Articles Tagged with Securities Act of 1933

There are many instances where an individual or corporation receives shares of stock by private placement, as opposed to purchasing the stock from the open market. Often times, the stock certificates received by private placement are stamped with a legend outlining applicable restrictions on the resale of that stock. This legend establishes the regulatory limitations surrounding the corporation or individual’s ability to resell the securities. This legend must be removed before one can legally effectuate the resale of the stock. Generally, the securities must either be registered with the Securities and Exchange Commission (SEC) or sold pursuant to an exemption from registration. Only after the securities are registered or are shown to be exempt, may a transfer agent remove the restrictive legend—and only upon the removal of the restrictive legend may the underlying securities sold.

In the United States, the resale exemption most often relied on is Rule 144 of the Unites States Securities Act of 1933. Rule 144 allows the resale of restricted stock to be sold to the public without a registration statement being filed if a number of conditions have been met. These conditions vary depending on (1) whether the issuing company is a reporting or non-reporting issuer; (2) whether the holder is arms-length, and thus considered a “Non-Affiliate”; or a director, officer or significant shareholder, and thus considered an “Affiliate”; and (3) the length of time the securities have been held.

Removing the restrictive legend involves extensive communications with the transfer agent of the issuer of the securities being held and the broker dealer where the stockholder seeks to deposit those securities. The certificate holder will need to provide a number of documents including, but not limited to, a seller’s representation letter, the original stock certificates, a medallion signature guarantee, a legal opinion letter, and in some cases, a Form 144 for the proposed transaction.

John S. Turo (a/k/a James S. Turo) recently reached a settlement with the Financial Industry Regulatory Authority (FINRA) concerning allegations that he sold unregistered, nonexempt securities through general solicitation of the public in violation of Section 5 of the Securities Act of 1933 and in violation of NASD Rule 2110 and FINRA Rule 2010.  The FINRA settlement result in a fine of $20,000.  Turo became a registered securities representative and principal in 2003.  From May 2005 until April 2007, Turo was associated with Innovation Capital, LLC.  Starting in 2001, Turo was also associated with GT Securities, Inc. (GT Securities a/k/a Growthink Securities, Inc., Growthink, Inc., GTK Partners).  Turo is the Managing Director and Chief Compliance Officer of GT Securities.

From 2008 and through 2010, Growthink issued securities to raise capital for GT Securities.  In order to raise the capital, Turo sold private placements investments in Growthink to approximately 46 investors totaling $2,611,124.  FINRA alleged that the private placement sales were nonexempt securities offerings that violated Rule 506 of Regulation D requiring registration and prohibits general solicitation of the investment to the public.

In order to sell the Growthink securities, FINRA alleges that Turo held webinars online on topics such as strategic business planning, entrepreneurship, and private equity investing that included general solicitations for investments in Growthink.  The webinars were open to the general public.  In addition, investors did not need a pre-existing relationship with Growthink or Turo in order to register and participate in the webinars.  Thus, the webinars lacked a pre-screening process in order to limit the participants to only those who would qualify as accredited investors under the securities laws governing the sale of private placements.  FINRA’s complaint alleged that the foregoing sales practices and the private placement offering itself violated various securities laws.