Although the economy appears to be starting a slight recovery, times remain tough for many companies. Public and private companies once thought beyond reproach have failed or are failing. When the stalwarts of the American economy are struggling how are smaller reporting companies expected to survive and maintain their public company status?

While there is no magical elixir, there are several things management of smaller reporting companies can do to improve their chances of remaining publicly-traded companies. Some of these suggestions are cost cutting measures and some are strategic alternatives. By following some or all of the suggestions in this guide we believe smaller reporting companies can drastically improve their chances of remaining listed on their current stock exchange.

1) Cut Legal Fees. This may seem like an odd suggestion coming from a law firm, but in our experience many smaller reporting companies are overpaying for their legal expenses related to their public filings - as much as $100,000 per year - and sometimes more. For most smaller reporting companies, total legal fees for a company’s annual report (10-K), quarterly reports (10-Qs), as well as an average number of current reports (Form 8-Ks) should not exceed $35,000 in total. Under The Lebrecht Group’s ‘34 Act Maintenance Plan, a smaller reporting company’s total annual legal fees for its 10-K, 10-Qs, up to six 8-Ks, as well as some 144 legal opinions and Section 16 filings (Forms 3 and 4) and some other small filings, is under $30,000, payable monthly over the course of the year.

Another area where a company may wish to review its legal fees relates to its registration statements (primarily S-1s). While legal fees for many registration statements are based on the dollar amount of the shares being registered, the legal fees for all but the largest registration statements should not exceed $50,000 to $60,000. However, at times, legal fees being charged for these registration statements are approaching, or are even over, $200,000. Therefore, searching out additional qualified lawyers to draft and file the company’s registration statement may provide a company with as much as $100,000 to $150,000 in savings.

2) Cut Auditor Fees. Similar to legal fees above, many smaller reporting companies are paying excessive auditor fees. Based on the auditors our firm works with on a regular basis, for the average smaller reporting company, the auditor fees for the annual audit and the review of the three quarterly periods should be anywhere from $50,000 to $100,000. Many smaller reporting companies are paying large accounting firms two to three times this amount for their annual audit and three quarterly reviews. If your company needs a referral to experienced auditing firm with fees in the $50,000 to $100,000 range please feel free to contact an attorney in our office.

3) Seek Money From Investors to Cover Fees Associated with ‘34 Act Filings. Obviously raising money for any purpose is a good way to save cash flow from operations. However, for smaller reporting companies that may have difficulty raising money to expand operations, financing may be available to fund reporting obligations, due to the fact that the funding necessary to do this is relatively small (in the range of $150,000 to $200,000 annually if suggestions #1 and #2 above are followed).

Therefore, if a current ‘34 Act reporting company has an adequate stock price and volume it may be able to raise $500,000 to $1 million to pay for its reporting obligations for 2-3 years, which would obviously accomplish two goals - keep the company current in its reporting obligations, a huge benefit to both the company and its shareholders, and preserve cash flow for operations. If this is an opportunity your company would like to pursue, please contact an attorney in our office, as we have several funding sources looking to invest money in smaller reporting companies for this purpose.

4) Stock Option Plan/S-8. It may seem counterintuitive to suggest that a company spend money on a stock option plan and an S-8 registration statement as a way to save money, however, this suggestion can be very productive in the long run. For smaller reporting companies that stay current in their reporting obligations, a stock option plan registered on an S-8 registration statement will allow the company to issue registered shares and/or options to qualified employees, consultants and service providers (such as the company’s legal counsel) for a portion of their fees thereby freeing up cash flow for operations and other service providers that cannot accept stock, such as the company’s auditor.

Obviously, this suggestion must be handled appropriately in order to ensure the company maintains its stock price and there is not major dilution to existing stockholders. However, when properly planned and executed a registered stock option plan can cut the cash expenses of a company’s ‘34 Act filing obligations as well as free up cash for operations.

5) E-Proxy Rules. Historically, the proxy materials that were sent to a company’s shareholders to inform them of an annual or special meeting of shareholders included a paper copy of a 14-A or a 14-C and a copy of the company’s last annual report. The cost for mailing hundreds of pages of documents to all the company’s shareholders was over $3.00 per shareholder, and thus many times easily exceeded $5,000 when all was said and done, including copy, stuffing and postage charges (and many times much higher).

Under the SEC’s new e-proxy rules, a company is permitted to post its 14-A or 14-C and its annual report, and any other proxy materials, to a website (many times a designated page on the company’s website) and then mail only a one page notification letter to the shareholders informing them where the company’s 14-A or 14-C and annual report can be viewed on the Internet. The company does, however, still have to mail a paper copy of the proxy materials to any shareholder that makes a request for a paper copy.

Additionally, the timelines in terms of when the one page notification must be sent differs from the mailing date for when the proxy materials had to be mailed to shareholders previously so this concept needs to be discussed with the company’s legal counsel before undertaking this procedure. However, if done properly and in compliance with the new e-proxy rules, this procedure can save a company thousands of dollars over the traditional mail method each time the company holds an annual or special meeting of shareholders.

