, and they prohibit leaving out the facts that would make the optimism look different.

Puffery and Its Limits

Courts have long recognized that some statements are too vague to mislead anyone. "We are a world-class team." "We are excited about the future." A reasonable investor does not rely on statements like these, and they are generally not actionable on their own.

The protection is narrower than many executives believe. Once a statement becomes specific, measurable, or verifiable, it is no longer puffery. "Our technology is revolutionary" may be puffery. "Our technology reduces processing time by 60 percent" is a factual claim that must be true and supportable. "We expect strong demand" is an opinion. "We have $40 million in committed orders" is a fact, and if the orders are not committed in any meaningful sense, it is a misstatement.

Opinions Carry Embedded Facts

Even a genuine statement of opinion can be misleading. An opinion implicitly communicates that the speaker actually holds it and has a reasonable basis for it. If management says it believes a product will receive regulatory approval, and management has received information seriously undermining that belief, the statement can mislead by omission even though it was phrased as a belief.

Forward-Looking Statements

Projections and forecasts receive some protection, including a statutory safe harbor for certain forward-looking statements by reporting companies when accompanied by meaningful cautionary language. That protection has limits. It does not apply in several contexts, including certain offerings by companies that are not yet reporting, penny stock issuers, and initial public offerings. And cautionary language must be meaningful: tailored warnings about the specific risks that could cause results to differ, not a generic paragraph copied from someone else's filing.

Where Promotion Goes Wrong

In my experience, offering materials become misleading in a few predictable ways.

Pipeline presented as revenue. Letters of intent, memoranda of understanding, pilot programs and "discussions" are described in language suggesting binding commitments or new business, when in fact they are preliminary, non-binding or contingent, and may never produce revenue.

Partnerships that are not partnerships. A vendor relationship, a customer purchase, or a trial license described as a strategic alliance with a well-known company.

Credentials that overstate. Advisors described as team members, former affiliations described as current ones, and a founder's experience rounded up.

Market size standing in for market share. A deck that describes a $50 billion market without explaining how the company expects to capture any of it.

Silence about the obvious. A glowing description of the product that omits the pending lawsuit, the lost license, or the fact that the company has three months of cash.

Paid Promotion

When a company, or anyone acting for it, pays for promotional coverage of its stock, the law requires disclosure of the compensation. Stock promotion campaigns that tout a thinly traded security while insiders sell into the resulting volume are a recurring enforcement pattern. A company that engages investor relations or marketing firms should know exactly what those firms will say, where, and how their compensation will be disclosed.

The Practical Rule

Before any investor communication goes out, whether a deck, a press release, a post, or a script for a call, someone should ask two questions of every factual statement. Is it true? Can we prove it today? And then one question of the whole document: is there anything a reasonable investor would want to know that makes this look different? If a statement cannot survive those questions, it should be changed before it is said, because afterward it cannot be unsaid.

Key Points

• Puffery protection ends the moment a statement becomes specific, measurable, or verifiable.
• An opinion implies the speaker holds it and has a reasonable basis for it.
• The forward-looking safe harbor has limits, and cautionary language must be tailored to real risks.
• Paid promotion must be disclosed. Know exactly what your investor relations firm will say, and where.

Every dollar raised needs registration or an exemption. Most private-offering problems begin with a conversation, a payment, or a filing that seemed too small to matter.

The failure cannot be cured retroactively. The line runs in one direction.

Rule 506 of Regulation D is the most used exemption in American capital formation and among the most frequently broken. Most of the breakage happens at one line: general solicitation.

Every offer and sale of securities must either be registered with the SEC or qualify for an exemption. Rule 506 provides the exemption that most private companies rely on, and it comes in two versions.

Rule 506(b)

Under Rule 506(b), a company may sell to an unlimited number of accredited investors and up to thirty-five non-accredited investors, provided each non-accredited investor, alone or with a purchaser representative, has enough knowledge and experience in financial and business matters to evaluate the investment. If any non-accredited investor participates, the company must provide specified disclosure, including financial statement information, that is comparable in many respects to what a registered offering would require. There is no dollar limit on the amount raised.

Under 506(b), a company may generally rely on an investor's written representation of accredited status, absent facts suggesting otherwise, provided it has a reasonable belief that the representation is accurate.

What the company may not do under 506(b) is engage in general solicitation or general advertising. No public advertisements. No public posts announcing the raise. No pitching a room of strangers. Offers should generally be made to people with whom the company, or someone acting for it, has a pre-existing, substantive relationship.

Rule 506(c)

Rule 506(c) permits general solicitation. A company may advertise the offering, post about it online, describe it at a conference, or run it through an online platform. The trade is that every purchaser must actually be accredited, and the company must take reasonable steps to verify that status.

A checked box on a subscription agreement is not verification. Reasonable steps can include reviewing tax returns or brokerage statements, or obtaining a written confirmation from a registered broker-dealer, registered investment adviser, licensed attorney, or certified public accountant who has verified the investor's status. SEC staff guidance issued in 2025 also indicated that, in appropriate circumstances, high minimum investment amounts combined with written representations can support a reasonable-steps conclusion. Whatever method is used, the file should show what was done for each purchaser.

Where Issuers Get Into Trouble

The pattern is consistent. A company begins under 506(b), because that is what counsel advised and it is less burdensome. Then the chief executive posts about the raise on LinkedIn. Or the company emails its deck to a purchased list. Or a founder describes the terms on a podcast, at a demo day, or in an interview.

That is general solicitation. It does not convert the offering into a 506(c) offering, because the investors who already came in were never verified. It jeopardizes the 506(b) exemption. The failure cannot be cured retroactively. The line runs in one direction.

If the exemption fails, the consequences are serious. The company may have conducted an unregistered offering in violation of Section 5 of the Securities Act. Investors may have a right to rescind their purchases and get their money back. State regulators may have their own claims. And the next time the company raises money, or tries to go public, the problem will surface in due diligence.

