Hawking liquidity: an analysis of reverse merergers and SPACS.
The implosion of the Dotcom bubble wiped out $5 trillion in paper wealth on the National Association of Securities Dealers Automated Quotations ("NASDAQ"), the exchange where many of these new companies traded. (129) NASDAQ valuations peaked at $6.7 trillion in March 2000, and then plummeted to $1.6 trillion by October 2002. (130) Equity was not the only casualty of the Dotcom Bust: Venture capital investment in internet firms has plummeted. (131) The market to initial public offerings (IPOs) has also been victimized by the market dislocation that resulted form speculation in internet stocks. (132) This lack of liquidity in IPO markets for both internet and traditional companies ahs restricted the ability of small and medium-sized companies to attract the financing needed to expand operations. (133) More recently, problems in the subprime debt market and the resulting credit crisis have led smaller companies to seek capital investment through more creative measures. (134)
Looking for cash, private businesses have turned to a financing mechanism known as a "reverse merger." Technically, a reverse merger is any merger structures so that the target company, rather than the acquirer is the surviving entity. (135) This mechanism allows the start-up company to be "merged" into an existing shell company with no operations, but whose stock symbol is traded on a public exchange. (136) The reverse mergers detailed in this paper are executed to gain an exchange listing. (137)
Gaining a stock symbol is incredibly valuable to a company. The stock symbol gives a company access to equity financing through equity offerings to the public. Thus, the stock symbol gives a start-up company freedom from other financing options that may compromise a company's control of its operations. Traditionally, start-up companies turn to friends and family for initial financing. (138) After the company expands, and this initial financing is exhausted, companies may turn to "Angel Investors" for further funding. (139) Later, if the company is viable, it may approach venture capitalist--more readily known as "vulture capitalists"--which routinely take equity states of 50% or more in the new company in exchange for financing. (140) A reverse merger then would allow start-up companies to keep more equity in their company and raise money in a more cost-efficient manner.
REVERSE MERGERS GAIN IN POPULARITY
Two types of reverse mergers aimed at securing exchange listings have gained prominence since 2002, the Dotcom bust: (1) the namesake reverse merger and (2) the special purpose acquisition company (SPAC). (141) Use of these mechanisms to facilitate equity financings for existing companies has significantly increased in the last decade. For example, from 2003 to 2007, 1444 SPACs have raided over $21 billion in offering proceeds, with the average deal sized at $136 million. (142) In 2003, there was one SPAC IPO raising $24 million. (143) By 2007, there were 66 operating SPACs, which raised $12 billion in that year alone. (144) Meanwhile, the number of reverse mergers has increased fourfold since 2000. In 2000, 46 reverse merger transactions successfully closed; by 2005, this number increased to 179. (145) These alternative methods of going public have become so popular that a trade association, the Reverse Merger Association of America, was formed to service professionals and entities engaged in alternative methods of going public. (146)
THE MECHANICS: REVERSE MERGER V. THE SPAC
Although reverse mergers and SPACs both acquire third companies, the mechanics of the mergers are different.
In a reverse merger, (147) a private company merges with a shell corporation. (148) The stock of this corporation has previously been offered to the public, or has otherwise become subject to the reporting requirements of the U.S. Securities Exchange of 1934 (the "Exchange Act"). (149) Rule 405 of the Securities Act of 1933 (the "Securities Act") and Exchange Act Rule 12b-2 define a shell company as: "a registrant, other than an asset-backed issuer ... that has: (1) No or nominal operations; and (2) Either: (i) No or nominal assets; (ii) Assets consisting solely of cash and cash equivalents; or (iii) Assets consisting of any amount of cash and cash equivalents and nominal other assets." 150 Typically, a shell involved in a reverse merger is the dormant remnants of a now sold or defunct business. Many times the shell is property in a bankruptcy proceeding. (151)
Conversely, in a SPAC, the start-up company does not buy the shell but rather the shell buys the start-up. Funds to acquire these businesses comes from an IPO initiated by the SPAC. The SPAC is a publicly traded shell company formed by a small group of sponsors that serve as the SPAC's management team. (152) The goal of the sponsors is to acquire an unidentified operating company with the money collected from the IPO (153). In exchange for letting an operating company merge into the shell, the SPAC charges the operating company a fee and retains an owwnership interest in the shell company after the merger. (154)
REGISTRATION REQUIREMENTS: REVERSE MERGERS V. THE SPAC
Both reverse mergers and SPACs must file registration statements with the Securities and Exchange Commission ("SEC"). However, exemptions allow reverse mergers and SPACs to occur without requiring the controlling parties to register with the SEC.