Craig V. Butler, Esq. is an attorney with The Lebrecht Group, APLC, located in Irvine, California (http://www.thelebrechtgroup.com). He can be reached at (949) 635-1240 or via e-mail at cbutler@thelebrechtgroup.com.

[tags]smaller reporting company, public company, ‘34 Act reporting company, public company compliance[/tags]

On May 18, 2009, the United States Supreme Court agreed to hear Free Enterprise Fund v. PCAOB, a case that challenges the structure of the Public Company Accounting Oversight Board as unconstitutional. The PCAOB has been called many things, but is it unconstitutional, and if it is, what then?

PCAOB Structure

Formation of the PCAOB

In 2002, in response to a series of accounting scandals including Enron and WorldCom, Congress hastily passed the Sarbanes-Oxley Act of 2002 (”SarBox”), which created the PCAOB (the “Board”) as a new entity to oversee the audits of public companies. Specifically, the Board’s purpose is “to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.”

Appointment and Removal of Board Members is Vested with the SEC

The Board consists of five members who are appointed by the Securities and Exchange Commission (the “SEC”), after consultation with the Chairman of the Board of Governors of the Federal Reserve (currently Ben Bernanke) and the Secretary of the Treasury (currently Tim Geithner). Appointment is by a majority vote of the five SEC Commissioners.

A member of the Board may be removed only upon a finding of good cause by the SEC.

Powers of the Board

Senator Phil Gramm (R-TX) said in July 2002 of the Board,

“This board is going to have massive power, unchecked power, by design…We are setting up a board with massive power that is going to make decisions that affect all accountants and everybody they work for, which directly or indirectly is every breathing person in the country. They are going to have massive unchecked powers.”

The Board can, subject to approval or termination by the SEC:

- impose regulations controlling the auditing of all public companies;

- dictate services that can and cannot be performed by accountants;

- impose a tax in the form of the accounting support fee that it levies;

- inspect, investigate, and punish accounting firms, and individual accountants, for violating its regulations, professional standards, or federal laws;

- fine an accountant up to $100,000, or an accounting firm up to $2 million, for a violation of its rules;

- set the salaries of its own board members.

The Appointments Clause of the Constitution

The Appointments Clause is found in Article II, Section 2, clause 2 of the U.S. Constitution. The Appointments Clause gives the President the power to “nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States, whose Appointments are not herein provided for. . . but Congress may, by Law, vest the Appointment of such inferior officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” Thus, an officer of the United States must either be appointed by the President, or, if the officer is an “inferior officer,” by either (1) the President, (2) a Court, or (3) a Head of Department. This is a crucial component of the separation of powers concept in our government.

The Issues Before the United States Supreme Court

Are Members of the Board Officers of the United States?

If the members of the Board are considered officers of the United States, then under the Appointments Clause they come under the power of the President. Principal officers are to be nominated by the President and confirmed by the Senate, while inferior officers are appointed by either the President, a Court, or a Head of Department. Whether or not members of the Board are considered officers of the United States is one of the issues before the Supreme Court.

Are the Five Commissions of the SEC the Head of a Department?

Assuming that members of the Board are officers of the United States, and the extensive powers given to the Board as outlined above indicates that they are, then the next issue (because the Board is not appointed by the President or a Court) is whether the five Commissioners of the SEC are considered the Heads of a Department. The SEC has a Chair, whom most would consider to be its head. But appointment to the Board is by a majority of the Commissioners of the SEC, not by its Chair. What’s more, the Commissioners of the SEC must consult with the Chairman of the Board of Governors of the Federal Reserve and the Secretary of the Treasury.

Is the SEC a Department?

Lawyers arguing against the Board have cited precedent that the term “Departments” in the Appointments Clause refers only to those entities that resemble cabinet departments and are directly accountable to the President, and whose heads are called “cabinet ministers.” Thus, they argue, the SEC is not a Department and its leaders, even if they are considered “heads”, cannot appoint an officer of the United States.

The Court of Appeals Decision

The United States Court of Appeals for the District of Columbia held in favor of the Board. In its decision, which was decided by a 2-1 vote, the Court held that members of the Board are inferior officers of the United States. The Court further held that the SEC was a Department, and that the five Commissioners of the SEC were the Heads of Department and thus under the control of the President. Therefore, the structure of the PCAOB was not in violation of the Appointments Clause and was constitutional.

The lone dissenting judge decided that the members of the Board were principal officers because they are not directed and supervised by the SEC, are not removable at will by the SEC, and the SEC cannot manage Board inspections, investigations or enforcement actions. Thus, as principal officers, the members of the Board must be appointed by the President and confirmed by the Senate. Further, the dissenting judge felt that Congress intended for the members of the Board to be principal officers because of the massive power given to them.