Choosing the Right Version

The choice should be made deliberately, before the first conversation with an investor, and it should be communicated to every person who will talk about the company. If the founders expect to speak publicly about the raise, if the company plans to use online platforms, or if the investor base will come largely from outside existing relationships, 506(c) is often the better fit, despite the verification burden. If the company will raise from a known circle, and non-accredited friends and family may participate, 506(b) may make sense, provided everyone understands the discipline it requires.

Bad Actors

Rule 506 is unavailable if the company or certain covered persons, including directors, executive officers, significant shareholders, and paid solicitors, are subject to specified disqualifying events, such as certain criminal convictions, regulatory orders, and injunctions. The company should conduct reasonable inquiry of every covered person before the offering and keep a record of it. A disqualification discovered after the fact can destroy an exemption the company thought it had.

Key Points

• Rule 506(b): no general solicitation; unlimited accredited investors plus up to thirty-five sophisticated non-accredited investors.
• Rule 506(c): general solicitation permitted, but every purchaser must be accredited and verified.
• A public post during a 506(b) raise cannot be cured by relabeling the offering as 506(c).
• Complete a bad actor inquiry of every covered person before the offering begins.

It is far easier to build the record as you go than to reconstruct it years later.

Some securities problems are loud. Fraud, manipulation, and misappropriation get attention. The problems I want to discuss in this chapter are quiet. They rarely feel like violations when they happen, and they are often discovered only when something else goes wrong.

The Finder Problem

A company needs capital. Someone offers to introduce investors in exchange for a percentage of whatever closes. It feels like a referral fee. It feels like how business is done.

It is very likely unregistered broker activity.

Under the Exchange Act, a person who is in the business of effecting securities transactions for others generally must be registered as a broker-dealer. Transaction-based compensation, meaning payment that depends on whether and how much money is raised, is one of the strongest indicators of broker activity. A finder who solicits investors, discusses the merits of the investment, handles negotiations, or is paid a success fee is at serious risk of acting as an unregistered broker.

The exposure is not limited to the finder. The issuer that pays an unregistered broker can face regulatory consequences, and investors who came in through that person may have grounds to seek rescission. In a later financing or going-public transaction, due diligence will ask how every prior investor was found and how anyone who helped was paid. The answer matters.

The safer course is to use a registered broker-dealer for placement work, or to structure any introducer relationship so that it does not involve solicitation or transaction-based pay. This is an area where facts matter and the lines are not always bright, which is exactly why the question should be asked before the engagement letter is signed.

Form D

A company relying on Regulation D must file a notice on Form D with the SEC within fifteen days after the first sale of securities in the offering. The date of first sale is generally the date the first investor is irrevocably contractually committed to invest. Amendments are required in certain circumstances, including annually for continuing offerings and when certain information changes.

Form D is a short form. Failing to file it does not by itself destroy the federal exemption under Rule 506. But it is a marker. It is also a condition to certain state notice filings, and it is one of the first things a later diligence reviewer, regulator, or acquirer will check. Markers accumulate.

Blue Sky Notice Filings

Securities offered under Rule 506 are "covered securities" for purposes of state law, which means states cannot require registration of the offering itself. States can, however, require notice filings and fees, and most do. Those filings are typically due within a short time after the first sale in that state. Missing them is another quiet failure that becomes visible later.

Integration

A company that conducts more than one offering in a short period must consider whether the offerings should be treated as one. If a private offering is integrated with a public offering, or with another private offering conducted under a different exemption, the exemption for one or both may be lost. The SEC's integration framework provides safe harbors and principles for analyzing this, but it requires analysis. It should not be assumed away.

Stock Issued for Services

Smaller companies often pay consultants, advisors, and vendors in stock. Each of those issuances is an issuance of securities that needs an exemption, proper documentation, board approval, and accurate accounting. Shares issued to consultants for capital-raising or promotional services raise additional concerns. When I review a company's capitalization history, stock issued for services is often where the gaps are.

The Record That Protects You

The common thread is documentation. For every issuance, the company should be able to show what was issued, to whom, for what consideration, under what exemption, with what board approval, and with what disclosure. That record will be requested, sooner or later, by an auditor, a transfer agent, a market maker, an acquirer, or a regulator. It is far easier to build it as you go than to reconstruct it years later.

Key Points

• A finder paid a success fee is very likely an unregistered broker, and the exposure reaches the issuer.
• File Form D within fifteen days of the first sale, and calendar state notice filings.
• Analyze integration; never assume it away. Document every issuance of stock for services.
• For every issuance, keep the record: what, to whom, for what consideration, under what exemption, with what approval and disclosure.

Qualification does not create investors.

Regulation A permits companies to offer securities to the public, including to non-accredited investors, with general solicitation, under a qualification process that is lighter than full registration. It is sometimes called a mini-IPO. For the right company, it is a useful tool. For the wrong company, it is an expensive detour.

Two Tiers

Regulation A has two tiers.

Tier 1 permits offerings of up to $20 million in a twelve-month period. Tier 1 offerings are subject to review by state securities regulators in addition to the SEC, and they carry no ongoing SEC reporting obligation beyond an exit report.

Tier 2 permits offerings of up to $75 million in a twelve-month period. Tier 2 offerings preempt state registration requirements, but they require audited financial statements, ongoing reporting through annual, semiannual, and current reports, and, for non-accredited investors in offerings not listed on an exchange, a limit on the amount each investor may invest relative to income or net worth.

The Process

A Regulation A offering is made through an offering statement on Form 1-A, which includes an offering circular. The SEC staff reviews it and typically issues comments, much as it would for a registration statement. The offering statement must be qualified before sales are made. Companies may "test the waters" before and after filing, subject to rules about the content and legending of those communications.

When It Makes Sense

Regulation A can make sense for a company with a genuine community of customers or supporters who want to invest, a story that can be told directly to the public, and the discipline to handle ongoing reporting. It can also serve as a step toward becoming a public company, since Tier 2 securities can, with the right planning, be positioned for quotation or, with additional steps, exchange listing.

Where It Disappoints

The most common disappointment is not legal. It is commercial. Qualification does not create investors. A company that qualifies an offering without a realistic plan to reach buyers, and a realistic budget for doing so, may find that it has spent heavily to raise very little.