Because the exchange of the start-up's shares for the shell's shares in a reverse merger is considered an offer and sale of securities, the merger must comply with the Securities Act of 1933 (the "Securities Act"). (155) However, shell companies usually rely on Rule 506 of Regulation D under the Securities Act for an exemption from registration. (156) Accordingly, to comply with securities law, the shell must only prepare and circulate to the start-up's shareholders a private placement memorandum (157) describing the terms of the deal and basic information about shell company (158) and file a Form D with the SEC setting forth some basic information about the offering. (159) Because Section 18 of the Securities Act preempts state securities offering registration or qualification requirements with respect to Rule 506 offerings, compliance with state Blue Sky Laws (160) is not required. (161) Securities issued in reliance on Rule 506 are considered "restricted securities," so shareholders of the start-up will not be able to sell shares of the shell for at least one year from the closing of the reverse merger unless the subsequent sale is registered with the SEC, under Rule 144. (162)
After a reverse merger is completed, the new company is restructured and usually is required to register with the SEC through requirements promulgated by the Exchange Act. For example, after the deal, the private company normally will change the name of the public corporation (often to its own name) and will appoint and elect its management and Board of Directors. (163) The new company will then be deemed a reporting company under the Exchange Act and will have to file an "information statement," akin to a proxy statement, containing substantial financial and non-financial disclosures mandated by Exchange Act rules. Also, since the merger is a material event for the public shell, it will have to file a "super 8-K" current event report containing the financial and non-financial information that a registration statement for the merged company would contain. (164) Under the 2005 SEC Rule Amendments, this Form 8-K filing must take place within four days following the completion of the reverse merger. (165)
A SPAC must also file registration statements with the SEC. To offer securities in the public markets, a SPAC is required to file a registration statement (Form S-1) with the SEC disclosing the details of the offering. (166) A SPAC is identified as a "blank check" company, (167) and must identify itself as such. Typically, the first line of the prospectus section of a SPACs S-1 will indicate that the filer is a "blank check" company. (168) if applicable, the registration statement sets forth a description of the sector in which the SPAC intends to conduct a merger or acquisition and the criteria used in determining the suitability of a target company for combination. (169) The registration statement identifies the SPAC's management team, details the securities to be offered, and lists any foreseeable risks relevant to blank check offerings in general and to the specific SPAC in question. (170) At the time of the IPO, the actual target acquisitions are unknown; it is only afterwards that the SPAC's management team will begin to identify and attempt to acquire revenue-producing companies.
Like some reverse mergers, SPACs use exemptions to bypass SEC information requirements: Most SPACs do not have to adhere to regulatory safeguards designed to protect investors form abuses by blank check corporations.
Rule 419 of the Securities Act imposes obligations and restrictions upon issuers that are deemed to be "blank check" corporations. (171) However, Rule 419 excludes issuers whose outstanding shares are not deemed to be "penny stock," as defined by Rule 3a51-1 of the Securities Exchange Act of 1934. 172 Specifically Rule 3a51-1 provides an exception for issuers that have $5 million in stockholders' equity and a market value of listed securities of $50 million for 90 days prior to applying or net income of $750,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years and an operating history of at least one year or market value of $50 million. 173 Thus, if a SPAC files a current Form 8-K promptly upon the initiation of an IPO indicating that its net assets are in excess of $5 million, (and it meets the other requirements), the SPAC will not be deemed a "blank check" company subject to the requirements of Rule 419.