The Effect of a Ruling Against the PCAOB

Corrective Structural Matters

The dissenting judge from the Court of Appeals outlined two relatively simple corrections to the constitutional flaws he found. First, Congress could simply amend the statute to require, for example, that the members of the Board, like the heads of other agencies, be appointed by the President and confirmed by the Senate, and thereafter be removable by the President. Alternatively, Congress could make the Board part of the SEC - directed, supervised, and removable at will by the five Commissioners of the SEC - just like other inferior officers of the SEC.

Historical PCAOB Disciplinary Actions

Some commentators have suggested a much more important effect of a decision against the PCAOB. In two Supreme Court cases, Freytag v. C.I.R (1991) and Ryder v. United States (1995), the Supreme Court affirmed that an individual or firm discliplined by a government agency can challenge that discipline if agency officials were improperly appointed. Thus, an accountant subject to enforcement proceedings by the PCAOB may have standing to challenge the structure of the PCAOB as a defense to any disciplinary action against him. They might also have standing to challenge the underlying policies such as the PCAOB’s broad interpretation of Section 404 of SarBox, the tax levied on public companies by the PCAOB, and other rules used to impose sanctions.

Important Precedent

More important than both of the effects outlined above may be the impact this case has on the separation of powers doctrine under which the Appointments Clause was adopted. On its face, a decision against the PCAOB appears to give power to the President. However, the Obama administration is expected to file a brief in support of the PCAOB, seemingly against its own interests. Why? Because a decision in favor of the PCAOB will support the concept of government agencies created by one branch of government but essentially unchecked by another branch of government. It will undermine the separation of powers and checks-and-balances doctrines put in place by our country’s founders. Given the Obama administration’s tendency to increase the role of government, evidenced by the appointment of over 20 czars as of the date of this article, this case presents a very slippery slope indeed. As a result, this may be one of the most important decisions in the first set of cases heard by Obama appointee Sonia Sotomayor.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]pcaob, appointments clause[/tags]

On May 10, 2005, the National Association of Securities Dealers, Inc., now known as the Financial Industry Regulatory Authority (”FINRA”), through its subsidiary, the Nasdaq Stock Market, Inc. (”Nasdaq”), filed with the Securities and Exchange Commission (the “Commission”) a proposed rule change to limit the eligibility for quotation on the OTCBB of the securities of an issuer that is repeatedly late in filing required periodic reports. This is known as the “three-strikes rule.”

On November 16, 2005, the Commission approved the change to Rule 6530 (the “Eligibility Rule”).

The rule change makes those OTCBB issuers that are delinquent three times in a 24-month period, and those OTCBB issuers that are removed for failure to file two times in a 24-month period, ineligible for quotation on the OTCBB for a period of one year following their removal. Reports filed within the extension period permitted by SEC Rule 12b-25 are considered timely filed.

Historically, Nasdaq has reported that approximately 80% of issuers achieve compliance within the grace period, but that 20% of issuers fail to comply and are eventually de-listed.

Once removed, the issuer cannot re-list on the OTCBB for a period of at least one year, and must file at least one Form 10-K and three Forms 10-Qs. If at any time prior to being relisted, the issuer is late in filing a periodic report, the one year period restarts.

If an issuer is late with more than one filing in a row, the sequence of late filings will only count as one “strike” until such time as the issuer gets back current in its filings. Because of this, there is some strategy in how you get back current once you have become delinquent in a filing. For example, if an issuer has missed a filing and has had an “e” appended to their stock symbol, there will be a temptation to file the delinquent filing as soon as possible to get the “e” removed. However, if it is likely that the next filing will also be late, the issuer might consider waiting and doing both filings at the same time in order to incur only one “strike” under this new rule amendment. This strategy has to be weighed against the possibility that, after the “e” period, the issuer will need to submit a new Form 211 to move back up to the OTCBB from the Pink Sheets.

NASDAQ implemented the proposed rule in connection with filings for periods ending on or after October 1, 2005. Delinquent filings prior to that period do not count towards the new rule.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]OTCBB, Suspension, Late Filer, 12b-25[/tags]

After several extensions, the Securities and Exchange Commission (the “SEC”) has finally settled on a compliance date for non-accelerated filers with respect to Section 404 of the Sarbanes-Oxley Act of 2002 (”Sarbanes-Oxley”).

What is Required?

In order to comply with Section 404 there are two reports that are required. One is prepared by management of the company, and the other is prepared by the company’s independent auditor.

Management’s Report on Internal Control over Financial Reporting

A company that is a reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”) is required to include in their Annual Report on Form 10-K or 10-KSB, a report on the effectiveness of the company’s internal control over financial reporting (its “ICFR”). In addition, management is required to evaluate, as of the end of each fiscal quarter, any change in the company’s ICFR that occurred during the period that has materially affected, or is reasonably likely to materially affect (emphasis added), the company’s ICFR. Additional information regarding management’s evaluation obligation is detailed later in this article.

Management’s report is contained in Item 9A and 9A(T) of Form 10-K, and Item 8A and 8A(T) of Form 10-KSB. Item 308 of Regulation S-K provides the instructions.

