Financial institutions used to close customer accounts or refuse to open customers’ accounts based on subjective reasons such as:

• Mitigating risks related to regulatory compliance
• Money laundering
• Fraud
• Terror financing
• Operational risks
• Religious or political views
• Avoiding reputational damage to the bank
• High-risk or politically sensitive industries

In 2011, federal regulators began issuing informal guidance encouraging banks to consider these subjective standards. This practice gave regulators great latitude to be biased against certain industries which they considered to be too risky and to warn banks against doing business with them.

Banks are heavily regulated and can only operate when in good standing with the regulators. Banking regulators are more than a strong influence on bank operations. They can direct and control bank activities.

President Trump’s August 7, 2025, Executive Order, “Guaranteeing Fair Banking for All Americans” (EO 14331), requires banks to ensure that decisions to restrict or terminate accounts (debanking) are based on individualized, documented, objective, and risk-based criteria, rather than political or religious beliefs.

Key Details of the Executive Order and Implementation

• Purpose: To eliminate “politicized or unlawful debanking” by financial institutions
• Requirements: Financial institutions must base decisions on documented, objective, and risk-based analyses
• Regulatory Actions: Federal regulators (OCC, FDIC, Fed, NCUA, CFPB) are instructed to review institution policies, take remedial action (fines, consent decrees) against those engaging in illegal debanking, and remove “reputational risk” as a justification for terminating accounts
• Scope: Protects against discrimination based on political views, religious beliefs, or lawful business activities
• Enforcement: The OCC (Office of the Comptroller of the Currency) announced actions to enforce this order, including reviewing bank performance under the Community Reinvestment Act (CRA)

Legislative Efforts

Congress passed the Ensuring Fair Access to Banking Act to further solidify these requirements into federal law. This law places restrictions on certain banks, credit unions, and payment card networks if they refuse to do business with a person who complies with the law. Restrictions on financial institutions for violations include prohibiting the use of electronic funds transfer systems and lending programs, termination of an institution’s depository insurance, and specified civil penalties. It establishes the right for a person to bring a civil action for a violation of this bill.

Government officials used to encourage banks to debank customers primarily to mitigate perceived risks related to money laundering, terrorism financing, and fraud. Using initiatives like “Operation Chokepoint” and “Know Your Customer” (KYC) rules, regulators have pushed banks to close accounts for high-risk or politically disfavored industries (such as gun manufacturers, crypto, and energy companies) under the guise of “reputational risk”.

Neither the Constitution nor any Congressional statute grant powers to the regulators to decide which lawful businesses deserve access to banking services. If you have been the victim of debanking, please consult the lawyers at Corporate Securities Legal LLP to review your rights and protect your financial reputation.

“The third-party litigation financing industry is not specifically regulated under U.S. federal law. However, some states regulate consumer funding by, for example, limiting the fees funders can charge. There also is no nationwide requirement to disclose litigation funding agreements to courts or opposing parties in federal litigation, although courts have required disclosures of funding arrangements in some instances”. The Litigation Funding Transparency Act and HR 1109, which seek to expose potential conflicts of interest and reduce risks of prolonged, funded litigation was introduced in Congress in February of 2026 but is still moving through the process to become law.

Common Complaints and Risks

• Lack of Transparency: TPLF agreements are usually confidential, and not subject to discovery, although that rule is slowly changing. The objective is to increase transparency and mitigate risks in the justice system. Defendants are put at a disadvantage if they do not know if a third-party investor is pulling the strings in a lawsuit.
• Control over Litigation: Although funders are investors, they may require contractual control over case decisions, including veto power over settlements.
• Foreign Influence: Many foreign entities are using TPLF to attack U.S. companies and gain access to sensitive information.

How TPLF Impacts Commercial Businesses

• Rise in “Nuclear Verdicts”: The influx of outside capital allows plaintiffs to pursue high-stakes, prolonged litigation, often resulting in massive, excessive jury awards that exceed $10 million.
• Increased Litigation Frequency: TPLF incentivizes the filing of non-meritorious or “questionable” claims, as plaintiffs are shielded from the risks of losing.
• Harder Settlement Negotiations: Because funders prioritize maximizing their investment returns, they may push for higher payouts, rejecting reasonable, early settlement offers that businesses often prefer.
• Rise in Specific Areas: TPLF is common in large commercial disputes.
• Operational Strain: Businesses face higher insurance premiums, tighter coverage terms, and increased legal fees defending these cases.

Although federal and state regulation of TPLF is slow in coming, businesses can take steps themselves to mitigate risks through contractual arrangements and other possible legal positions. The lawyers at Corporate Securities Legal LLP have many years of experience dealing with difficult threats to business operations, both for startups and for public companies.

AI is no longer experimental. It now plays a central role in core decision-making processes, and without proper oversight, it can create significant legal, financial, and operational consequences. Regulators are increasingly requiring organizations to move beyond general policy guidance and implement actionable, audit-ready controls.

Emerging AI Risk Areas

As regulatory scrutiny increases, several key risk areas have emerged across industries:

• Black box opacity: AI systems often operate in ways that are difficult to interpret. Organizations must be able to explain how decisions are made to regulators and stakeholders.

• Systemic and automation risk: AI can rapidly scale decisions, allowing small errors to be repeated at high speed, potentially leading to widespread operational failures.

• Third-party and data risks: Reliance on external data sources introduces risks related to data privacy, accuracy, and potential bias or manipulation.

• AI-enabled fraud: Technologies such as deepfakes and AI-driven phishing schemes create new avenues for fraud, increasing potential liability and requiring stronger verification controls.

Why AI Risk Management Matters

Organizations that fail to implement effective AI governance frameworks face both regulatory and competitive consequences:

• Avoiding heavy penalties: Regulatory enforcement actions have resulted in significant financial penalties for inadequate compliance systems.

• Competitive advantage: Companies that successfully integrate AI within structured risk frameworks can innovate more efficiently while maintaining compliance and trust.

NIST AI Risk Management Framework

The National Institute of Standards and Technology (NIST) has developed a widely adopted AI Risk Management Framework that organizations can use to manage AI systems throughout their lifecycle.

The framework includes four core functions:

• Govern: Establish internal governance structures to oversee accountability, compliance, security, and risk management, including clear decision-making and escalation procedures.

• Map: Develop and maintain an inventory of AI use cases, including third-party tools, and evaluate each for risk factors such as data security, regulatory impact, and operational significance.

• Measure: Assess risks through audits and feedback, focusing on issues such as bias, transparency, explainability, and potential manipulation.

• Manage: Implement controls to mitigate identified risks, including human oversight, access controls, employee training, and continuous system monitoring.

Staying Ahead of Regulatory Developments

AI risk management is rapidly evolving as both technology and regulatory expectations continue to develop. Organizations that proactively implement structured frameworks will be better positioned to manage risk, maintain compliance, and capitalize on emerging opportunities.