Most notably Rule 419's safeguards include: (1) a requirement that funds raised in the initial offering and securities issued by the blank check company must be put in escrow accounts; (2) an eighteen-month limit on the company's right to retain investor funds without completing an acquisition, after which funds would be returned to investors; (3) a prohibition on trading securities held in escrow; (4) a requirement that the issuer disclose in the prospectus all its obligations regarding the escrow account, including the date on which invested funds would be returned absent an acquisition; (5) the filing of a post-effective amendment to the company's registration statement upon the consummation of an acquisition by the company, including the financial details of said acquisition; (6) an opportunity for investors to have their investment refunded if they disapprove of a proposed acquisition; and (7) a requirement that the acquisition must account for at least eighty percent of the funds held in escrow. (174) Although most SPACs voluntarily adhere to the safeguard of Rule 419 to attract investors, most SPACs are structured to be exempted from the rule. (175)
TRADE ON NATIONAL EXCHANGES AND EXCHANGE REQUIREMENTS HAVE LED TO TIGHTER REGULATORY STANDARDS FOR SPACS
Requirements to list on national exchanges--particularly on the NASDAQ, (176) and the New York Stock Exchange ("NYSE) (177)--codify some Rule 419 protections to which most SPACs are exempt. (178) To protect investors from potential fraud, both the NASDAQ and the NYSE require that: (1) SPACs deposit at least 90% of IPO proceeds and the proceeds of any concurrent sale of equity in a deposit account to be held in trust; (2) the acquisition must account for at least 80% of the funds held in escrow; (3) each business combination be approved by a majority of the SPAC's independent directors and a majority of common shareholders; (4) SPACs allow shareholders who vote against a business combination the right to convert shares to cash if the business combination is approved and consummated; and (5) both exchanges limit the time in which a SPAC must complete an acquisition before funds are returned to investors. (179)
SPACs listed on the NASDAQ must meet that exchange's current initial listing standards. (180) Meanwhile, SPACs listed on NYSE must meet the same distribution criteria and corporate governance requirements as other IPOs and operating companies, (181) must have a market capitalization of $250 million and must have a public float of $200 million at the time of its initial acquisition.
Thus, because SPACs are listed on these national exchanges, regulatory policies to which the SPACs have previously only voluntarily adhered to are now mandatory. This protection reaches a substantial amount of investors: since 2003, forty-five SPACs have consummated acquisitions with an aggregate transaction value exceeding $12 billion. (182)
WHILE REVERSE MERGERS DO NOT HAVE TO ADHERE TO TIGHER STANDARDS BECAUSE THEY DO NOT TRADE ON THE SAME TYPE OF EXCHANGES
In contrast, public shells do not have the same type of regulatory oversight as SPACs because they cannot trade on the same exchanges. Because public shells typically have no assets or operations, they do not meet the minimum listing standards of the NYSE, the NASDAQ, or the NASDAQ-owned Over-the-Counter-Bulletin-Board (OTCBB). (183) Instead, shell companies typically trade on "exchanges," such as The Pink Sheets or the grey markets. (184)
Neither the Pink Sheets nor the grey markets are authorized exchanges, and such they are not per se regulated by the SE C. The Pink Sheets is a "centralized quotation service that collects and publishes market maker quotes for OTC securities in real time." (185) There are no listing standards. (186) Companies listed on The Pink Sheets fall outside SEC oversight because The Pink Sheets is not an exchange but merely a quotation system where market makers (broker-dealers) exchange bid-ask spreads. 187 Nor can the SEC regulate the grey markets--over-the-counter exchanges--which do not publish bid-ask spreads. Because these shell companies trade outside the regulated exchanges, they can use the Rule 419 exemption, and, unlike the SPACs can not be forced to comply through pressures wrought by the exchanges.
SEC COMBATS POSSIBLE FRAUD THROUGH 12(J) program
Traditionally, shell companies have had a history of fraud. (188) In particular, perpetrators have used "pump-and-dump" schemes to manipulate stock prices for profit. Because shell companies are mostly traded on The Pink Sheets or grey markets, where there are no listing requirements, there is limited information about these companies. A perpetrator may release fraudulent information in order to generate interest in the company and drive up share prices, then sell the shares, making an unjust profit.
To combat market manipulation, the SEC is actively enforcing Section 12(j) of the Exchange Act against companies that are not current in their reporting requirements. (189) Section 12(j) provides that "No member of a national securities exchange, broker or deal shall make use of the emails or any means of instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked ..." 190 Section 12(j) to allows the Commission to revoke the registration of a security if the Commission finds on the record after notice and opportunity for hearing that the issuer has failed to comply with any provisions of the securities laws or the rules and regulations thereunder. (191) The SEC has interpreted 12(j) as in such a way that failure to make periodic filings as required by Exchange Act Section 13(a) and Rules 13a1 and 13a-13, for which no showing of scienter is necessary, is sufficient grounds for revocation under Exchange Act Section 12(j). (192)
A successful Section 12(j) proceeding against a company will result in the voluntary--or involuntary--delisting of the security from a national securities exchange, and The Pink Sheets.