There are two important considerations with respect to management’s report. First, management’s report included in a non-accelerated filer’s annual report during the filer’s first (emphasis added) year of compliance will be deemed to be “furnished” rather than “filed.” This relieves management of liability under Section 18 of the Exchange Act and is designed to relieve any initial tension between management and the independent auditor should their conclusions differ. If, however, the issuer subsequently incorporates by reference its report into a filing under the Exchange Act of the Securities Act of 1933, it will be deemed to be filed.

Second, if the annual report filed for this first year contains management’s report but does not contain an attestation report by the independent auditor (see Auditor’s Attestation Report on Internal Control over Financial Reporting, below), management’s report must contain a statement in substantially the following form:

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Auditor’s Attestation Report on Internal Control over Financial Reporting

In addition to management’s report, the company’s independent auditor is required to issue a report attesting to management’s report on the company’s ICFR. The auditors we have talked with have indicated that they will want to review the company’s internal controls, and then review management’s report, before they issue this attestation.

Changes to Certifications

Non-accelerated filers have been allowed to omit the portion of the introductory language in paragraph 4, as well as language in paragraph 4(b) of the certification required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers’ responsibility for designing, establishing, and maintaining ICFR for the company. These omissions must be re-inserted when the certifications are filed with an annual report that includes a report by management on the effectiveness of the company’s ICFR.

The language that has been allowed to be omitted is underlined:

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

When is it Required?

Management’s Report

Non-accelerated filers are required to provide management’s report on ICFR in its annual report for its first fiscal year ending on or after December 15, 2007.

Auditor’s Attestation Report

Non-accelerated filers are required to provide the auditor’s attestation report in its annual reports for its first fiscal year ending on or after December 15, 2008.

Changes in Certifications

Non-accelerated filers are allowed to omit the referenced language until it files its first annual report that includes a Management’s Report.

What is Management’s Evaluation Obligation?

Management is responsible for maintaining a system of ICFR that provides reasonable assurance (emphasis added) regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is further responsible for maintaining evidential matters, including documentation, to provide reasonable support for its assessment.

Exchange Act Section 13(b)(7) defines “reasonable assurance” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”

Although there are numerous ways for management to conduct an evaluation of its ICFR, SEC Release No. 34-55929 establishes an evaluation method that is a safe harbor for management.

One of the key definitions in the Releases is that of “material weakness” as “a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.”

Newly Public Companies

It is important to highlight that there is a transition period for newly reporting companies. A company will not become subject to the ICFR requirements until it either (i) had been required to file an annual report for the prior fiscal year with the SEC, or (ii) had filed an annual report with the Commission for the prior fiscal year. However, newly public companies are required to include a statement in its first annual report that the annual report does not include either management’s assessment on the company’s ICFT or the auditor’s attestation report. The extra year of filing a management’s report without an auditor’s attestation does not apply, they must both be filed in the second year.

The Effect of Deficiencies

One of the most common questions we anticipate is “what is effect of having deficiencies in our ICFR?”

None of the NASDAQ exchanges, the American Stock Exchange, nor the Over the Counter Bulletin Board will de-list or negatively identify a company that has reported deficiencies in its ICFR.

On a macro-economic level, the cost of money should be higher for a company that reports deficiencies than for a similar company that does not. Ratings agencies such as Fitch’s and Standard & Poor’s have published guidance as to how they intend to handle the reports. It remains to be seen whether hedge funds and other PIPE-financing funds will increase the cost of money to issuers that report deficiencies.

All of the auditors we have talked to have said that deficiencies in ICFR will increase the cost of an audit because they have to do extra sampling and follow other time-consuming processes.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]Section 404, Non-Accelerated Filer, Sarbanes-Oxley, SarBox[/tags]

The purpose of this article is to give an outline of the parameters under which a company can purchase its own stock in the open market. This is a summary of the rules, which will provide you guidelines sufficient for most situations. These rules are set forth in Rule 10b-18 of the Securities Exchange Act of 1934, and SEC Release No. 34-48766.

Applicability of Rules

Rule 10b-18 is promulgated under the Securities Exchange Act of 1934, and thus is only applicable to reporting companies. Rule 10b-18 is also a safe harbor, meaning that reporting companies who follow it are assured that they will not be liable for manipulating their own stock price, however it is not the only method whereby a company can purchase its own securities.

Even if a company is not a reporting issuer, following the safe harbor is clearly the most effective way for the company to avoid liability for manipulating its own stock price. Therefore, we generally recommend that Rule 10b-18 be followed by all public issuers, even those whose stock is traded on the Pink Sheets.

Conditions of Rule 10b-18

The anti-manipulation provisions of section 9(a)(2) or 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 under the Act, will not be deemed to have been violated, if the issuer or an affiliated purchaser of the issuer makes the purchases according to the following conditions:

1. One broker or dealer. Purchases must be effected from or through only one broker or dealer on any single day. If there is more than one affiliated purchaser of the issuer purchasing on a single day, they must all use the same broker or dealer.

