Investor Relations 101
Investor relations involve the dissemination of information regarding a publicly traded company to create awareness of the public company and its business and to increase its stock price. The person who provides the investor relations services is known as a “Stock Promoter”. Stock promoters have used illegal practices and are often the subject of enforcement actions by the Securities and Exchange Commission (the “Commission”) is the stock promoter.
Stock promoters use a variety of methods to get the news out about a company including spam email campaigns, newsletters, stock touting websites and press releases.
Stock Promoters are often paid for their services with purportedly unrestricted shares of the companies they promote, which they sell while developing investor interest in a company’s securities. Most often, when paid in securities, stock promoters receive securities issued by the promoted company or a third party shareholder possibly working in collusion with the promoted company. Stock promoters receive free trading shares through a variety of methods; however, those shares are rarely (if ever) in compliance with the securities laws. These bogus methods include the issuance of free trading shares based upon 504 exemptions, third party shareholder transfers, satisfaction of debt and convertible promissory notes.
Rule § 17(b) of the Securities Act of 1933, as amended (the “Securities Act”) which provides the disclosure requires for compensation for promoters. 17(b) provides that “"It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof."
Regulation 17(b) requires full disclosure of the stock promoter’s compensation and services including:
(i) the type of consideration (securities or cash) and if compensation is in securities, the promoter must disclose whether the securities are restricted or unrestricted;
(ii) the amount of securities or cash paid;
(iii) the sources of the compensation (directly and indirectly) and if compensated by a third party shareholder or corporate entity, the shareholder or control persons of the entity must be identified by their individual names;
If a corporate entity is the publisher of the information, the consideration and , the control persons of the corporate entity must be disclosed.
Section 17(b) also requires that the compensation be disclosed in every press release, as well as other published documents, including emails or faxes. The disclosure must also state the relationship of the payer to the company being promoted. In the case of the SEC reporting company that engages a stock promoter, the issuer should disclose the transaction with the stock promoter in its periodic filings. It should be noted that the ant-fraud provisions of the securities laws apply regardless of whether Section 17(b) is complied with.
Section 5 of the Securities Act makes it unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy . . . any security, unless a registration statement has been filed as to such security.” In the case of stock promoters paid in securities they must either obtain registered stock or sell their shares in reliance upon Rule 144 of the Securities Act. The rule imposes strict liability for sellers of unregistered securities even where they have obtained a legal opinion from a securities attorney to opine their securities are “free trading”.
Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires a person acting as a “broker” or a “dealer” in securities transaction to register with the SEC. Both brokers and dealers are persons who are “engaged in the business” of buying and selling securities. Brokers arrange securities transactions for others, whereas, dealers purchase and sell securities for their own accounts. For purposes of the Exchange Act, persons are “engaged in the business” of buying and selling securities if they demonstrate a “regularity of participation” in securities transactions. Participation in a single, isolated transaction is insufficient to require registration. Nevertheless, the SEC and the courts interpret the phrase “engaged in the business” broadly.
Generally, if a person engages in more than one broker-dealer transaction, this portion of the definition of broker-dealer is satisfied.
In determining whether a person has acted as an unregistered dealer, the primary question is
whether they receive securities as compensation as a regular part of their business. If the stock promoter receives stock compensation from their clients routinely in exchange for their services, they will likely be deemed to be a dealer and subject to the broker dealer registration provisions.
In determining whether a person has acted as an unregistered broker, many factors are considered, including whether the person 1) solicited investors; 2) advised investors as to the merits of an investment; 3) received commissions or transaction-based remuneration; (4) is selling, or previously sold, the securities of other issuers; and (5) makes investment recommendations. If the stock promoter has any contact with investors or contacts broker dealers he risks being deemed an unregistered broker.
The failure to be properly registered as a broker-dealer may subject that person to potential liability, including criminal penalties, fines or, suspension.
The potential harm to the company includes investor rescission rights. Investors have a rescission right, meaning that they could demand repayment of their entire investment without setoff or deduction. The company could also be subject to sanctions and penalties from federal securities regulators as an aider and abettor of the activities of the unregistered broker-dealer including fines, prohibition on future securities offerings, and criminal actions.
This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed in the material do not guarantee similar outcomes.
ABOUT THE AUTHOR: Brenda Lee Hamilton, P.A.
Ms. Hamilton counsels clients in stock exchange listings involving the New York Stock Exchange, American Stock Exchange, NASDAQ and the OTC Markets. She also assists clients with obtaining dual and single listings on international exchanges such as the Frankfurt, TSX Venture Exchange , Toronto and London exchanges including compliance with regulatory requirements of the various Securities Commissions, including corporate governance matters, liaising with the various Securities Commissions, continuous disclosure and other filing requirements with the various Securities Commissions, prospectus preparation and filings (IPO and non-IPO), preparation and filing of stock exchange listing submissions , compliance with various stock exchange policies.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.