Although the SEC cannot regulate The Pink Sheets, the SEC can regulate the broker-dealers, which issue quotations on The Pink Sheets. Accordingly, if a security has its registration revoked under a Section 12(j) proceeding, brokers are no longer able to quote the security on The Pink Sheets. The Pink Sheets has reflected the revocation by putting a skull and cross bones next to the security, and removing the bid-ask spread from its website. (193) This effectively ends the trading of that security, as they can no longer be listed on the exchanges or The Pink Sheets. (However, securities that have been "12(j)'d" can still trade in the grey markets.) Thus, the SEC's 12(j) proceedings limit an investor's ability to invest in a "dirty" shell by ending the trading of shell companies, which have not met regulatory filing standards.
Although raising capital is not always part of a reverse merger, many private companies couple a reverse merger with a private investment in public equity (PIPE) financing transaction. (194) "PIPES have become a vital financing option as smaller companies may have no other financing options." (195) A typical PIPE transaction is conducted either before or after the reverse merger as a private placement of restricted securities, but the merged public company subsequently files a registration statement with the SEC to register the securities and permit public resale. (196) PIPE investors--typically hedge funds--are often able to lock in gains on PIPE investment as a result of favorable deal terms and short-selling, regardless of how the company's stocks performs post-deal. (197) The investors generally are not looking to invest in private companies because the investors' strategies depend on quickly obtaining publicly tradable stock in which they can flip. (198) Logically, if less companies are available for reverse mergers, less PIPE financing will also be available from hedge funds for start-up companies, further constricting credit markets.
Ultimately, the 12(j) program will protect investors by ensuring that their money is invested in the "clean" shells, either sanitized by listing requirements or by filing requirements. Still, it is undeniable that the 12(j) program reduces the number of shells eligible for reverse mergers by forcing companies to involuntarily delist from an exchange or "go dark." This may lead to a more regulated market but fewer financings. Shelley Parratt, deputy director of SEC's Division of Corporation Finance, has stated, with regard to SPACs, that "our role is not to say people can't do these deals. Our role is full disclosure." (199) However, one unintended consequence of SEC actions may be the constriction of financing in an already credit-crunched market with the number of reverse mergers cut and the competition for SPAC financing fierce.
(129) Will Dotcom Bubble Burst Again?, L.A. Times, July 16, 2006, http://wwwvw.qctimes.com/business/article_114ea0f5-677a-5487-8 f16-de1faca2dddd.html (last visited Aug. 24, 2009).
(131) For example, in the first quarter of 2006, investment totaled less than twenty percent of the $28.1 billion spent in the first quarter of 2000, according to the Pricewaterhouse Cooper's Money Tree report, which tracks nationwide spending. Id
(132) In 1999, the New York Stock Exchange (NYSE) and the NASDAQ secured fifty-seven percent of global IPO proceeds, a significant increase from the thirty-nine percent of proceeds America realized in 1990. By 2007, America's share of the global IPO market had plummeted to eighteen percent. Greg Ip, Kara Scannell & Deborah Solomon, In Call to Deregulate business, a Global Twist, Wall St. J., Jan. 25, 2007, at A1.
(133) See, e.g., Chris O'Brien, It Turned on a Dime ... Or $ 2 Trillion Technology Investors, Badly Burned, Remain Wary, The San Jose Mercury News, Mar. 10, 2005, at A1 (noting that after the dotcom bust newer companies are finding it very "difficult to raise money from cautions stock market investors."), Jenny Anderson, Crave Huge Risk? This Investment MayBe for You N.Y. TIMES, Sept. 23, 2005, at C7.
(134) Kelly Holman, The NASDAQ Welcomes SPACs, Proposes Change to List Special Purpose Acquisition Companies, IDD Magazine.com, March 3, 2008.
(135) Owen D. Kurtin, Dollars and Sense: Reverse Mergers: Going Public Without Underwriting, Via Satellite, LLC, Jan. 1, 2008.
(136) Emma Trincal, Reverse Mergers Seen as Alternative to IPOs, Hedge World Daily News, Mar. 26, 2008.
(137) See Section 341 of the Amex Company Guide. Section 341 defines "Reverse Merger" as "any plan of acquisition, merger or consolidation whereby a listed company combines with, or into, a company not listed on the Exchange, resulting in a change of control of the listed company and potentially allowing such unlisted company to obtain an Exchange listing. in determining whether a change of control constitutes a Reverse Merger, the Exchange will consider all relevant factors, including, but not limited to, changes in the management, board of directors, voting power, ownership, and financial structure of the listed company. The Exchange will also consider the nature of the businesses and the relative size of both the listed and the unlisted companies."
(138) See generally, Constance E. Bagley & Craig E. Dauchy, The Entrepreneur's Guide to Business Law 132-80 (Thompson Learning, Inc. 2008).