2. Time of purchases. The purchases must not be:

a. the opening purchase of the day; or

b. effected during the thirty (30) minutes before the scheduled close of the trading session (this time limit is reduced to ten (10) minutes for issuer’s with an average daily trading volume of $1m or more and a public float of $150 million or more).

3. Price of purchases. The purchase price paid by the company cannot exceed the highest independent bid price, or the last independent transaction price, whichever is higher, quoted at the time the purchase is effected.

This is potentially the most difficult of the conditions to meet. Typically, a buyer will buy at the ask, which is in fact higher than the bid price, while a seller will sell at the bid price. A company buying its own stock cannot buy at the ask price unless that is also the last transaction price, which effectively means that the company cannot buy its own stock if the immediately preceding transaction was a sell transaction by another shareholder. The company cannot support its own stock price in this manner, which is consistent with the intention of Rule 10b-18 to prevent manipulation in the market.

4. Volume of purchases. The total volume of purchases by the company, and any affiliated purchaser, on any single day cannot exceed twenty five percent (25%) of the average daily trading volume. However, once each week, instead of staying under the 25% limitation, the company may effect one block purchase (defined in the Rule) if (i) no other Rule 10b-18 purchases are effected that day, and the block purchase is not included when calculating the four (4) week average daily trading volume.

The Rule goes on to outline certain alternative conditions in the event of market-wide trading suspensions and other exceptions.

Practical Application

An issuer considering the purchase of its own securities should open an account with a brokerage firm that has a clear understanding of, and experience working under, these rules. A copy of these rules should be provided to the brokerage firm, including a copy to its compliance officer, in writing upon the initiation of a stock purchase program.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]public company, issuer purchases of common stock[/tags]

There are three primary ways to go public: The Yellow Brick Road, The Self-Underwritten IPO, and The Reverse Merger into a Public Shell. The intent of this article is to briefly describe some of the benefits and drawbacks of each method.

The Yellow Brick Road

The traditional venture capital/underwritten IPO method is the hardest to accomplish, but is probably the fastest and will provide the most capital to your company. If you need $25 million or more in capital, this is probably the only method available to you. Obviously, the primary benefit to this method is the infusion of capital the company will receive. Other benefits include having a lead venture capitalist “take you by the hand” and lead you to different funding groups, underwriters, lawyers and accountants, and the access they provide you to industry experts to advise you and sit on your board of directors. An additional benefit is likely a higher starting stock price, which potentially provides value to your shareholders, especially the non-affiliate shareholders.

As you might imagine, the major drawback of this method is the loss of control by the founding group. It is not uncommon for venture capital or private equity firms to own a majority interest in the company, and you may feel as though they are almost forcing you to use their service providers and advisers. Yes, they spend lavishly wining and dining company management, and yes they are using your deal to return the favor of those who brought them their last deal, but those things come at a price, which is usually a large chunk of stock in your company.

Drawbacks aside, if you can go down the Yellow Brick Road, then “Do It,” at least once in your lifetime.

The Self-Underwritten IPO and the Spin Out

A self-underwritten IPO, and the spin out, is analogous to being your own contractor for a bathroom remodel. You have to coordinate all the different parties and you have to take responsibility for the end result, but if you know what you are doing you can save a lot of money and have more control over the process and the end result.

The list of necessary parties is long. Lawyers, accountants, officers, directors, auditors, broker/dealers, market makers, finders, public relations firms, investor relations firms, insurance brokers, and a little bit of well-timed luck. Government or quasi-government agencies will include the Securities and Exchange Commission, FINRA, and state securities divisions.

This method may take from 9 months to over a year from start to finish, and during some of this time (the so-called Quiet Period) you will not be able to raise equity capital. Because you don’t have a traditional underwriter to purchase your offering and guarantee a market, you have to develop a shareholder base of investors and you have to establish a market capitalization for your company. Once you are public, because institutional funds and analysts will not follow your stock, you have to create the demand for your stock using public relations and investor relations firms. However, as stated above, at the end of a successful self-underwritten IPO, only you, and the investors you brought in along the way, own the stock of your publicly-traded company, as opposed to a large group of unknown shareholders as is the case with the other two methods described herein.

This is the method where our services prove most valuable. We do many self-underwritten IPO’s every year, and as a result we have relationships with all the necessary parties listed above. As important, we can help you stay away from the many unscrupulous providers that lurk in this marketplace.

The Reverse Merger into a Public Shell

The primary benefit of a reverse merger, as compared to the two methods descried above, is time. Depending on the status of the public shell, a reverse merger transaction can be completed in between 60 and 120 days.

There are two major drawbacks, cost and risk. First, a reverse merger transaction has all the costs of a self-underwritten IPO, plus the cost of the shell itself. You still need all of the same service providers as outlined above, and one of the major pitfalls in a reverse merger transaction is to use advisers recommended by the shell provider who are loyal to that provider, not to you or your company.

