SEC Provides Exemption from Broker-Dealer Registration Requirements for M&A Brokers

On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the Supreme Court has held to be a sale of securities under federal securities laws — required to register as broker-dealers under the Securities Exchange Act of 1934, with all of the attendant expenses and obligations?

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Neogenix Oncology: A Good Case Study on Securities Law (Non)Compliance by a High Growth Company – Part 3: When the Genie Can’t Be Put Back in the Bottle

In my previous posts, I described the events leading up to the Chapter 11 bankruptcy and supervised asset sale of Neogenix Oncology. To recap, Neogenix’s payment of fees to unregistered “finders” to raise money in some of its earlier rounds of financing called into question the company’s compliance with federal and state securities laws. Under such laws, just about any arrangement in which someone is paid a contingent or variable fee to raise capital for a company is prohibited, unless that person is registered as a broker-dealer or is a registered representative of a broker-dealer. After the SEC commenced an investigation into Neogenix’s practices, the company’s accountants concluded that potential investor lawsuits and/or governmental enforcement actions could give rise to large contingent liabilities on the company’s balance sheet. This uncertainty led to Neogenix being unable to raise further funds, necessitating the company’s bankruptcy filing. In this post, I’ll explore the likely reason why Neogenix had to take the drastic step of filing for bankruptcy to cure its securities violations. [Read more...]

Neogenix Oncology: A Good Case Study on Securities Law (Non)Compliance by a High Growth Company – Part 2: What Neogenix Did

In my previous post, I described the events leading up to the Chapter 11 bankruptcy and supervised asset sale of Neogenix Oncology. To recap, Neogenix’s use of unregistered “finders” in some of its earlier rounds of financing called into question the company’s compliance with federal and state securities laws. After the SEC commenced an investigation, Neogenix’s accountants concluded that potential investor rescission rights could give rise to large contingent liabilities on the company’s balance sheet. This uncertainty led to Neogenix being unable to raise further funds, necessitating the company’s bankruptcy filing. In this post, I’ll explore how exactly Neogenix violated securities laws and the lessons this case study provides to startups and other growth stage companies. [Read more...]

When does a deal involve securities regulation? Part 4: Promissory Notes

This post is the fourth in a series exploring when securities laws impact business transactions.

In my previous posts, I provided a general overview of the definition of a “security” under federal securities laws, and covered when various categories of instruments constitute a security, including partnership and limited liability company interests. In this post, we’ll explore when a promissory note falls within the definition of a security under federal law. [Read more...]

When does a deal involve securities regulation? Part 1: Introduction

Business owners and attorneys without a securities background will often engage in transactions that, while on first blush do not involve securities regulation, but actually are a securities transaction, and thus subject to federal and state securities laws.  For instance, real estate developers often finance projects by bringing in outside investors as limited partners.  They are likely to hire a real estate attorney to complete the deal, who will dutifully draft a limited partnership agreement for the transaction.  What neither of them often realize is that a securities transaction is occurring as part of the deal.  The sale of limited partnership interests is usually a securities transaction under federal and state law.  This means that the interests are subject to registration with the SEC and with the state of each investor’s residence[1], unless an exemption can be found. In addition, all statements made in discussions with limited partners are subject to the anti-fraud rules. [Read more...]