(141) See generally, William K. Sjostrom, Jr. The Truth about Reverse Mergers, 2 ENTREPREN. BUS. L.J. 531, 536 (2007).
(142) SPAC Analytics, Summary of Funds Raised, http://wwwvw.spacanalytics.com/ (last visited Aug. 24, 2009).
(145) David N. Feldman, Reverse Mergers: Takinga Company Public Without an IPO 2 (2006).
(146) http://belmontpartners.net/belmont-news/ reverse-merger-association-of-america-rmaaformation-announced-by-belmont- partners/ (last visited Oct. 5, 2008) (formed to serve to service professionals and entities engaged in the business of reverse mergers and alternative methods for going public.)
(147) Technically a SPAC is a type of reverse merger. However, for purposes of description this paper will distinguish a SPAC from a reverse merger.
(148) Rule 405 of the Securities Act of 1933 (the "Securities Act") and Exchange Act Rule 12b-2 define a shell company as: "a registrant, other than an asset-backed issuer ... that has: 1) No or nominal operations; and 2) either: i) nor or nominal assets, ii) assets consisting solely of cash and cash equivalents; or iii) assets consisting of any amount of cash and cash equivalents and nominal other assets." 17 C.F.R. [section] 230.405 (2006); 17 C.F.R. [section]240.12b-2 (2006).
(149) See, eg, SEC v. M & A West, Inc., No. C-01-3378, 2005 WL 1514101, at 2 (N.D. Cal. June 20, 2005) (defining the shell's obligation to report to the SEC).
(150) 17 C.F.R. [section] 230.405 (2006); 17 C.F.R [section] 240.12b-2 (2006).
(151) Aden R. Pavkov, Ghouls and Godsends? A Critique of "Reverse Merger" Policy, 3 BERKELEY BUS. L.J. 475, 478 (Fall 2006).
(152) Rick Miller, Terry Childers, Michael K Rafter, Hannah Crockett and Eliot Robinson, The SPAC As An Alternative Exit Opportunity For Private Equity Firms, Mondaq Ltd., Aug. 6, 2008.
(154) Sjostrom, supra note 7, 744.
(155) See 17 C.F.R. [section] 230.145 (2007) (An offer and sale of securities "occurs when there is submitted to security holders a plan or agreement pursuant to which such holders are required to elect, on the basis of what is in substance a new investment decision, whether to accept a new or different security in exchange for their existing security.").
(156) Feldman, supra note 10, at 105.
(157) The shell can forgo preparing a private placement memorandum if all of the start-up's shareholders qualify as "accredited investors." See 17 C.F.R. [section] 230.501(a) (2007).
(158) See 17 C.F.R. [section] 230.506(b) (2007).
(159) 17 C.F.R. [section][section] 230.503, 239.500 (2007).
(160) A Blue Sky Law is a state law--as opposed to a federal law--that protects the public from fraud. See Hall vs. Geiger-Jones Co. 242 U.S. 539 (1917)
(161) The National Securities Markets Improvement Act of 1996 does require notice documents to be filed with the states, however.
(162) See 17 C.F.R. [section][section] 230.144(a)(3)(ii), 230.502(d) (2007).
(163) Turner Hughes Corp., Reverse Mergers, http://www.turnerhughescorp.com/reversemergers.php (last visited Oct. 8, 2008).
(164) See Use of Form S-8, Form 8-K, and Form 20-F by Shell Companies, Securities Act Release No. 33-8587, Exchange Release No. 34-52038, 70 Fed. Reg. 42,234 (July 15, 2005) [hereinafter "2005 SEC Rule Amendments"];
(166) Sutherland, Asbill & Brennan LLP, Legal Alert: A Primer on SPACs: An Explanation of the Purpose, Structure and Current Issues Affecting Special Purpose Acquisition Companies, Aug. 10, 2005, at 2, http://wvwvw.sablaw.com/files/ tbl_s10Newvs%5CFileUpload44%5C14605%5CAPrimeronSPACs.pdf
(167) A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. See U.S. Securities Commission, definition of blank check companies, http://www.sec.gov/answers/blankcheck.htm. (last visited Aug. 24, 2009).
(168) Daniel S. Riemer, Special Purpose Acquisition Companies: SPA C and Span, or Blank Check Redux?, 85 Wash. U. L. Rev. 931, 951(2007).
(171) 17 C.F.R. [section] 230.419(a)(2) (2007).
(172) See Rule 3a51-1(g)(1), 17 C.F.R. [section] 240.3a51-1(g)(1) (2007).