The risks are many, and come from several different sources. First is contingent corporate liability that comes from the shell. This is creditors, employees, vendors, customers, shareholders, and other stakeholders who have a claim against the shell company but have not notified anybody because the shell has no assets, and thus pursuing their claim does not make economic sense. However, once your company has been merged into the shell corporation, and your assets are available, their economic analysis may come to a different result. The second major area of risk is unscrupulous parties or providers. It is not uncommon for shareholders to hold stock in many different names so as to hide their true ownership, or for lawyers and consultants to have loyalty to the shell provider rather than your company.

Summary

This is a very brief overview of three alternative methods of going public. Before undertaking any of these strategies, consult with a securities lawyer who is experienced in this type of transaction, and educate yourself on the characteristics of each strategy.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]ipo, reverse merger, initial public offering, spin out[/tags]

This is not another article on why you should go public, nor is it another briefing on all the disclosure and costs brought about by the Sarbanes-Oxley Act. For this article, I have assumed that the benefits and burdens of operating as a public company have been considered, and the decision to go public has already been made. The next question that business owners, investors, key employees and other stakeholders ask is, “how do we go about becoming publicly traded?”

The Lebrecht Group, APLC has developed a specialized practice in taking private companies public through a variety of alternative methods. When we undertake representation of a new client interested in becoming publicly traded, the first thing we do is educate them on the different methods that can be used to achieve their goal. This article is intended to be an overview of three common methods used by our clients. Subsequent articles will detail the benefits and drawbacks of each method.

The Yellow Brick Road

This is the term I use for the traditional method we all learned about in business school and read about in magazines and newspapers. Start your company; go to friends and family for your first round of financing, followed by rounds of financing by angels and venture capitalists; and finally conduct a multi-million dollar IPO underwritten by a major investment banking firm and a simultaneous listing on a national stock exchange.

If you want to be public, and you can go down the Yellow Brick Road, my advice is generally “Do It.” However, a very small percentage of the good companies out there are able to utilize this method, primarily because venture capitalists and major investment banking firms only fund companies that can show extraordinary potential growth, and other factors such as the overall economic climate have a material impact on the number of deals they will do in any given year.

The Self-Underwritten IPO

The first alternative method is to conduct an initial public offering without the services of a major investment banking firm. Here, the issuer files a registration statement on Form S-1 with the Securities and Exchange Commission, addresses comments to the filing issued by the Commission and amends the filing in response thereto, and eventually the Commission declares the registration statement effective.

The registration statement serves multiple purposes. First, by filing a Form 8-A towards the end of the comment process, the issuer makes itself subject to the reporting requirements of the Securities Exchange Act of 1934 (the “‘34 Act”). The ‘34 Act requires the filing of quarterly reports, annual reports, makes an issuer subject to the proxy rules, and makes the issuers management team subject to Section 16 filings, among other things. Before any stock exchange will list an issuer’s common stock (other than the Pink Sheets), the issuer must be subject to the reporting requirements of the ‘34 Act.

The second purpose of the registration statement is to register the resale of stock that was previously sold to investors in a private placement, or issued in exchange for services. Under most private placement exemptions, the stock issued in these transactions is restricted in accordance with Rule 144 and thus can’t be sold into an open marketplace should trading develop in the issuer’s stock. Before any stock exchange will list an issuer’s common stock for trading, the issuer must be able to demonstrate that it has a sufficient number of people, with a sufficient number of shares of common stock, so that it is reasonably likely that a public trading market will develop. Because of this requirement, it may be necessary for the issuer to conduct a private placement before filing the registration statement, not only to raise the necessary funds, but also to increase its number of shareholders.

The third purpose of the registration statement is to raise money for the issuer. Like any IPO, a self-underwritten IPO can register stock for sale to the public, and unlike a private placement, a registered public offering generally allows the issuer to solicit investors, advertise, and pay sales commissions. And, since the issuer anticipates that it will have its stock publicly traded in a short period of time, it should be able to attract a larger group of potential investors, including hedge funds and institutional investors. Note, however, that an issuer cannot apply to have its stock traded on any exchange until the offering is finished, so unlike an underwritten IPO where the investment banking firm buys the entire offering immediately upon effectiveness of the registration statement, a self-underwritten IPO may take days, weeks, or months to complete.

The Reverse Merger into a Public Shell

A very common alternative method of going public is to merge a private company into a public shell. A public shell is a company that is available for public trading (although often it has very little recent trading activity), but has no operational business of its own. There are a number of ways that a public shell could find itself in this position, including a failed prior business, or it was formed for the express purpose of being a public shell.

Regardless of its past, public shells all have a few common characteristics. The most prominent is that its stock is already listed for trading on some exchange. This is most commonly the Over the Counter Bulletin Board, but could be the Pink Sheets or NASDAQ as well. If the issuer’s stock is traded on any exchange except for the Pink Sheets, it is also already subject to the reporting requirements of the ‘34 Act (see above.)

The second common characteristic is that the public shell is controlled by one or a small group of shareholders who, for a negotiated price, are willing to transfer control to the private company shareholders, or agree to vote in favor of the issuance of a control block of stock to the private company shareholders.

