When is it preferable to use Form 10-SB instead of Form SB-2 for a pri- vate operating business to go public? Since a Form 10-SB fi ling does not contemplate an offering, a company can use it and at the same time raise money privately from sources other than QIBs. (Remember: companies waiting for a Form SB-2 fi ling to become effective can only raise money from qualifi ed institutional buyers.) In addition, if the company has a number of shareholders who have held securities long enough to be able to sell publicly under Rule 144, fi ling an SB-2 resale registration may not
Form 10-SB
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even be necessary. If a PIPE (private investment in public equity) investor wishes to have securities registered, an SB-2 can be fi led after the 10-SB.
Form 10-SB Versus Form SB-2 (Exchange Act Versus Securities Act)
Form 10-SB is remarkably similar to the SB-2, except it does not describe a securities offering. The company description and other sections are basi- cally the same as on an SB-2 or any public offering document. (Again, the integrated disclosure rules mean disclosure is often the same, even though the purpose is different.)
SB-2 is a form created under the Securities Act of 1933, and 10-SB is a form under the Securities Exchange Act of 1934. As a refresher, follow- ing the great stock market crash of 1929, Congress sought to regulate the ailing securities markets. The ’33 Act, as it is often called, or the Securities Act, as we will call it here, established guidelines for companies conduct- ing public offerings, requiring them to register any such offering with the U.S. Securities and Exchange Commission.
The ’34 Act, frequently referred to as the Exchange Act, set up the integrated disclosure system and series of periodic and current reports re- quired by reporting companies, the regulation of securities brokers, the proxy rules, and the causes of action for violations, and insider trading and reporting mechanisms. If a company is subject to the reporting require- ments of the Exchange Act, it may be able to list its securities on the OTC Bulletin Board, Nasdaq, American Stock Exchange, or New York Stock Exchange. Nonreporting companies’ stock may only trade on the Pink Sheets.
When a company goes public through a public offering by it or its shareholders (for example, on Form SB-2), it is automatically subject to the reporting requirements through the end of its fi rst fi scal year after the offering (this is pursuant to Section 15 of the Exchange Act). After that, continuing to be a reporting company is by choice (pursuant to Section 12 of the Exchange Act). Some companies simply cease reporting after this one year, and their stock trades on the Pink Sheets.
Most companies completing a public offering immediately become reporting companies through a very simple fi ling known as Form 8-A. If this is fi led within the fi rst full fi scal year after the offering, a company au- tomatically becomes permanently subject to the reporting requirements.
After this time, or if a company has not yet conducted a public offer- ing, if it wishes to become a reporting company, it fi les a more complex form known as Form 10-SB (or Form 10 if it is not under the Regulation S-B reporting system). As mentioned above, this form is very similar to Form SB-2 and other registrations involving securities offerings; however,
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this form, like Form 8-A, is fi led simply for the company to have a class of its securities (typically its common stock) registered with the SEC, rather than individual shares. No offering is involved and no shares become trad- able by virtue of this fi ling (unless an exemption from registration applies like Rule 144).
There is a little known SEC staff telephone interpretation from 1997 that essentially says, if after one fi scal year of fi lings under Section 15 a company voluntarily keeps up all periodic quarterly and annual fi lings, and all the information that would be in a Form 10-SB is in those fi lings, even though the time may have expired to use simple Form 8-A, a com- pany is permitted to use it anyway.
Some shell operators purposely use this approach, keeping their fi lings up, trading on the Pink Sheets, then pursuing a reverse merger and fi ling Form 8-A right before the deal is signed. The reason for this is, while peri- odic reports are made, the company is not subject to any other Exchange Act requirements such as insider reporting and proxy rules while waiting to enter into a merger. I know from SEC insiders that they are not thrilled with these “voluntary fi lers,” in part because of the lack of other informa- tion the public generally likes to see.
Form 10-SB is typically used in two situations. One is when a com- pany has conducted a public offering, its stock is trading, and it is beyond its Section 15 mandatory fi ling period. Now it seeks to become a reporting company either to complete a merger or move up to a higher exchange, and it has not kept up all its fi lings, or those fi lings do not include all infor- mation that would be in a Form 10-SB, and thus cannot use Form 8-A.
In the other case, a company “goes public” through a Form 10-SB fi l- ing. This is how the form can be used within the context of a self-fi ling. A private company wants to voluntarily subject itself to the SEC’s reporting requirements. But if no shares are individually registered, how can trading commence? This can be done in one of two ways. Either enough share- holders have held their shares long enough under Rule 144 to allow them to become tradable once the company is reporting and has a ticker sym- bol, or the company intends to fi le an SB-2 resale registration to release some shares from restriction immediately following the 10-SB fi ling being completed and effective.
The question then becomes: Why fi le an SB-2 after a 10-SB rather than just go public through an SB-2? The answer, as mentioned above, is timing of fi nancing. If a company needs to complete private placements and raise money while waiting to become public, it can do so while a 10-SB is pending but not while an SB-2 is pending, other than to QIBs.
If it seems a little tedious to deal with two different fi lings, consider that the second fi ling, taking place right after the fi rst, is likely to get much
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less SEC scrutiny (assuming they have carefully reviewed the Form 10-SB before its effectiveness, which is likely). And this way, a company is able to fi nance itself while waiting to go public, can close a PIPE when the 10-SB is effective, and then fi le the SB-2 resale registration with its money already in the bank.
Filing Form 10-SB and Automatic Effectiveness
The process of preparing and getting the Form 10-SB fi led is basically the same as with an SB-2. The difference comes into play after the fi ling is made. Under SEC rules, Form 10-SB is automatically effective sixty days after it is fi led. In other words, if the SEC chooses not to comment, the form is effective and the company is thereupon public and subject to the Exchange Act reporting requirements. If the SEC does comment, the form still becomes effective sixty days after its original fi ling date provided the amendments have been fi led and all comments have been cleared before sixty days pass. Miss this deadline and the SEC will either allow the form to go effective and treat future responses to the comments as a so-called post-effective amendment or insist that the form be withdrawn and re- fi led, starting another sixty-day period. Which way they go does not seem always to be predictable, but there appears to be a trend in allowing these to go effective with amendments fi led after the form is effective.
At times as it nears the end of the comments, the SEC will announce that it does not intend to review the fi nal amendment. In this case, the fi ling becomes effective on day sixty.
None of this guarantees that the comment/revision process will be completed in sixty days. Yet, the process is still generally less laborious than with an SB-2, since the SEC tends to review securities offerings more closely.
Developing a Market After Filing a Form 10-SB
As mentioned above, the process of obtaining a ticker symbol and get- ting trading started is a little more complex with a Form 10-SB approach.
Hopefully, the company has at least thirty-fi ve to forty nonaffi liated share- holders with more than one hundred shares that have been held a suffi cient time to be tradable under Rule 144. If so, trading on the OTC Bulletin Board could commence immediately upon the form being declared effec- tive. If not, an SB-2 needs to be fi led and brought to effectiveness before trading on the OTC Bulletin Board can begin. In the meantime, if there are some shareholders with tradable shares, a ticker can be obtained and trading can commence on the Pink Sheets.
Source: TKTK