The second disappointment is liquidity. Qualification under Regulation A does not by itself create a trading market. Chapter 9 explains why a ticker requires more than an effective filing, and that explanation applies here as well.

The third is ongoing obligation. A Tier 2 issuer has reporting responsibilities that continue after the money is raised. Companies should budget for them from the beginning.

The Marketing Rules Still Apply

Because Regulation A permits general solicitation, companies sometimes treat their offering campaigns as ordinary marketing. They are not. Every statement made to promote the offering is a statement made in connection with the offer of securities. Chapter 3 applies in full. Paid influencers, social media campaigns, and video testimonials all need review, and the offering circular must remain consistent with what the marketing says.

Key Points

• Tier 1 permits up to $20 million with state review; Tier 2 permits up to $75 million with state preemption, audited financials, and ongoing reporting.
• Qualification creates neither investors nor a trading market.
• Every marketing statement in a Regulation A campaign is a statement made in connection with an offer of securities.

The problem is arithmetic.

Small public companies, particularly those quoted on the OTC Markets, often have limited access to conventional capital. Into that gap steps a category of financing that looks like a lifeline and frequently operates like an anchor.

The Structure

The typical instrument is a convertible note or preferred stock that converts into common stock at a discount to the market price at the time of conversion, often the lowest trading price over a period of days before conversion. There may be an original issue discount, meaning the company receives less than the face amount. There may be high default interest, penalties, and provisions that increase the principal if the company falls behind in its reporting or its share price declines.

The Spiral

The problem is arithmetic. Because the conversion price floats with the market, the lower the stock goes, the more shares the holder receives on conversion. The holder converts and sells. The selling pressure pushes the price down. The next conversion yields even more shares. Dilution compounds. The company may exhaust its authorized shares, need to increase them, effect a reverse split, and begin again.

For the holder, the structure can be profitable regardless of how the company performs, because the discount is locked in and the shares are sold quickly. For the company and its existing shareholders, the result is often catastrophic.

The Legal Questions

Toxic financing raises several issues beyond business judgment.

Disclosure. A company that enters into these instruments must disclose their material terms, the potential for dilution, and the risks they create. Disclosure that describes a "financing" without explaining that the conversion price floats, and what that could mean, may be misleading.

Resale and Rule 144. The holder's ability to sell the conversion shares often depends on Rule 144 and on legal opinions supporting removal of restrictive legends. Chapter 13 discusses those opinions and the risk they carry for the lawyers who give them.

Dealer registration. The SEC has brought actions asserting that certain toxic lenders were acting as unregistered securities dealers by buying convertible notes, converting, and selling in volume as a regular business. Courts have reached differing conclusions on aspects of that theory, but the issue remains live.

Manipulation. Trading around conversion windows, short selling ahead of conversion, and coordinated promotion can give rise to manipulation claims.

Before You Sign

If a company is considering financing of this kind, the board should see a model of what happens to the capitalization at several different stock prices, including prices well below the current market. It should understand every default trigger. It should know how many authorized shares it has and how quickly they could be consumed. And it should ask whether there is any alternative, including a smaller raise on better terms, a registered direct offering, or a strategic investor.

Sometimes there is no alternative, and a company chooses to survive on hard terms. That can be a legitimate decision. It should be an informed one, and it should be disclosed honestly.

Key Points

• A floating conversion price means a lower stock price produces more shares, more selling, and a still lower price.
• Disclose the material terms and the potential dilution in plain language.
• Before signing, the board should model the capitalization at several prices, including prices far below market, and understand every default trigger.
• Hard terms can be a legitimate choice. They must be an informed and disclosed one.

Going public describes an outcome, not a procedure. The path, the paperwork, and the market are three separate problems.

The most expensive going-public mistake is not choosing the wrong path. It is starting any path before the company is ready.

"Going public" describes an outcome, not a procedure. There are several paths, and the right one depends on what the company is actually trying to achieve. Before choosing, the company should answer three questions honestly. Does it need to raise money in the process, or does it primarily want to become a reporting company with a public market? Does it have, or can it produce, audited financial statements that will withstand review? And is it prepared for the permanent obligations of public company life?

Form S-1: Registering an Offering

A registration statement on Form S-1 registers an offering of securities under the Securities Act. It may register a primary offering, in which the company sells new shares and raises capital, a resale offering, in which existing shareholders register shares so they can sell them, or both.

An S-1 requires a full disclosure document: the business, risk factors, use of proceeds, dilution, management's discussion and analysis, executive compensation, related-party transactions, beneficial ownership, and audited financial statements. The staff of the Division of Corporation Finance reviews it, often issues comments, and the company responds and amends until the staff has no further comments. The company then requests that the registration statement be declared effective.

Upon effectiveness of an S-1, the company generally becomes subject to reporting under Section 15(d) of the Exchange Act. Many companies also register a class of securities under Section 12 so that they are subject to the full reporting and proxy regime, which is typically required for exchange listing and relevant to certain OTC Markets tiers.

Form 10: Registering a Class of Securities

A Form 10 registers a class of securities under Section 12 of the Exchange Act. It does not register an offering and does not by itself permit the company to sell shares to the public. What it does is make the company a reporting company, with the full set of periodic reporting, proxy, and insider reporting obligations.

A Form 10 filed under Section 12(g) generally becomes effective automatically sixty days after filing, whether or not the staff has completed its review. That automatic effectiveness surprises companies: reporting obligations can begin while comments remain open, and the company must continue to resolve them.

Form 10 can make sense for a company that already has a shareholder base, does not need to raise money in the registration itself, and wants to become a reporting company, sometimes as a step toward quotation or listing. It is also used by companies that are required to register because they have crossed shareholder and asset thresholds.

Regulation A

Chapter 6 described Regulation A in detail. As a going-public path, Tier 2 can raise capital from the public with a lighter process than an S-1, and with planning it can be paired with Exchange Act registration and a quotation or listing strategy. It is not the right fit for every company, and its limits should be understood before it is chosen.

The Reverse Merger

In a reverse merger, a private operating company combines with a company that is already public, usually a shell with few or no operations, and the private company's owners end up controlling the combined entity. It can appear faster and cheaper than an IPO. It carries distinct risks.