The attorneys at Corporate Securities Legal LLP provide guidance on navigating evolving regulatory requirements and implementing effective compliance strategies.

As financial strain intensifies, companies are facing higher exposure to liability, contract disputes, and employment-related claims. Proactive planning can be the difference between continued operations and financial failure.

Impact of Corporate Distress

The burdens placed on companies experiencing financial distress can significantly disrupt normal operations and long-term planning. Common impacts include:

• Increased legal costs: The growing complexity of disputes requires substantial resources for legal defense and risk management.
• Reputational damage: Litigation can result in negative publicity, reducing stakeholder trust and future business opportunities.
• Reduced operational flexibility: Ongoing legal matters may limit management’s ability to make strategic decisions and adapt to changing conditions.

Statistical Trends

Recent data highlights the growing severity of corporate distress and its legal consequences:

• Corporate distress and bankruptcy: Monthly large bankruptcy filings have increased significantly, particularly among companies with assets exceeding $1 billion.
• Economic pressures: Rising interest rates and debt burdens have contributed to a notable increase in commercial Chapter 11 filings.

Trending Litigation Areas

Certain types of litigation have become more prevalent as companies navigate financial stress:

• Data breach and cybersecurity: Companies handling sensitive customer data face increased exposure to litigation when security failures occur.
• Employment litigation: Workplace disputes have expanded following the COVID-19 era, including wage issues and evolving employment standards.
• Liability management disputes: Financial restructuring strategies, such as debt exchanges and priority shifts among creditors, have led to increased legal challenges.
• Class actions and regulatory enforcement: Companies are facing heightened scrutiny related to environmental, social, and governance (ESG) issues, as well as contractual and regulatory compliance.

Common Legal Consequences

Legal actions arising from corporate distress can lead to serious financial and operational consequences, including:

• Acceleration of debt: Creditors may demand immediate repayment of outstanding obligations.
• Foreclosure and asset seizure: Lenders may enforce their rights against collateral securing loans.
• Forced bankruptcy: Creditors may initiate involuntary bankruptcy proceedings.
• Receivership: Courts may appoint a receiver to take control of company assets.
• Shareholder claims: Courts may award damages or grant injunctive relief to affected parties.

Why Advance Planning Matters

Preparing for potential legal and financial challenges is essential in times of economic uncertainty. Strategic planning, including carefully structured contracts and internal policies, can help mitigate risk, preserve assets, and maintain operational control.

The attorneys at Corporate Securities Legal LLP have extensive experience advising companies through periods of financial stress, helping them anticipate risks and implement effective protective strategies.

The process involves filing a registration statement—including a prospectus, financial statements, and other disclosures—followed by staff review, comment letters, amendments, and final approval. Once all regulatory requirements are satisfied and the company formally requests effectiveness, the SEC may declare the registration statement effective, allowing the company to proceed with its public offering.

Initial Staff Review

The SEC staff conducts an initial review of the registration statement to confirm compliance with disclosure and accounting requirements. The goal of the review is to ensure that the filing contains sufficient information for investors to make informed decisions.

Importantly, the SEC does not evaluate the merits of the transaction or determine whether the investment is appropriate for any particular investor.

The scope of review generally takes one of three forms:

• Full Review: A comprehensive examination of the entire filing for compliance with securities laws and disclosure standards.
• Financial Statement Review: A focused review of financial statements and related disclosures to ensure compliance with applicable accounting standards.
• Targeted Issue Review: A limited review focusing on specific disclosure issues or regulatory concerns.

Staff Comment Letter

After reviewing the filing, the SEC staff may issue a comment letter identifying deficiencies, questions, or areas where additional clarification is required.

Comment letters may request:

• Expanded disclosure to enhance investor understanding;
• Additional financial information;
• Clarification of statements that could potentially be misleading;
• Supplemental information that assists the staff in evaluating the filing.

Company Response to Comments

The company must respond to each staff comment, typically through a written response letter submitted alongside amendments to the registration statement.

Companies may address comments by:

• Providing additional explanations or analysis;
• Revising disclosure language within the filing;
• Supplying supplemental information requested by the staff.

If the company does not fully understand a comment, it may seek clarification from the reviewing examiner before responding.

Certain technical accounting issues may also be addressed with the SEC’s Office of the Chief Accountant, while disclosure issues are typically handled by the reviewing division.

Iterative Review Process

The SEC staff reviews the amended filing and the company’s responses. Depending on the adequacy of the revisions, the staff may issue additional comment letters requesting further clarification.

This iterative process—involving comments, responses, and amendments—continues until both the SEC staff and the company agree that the registration statement satisfies regulatory requirements.

Request for Effectiveness

Once all comments have been resolved, the company may formally request that the SEC declare the registration statement effective. This request signals that the company believes the filing is complete and compliant with applicable disclosure rules.

Declaration of Effectiveness

If the SEC staff determines that the filing satisfies all requirements, the Commission will declare the registration statement effective. The SEC confirms this determination through a formal notice and records the effectiveness on the EDGAR system.

Once the registration statement becomes effective, the company may legally proceed with its public offering of securities.

Legal Guidance During the SEC Review Process

Preparing and navigating a registration statement review requires careful coordination among legal counsel, accountants, and company management. Errors or incomplete disclosures can significantly delay the process or trigger additional regulatory scrutiny.

The attorneys at Corporate Securities Legal LLP assist companies throughout every stage of the public offering process—from preparing registration statements to responding to SEC comment letters and securing the final declaration of effectiveness.

Contact Corporate Securities Legal LLP to learn how experienced securities counsel can guide your company through the SEC registration review process and help ensure a successful public offering.

Illegal insider trading can expose a company and its leadership to severe legal, financial, and reputational consequences. A well-structured insider trading policy helps protect the company by establishing clear expectations and discouraging improper conduct.

The SEC has published guidance outlining best practices for companies developing insider trading policies.

Who and What Is Covered

An insider trading policy should clearly identify who is subject to the rules and what types of activities are restricted. SEC Rule 10b-5 prohibits corporate insiders from using confidential corporate information to trade securities for personal gain.

Covered individuals may include:

• Corporate officers and directors;
• Employees with access to sensitive information;
• Consultants and contractors;
• Significant shareholders;
• Family members and household residents of insiders.

The rule also prohibits “tipping,” which occurs when insiders share confidential information with third parties who then use that information to trade securities.

A company’s policy should summarize relevant federal securities laws—including the Securities Exchange Act of 1934 and SEC Rule 10b-5—and explain how insiders may trade securities while remaining compliant with these regulations.

