QUESTION
Hello Eric, Hope you are well and things are progressing well. Regarding your recent blog, would you possibly clarify what the meaning behind this paragraph is. It is a bit technical for me to understand in which way these quoted words have a relationship with another. My guess Rule 504 will continue its course,I hope i am wrong. The impact of the company’s progression from the category of “exempt offeror” to “registered offeror” in due course will be to permit a wide range of new shareholders and professional money managers to participate in WNBD for the first time. This is vital for the company’s operations as well as to enhance liquidity. Thank you for your time.
ANSWER
A firm can be public, but not yet registered with the SEC. Winning Brands falls into this category. It is classified as a “non-reporting issuer”. The term is a misnomer, because the firm does actually “report”, but not to the SEC in most matters. Instead, it reports to the public by means of the Alternative Reporting Guidelines of www.OTCMarkets.com, or “Pink Sheets”, the quotation service. Regulators generally consider this to be an adequate compromise for small entities that receive capital from investors for shares, but for whom the costs in time, money and process for conventional reporting to the SEC are not feasible.
The price that the non-reporting issuer pays for this compromise is that its ability to issue shares is confined in a number of special ways. Limited types of share issuance are classified as “exemptions”. Therefore, an exempt offeror is a non-reporting issuer which is meeting one of the exemptions available by which it can issue shares. The most frequently referred to exemptions fall under Regulation D, such as Rules 504, 505 & 506 – but these are not the only exemptions. Regulation A is another method by which a non-reporting issuer can introduce securities to suitable investors, after a specific consent of the SEC by application. One of the most restrictive features of most exempt offerings is that the share subscribers must usually be so called “accredited investors”, i.e. persons with a high minimum net worth or consistently high taxable income. Either of these definitions generally confine the exempt offerings to a small percentage of the population at first. Only after ownership by such accredited parties (i.e. either individuals or in some cases legal entities) can their shares eventually be released to the public at large. The duration and circumstances of this holding period are the subject of various legal and regulatory definitions, both formal and by general precedent. Also, the amount that can be raised by means of exempt offerings s limited by prescribed upper limit, annually. So an exempt offeror can raise funds through these channels, but the number of available participants is limited and dollar limits are set.
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A registered offeror is an entity which has met the requirements of SEC registration. Such an entity can generally offer its securities to a much wider audience because of the pre-emptive controls put into place as to the nature of the registered shares and the information associated with their offering. Generally, the limits that are imposed on exempt offerors no longer apply.
The effect upon the company of combining registration and uplisting to a quotation tier higher than OTC Pink, such as the Bulletin Board, either FINRA’s or the OTCQB, is to “open up” exposure of the firm to a vastly wider range of investors. This helps liquidity and makes it possible to attract institutional placements as well. Registered companies and shares are taken more seriously and have possibilities that just don’t exist for exempt offerors. The cost of money secured in this environment is generally lower (but compliance costs are higher). Arrangements are also more in the line of friendly financing, in so far that sensible arrangements are negotiated between equals, rather than the excessive reliance that exempt offerors have on a small number of qualitied parties. On balance, it can be thought of as moving your family to a better neighbourhood. In real estate, location matters. In the equity markets, registration matters. It’s just not possible for all companies to take that step because of the associated costs. Also, not all companies possess an internal culture that fits a reporting entity. The effort to communicate is ongoing and exacting. Winning Brands already demonstrates willingness and ability in this cultural sense, whereas many of its peers do not, and are not likely to thrive in the environment where this is necessary. Therefore, if a smaller emerging enterprise has reason to believe that it will be able to sustain the higher compliance costs in the future, and is willing to provide appropriate information continuously, then the added benefits will probably outweigh those costs, sometimes to an enormous extent.
Therefore, contrary to your implied assumption that additional offerings under Regulation D, Rule 504 would be undesirable, there is in fact a greater constraint upon the equity financing to be raised, than with the case of registered offerings. Regulation D, Rule 504 subscriptions are often cast in a bad light more in connection with its abuse, than the system working as intended. For example, Winning Brands never exceeded its annual limit under the regulations, but some issuers have. Another typical violation is for companies to coordinate with stock promoters to combine the issuance of new shares under an exemption and to promote them at the same time without the public having adequate information in accordance with an accepted reporting standard, such as OTC Pink. It is therefore a violation for OTC quoted stocks that are Yield Sign, or Stop Sign, to engage in stock promotion. Another example of a violation would be to issue shares under the exemption, but fail to disclose this fact by means of the public filing of a Form D Notice of the Sale of Unregistered Securities. Wherever there is a rule, there are people to break them, in any facet of life. Winning Brands has always understood that it is a privilege, not a right, to raise funds under exemptions and has tried to be responsible and moderate in behaviour within this privilege.