The shell's history. A shell comes with its past: its shareholders, its filings, its liabilities, and sometimes its regulatory problems. Due diligence on the shell is not optional. Before entering into a reverse merger, a company should know who controls the shell, how every block of its shares was issued, whether its filings are current and accurate, and whether anyone associated with it has a regulatory history.

The Super 8-K. When a shell company completes a transaction that causes it to cease being a shell, it must file a current report on Form 8-K within four business days containing the information that would be required in a Form 10 registration statement, including audited financial statements of the acquired business. This filing is often called a Super 8-K. It is a full disclosure document, prepared on a very short clock, and many companies underestimate it.

Rule 144 restrictions. Shares of companies that are or were shell companies are subject to special limitations under Rule 144, discussed in Chapter 13. Those limitations can delay the ability of shareholders to resell for a significant period.

Exchange seasoning. The major exchanges impose additional requirements on companies that went public through a reverse merger, including a trading period and reporting history before an initial listing application will be approved.

Reputation. Reverse mergers have a history, and the SEC, FINRA, and the exchanges have all issued warnings about them. A reverse merger done carefully can be entirely legitimate. One done carelessly will attract exactly the attention the company does not want.

A Word About SPACs

Special purpose acquisition companies raise capital in an IPO and then seek a private operating company to acquire. A business combination with a SPAC is a form of going-public transaction with its own disclosure regime, which the SEC substantially updated in 2024 with rules addressing projections, conflicts, dilution, and the liability of participants. It is a specialized path and should be evaluated on its own terms.

Readiness Before Path

The most expensive going-public mistake is not choosing the wrong path. It is starting any path before the company is ready. A company without auditable financial statements, clean corporate records, a documented capitalization history, and management that understands its obligations will discover those gaps in the middle of an SEC review, when fixing them is slowest and most costly. Appendix C lists the questions I ask before any going-public engagement begins.

Key Points

• Form S-1 registers an offering. Form 10 registers a class of securities and becomes effective automatically sixty days after filing.
• A reverse merger brings shell diligence, a Super 8-K due in four business days, Rule 144 shell limits, and exchange seasoning requirements.
• SPAC transactions carry their own disclosure regime, substantially updated in 2024.
• Readiness comes before path.

Anyone who guarantees that a symbol will appear on a schedule is selling something.

Becoming a reporting company and having a stock that trades are two different things. Companies conflate them constantly.

SEC registration makes you a reporting company. It does not create a market. No investor can buy your shares in the public market until a broker-dealer is willing to quote them, and for over-the-counter securities that path runs through FINRA.

The Sequence

A market maker, meaning a registered broker-dealer, agrees to sponsor the company's quotation. The company does not apply to FINRA itself. The market maker files Form 211 on the company's behalf. That form asks FINRA to permit the broker-dealer to publish quotations in the security. FINRA reviews it under its own rules and under Exchange Act Rule 15c2-11.

Since the amendments to Rule 15c2-11 took effect, that standard is materially higher than it used to be. Current information about the issuer must be publicly available, and it must stay available. A company that stops making current information available can lose eligibility for public quotation, and its shares can move to the Expert Market, where retail investors generally cannot buy them.

What Goes Into the Package

The information a market maker and FINRA will want is substantial: organizational documents; a capitalization table showing how each block of shares was issued and under what exemption; financial statements; information about officers, directors, and control persons; and information about any promoters and prior corporate actions. Gaps in the issuance history are among the most common causes of delay. This is where the documentation discipline described in Chapter 5 pays for itself.

The OTC Markets Tiers

The OTC Markets Group operates the marketplace tiers on which over-the-counter securities are quoted. Those tiers are separate from FINRA's Form 211 review, and they were restructured in 2025.

OTCQX sits at the top, with the most demanding financial and governance standards.

OTCQB is the venture market tier. Its core criteria include being current in reporting; annual financial statements audited by a PCAOB-registered firm; a minimum bid price of five cents for the thirty days before admission and above one cent to remain; a public float of at least ten percent; at least fifty beneficial shareholders; and not being in bankruptcy, along with annual certification and fee requirements. OTC Markets revises these standards from time to time, so the current criteria should be confirmed at the time of application.

OTCID Basic replaced what most people still call Pink Current, for companies that make current information available but do not qualify for or choose not to join a higher tier.

Below those are Pink Limited and the Expert Market, where quotation is restricted and retail access is limited.

Two Practical Points

First, finding a market maker willing to sponsor a Form 211 is often the hardest step, and it has nothing to do with law. It is a business decision by the broker-dealer, which is taking on its own regulatory responsibility by filing. Companies are frequently surprised by this. Counsel can prepare a complete and clean information package. No lawyer can compel a market maker to file.

Second, the timeline is unpredictable. Comments come back. Information is requested. Plan in months, not weeks, and do not promise shareholders a date.

Anyone who guarantees that a symbol will appear on a schedule is selling something.

Keeping the Quotation Alive

The work does not end when trading begins. The company must keep current information publicly available, stay current in its reporting, maintain tier qualifications, and handle corporate actions, such as name changes, reverse splits, and symbol changes, through FINRA's corporate action process. A company that treats quotation as a one-time achievement rather than an ongoing obligation risks losing it.

Key Points

• SEC registration creates a reporting company, not a market. A market maker must file Form 211.
• Amended Rule 15c2-11 requires current public information on a continuing basis.
• Market maker sponsorship is a business decision no lawyer can compel. Plan in months.
• Quotation is an ongoing obligation, not a one-time achievement.

It is a regulatory examination of the company's disclosure, and the response creates a record.

When the staff of the Division of Corporation Finance reviews a registration statement or periodic report, it may send the company a comment letter. Many companies treat the letter as a request for edits. It is not. It is a regulatory examination of the company's disclosure, and the response creates a record.

What Comments Mean

Staff comments take several forms. Some ask the company to revise disclosure. Some ask the company to provide supplemental information to the staff. Some ask the company to explain its analysis, for example of an accounting position or a legal conclusion. Some ask the company to tell the staff whether it considered something. Each form deserves a different kind of response.