Defining Key Terms

Clear definitions help employees understand what information and conduct may create insider trading risks. Important terms typically addressed in the policy include:

Material Information: Information that could reasonably affect the value of the company’s securities or influence an investor’s decision to buy, sell, or hold stock. Examples include:

• Financial projections;
• Proposed mergers or acquisitions;
• Significant new products or services;
• Major corporate transactions.

Non-Public Information: Information that has not yet been widely disseminated to the public or fully absorbed by the market.

Insider: Any individual who has access to material non-public information due to their relationship with the company, including officers, directors, large shareholders, and individuals who receive confidential tips.

Trading Restrictions and Procedures

An insider trading policy should establish clear rules governing when and how insiders may trade company securities.

Common procedures include:

Blackout Periods: Pre-determined periods during which certain executives and directors may not trade securities, such as around quarterly earnings announcements or other major corporate events.

Event-Specific Trading Restrictions: Temporary restrictions imposed when the company is involved in confidential transactions such as merger negotiations or strategic business developments.

Pre-Clearance Requirements: Directors, officers, and employees with access to confidential information may be required to obtain approval from a designated compliance officer before trading company securities.

Compliance, Enforcement, and Penalties

An effective insider trading policy must address enforcement mechanisms and the consequences of violations.

Key components include:

Designated Compliance Officer: A specific individual—often the company’s general counsel—responsible for administering the policy and answering compliance questions.

Reporting Violations: A confidential reporting channel allowing employees to report suspected violations without fear of retaliation.

Penalties: Violations may result in serious consequences, including:

• Disciplinary action or termination of employment;
• Civil enforcement actions by regulatory authorities;
• Criminal prosecution and imprisonment.

Insider trading penalties can be severe and may include:

• Up to 20 years imprisonment;
• Criminal fines of up to $5 million;
• Civil penalties of up to three times the profits gained or losses avoided.

Implementation and Best Practices

For an insider trading policy to be effective, it must be properly implemented and communicated throughout the organization.

Best practices include:

• Legal Review: Have the policy drafted or reviewed by experienced securities counsel.
• Employee Training: Conduct regular training sessions for employees, especially those with access to sensitive information.
• Monitoring Systems: Track trading activity to detect unusual or suspicious patterns.
• Clear Communication: Provide employees with electronic access to the policy and distribute written copies to directors and senior management.
• Regular Updates: Revise the policy as the company grows or transitions from a private company to a publicly traded entity.

Why Legal Guidance Matters

As companies grow and evolve, insider trading risks and compliance requirements may also change. Maintaining a clear and enforceable insider trading policy helps protect the company and its leadership from significant legal exposure.

The attorneys at Corporate Securities Legal LLP assist companies in developing insider trading policies, implementing compliance programs, and navigating federal securities regulations.

Contact Corporate Securities Legal LLP to ensure your company’s insider trading policies remain compliant with current securities laws and regulatory expectations.

Board members hold fiduciary duties of care, loyalty, and obedience, which require them to protect company assets, oversee management, and ensure that corporate operations comply with applicable laws and governing documents.

Strategic Oversight and Corporate Governance

The number of directors serving on a board typically depends on the needs and size of the company. Boards provide strategic guidance and long-term planning, while the day-to-day execution of business operations is delegated to executive officers.

As part of their governance responsibilities, boards are expected to:

• Provide strategic direction and long-term planning;
• Oversee executive management performance;
• Protect company assets and financial stability;
• Identify and mitigate operational and regulatory risks;
• Ensure transparency and ethical business practices.

The powers and responsibilities of the board are defined in the articles of incorporation and corporate bylaws. Major corporate decisions—such as amendments to governing documents or mergers with other companies—generally require approval from shareholders, who ultimately own the corporation.

Fiduciary Duties of Directors

Directors are generally protected from liability for decisions made in good faith while performing their fiduciary duties. However, this protection only applies when directors act responsibly and within the scope of their obligations.

The three primary fiduciary duties include:

Duty of Care
Directors must act with the same level of diligence and prudence that a reasonably careful person would exercise under similar circumstances.

Duty of Loyalty
Directors must place the interests of the corporation above personal interests and avoid conflicts of interest when making decisions on behalf of the company.

Duty of Obedience
Directors must ensure that the corporation operates in compliance with applicable laws and its own governing documents.

Corporate governing documents may limit liability for certain decisions, but they generally cannot eliminate liability for breaches of fiduciary duties involving fraud, misconduct, or illegal activity.

Directors of publicly traded companies may also face liability for violations of federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, particularly when anti-fraud or disclosure requirements are violated.

Indemnification of Directors

Most state corporate statutes provide indemnification protections for directors who successfully defend themselves against legal claims related to their service on the board.

Corporations may also voluntarily indemnify directors when the board determines that the individual acted:

• In good faith;
• In a manner reasonably believed to be in the corporation’s best interests.

These protections help encourage qualified individuals to serve as directors without undue personal risk.

Roles Within the Board Structure

Although the board acts collectively when making decisions, individual directors may hold specific leadership roles within the organization.

Common board positions include:

• Chairperson – Leads board meetings and guides the board in overseeing the company’s strategic direction.
• Vice Chairperson – Assists the chairperson and assumes responsibilities when necessary.
• Chief Executive Officer (CEO) – Implements the strategic decisions and policies adopted by the board.
• Chief Financial Officer (CFO) – Oversees financial management and reports to the board on financial performance and compliance matters.
• Corporate Secretary – Maintains board records, meeting minutes, and official corporate communications.
• Independent Directors – Provide objective perspectives and unbiased oversight in board decisions.

Board Committees

Boards frequently establish committees to assist with oversight responsibilities. These committees provide recommendations to the board but do not exercise the board’s full authority.

Common board committees include:

• Audit committees responsible for financial oversight;
• Compensation committees reviewing executive compensation structures;
• Governance committees addressing corporate governance policies and practices.

Preparing for Public Company Governance

Companies preparing for an initial public offering (IPO) must establish formal corporate governance policies and board procedures that comply with federal securities regulations and stock exchange requirements.

The attorneys at Corporate Securities Legal LLP assist companies in developing governance frameworks, advising boards of directors regarding fiduciary duties, and implementing the governance practices required for publicly traded companies.

Contact Corporate Securities Legal LLP to learn how effective corporate governance practices can strengthen your organization and prepare it for future growth and public market opportunities.

The Foreign Corrupt Practices Act of 1977 (FCPA) prohibits U.S. companies and individuals from offering or paying bribes to foreign officials in order to obtain or retain business advantages. The law applies to conduct occurring both outside and within the United States and broadly covers the use of mail or any means of interstate commerce in furtherance of improper payments.

The statute makes it unlawful to offer, promise, authorize, or provide money or anything of value while knowing that such benefits may be directed—either directly or indirectly—to a foreign official for the purpose of influencing official actions, securing improper advantages, or directing business opportunities.

Importantly, the FCPA also applies to foreign companies and individuals whose actions further corrupt payments within the United States.

