SEC Cracks Down on Smaller Public Companies

Corporate Attorney Mark TaralloBy: Mark Tarallo

On November 5, 2014, the United States Securities and Exchange Commission (SEC) announced enforcement actions against 10 publicly traded companies for failing to properly disclose financing transactions and other sales of unregistered stock.

Companies are required to file a Form 8-K to inform investors when shares of common stock are sold in transactions that are not registered with the SEC under the federal securities laws and constitute at least five percent of the total stock held by their shareholders.  Companies also must report when they have entered into a financing agreement not made in the ordinary course of business.  These disclosures enable investors to be aware that stock dilution has occurred as a company issues additional shares in a financing transaction or other unregistered sale that has the effect of reducing the earnings per share and an investor’s percentage of ownership in the company.

The SEC found that each of the 10 companies failed to make proper disclosures regarding the dilutive effects of the transactions, and some later used incorrect share numbers when filing quarterly or annual reports.  Each of the companies was fined at least $25,000, with some of the fines as high as $50,000.

The companies that these actions were brought against are all smaller public companies, and signal that the SEC continues to engage in the “broken windows” enforcement strategy expressed by SEC Chair Mary Jo White in October, 2013.  It shows a continued effort by the SEC to prosecute “even the smallest infractions,” and that even micro-cap issuers are at risk of an enforcement action for failing to comply with applicable requirements.


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