Comments are also rarely isolated. A question about revenue recognition in the notes may relate to a question about MD&A, a risk factor, and the business description. A good response treats the letter as a whole and considers how a change in one place affects every other place the same subject appears.

The Response Is Public

After the staff completes its review, comment letters and company responses are generally made public on EDGAR, typically no earlier than twenty business days after completion. Everything the company writes in its response should be written on the assumption that investors, analysts, plaintiffs' lawyers, competitors, and future regulators will read it. Companies may request confidential treatment for specific information under the Commission's rules, but the request must be justified and properly made.

How to Respond Well

Answer the question asked. Evasive or partial responses generate follow-up comments and extend the review. If the staff asks why, explain why.

Do not concede what is not true, and do not argue what cannot be won. Some comments reflect a misunderstanding that should be politely corrected with support. Others reflect a disclosure gap the company should simply fix. Distinguishing between them is a judgment call.

Coordinate management, auditors, and counsel. Accounting comments must be answered consistently with the audited financial statements and the auditor's views. The worst responses are those in which the legal, accounting, and business answers do not agree.

Show the change. When the company revises disclosure in response to a comment, the response letter should identify where the revision appears so the staff can confirm it easily.

Do not open new issues. A response that volunteers new, unsupported assertions invites new comments. Say what is necessary and support it.

Keep the calendar. The staff expects responses in a reasonable time, and delays in a registration statement review delay the offering itself.

When Amendment Is Required

For a pending registration statement, responses are typically accompanied by an amendment reflecting the revised disclosure. For periodic reports, the staff may accept revisions in future filings when the issue is not significant enough to require amending the past report. Whether an amendment of a previously filed report is necessary depends on the materiality of the issue, and it is sometimes a matter for negotiation with the staff. If the question involves the reliability of previously issued financial statements, it may also trigger a separate 8-K obligation.

Why It Matters Beyond the Review

Comment letter histories are read. Underwriters review them. Acquirers review them. The Division of Enforcement can review them. A pattern of recurring comments about the same subject is a signal. A candid, well-supported response is evidence of a company that takes its disclosure seriously.

Appendix A contains the checklist I use when a client receives a comment letter.

Key Points

• A comment letter is an examination, and the response becomes part of the public record on EDGAR.
• Answer the question asked, coordinate with the auditors, show the change, and do not open new issues.
• Underwriters, acquirers, and the Division of Enforcement all read comment letter histories.

Once public, the company answers to a calendar, and its officers and directors answer personally.

Simple processes followed consistently outperform elaborate ones that are ignored.

Once a company is a reporting company, its relationship with investors is governed by a calendar. The calendar does not care whether the quarter was good, whether the auditor is behind, or whether management is traveling. Missing it has consequences that compound.

The Annual Report on Form 10-K

The 10-K is the company's comprehensive annual disclosure: the business, risk factors, legal proceedings, market information, MD&A, audited financial statements, controls and procedures, and information about directors, executive officers, compensation, ownership, and related transactions, some of which may be incorporated from the proxy statement.

The deadline depends on the company's filer status. Large accelerated filers have sixty days after fiscal year end, accelerated filers seventy-five days, and non-accelerated filers ninety days. Most smaller reporting companies are non-accelerated filers.

The Quarterly Report on Form 10-Q

The 10-Q covers each of the first three fiscal quarters, with reviewed, unaudited financial statements, MD&A, updates to risk factors, and controls disclosure. It is due forty days after quarter end for large accelerated and accelerated filers, and forty-five days for others.

The Current Report on Form 8-K

The 8-K is where many compliance failures happen, because it is event-driven rather than calendar-driven. Specified events require a report generally within four business days, including entry into or termination of a material definitive agreement; completion of a significant acquisition or disposition; creation of a material direct financial obligation; unregistered sales of equity above specified thresholds; changes in control; departures and appointments of directors and certain officers; amendments to the articles or bylaws; changes in the certifying accountant; a conclusion that previously issued financial statements should no longer be relied upon; notices of delisting; and material cybersecurity incidents, among others.

The question that generates the most calls, and should generate more, is whether something is a reportable event. Is this contract material? Is this officer an executive officer for these purposes? Does this financing create a direct financial obligation? These questions are answerable, but they need to be asked within the four-day window, not after it.

Late Filing

If a company cannot file a 10-K or 10-Q on time, it may file a Form 12b-25 notification of late filing, which, if properly filed and the report is filed within the extension period (fifteen calendar days for a 10-K, five for a 10-Q), treats the report as timely for certain purposes. A 12b-25 must explain the reason for the delay. It is not a routine extension, and repeated use of it is noticed.

Delinquency has concrete costs. It can cost the company eligibility for short-form registration, affect shareholders' ability to resell under Rule 144, jeopardize OTC Markets tier status or exchange listing, and, in serious cases, lead the SEC to suspend trading or institute proceedings to revoke registration of the company's securities.

Certifications and Controls

The chief executive and chief financial officer must certify each 10-K and 10-Q, including as to the accuracy of the report and the design and effectiveness of disclosure controls. Management must also assess internal control over financial reporting annually. These certifications are personal. An officer who signs them without a basis for doing so is taking on individual exposure.

Building the Calendar

A reporting company should have a written disclosure calendar with every periodic deadline, internal milestones for drafts, auditor review, and board or audit committee review, and a standing process for evaluating events for 8-K purposes. In a small company, that process may be as simple as a rule that any significant contract, financing, personnel change, or problem is raised with counsel the day it happens. Simple processes followed consistently outperform elaborate ones that are ignored.

Key Points

• Form 10-K is due 60, 75, or 90 days after year end; Form 10-Q is due 40 or 45 days after quarter end, depending on filer status.
• Most 8-K items are due within four business days. Ask whether an event is reportable inside that window, not after it.
• Form 12b-25 is not a routine extension. Delinquency costs short-form eligibility, Rule 144 availability, and market status.
• CEO and CFO certifications are personal.

Intent is irrelevant. The rule is mechanical.

Insider trading cases were a significant part of my work at the Commission. They are often the most personal enforcement matters, because the defendants are individuals, and the conduct at issue is frequently a single decision made quickly.