Accounting and Internal Control Requirements

Companies subject to the FCPA must maintain strong internal accounting controls designed to ensure transparency and accurate financial reporting. Public companies whose securities trade in the United States are required to:

• Maintain books and records that accurately reflect corporate transactions;
• Implement internal accounting controls sufficient to prevent and detect improper payments;
• Ensure financial reporting systems properly account for corporate expenditures.

The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) jointly enforce FCPA provisions. Violations may result in severe penalties, including:

• Civil and criminal enforcement actions;
• Monetary fines reaching up to twice the anticipated benefit obtained through misconduct;
• Individual criminal liability;
• Imprisonment of up to five years.

Increased Enforcement and National Security Concerns

Federal regulators have expanded FCPA enforcement efforts in response to growing concerns that corporate misconduct may impact national security. Enforcement priorities now include risks associated with:

• Sanctions evasion and export control violations;
• Cybercrime and cryptocurrency-related misconduct;
• Intellectual property theft;
• Disruption of critical supply chains and emerging technologies.

Companies are increasingly expected to implement sophisticated compliance programs and exit business relationships or markets presenting unacceptable regulatory risks.

DOJ Safe Harbor Policy for Mergers and Acquisitions

In October 2025, Deputy Attorney General Lisa O. Monaco announced a department-wide Safe Harbor Policy encouraging voluntary self-disclosure of misconduct discovered during mergers and acquisitions transactions.

Under this policy, acquiring companies that:

• Promptly and voluntarily disclose criminal misconduct;
• Fully cooperate with government investigations;
• Implement timely remediation measures;
• Provide restitution and disgorgement where appropriate

may receive a presumption of declination, meaning the DOJ may decline prosecution despite otherwise prosecutable conduct.

Significantly, misconduct discovered at an acquired company—including aggravating factors—will not automatically prevent the acquiring company from qualifying for Safe Harbor protection.

According to the DOJ’s FCPA Corporate Enforcement Policy, a declination applies where prosecution would otherwise occur but is avoided due to voluntary disclosure, cooperation, remediation, and financial restitution.

The Importance of Compliance Planning

Modern enforcement policy reflects a shift in regulatory expectations. Corporate compliance programs are no longer viewed merely as operational costs but as essential safeguards against substantial financial and reputational exposure.

Companies engaged in cross-border transactions or acquisition activity should evaluate compliance risks early in the transaction process to preserve eligibility under Safe Harbor protections.

For questions regarding FCPA compliance or voluntary self-disclosure obligations, consultation with experienced securities counsel is critical. The attorneys at Corporate Securities Legal LLP assist companies in meeting regulatory deadlines, conducting internal investigations, and navigating Safe Harbor requirements during mergers and acquisitions transactions.

Contact Corporate Securities Legal LLP to discuss strategies for maintaining compliance and minimizing enforcement risk under the Foreign Corrupt Practices Act.

The risks presented by artificial intelligence (AI) are becoming an increasing concern for corporate boards as emerging technologies influence business strategy, operations, and long-term planning. At the same time, regulators are closely examining how accurately companies disclose AI-related risks and the mitigation measures being implemented.

The U.S. Securities and Exchange Commission (SEC) has already initiated enforcement actions challenging misleading or incomplete disclosures related to artificial intelligence claims.

Growing Focus on AI Risk Reporting

A recent study conducted by Cornell University analyzed more than 30,000 filings from over 7,000 companies during the past five years. Using both quantitative and qualitative analysis, researchers identified a significant increase in AI risk disclosures. Mentions of AI-related risks in company filings increased from 4% of filings in 2020, to more than 43% of filings in 2024. This dramatic increase reflects both expanded corporate reliance on artificial intelligence and heightened regulatory scrutiny.

The Role of Form 10-K Disclosures

Evaluation of AI-related risk disclosure begins with Form 10-K, the annual report most U.S. public companies must file with the SEC. The Commission establishes required disclosure topics and prescribes how information must be presented to investors.

Companies must disclose:

• Material risks affecting business operations;
• Methods used to evaluate emerging risks;
• Strategies implemented to mitigate potential threats.

Because artificial intelligence can affect nearly every aspect of business operations, AI risks may be considered material at multiple levels, including:

• The broader economy;
• Industry-wide impacts;
• Geographic exposure;
• Company-specific operational risks.

Material Disclosure Obligations

Federal securities laws prohibit companies from:

• Making materially false or misleading statements; or
• Omitting material information necessary to prevent investor deception.

To reinforce accountability, both the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must certify the accuracy and completeness of Form 10-K disclosures.

Categories of Material Risk

Companies generally evaluate disclosure obligations across four recognized categories of material risk.

Market Risk

Market risk arises from broad economic fluctuations such as:

• Interest rate changes;
• Foreign exchange volatility;
• Commodity price movements;
• Stock market valuation shifts.

These risks are largely outside company control but must still be disclosed when material.

Credit Risk

Credit risk evaluates the likelihood that customers or counterparties may fail to meet payment obligations. Companies may manage this risk through:

• Structured repayment terms;
• Collateral requirements;
• Credit evaluation procedures.

Liquidity Risk

Liquidity risk concerns a company’s ability to meet financial obligations as they become due. Companies must assess how quickly they can:

• Obtain financing; or
• Convert assets into cash during downturns.

Operational Risk

Operational risk involves failures in internal systems or external dependencies, including:

• Cybersecurity threats and AI system vulnerabilities;
• Ineffective internal controls;
• Employee training deficiencies;
• Supplier concentration risks;
• Financial reporting fraud or system failures.

Why Compliance Matters

Failure to comply with SEC disclosure requirements—including Form 10-K reporting obligations—can result in significant regulatory consequences and enforcement actions. Accurate disclosure not only promotes investor confidence but also protects companies from allegations of misleading statements.

Consultation with experienced securities counsel helps companies maintain compliance while developing practical risk mitigation strategies aligned with evolving regulatory expectations.

The securities lawyers at Corporate Securities Legal LLP assist companies in navigating disclosure obligations, strengthening compliance frameworks, and implementing effective governance practices related to emerging technologies such as artificial intelligence.

Contact Corporate Securities Legal LLP to ensure your company’s SEC disclosures remain accurate, compliant, and aligned with current regulatory standards.

Fair and orderly securities markets depend on the accuracy and honesty of information provided to investors. Public companies and individuals involved in securities transactions are required to ensure that all filings and communications are complete, truthful, and not misleading. There is no tolerance under federal securities laws for inaccuracies—whether negligent or intentional.

False or misleading disclosures can distort investor decision-making, lead to substantial financial losses, and improperly enrich bad actors. To address these risks, the Securities Exchange Act strictly prohibits deceptive conduct in connection with the purchase or sale of securities.