(174) See 1933 Securities Act, Rule 419(a)(2), 17 C.F.R. [section] 230.419(a)(2) (1995)
(175) Sjostrom, supra note 7, at 757.
(176) Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval to Proposed Rule Change, as modified by Amendment No. 1, to Adopt Additional Initial Listing Standards to list Securities of Special Purpose Acquisition Companies, Securities, Self-Regulatory Organizations Release No. 34-58228; File No. SR-NASDAQ-2008-013 (adopted July 25, 2008) at http://www.sec.gov/rules/sro/nasdaq/2008/34-58228.pdf.
(177) Order Approving Proposed Rule Change to Adopt New Initial and Continued Listing Standards to List Securities of Special Purpose Acquisition Companies, Self-Regulatory Organizations Release No. 34-57785; File No. SR-NYSE-2008-17 (adopted May 6, 2008).
(178) Chadbourne & Parke Legal Alert: NASDAQ Joins NYSE and AMEX in Mowing Listing of Special Purpose Acquisition Companies (SPACs), Aug. 20, 2005, http://www.chadbourne.com/clientalerts/2008/specialacquisition/
(179) NASDAQ has an eighteen-month limit on the company's right to retain investor funds without completing an acquisition, after which funds would be returned to investors. NYSE has a three-year limit.
(180) See NASDAQ Stock Market Rule 4300. To list on NASDAQ, SPACs must have a market capitalization exceeding $75 million for the Global Market and a market capitalization exceeding $50 million for the Capital Market.
(181) Chadbourne & Parke Legal Alert: NASDAQ Joins NYSE and AMEX in Allowing Listing of Special Purpose Acquisition Companies (SPACs), Aug. 20, 2005 at http://www.chadbourne.com/clientalerts/2008/specialacquisition/
(182) Press release, Morgan Joseph & Co., Inc., Morgan Joseph, SPAC-Pioneering Investment Bank, Announces Inaugural SPAC Conference (Apr. 2, 2008) available at http://wvwvw.morganjoseph.com/firm_newvsroom_detail.php?newvsid=97 (last visited Aug. 24, 2009).
(183) Pavkov, supra note 15, 513.
(187) However, the SEC has jurisdiction to regulate market makers, just not the exchange itself.
(188) Sjostrom, supra note 7, at 756.
(189) See e.g., In the Matter of California Service Stations, Inc., et al., Initial Decisions Release No. 58786, Oct. 15, 2008, Administrative Proceeding File No. 3-13184.
(190) Exchange Act [section] 12(j), 15 U.S.C. [section] 78l(j).
(191) Exchange Act [section] 12(j), 15 U.S.C. [section] 78l(j).
(192) Stansbury Holdings Corp., Initial Decisions Release No. 232, July 14, 2003, Administrative Proceeding File No. 3-11108, 2003 SEC LEXIS 1639 (the administrative law judge found that in order to determine the appropriate sanction, i.e., a limited suspension or permanent revocation, the SEC should be guided by the public-interest factors identified in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979). Under Steadman, several issues should be considered, including (1) the egregiousness of the respondent's actions, (2) the isolated or recurrent nature of the infraction, (3) the degree of scienter involved, (4) the sincerity of the respondent's assurances against future violations, (5) the respondent's recognition of the wrongful nature of its conduct and (6) the likelihood of future violations. No one factor is controlling); accord, WSF Corp., Initial Decisions Release No. 204, May 8, 2002, Administrative Proceeding File No. 3-10668, 2002 SEC LEXIS 1242.
(193) See Pink Sheets Establishes New Categories For All Pink Sheets Securities, Nov. 6, 2006, http://www.pinksheets.com/pink/about/newvs.jsp
(194) See generally, William K Sjostrom, Jr., PIPES, 2 Entrepren. Bus. L.J. 381 (2007).
(196) William K Sjostrom, Jr. , Going Public Through an Internet Direct Public Offering: A sensible Alternative for Small Companies?, 53 FLA. L. REV. 529, 572-73 (2001).
(197) Id. at 390.
(198) Id at 388.
(199) Securities & Exchange Commission: Corporation Finance Reviewed 6K Issuers over Past Year, Deputy Director Announces, 37 SEC. REG. & LAW REPT. 1881 (Nov. 14, 2005).
Carolyn Adi Kuduk
University of San Diego
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|Author:||Kuduk, Carolyn Adi|
|Publication:||Journal of Applied Economy|
|Date:||Oct 1, 2009|
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