Once the private company is acquired by, or merged into, the public shell, and the shareholders of the private company own a controlling interest in the public shell, in effect the private company has “gone public” via a reverse merger.

The Spin Out

A less-often used alternative technique for taking a private company public is the spinout. In a spinout, a “host” company, usually a publicly traded company, acquires an interest in a private company, the “target.” The host then declares a dividend of its ownership interest in the target, distributing that interest to the host company’s shareholders pro-rata. Now, all of the public company’s shareholders own a small interest in the target, giving it the necessary number of shareholders so that there is a reasonable chance that a public market might develop. Once the target makes itself subject to the reporting requirements of the ‘34 Act, it is eligible to apply to have its stock traded on an exchange.

Generally, there is a requirement that there be some kind of business purpose for the transaction (other than to take a company public) and that there be some business synergy between the host and the target.

Moving to a National Exchange

In most cases, no matter what strategy is used, the issuer will initially list its stock for trading on the Over the Counter Bulletin Board. Once an issuer can demonstrate the minimum stock price and/or capitalization requirements of another exchange, such as the AMEX or NASDAQ, the issuer can apply to move to that exchange.

Summary

I have provided a very brief overview of three alternative methods of going public. There are many advantages and disadvantages of each, including the cost, the time it takes to complete a strategy, and the potential liabilities of each strategy. Before undertaking any of these strategies, consult with a securities lawyer who is experienced in this type of transaction, and educate yourself on the characteristics of each strategy.

Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. http://www.thelebrechtgroup.com.

[tags]reverse merger, ipo, initial public offering, going public[/tags]

Walt Disney World officials unveiled a new vision for Downtown Disney with plans for new shopping, dining and other experiences, including a completely reimagined Pleasure Island. Also on tap are numerous enhancements to existing Downtown Disney locations, as well as additional theming and storytelling by Walt Disney Imagineers.

According to Downtown Disney Vice President Kevin Lansberry, the changes will be made in response to guest’s needs. “Our guests have been asking us for additional shopping and dining experiences at Downtown Disney for quite a while,” he said.

Downtown Disney will get a new iconic attraction on the West Side, a giant tethered balloon that will transport guests 300 feet into the air to give them amazing views of the Walt Disney World Resort. I can guarantee you that all of us here at Disney Exclusive Online will be the first in line.

One of the first changes already seen by guests and Cast Members is the refurbishment of the stage in the Downtown Disney Marketplace area. It has been replaced with a larger, covered stage that will serve as a venue for Disney’s Magic Music Days performance groups.

For the Disney shopping enthusiasts, Hanes is adding a design your own t-shirt store to the growing collection of Authentic Disney Theme Park Merchandise, which guests can personalize at The Downtown Disney Marketplace. Also, Fulton’s Crab House will update its interior fixtures and furnishings as well as its exterior.

On the West Side, Wolfgang Puck Cafe will update its interior fixtures and furnishings and enclose its patio with glass to enable guests to enjoy outdoor seating year-round. On Disney’s Pleasure Island, here is what to expect from changes to the dining experiences. Portobello Yacht Club will transform into Tuscan Country Trattoria, a restaurant featuring family style dishes and a redesigned interior and exterior, including additional outdoor seating.

Also, The Downtown Disney Marketplace has been invaded by prehistoric creatures, don’t worry they seem tame. Yes, all of us here at Disney Exclusive Online love the new T-Rex restaurant. T-Rex at Disney’s Marketplace is a Prehistoric family adventure, operated by Landry’s Restaurants of Houston. The family eatery offers pizzas, pastas, seafood and more, featuring life size animated dinosaurs who dwell among bubbling geysers, waterfalls and a fossil dig site. T-Rex is amazing and where could a restaurant of such Prehistoric nature exist, except The Walt Disney World Resort.

E-brands restaurants, an Orlando based, multi-concept restaurant group, will premiere its newest concept this spring. The high energy, casual eatery will feature authentic Central and South American cuisine, specialty drinks and live music along the waterfront. “The new offerings and enhancements planned for Downtown Disney will position us to deliver a more immersive experience for our guests,” Kevin said. “We feel that this diversified mix of food, shopping, and entertainment will create an even more appealing family atmosphere for our guests planning to visit Downtown Disney during their vacations.”

To make way for all the new offerings, all of the clubs at Disney’s Pleasure Island have closed. Other locations, including Raglan Road, Fuego by Sosa Cigars, Curl by Sammy Duvall, Orlando Harley Davidson, and outdoor food and beverage locations, will remain open during the transition. Walt Disney World is a resort of constant enhancements, and the exciting changes at The Downtown Disney Marketplace have many guests excited. It’s just another day in the world of creating magic, and this goal was Walt’s dream.