What Insider Trading Is

In general terms, insider trading is buying or selling a security while in possession of material, nonpublic information, in breach of a duty of trust or confidence. That duty may be owed to the company's shareholders, as in the case of an officer or director, or to the source of the information, as in the case of someone who misappropriates confidential information. Tipping, meaning passing the information to someone else who trades, can create liability for both the tipper and the tippee.

Materiality here means what it means everywhere: information a reasonable investor would consider important. Upcoming earnings, a pending acquisition, a regulatory decision, a major contract, a financing, or a cybersecurity incident can all be material.

How Cases Are Built

Insider trading cases are often built from trading data. Surveillance identifies unusual trading ahead of a significant announcement. The staff then works backward: who traded, what connection do they have to the company or its advisors, and what communications occurred before the trade. Phone records, emails, text messages, and calendar entries fill in the story. The staff is patient, and the data is extensive.

Section 16

Directors, officers, and beneficial owners of more than ten percent of a class of registered equity securities are subject to Section 16 of the Exchange Act. They must file an initial statement of ownership on Form 3, report most changes in ownership on Form 4 within two business days, and file an annual statement on Form 5 for certain transactions not previously reported.

Section 16(b) also requires insiders to disgorge to the company any profit from a purchase and sale, or sale and purchase, within any period of less than six months. Intent is irrelevant. The rule is mechanical, and it catches people who had no idea they were doing anything wrong.

Late Section 16 filings must be disclosed by the company, and they are an area in which the SEC has brought sweeps against both insiders and issuers.

Rule 10b5-1 Plans

A Rule 10b5-1 trading plan allows an insider to establish, at a time when the insider does not possess material nonpublic information, a written plan for future trades. Trades made under a properly adopted and operated plan have an affirmative defense against insider trading claims.

The SEC amended the rule in 2022 to tighten it. Directors and officers must now observe a cooling-off period before trading under a new or modified plan, generally the later of ninety days after adoption or two business days after the company files its financial results for the quarter in which the plan was adopted, up to a maximum of one hundred twenty days. Others are subject to a thirty-day cooling-off period. Directors and officers must certify certain matters in the plan, overlapping plans are restricted, single-trade plans are limited, and the plan must be entered into and operated in good faith. Companies must disclose quarterly the adoption and termination of plans by directors and officers, and annually disclose their insider trading policies.

The Company's Role

Every reporting company should have a written insider trading policy, blackout periods around earnings, pre-clearance of trades by directors and officers, and a person responsible for administering it. The policy protects the insiders and the company. It also creates a record, which in a later investigation may matter a great deal.

Key Points

• Insider trading is trading on material, nonpublic information in breach of a duty. Tippers and tippees can both be liable.
• Cases are built backward from trading data, and the data is extensive.
• Section 16 requires Form 4 within two business days. Short-swing profits under Section 16(b) are recoverable regardless of intent.
• Since the 2022 amendments, Rule 10b5-1 plans carry cooling-off periods and a good-faith requirement.

That opinion is not a formality.

Shares acquired in private transactions are generally "restricted securities." Shares held by affiliates of the company, meaning its officers, directors, and control persons, are "control securities." Neither can be sold freely in the public market without registration or an exemption. Rule 144 provides a safe harbor for many of those resales.

The Basic Conditions

For restricted securities, the holder must satisfy a holding period: generally six months if the issuer has been a reporting company for at least ninety days and is current in its reports, and one year otherwise. For non-affiliates, once the applicable holding period has run, resale conditions are limited, and after one year they are largely eliminated, subject to the current public information requirement during the period between six months and one year for reporting companies.

Affiliates face additional conditions whether or not their securities are restricted: current public information about the issuer, volume limits, manner-of-sale requirements for equity securities, and a notice on Form 144 if sales exceed specified thresholds.

The Shell Company Trap

Rule 144 is not available for resale of securities of an issuer that is, or at any time was, a shell company, unless specific conditions are met. The issuer must have ceased to be a shell, must be subject to Exchange Act reporting, must have filed all required reports during the preceding twelve months, and at least one year must have elapsed since it filed information equivalent to a Form 10 registration statement reflecting its status as a non-shell company. If the company later falls behind in its reporting, the exemption is unavailable until it becomes current again.

This rule has ended many shareholders' expectations of liquidity after a reverse merger. It should be analyzed before the transaction, not after.

Legend Removal and the Opinion Letter

Restricted securities typically bear a legend. To sell them, the holder generally needs the transfer agent to remove the legend, and the transfer agent generally requires an opinion of counsel that the resale is permissible under Rule 144 or another exemption.

That opinion is not a formality. The lawyer giving it is making representations that the transfer agent, the broker, and the market rely on. The SEC has brought enforcement actions against attorneys who issued opinions without adequate investigation, including in cases where the shares were later used in pump-and-dump schemes or were issued in transactions that did not qualify for the exemption claimed.

When I review a request for a tradability opinion, I want to see how the shares were acquired, when, for what consideration, under what exemption, whether the holder is or has been an affiliate, whether the issuer is or was a shell, whether the issuer is current, and whether anything about the transaction, including its timing relative to promotional activity, suggests that the holder is an underwriter rather than an ordinary investor. If the answers are not documented, the opinion cannot be given.

Why Brokers Ask Hard Questions

Holders are sometimes frustrated when brokers refuse to deposit shares or demand extensive documentation. Brokers have their own obligations, and they are aware that low-priced securities deposited in volume have historically been a vehicle for unregistered distributions. The best response is a complete file. The worst is an attempt to find a less careful broker.

Key Points

• Restricted securities carry a holding period of six months for current reporting issuers and one year otherwise.
• Rule 144 is unavailable for securities of current or former shell companies unless strict conditions are met. Analyze this before a reverse merger.
• A legend removal opinion is a representation the market relies on. The SEC has brought actions against lawyers who gave them carelessly.
• The answer to a skeptical broker is a complete file.

If a regulator could substitute any other company's name without changing a word, the risk factor has not done its job.