Federal Prohibitions Against Securities Fraud

Under the Securities Exchange Act, it is unlawful for any person, directly or indirectly, using interstate commerce, the mails, or the facilities of a national securities exchange, to:

• Employ any device, scheme, or artifice to defraud;
• Make untrue statements of material fact or omit material facts necessary to prevent statements from being misleading;
• Engage in any act, practice, or course of business that operates as a fraud or deceit upon any person.

These provisions apply broadly and are enforced aggressively by the Securities and Exchange Commission (SEC).

SEC Enforcement and Real-World Consequences

Some individuals attempt to conceal misconduct through sophisticated accounting practices or misleading disclosures. However, such schemes are frequently uncovered through SEC investigations, whistleblower reports, or audits. When violations are discovered, the consequences can be severe—financially, professionally, and, in some cases, criminally.

A recent enforcement action illustrates these risks.

Example: SEC v. Wagenhals, Wiley, and Larson

In Securities and Exchange Commission v. Frederick W. Wagenhals, Robert D. Wiley, and Christopher D. Larson, the SEC charged three former executives of Scottsdale, Arizona–based Ammo, Inc. (now known as Outdoor Holding Co.) with accounting and disclosure fraud.

According to the SEC’s complaint, former CEO Wagenhals and former CFO Wiley made repeated materially false and misleading statements in Ammo’s public filings and financial statements. These statements were allegedly intended to conceal unfavorable information about the company’s management and operations.

The SEC further alleged that the filings hid the fact that Defendant Larson—a company co-founder and key business leader—continued to play a critical executive and management role despite a 2020 federal court order prohibiting him from serving in an executive capacity at a public company.

Alleged Misconduct and Disclosure Failures

The complaint alleges that Larson’s undisclosed senior role enabled him to:

• Lead major business operations in violation of the court order;
• Negotiate the largest acquisition in the company’s history;
• Structure transactions that financially benefited himself or members of his family.

According to the SEC, Ammo’s public reports and financial statements contained pervasive misstatements, omissions, and fundamental accounting errors. The SEC alleges that Wagenhals and Wiley approved and certified these filings while knowing they were inaccurate.

Legal Charges and Potential Penalties

The SEC filed its complaint in the U.S. District Court for the District of Arizona, charging all three defendants with violations of:

• Sections 17(a)(1) and (3) of the Securities Act of 1933;
• Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Wagenhals and Wiley were also charged with falsifying books and records, misleading auditors, submitting false certifications, and failing to reimburse the company for compensation following an accounting restatement, as required under the Sarbanes-Oxley Act.

The SEC seeks:

• Permanent injunctions;
• Civil monetary penalties;
• Officer and director bars;
• Disgorgement of ill-gotten gains with prejudgment interest;
• Reimbursement of compensation under Section 304(a) of the Sarbanes-Oxley Act.

Civil penalties are often assessed in amounts equal to disgorgement, effectively doubling the financial consequences of the misconduct.

Why Compliance Matters

SEC filing obligations are complex, and mistakes—whether intentional or accidental—can expose companies and executives to significant enforcement risk. Proper legal guidance is essential to ensure accurate disclosures, compliant accounting practices, and adherence to federal securities laws.

If you have questions or concerns regarding SEC filing requirements, the securities attorneys at Corporate Securities Legal LLP can provide experienced counsel and practical guidance. Early legal involvement can help ensure compliance, reduce risk, and prevent costly SEC enforcement actions.

Forward-looking statements are designed to address that final element: how management expects the company to perform going forward. While these statements can provide valuable insight into a company’s strategic vision, they also carry legal risk if not prepared carefully and in compliance with federal securities laws.

What Is a Forward-Looking Statement?

A forward-looking statement is a management prediction or projection regarding the future performance of a business. These statements are typically included in SEC registration materials and other public disclosures and may address a wide range of anticipated outcomes.

Common categories of forward-looking statements include:

• Financial performance
  Forecasts of revenue, losses, earnings per share, dividends, operating expenses, capital expenditures, and retained earnings.
• Operational plans
  Planned business development initiatives, mergers or acquisitions, capital investments, and anticipated product lines or services.
• Risk factors
  External conditions that could impact performance, such as economic trends, regulatory changes, or competitive pressures.
• Management assumptions
  The underlying assumptions and reasoning that support the company’s projections and strategic direction.
• Independent review
  Reports or analyses from outside reviewers that lend credibility to the reasonableness of management’s projections.
• Legal disclaimers
  Statements clarifying that projections are inherently speculative and not guarantees of future performance. The SEC requires such disclaimers in published management materials to prevent investors from treating projections as assurances.

Legal Protections for Management

To balance investor protection with the need for companies to communicate future plans, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides a “safe harbor” that protects corporate officers and directors from unwarranted securities fraud claims based solely on forward-looking statements, provided those statements meet statutory requirements.

Under U.S. Supreme Court interpretations of the PSLRA, an investor bringing a claim based on a forward-looking statement must prove:

• A material misrepresentation or omission meeting the legal definition of fraud;
• Direct reliance on that misrepresentation when deciding to buy or sell a security; and
• A resulting financial loss caused by the transaction.

Absent these elements, claims based on forward-looking statements are unlikely to succeed.

Procedural Requirements Under the PSLRA

The PSLRA also introduced procedural safeguards designed to curb frivolous shareholder lawsuits and abusive litigation practices. These safeguards include:

• Stricter pleading standards – Allegations of negligence are insufficient. Plaintiffs must plead facts creating a “strong inference” of fraudulent intent.
• Lead plaintiff requirements – Class actions must be led by the shareholder with the largest financial interest in the claim, not random or nominal investors.
• Automatic stay of discovery – Discovery is paused while motions to dismiss are pending, preventing plaintiffs from engaging in costly fishing expeditions.
• Limits on damages and attorneys’ fees – Recovery is limited to actual losses, and caps are placed on permissible attorneys’ fees.
• Auditor obligations – Auditors must report illegal acts to management and, if necessary, to the SEC.
• Proportional liability – Defendants are liable only for their share of the harm, rather than being jointly responsible for the entire damage award.

Why Proper Drafting Matters

To qualify for PSLRA safe harbor protection, forward-looking statements must meet specific statutory and regulatory requirements. Poorly drafted projections, missing disclaimers, or unsupported assumptions can expose a company and its leadership to unnecessary legal risk and SEC scrutiny.

Need Guidance on Forward-Looking Statements?

The attorneys at Corporate Securities Legal LLP have extensive experience preparing compliant forward-looking statements and full SEC registration filings. Our team understands how to balance meaningful disclosure with legal protection, helping companies avoid delays, revisions, and enforcement exposure.

Contact us to ensure your forward-looking statements meet SEC requirements, qualify for PSLRA safe harbor protection, and move smoothly through the registration process.