Tollie Schmidt, lost over 300 pounds. Tollies passion, is to end Teen & youth obesity, anorexia, depression and diet. Tollie a former WDW Cast member founded Disney Exclusive Online. A Disney Theme Park Exclusive store, Blog, news, tips.Disney Exclusive Online
Tollie’s Personal Site

[tags]walt disney world, downtown disney, disney store, disney exclusive online, disney merchandise, wdw[/tags]

Circuit City was the largest competitor to Best Buy in the retailing business. After years of mistakes, Circuit City has finally bitten the bullet. There are many blunders to address, but not enough time in the world to analyze them all. Here are a few of the issues at the heart of the Circuit City collapse.

First, the end of commission. As soon as Circuit City decided to end commission and hire a bunch of hourly goons, it was all over. Nothing is worse than going into a retail store than to see apathetic teenagers who could really not care at all about customer satisfaction. Mix this fact with the management who was constantly pushing their “cheese” or “service protection plans” on the employees, pressuring them consistently, and it would appear only the apathetic could survive in such a setting, with no true reward for employees who succeeded. Commission served as an incentive that helped generate sales, but also helped create amiable relations between the customer and employees. Concerned employees had a reason to develop a rapport with customers. After Circuit City ended that practice, many of the long time employees left, taking their customer-employee relationships with them.

Second, strange management shifting policies. After being employed there for years, it becomes hard to notice that the management was completely shifted out every few months and moved to separate offices only miles away. This strange disruption seemed to always occur right before it was time for evaluation (which leads to raises). Thus the promises of the old management would become null and void as they disappear suddenly, and often without so much as a word in advance. This would lead to not only many of the good employees promised salary increases getting the shaft, but disruption of the smooth operation of the company. The anger of employees at such schemes may lead to lowered sales and customers being treated with less enthusiasm. If one had the phone number of their old bosses, they were usually at the Circuit City on the other side of town, having not been moved very far.

In finality, it is the bottom line focused nature of Circuit City that killed it. Just before the fall, Circuit City cut all of their employees making above a certain amount. If raises are an indication of good employees, that would mean Circuit City just fired anyone who did “too good” of a job. This type of cost-cutting is of the worst variety. The death of the company soon to follow should come as no surprise.

Clarke Baldwin is a journalist who has worked for Dallas Morning News and other publications. You can find his site at
Quick Flash News and this story at
The Death of Circuit City in
News

[tags]Circuit City, Bankrupt, News, Financial, Stock, Best Buy, Going Under, Profits, Retail,[/tags]

With the credit crunch and the global economic climate taking its toll everywhere companies are being forced to take stock and examine their businesses in fine detail to see where they can make savings and improve the way they do business. As well as the obvious considerations like expenditure, staffing and working hours areas like transport, sourcing products and materials and location are also being looked at.

Europe has always been an attractive proposition for businesses. Historically it’s one of the oldest markets in the world and geographically it provides a useful central base for people wishing to attract business worldwide. There are strong links to America and the east and now that the states that once made up the old Soviet Union have started to settle into their place in world commerce, that market too is becoming more attractive to business. For those reasons European Company Formation is now being looked at as a way of weathering the current economic gloom and establishing important links in new areas.

Setting up a business at the best of times can be an arduous and confusing process. Add to that the complications of foreign language, different tax laws and employment laws and the whole area can look like a minefield. But help is at hand. Many new companies are positioning themselves to help overcome these difficulties. On the back of European Company Formation a new type of business has emerged offering a comprehensive service to those wishing to expand or get a foothold in a new market in Europe.

These new companies have responded to a demand for a quick and easy route into Europe for new entrepreneurs and established business people. Most successful business people are adept at handling their own affairs but what separates them from the pack is their ability to recognize their own weaknesses and delegate responsibility or source out tasks accordingly.

Company Formation - Paperwork isn’t something most of us get excited about. When registering a new company it is important to complete the correct forms. Failure to do so will slow down the whole process and can be costly in the long term.

Bank Accounts - Making the most of you money is paramount to a business’s success. Make sure you choose the correct type of account to suit your business.

Tax Planning - The location you choose for your business will have a major bearing on the tax laws you have to adhere to. It is worth taking this into account early on as it could be the difference between profit and loss.

So the business person who is familiar with UK tax and employment laws may see the complication of breaking into Europe with its myriad of different languages, laws and business centers as too much of a task to undertake themselves. It’s mot that the challenge is too much for them but the time and effort could be better spent in other areas and sometimes it’s more cost effective to employ an expert to take care of certain things for you.

Many of these new companies provide a holistic service and can help companies, organizations and individuals with everything they need to get through the process of European Company Formation. They can guide someone through the whole process pointing out the pitfalls and highlighting the benefits of getting established in Europe.

With so many countries and so many different markets to look at most businesses could benefit from looking towards Europe as a way of positioning themselves for the future. It might not seem like it at the moment but the credit crunch will not last forever and the companies and businesses that can get a footing into Europe and all that it offers early on will be the companies who will benefit later once the global economy improves.

Dominic Donaldson is an expert in the company law industry.
Find out more about European Company Formation and company law.

[tags]European Company Formation, Registering a Company, European Business[/tags]