The firm's clients have come from a wide range of industries, including entertainment, sports, cannabis, artificial intelligence, real estate, hydration and consumer products, shipping, lending, telecommunications, animal nutrition, cryptocurrency, gaming, and electric vehicles. What these companies have in common is not a business model. It is the need to translate their specific operating realities into disclosure that the SEC staff will find complete.

Some industries draw more scrutiny than others. In those industries, boilerplate is not merely weak. It can be misleading.

Cannabis and Hemp

Cannabis companies operate at the intersection of state legalization and federal law. A cannabis company that discloses federal illegality in a single generic paragraph is not adequately disclosing the specific operational risks that flow from it: limited access to banking and payment systems, restrictions on interstate commerce, the tax consequences of federal treatment, the implications for employees and insurance, the effect on intellectual property protection and bankruptcy access, and the risk that federal enforcement priorities could change.

Disclosure should describe the company's federal and state status precisely as of the date of the filing, including the status of any proposed change in federal scheduling, and should explain what a change would and would not mean for the company. Hemp and CBD companies have a different, but equally specific, set of issues under the agricultural laws and the authority of the FDA and USDA. Those issues should be described, not assumed.

Artificial Intelligence

Companies describing artificial intelligence capabilities are under particular scrutiny. The SEC has brought actions against companies and advisers for "AI washing," meaning statements about the use of artificial intelligence that were false or overstated.

An artificial intelligence company that describes its technology in aspirational terms without explaining what it actually does today, what it depends on, and what can go wrong is creating exactly the kind of disclosure gap that generates comment letters. Disclosure should distinguish between capabilities in production and capabilities in development; identify dependence on third-party models, data, or computing resources; address risks of model error, bias, and failure; describe data privacy, intellectual property, and cybersecurity exposure; and explain how evolving regulation in the United States and elsewhere could affect the business. Chapter 3 applies here with special force: claims about performance must be supportable.

Cryptocurrency and Digital Assets

The threshold question for any digital asset issuer is whether the instrument it offers is a security. Under the Howey test, an investment contract exists where there is an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The analysis turns on the economic reality of the arrangement, not its label.

The federal regulatory approach to digital assets has changed significantly in recent years, through Commission statements, staff guidance, new exemptions, and legislation, and it continues to change. A digital asset company's disclosure should describe the specific regulatory status of its assets and activities as of the filing date, the basis for any legal conclusions it relies on, and the risks that those conclusions could be challenged or that the framework could change again. Custody, valuation, cybersecurity, and counterparty risk require their own specific treatment.

The Common Principle

Across all of these industries the principle is the same. Disclosure should describe this company, in this industry, under this regulatory framework, as of this date. When a regulator reads a risk factor and could substitute any other company's name without changing a word, the risk factor has not done its job.

Key Points

• In industries regulators watch, boilerplate is not merely weak; it can be misleading.
• Cannabis: disclose the specific operational consequences of federal illegality as of the filing date.
• Artificial intelligence: distinguish capabilities in production from those in development. The SEC has pursued AI washing.
• Digital assets: apply Howey to the economic reality and state the regulatory status as of the filing date.

How advice is priced shapes whether it is sought.

A five-minute conversation would have cost nothing to have and a great deal to skip.

I want to end the substantive part of this book with something that is not a rule or a form: how legal work gets priced, and why I do it the way I do.

I bill flat fees. For a defined scope of work, the fee is agreed in writing before the work begins, and it does not change because the work took longer than I expected. For ongoing securities and corporate work, I offer a monthly flat fee covering the services within an agreed scope, with no separate charge for calls and questions within that scope.

The Meter

The reason is not marketing. It is about what a meter does to a relationship.

When every phone call has a price, a client who is uncertain whether something is a reportable event has a financial reason not to call. And the calls that do not happen are, in my experience, the expensive ones. The 8-K that was filed late. The press release that went out before anyone read it. The investor introduced by a finder, when nobody asked how the finder was being paid.

Every one of those is a situation in which a five-minute conversation would have cost nothing to have and a great deal to skip. This entire book has been about those conversations. A flat fee removes the meter. Call. Ask the question that seems too small to ask. That is the point of the arrangement.

Honesty About Cost

There is a second reason, which is simple honesty about cost. A registration statement is a definable piece of work. I have drafted a great many of them, and I know approximately what one requires. A company deciding whether to go public is making a capital allocation decision, and it cannot make that decision well against an estimate that might double. With a flat fee, the number in the engagement letter is the number. For large projects, such as registration statements and private placement memoranda, the flat fee can be paid in negotiated installments.

What a Flat Fee Is Not

A flat fee does not mean cheap, and it does not mean unlimited scope. The scope is written down. If the matter changes materially, whether through a new transaction, an investigation, or something nobody anticipated, the new work is scoped and priced separately, in writing, before it starts.

Direct Involvement

The last point is not about fees but about who does the work. I am directly involved in every matter, from the first conversation through completion. Clients reach me directly. I do not believe securities counsel can give good advice at a distance from the documents, and I do not believe a client should have to wonder who is actually reading its filings.

Key Points

• A meter discourages exactly the calls that prevent expensive problems.
• With a flat fee, the number in the engagement letter is the number.
• Scope is written down. Material changes are scoped and priced separately, in writing, before work begins.
• Clients reach the lawyer who reads their filings, directly.

If there is a single idea in this book, it is the one I began with. Enforcement matters rarely start with a decision to break the law. They start with a decision not to ask.

The founder who is not sure whether a post counts as general solicitation. The chief financial officer who is not sure whether a new debt facility needs an 8-K. The director who is not sure whether a trade falls within a blackout. The chief executive who is not sure whether a partnership described in a press release is really a partnership. Each of them has a question that takes minutes to answer before the fact and months or years to resolve afterward.

Nine years in the Division of Enforcement taught me how those matters look from the other side of the table. Twenty-five years of private practice have taught me that the companies that avoid them are not necessarily the most sophisticated or the best funded. They are the ones that built the habit of asking early.

Build the habit. Read your disclosure the way the staff will read it. Keep the record that shows how every share was issued. Make sure every statement to investors is true and provable today. Update what has changed. And when you are not sure, ask.

This is general information, not legal advice. For advice about your situation, talk to counsel who knows your facts.