Securities market integrity refers to the fairness, transparency, and honesty of the U.S. financial markets. Following widespread corruption that led to the stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 to curb abusive practices and restore investor confidence.

These laws mandate truthful disclosure and prohibit deceptive conduct in connection with the offer, sale, and trading of securities. The U.S. Securities and Exchange Commission (SEC) enforces these statutes to ensure investors can rely on the integrity of the securities markets for the benefit of the public as a whole.

Ongoing Abuses in the Securities Markets

Despite this regulatory framework, abuses continue to occur. A recent and notable example illustrates how the SEC actively enforces market integrity when disclosure obligations are violated.

On January 27, 2026, the SEC settled a significant enforcement action against Archer-Daniels-Midland Company (ADM), the Chicago-based global grain trader, along with certain former executives. The misconduct spanned approximately seven years and involved materially inflating the performance of a key business segment that failed to meet operating profit targets.

In parallel, a class action lawsuit filed on January 24, 2026, seeks to recover approximately $8.8 billion in investor losses, alleging ADM made “false and misleading statements” regarding its financial performance.

SEC Enforcement Perspective

In announcing the settlement, Judge Margaret A. Ryan, Director of the SEC’s Division of Enforcement, emphasized the agency’s role in protecting investors and markets:

“Transparent and honest disclosure are key to maintaining market integrity, so when ADM misled its investors, the SEC stepped in to protect them and the market. The SEC is steadfast in its commitment to rooting out fraud and holding accountable wrongdoers, while also engaging market participants constructively to ensure the right outcomes are achieved in a timely and fair manner.”

Accounting and Disclosure Fraud Allegations

The SEC’s complaint charged ADM executives with Accounting and Disclosure Fraud. According to the SEC, the company employed several improper practices to meet operating profit goals or conceal shortfalls, including:

• Retroactive rebates
• Price changes targeted to specific dollar amounts
• Transactions designed to mask operating profit shortfalls
• One-sided transfers of operating profit not available to third parties

These actions allegedly distorted ADM’s reported financial performance and misled investors.

Settlement and Remedial Measures

The litigation did not proceed to judgment because ADM agreed to cooperate fully with the SEC and implement substantial remedial actions, including:

• Instituting an internal investigation
• Voluntarily reporting findings to SEC staff
• Providing additional analyses from an outside accounting expert
• Implementing new internal accounting controls
• Amending accounting policies and procedures
• Testing the effectiveness of new controls
• Creating a Fair Fund to distribute monetary relief to harmed investors

Penalties Imposed

As part of the settlement:

• ADM agreed to pay a $40 million civil penalty
• One officer agreed to disgorgement and prejudgment interest totaling $404,343, a $125,000 civil penalty, and a three-year officer and director bar
• A second officer agreed to disgorgement and prejudgment interest totaling $575,610 and a $75,000 civil penalty

What This Signals for Future SEC Enforcement

The ADM matter provides insight into how enforcement actions may proceed during the second Trump administration:

• Although the company settled, former and current executives may still face liability
• The SEC included accounting fraud charges, which are more serious than mere disclosure failures
• Despite a more business-friendly enforcement climate, the case was viewed as serious across administrations
• Cooperation with the SEC influenced the outcome, and the $40 million penalty is relatively modest compared to prior enforcement actions

Operational Damage Beyond Financial Penalties

SEC enforcement actions often disrupt company operations well beyond the monetary sanctions imposed. Common consequences include:

• Credit rating downgrades
• Reduced access to credit markets
• Significant diversion of senior management time
• Escalating legal and compliance costs
• Additional resources devoted to strengthening accounting and internal controls

How Companies Can Protect Themselves

The federal securities laws impose strict compliance obligations, and negligence is not a defense to SEC enforcement actions. Companies must proactively ensure accurate disclosures, sound accounting practices, and effective internal controls.

The attorneys at Corporate Securities Legal, LLP specialize in advising clients on securities law compliance, enforcement risk, and disclosure obligations. Our goal is to help clients stay out of trouble with the SEC while preserving investor confidence and the integrity of the securities markets.

A mandatory arbitration provision requires investors to arbitrate claims arising under the federal securities laws with the issuer of the securities, rather than pursuing those claims in federal court. In the context of an SEC registration statement, this is commonly referred to as an issuer-investor mandatory arbitration provision.

According to Paul S. Atkins, Chairman of the U.S. Securities and Exchange Commission (SEC):

“A mandatory arbitration provision requires an investor to arbitrate its claims arising under the federal securities laws with the issuer of the securities.”

Mandatory arbitration provisions offer an alternative forum for resolving disputes and have long raised questions regarding enforceability and investor protections under federal securities laws.

Is Arbitration a Satisfactory Alternative to Federal Court Litigation?

The Federal Arbitration Act of 1925 (“FAA”) established a strong federal policy favoring arbitration agreements. Section 2 of the FAA, its principal substantive provision, states in relevant part:

“A written provision in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction shall be valid, irrevocable, and enforceable.”

Whether the FAA applies to issuer-investor mandatory arbitration provisions depends initially on whether there is a valid and enforceable written agreement to arbitrate between the parties.

Do Federal Securities Laws Override the FAA?

Chairman Atkins has explained that issuer-investor mandatory arbitration provisions have historically been viewed as potentially inconsistent with federal securities statutes in at least two ways:

They may violate the anti-waiver provisions of federal securities laws by foreclosing a judicial forum; and
They may impede investors’ ability to bring private actions—particularly class actions—to enforce their rights under federal securities laws.

Anti-Waiver Provisions Under Federal Securities Laws

Section 14 of the Securities Act of 1933 and Section 29(a) of the Securities Exchange Act of 1934 contain anti-waiver provisions that invalidate contractual clauses which:

•Require investors to waive compliance with federal securities laws; or
•Eliminate substantive investor protections, including remedies for fraud.

Supreme Court Resolution of Arbitration and Anti-Waiver Conflicts

In a series of decisions issued in the late 1980s, the U.S. Supreme Court clarified the relationship between arbitration agreements and federal securities laws. The Court held that:

1. Anti-waiver provisions prohibit waivers of substantive obligations, not procedural or jurisdictional provisions;
2. The arbitration process does not inherently undermine substantive rights granted under the Securities Act; and
3. To override the FAA, Congress must express a “clear and manifest” intention to do so in subsequent legislation.

These rulings significantly strengthened the enforceability of arbitration agreements in securities-related disputes.

New SEC Policy Statement

On September 17, 2025, the SEC issued a policy statement titled Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions.

In announcing the policy change, Chairman Atkins stated:

“The Commission has determined that the presence of an issuer-investor mandatory arbitration provision will not impact decisions regarding whether to accelerate the effectiveness of a registration statement.”

This policy marks a significant shift, making clear that mandatory arbitration provisions will no longer impede SEC approval or acceleration of registration statements.

