HOW DO “BLUE SKY” ISSUES IMPACT REVERSE MERGERS AND IPOS

Not only does the federal government promulgated securities laws, so has every state and territory of the United States. Therefore, before selling any security, or even trading a security by residents of any state, one has to assure that those securities laws are complied with.

For example, if selling shares under an S-1 registration statement, the issuer has to file and obtain approval for the sale of that security in every state in which purchasers reside. There are some states where this is a simple process, and other states where, depending on the “merits” of the company and the offering, it may be impossible.

One of the advantages to the Regulation A+ offering is that securities sold under a qualified (approved) Regulation A+ offering are exempt from the approval process of the states,  although a state is free to require a notice filing and payment of a filing fee.

In addition, trading of a security must be legal in the state in which both the buyer and the seller reside. Even if the security has been public for decades, if it is an account of a California shareholder who sells those shares to a Nevada buyer, the transaction must be exempt in both states. Under federal law, if a company is reporting with the Securities and Exchange Commission, a state has no authority to regulate its trading. However, pennies which are not reporting must satisfy other exemptions. One of these exemptions is known as the “manual exemption” and involves the public company filing its financial statements and other information in a securities manual such as Moody’s or Standard & Poor’s. Standard & Poor’s in particular, in marketing its services, often forgets to tell issuers who are fully reporting that their service is entirely useless.

But in point of fact, very few nonreporting issuers take any thought to this serious issue.