1. Log the letter. Record the date received, the filing reviewed, the staff contacts, and the requested response date.
2. Circulate immediately to management, the audit committee chair, the auditor, and counsel.
3. Classify each comment: revise disclosure, provide supplemental information, explain analysis, or confirm consideration.
4. Map every comment to every place the subject appears: business, risk factors, MD&A, financial statements, notes, exhibits, website, and investor materials.
5. Assign an owner for each comment, with the auditor owning accounting positions jointly with management.
6. Draft answers that respond to the question asked, with support, and without new unsupported assertions.
7. Decide the path for each revision: amendment now, or revision in future filings, and document the materiality reasoning.
8. Consider whether any comment implicates prior financial statements and a potential non-reliance 8-K.
9. Identify any information for which confidential treatment is appropriate and follow the Commission's procedure.
10. Assume publication. Reread the whole response as an investor, a plaintiff, and a future enforcement attorney would.
11. Reconcile legal, accounting, and business answers so they say the same thing.
12. Show the change: cite the page or section where each revision appears.
13. File on time, or contact the staff before the date if more time is genuinely needed.
14. Calendar follow-up and track any commitments made for future filings.
15. Archive the complete file, including drafts and the reasoning behind each position.

1. Which exemption: Rule 506(b), Rule 506(c), Regulation A, or another? Decided in writing.
2. Has everyone who will speak about the company been told what they may and may not say publicly?
3. If 506(c): what verification method will be used for each purchaser, and who will keep the record?
4. If 506(b) with non-accredited investors: is the required disclosure package prepared?
5. Has a bad actor inquiry been completed for every covered person?
6. Is anyone being paid to introduce investors? Are they registered? How are they compensated?
7. Is the offering document accurate, current, and consistent with the deck, website, and any press?
8. Are subscription documents, investor questionnaires, and board approvals complete?
9. Is the Form D calendared for fifteen days after the first sale?
10. Are state notice filings identified and calendared?
11. Could this offering be integrated with any other recent or planned offering?
12. Is the capitalization table current and supported by documentation for every prior issuance?

1. Why are we going public: to raise capital, to create liquidity, to use stock as currency, or something else?
2. Do we need to raise money in the process, or primarily become a reporting company?
3. Can we produce audited financial statements, by a PCAOB-registered firm, for the required periods?
4. Is our capitalization history documented, with an exemption identified for every issuance?
5. Are our corporate records, minutes, and consents complete?
6. Who are our officers and directors, and is there anything in their backgrounds that must be disclosed or that would disqualify an offering?
7. Do we have, or can we build, disclosure controls and internal control over financial reporting?
8. Have we budgeted for ongoing legal, audit, filing, transfer agent, and market costs?
9. If we want a trading market, have we thought realistically about market maker sponsorship or exchange requirements?
10. If a reverse merger is proposed, what do we know about the shell, its history, and its shareholders?
11. Do our management and board understand the personal obligations of public company officers and directors?
12. Are there material contracts, disputes, regulatory issues, or related-party arrangements that will need disclosure?

Accredited investor

An investor meeting income, net worth, professional, or entity criteria defined in Regulation D.

Affiliate

A person that directly or indirectly controls, is controlled by, or is under common control with the issuer, typically including officers, directors, and significant shareholders.

Bad actor disqualification

The rule that makes Rule 506 unavailable if the issuer or a covered person is subject to specified disqualifying events, such as certain convictions, regulatory orders, and injunctions.

Blue sky laws

State securities laws. For Rule 506 offerings, states may require notice filings and fees but not registration.

Comment letter

Written comments from the SEC's Division of Corporation Finance on a company's filing.

Control securities

Securities held by an affiliate of the issuer.

Expert Market

An OTC market segment where quotations are restricted and retail investors generally cannot buy.

Finder

A person who introduces investors to an issuer. A finder who solicits investors or receives transaction-based compensation risks acting as an unregistered broker.

Form 1-A

The offering statement, including the offering circular, used for Regulation A offerings.

Form 10

A registration statement registering a class of securities under the Exchange Act.

Form 12b-25

The notification of late filing for a periodic report, which can provide a short extension if properly filed.

Form 211

The FINRA form a broker-dealer files to initiate quotation of an OTC security.

Form D

The notice filed with the SEC for Regulation D offerings.

Form S-1

The general registration statement for offerings under the Securities Act.

General solicitation

Advertising or other public communication used to offer securities.

Howey test

The Supreme Court test for whether an arrangement is an investment contract, and therefore a security.

Integration

The analysis of whether two or more offerings should be treated as a single offering for purposes of an exemption.

Materiality

Whether a reasonable investor would consider information important, in light of the total mix of information.

MD&A

Management's Discussion and Analysis of Financial Condition and Results of Operations.

OTCQB

The venture market tier of OTC Markets, with reporting, audit, bid price, float, and shareholder requirements.

Regulation A

An exemption permitting public offerings of up to $20 million (Tier 1) or $75 million (Tier 2) in a twelve-month period.

Restricted securities

Securities acquired in unregistered, private transactions.

Rule 10b5-1 plan

A written trading plan that provides an affirmative defense to insider trading claims when properly adopted and operated.

Rule 144

A safe harbor for resale of restricted and control securities.

Rule 15c2-11

The Exchange Act rule governing broker-dealer publication of quotations for OTC securities.

Rule 506(b)

The Regulation D exemption permitting sales to accredited investors and up to thirty-five sophisticated non-accredited investors, without general solicitation.

Rule 506(c)

The Regulation D exemption permitting general solicitation, provided every purchaser is accredited and the issuer takes reasonable steps to verify that status.

Section 16

The Exchange Act provisions requiring directors, officers, and ten-percent owners to report their holdings and transactions and to disgorge short-swing profits.

Shell company

A company with no or nominal operations and no or nominal assets, or assets consisting mainly of cash.

Super 8-K

The Form 8-K containing Form 10 information that a shell company must file after a transaction ending its shell status.

Toxic financing

Convertible financing with a floating conversion price at a discount to market, which can produce escalating dilution.

Wells notice

A notice from SEC staff that it intends to recommend an enforcement action.