Need Legal Guidance on Mandatory Arbitration Provisions?

The attorneys at Corporate Securities Legal LLP advise companies on the advantages and risks associated with mandatory arbitration provisions, registration statement disclosures, and all aspects of the IPO process.

Our team is prepared to help you evaluate strategic considerations, comply with SEC requirements, and structure registration statements for a successful public offering.

Public companies are required under U.S. Securities and Exchange Commission (SEC) rules to periodically provide transparent disclosures to investors and the public regarding executive compensation, partcularly when compensation is tied to equity awards such as stock and stock options. These requirements are collectively referred to as equity plan disclosure rules.

Equity plan disclosures include:

• Grant policies
• Pay versus performance policies
• Clawback policies
• Insider trading and ownership disclosures

SEC Requirements for Pay Versus Performance Disclosures

The SEC provides highly specific instructions governing how pay versus performance information must be presented. Public companies are required to include detailed tables that compare executive compensation against company performance metrics.

These tables must clearly disclose:

• The compensation of the Chief Executive Officer (CEO);
• The average compensation of other Named Executive Officers (NEOs); and
• The company’s financial performance, often tied to equity-based awards.

The purpose of these disclosures is to allow investors to evaluate whether executive compensation aligns with company performance.

Mandatory and Company-Selected Performance Measures

Under SEC rules adopted in 2022 pursuant to the Dodd-Frank Act, public companies must disclose specific performance measures in their proxy statements to illustrate the relationship between executive pay and performance.

Mandatory measures include:

• Total Shareholder Return (TSR); and
• Net income.

In addition, companies must identify and disclose Company-Selected Measures (CSMs)—the financial performance measures the company believes are most important in linking executive compensation to performance.

Common CSMs include:

• Earnings before interest, taxes, depreciation, and amortization (EBITDA);
• Earnings per share (EPS); and
• Revenue or sales.

TSR measures the return generated for shareholders through stock price appreciation and dividends over a specified period and must be compared to a selected peer group. Net income reflects the company’s profitability after all expenses and taxes.

Uniform Formatting and Disclosure Obligations

The SEC requires pay versus performance disclosures to be presented in a uniform and standardized format to ensure comparability across public companies. Failure to comply with the prescribed format constitutes a violation of SEC reporting requirements. Ignorance of the rules is not a defense.

The SEC’s detailed disclosure instructions include the following requirements:

1. Footnotes to the table. Registrants must disclose specified information in footnotes, including the name of each Principal Executive Officer (PEO) and each non-PEO NEO included in the average compensation amounts, as well as amounts deducted or added to calculate executive compensation actually paid.
2. Relationship disclosure. Item 402(v) requires registrants to describe the relationships between each financial performance measure and the executive compensation actually paid to the PEO and, on average, to other NEOs over the five most recently completed fiscal years (or three years for Smaller Reporting Companies). Registrants other than SRCs must also describe the relationship between company TSR and peer group TSR. These disclosures may be presented in narrative, graphical, or combined formats.
3. Tabular List. Registrants other than SRCs must provide a list of three to seven financial performance measures they determine are the most important measures used to link executive compensation to performance. Non-financial measures may be included if they are among the company’s most important metrics.
4. Inline XBRL. All registrants are required to use Inline XBRL to tag pay versus performance disclosures in proxy or information statements. Each value in the pay versus performance table must be separately tagged, with block-text tagging required for footnotes, relationship disclosures, and the Tabular List where applicable.

Why This Matters for Public Companies

Pay versus performance disclosures are a frequent focus of SEC review and investor scrutiny. Errors, omissions, or deviations from the required format can result in regulatory comments, amended filings, enforcement actions, and reputational harm.

Careful coordination between legal, finance, compensation, and reporting teams is essential to ensure compliance and minimize regulatory risk.

Need Legal Guidance on Pay Versus Performance Compliance?

The securities attorneys at Corporate Securities Legal LLP advise public companies on executive compensation disclosures, proxy statement compliance, equity plan reporting, and SEC regulatory strategy.

Our team can help ensure your Pay Versus Performance Executive Compensation disclosures fully comply with SEC requirements—so you can avoid regulatory exposure and the uncertainty of how the SEC may respond.

If you work in any area of the securities industry—such as advising investors, issuing publicly traded securities, or even investing yourself—you may one day face the possibility of receiving a subpoena from the U.S. Securities and Exchange Commission (SEC). The SEC has broad authority to regulate the securities markets by issuing rules and investigating potential violations of federal securities laws.

An SEC subpoena requires you to either produce documents in your possession or appear before the SEC to provide sworn testimony. While subpoenas are a powerful investigative tool used to protect the investing public and promote fair markets, receiving one can be an alarming and stressful experience.

The most important step you can take upon receiving an SEC subpoena is to immediately consult an experienced SEC defense attorney. An attorney can protect your rights, ensure compliance with complex SEC rules, and help manage the agency’s often short and inflexible deadlines.

What an SEC Subpoena Means

An SEC subpoena is a legal order indicating that the Commission has already issued a formal order of investigation. It is backed by the authority of the federal government and ignoring it can lead to contempt proceedings in federal court.

Key points to understand include:

• The subpoena confirms that a formal investigation is already underway;
• Failure to comply may result in court enforcement, daily fines, or possible incarceration;
• The subpoena will not disclose whether you are a witness or a target;
• It will not specify whether the investigation is civil or criminal;
• It will not identify the precise conduct under investigation or the evidence the SEC already possesses.

The SEC intentionally keeps subpoenas vague to preserve flexibility while gathering additional information.

In March 2025, the SEC adopted a new rule requiring approval by a majority of SEC commissioners before issuing a subpoena to open a formal investigation. As a result, subpoenas are no longer mere “fishing expeditions” and now signal a higher level of internal scrutiny.

Formal Orders of Investigation

A formal order of investigation outlines the securities law violations the SEC believes may have occurred and describes the scope of the inquiry. Although recipients are entitled to request a copy of the formal order, most individuals never do—often because they are unaware that it exists.

A request must be made in writing to the Assistant Director assigned to the investigation. The SEC may deny the request if disclosure would impede the investigation or compromise the privacy of others involved.

Witness vs. Target Status

Your status in an SEC investigation is fluid and may change without notice. Based on documents you produce or statements you make during testimony, you may transition from witness to target—often without being informed.

By the time that shift occurs, you may have already provided the SEC with information it can use against you. This makes early legal representation critical.

The Importance of Legal Representation

Compliance with an SEC subpoena is mandatory, but how compliance is handled can significantly affect the outcome of the investigation. An experienced SEC defense lawyer can:

• Negotiate the scope and timing of document production;
• Assert and preserve attorney-client privilege;
• Prevent inadvertent waiver of privilege through document review;
• Prepare you for testimony and questioning;
• Advocate on your behalf with SEC enforcement staff.

Accidentally producing a privileged document can waive protection not only for the document itself, but for all related communications—potentially impacting future proceedings as well.

Why This Matters

Receiving an SEC subpoena can be a life-altering event regardless of the ultimate outcome. The stakes are high, the rules are unique, and every decision matters. SEC investigations differ significantly from traditional litigation, and missteps can have long-term professional and financial consequences.

Need Legal Guidance for an SEC Subpoena?

The securities attorneys at Corporate Securities Legal LLP have extensive experience defending individuals and companies in SEC subpoena investigations. Our team understands how SEC investigations work, how to interpret enforcement signals, and how to navigate this complex regulatory process while protecting your rights.

Contact us to discuss your situation and ensure you are responding to an SEC subpoena strategically, efficiently, and in full compliance with the law.

Recent amendments to Internal Revenue Code Section 1202, introduced under the One Big Beautiful Bill Act, significantly expand the benefits available under the Qualified Small Business Stock (QSBS) tax exemption. These changes apply only to stock purchased on or after July 4, 2025, and they provide increased exclusion limits, reduced holding periods, and higher gross asset thresholds for qualifying businesses.

Key Enhancements Include:

1. Increased Exclusion Limits

The maximum gain exclusion increases from $10 million to $15 million for qualifying stock purchases made on or after July 4, 2025. This expanded benefit can substantially reduce taxable gains when founders or early investors sell their company.

2. Reduced Holding Periods With Partial Benefits

The revised rules introduce tiered exclusions based on the investor’s holding period:

50% exclusion for stock held 3–4 years

75% exclusion for stock held 4–5 years

100% exclusion for stock held 5+ years

Previously, taxpayers could only receive a 100% exclusion if they held their stock for at least five years.

3. Increased Gross Asset Threshold

The gross asset limit for a corporation to qualify as a “small business” increases from $50 million to $75 million, measured at the stock’s issuance date using tax basis, not fair market value.

These updated benefits apply solely to new stock issuances and do not apply to stock conversions through exchanges.

Who Qualifies for QSBS?

Individual Eligibility

To qualify:

Stock must be purchased directly from the corporation in exchange for money, property, or services

Stock purchased from another shareholder does not qualify.

Company Eligibility

A business must:

• Be a U.S. C-corporation
• Use at least 80% of its assets in active business operations
• Not fall within excluded categories such as:
  • Professional services (law, medicine, accounting)\
  • Banking, insurance, finance
  • Farming or natural resource extraction
  • Hospitality, hotels, and restaurants
  • Businesses primarily driven by employee skill or reputation

Passive investment companies also do not qualify.

How Is the QSBS Exclusion Calculated?

The IRS requires a two-step calculation, applied in the following order:

1. Dollar Limitation

• $10 million exclusion for stock purchased before July 4, 2025
• $15 million exclusion for stock purchased on or after July 4, 2025
• Inflation adjustments will begin after 2026
• Alternatively, investors can exclude up to 10× their aggregate stock basis, which is advantageous for founders contributing appreciated property

2. Percentage Limitation

Next, apply the exclusion percentage based on the holding period (50%, 75%, or 100%).

Tax Rates

• Gains limited by the percentage exclusion (i.e., non-excluded gains within the holding period bracket) are taxed at a special 28% federal rate
• Gains above the dollar limitation are taxed at regular capital gains rates.

Public Policy Considerations

Congress designed the QSBS exemption to encourage investment in early-stage U.S. businesses by rewarding long-term capital commitment. With the 2025 amendments, policymakers intend to:

• Modernize qualification thresholds
• Expand access to tax benefits for founders and investors
• Stimulate growth among innovative startups and emerging companies

The updated framework increases flexibility while maintaining guardrails to ensure that only genuine small businesses benefit from the exemption.

How Corporate Securities Legal LLP Can Assist

Corporate Securities Legal LLP is a boutique securities law firm based in Costa Mesa, California and New York City.

We advise startups, founders, and investors on the structuring, issuance, and tax implications of QSBS stock. Our practice is exclusively focused on securities law, including: Private and public offerings, corporate financings, Transactional structuring, SEC compliance and enforcement.

If you are forming a new corporation or planning a future exit, we can help you structure your stock issuances and corporate governance to maximize QSBS tax benefits.

How is the definition of an accredited investor being expanded?

The proposed rule will amend the definition of an “accredited investor” as follows:

With regard to individuals, the proposed rule would add the term “spousal equivalent” to the definition of a spouse, and give accredited investor status to individuals:

• that have certain professional certifications or designations or other credentials; or
• whose status as a private fund’s “knowledgeable employee.”

With regard to entities, the proposed rule would expand the list of entities, including, but not limited to:

• entities that meet an investments test; and
• family offices with at least $5,000,000 in assets under management and their family clients.

Background

Under the U.S. federal securities laws, a company that offers or sells its securities must register the securities with the Securities and Exchange Commission (“SEC”) or qualify for an exemption from registration.[1] Regulation A+ and crowdfunding provide an exemption from registration that allow the company to raise capital to with unaccredited investors, however, the process for preparing these offering documents can oftentimes be just as burdensome on the company as registering the securities. Rule 506 of Regulation D provides additional exemptions from registration; for these exemptions, we recommend only raising capital from accredited investors. If the SEC is successful in broadening the scope of who is considered to be an accredited investor, more investors will hold accredited investor status, making it easier for private companies trying to raise capital using Rule 506.

What is an accredited investor?

Rule 501 of Regulation D of the Securities Act of 1933 (the “Securities Act”) defines an accredited investor. In summary, an accredited investor is: an individual that has a net worth of $1,000,000, excluding their primary residence; or an individual that has an annual income of $200,000 or more (or $300,000 combines with their spouse) for two years and has a reasonable expectation of meeting those income requirements in the upcoming year. Additionally, Rule 501 defines specific types of entities; and directors, executive officers, or general partners of the issuing company as being accredited.

Public Policy

The SEC depicts the “accredited investor” definition as a central component of Regulation D, stating that it is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.”[2] Considering this definition, it’s clear why the SEC would like to expand the definition of an accredited investor to “identify more effectively institutional and individual investors that have the knowledge and expertise to participate in our private capital markets and therefore do not need the additional protections of the registration under the Securities Act.”[3]

Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

[1] U.S. Securities and Exchange Commission, Accredited Investor, Fast Answers (Nov. 27, 2017), https://www.sec.gov/fast-answers/answers-accredhtm.html.

[2] U.S. Securities and Exchange Commission, Report on the Review of the Definition of “Accredited Investor”, Files (Dec. 18, 2015), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.

[3] U.S. Securities and Exchange Commission, 17CFR Parts 230 and 240, Release Nos. 33-10734; 34-87784; File No. S7-25-169, Amending the “Accredited Investor” Definition (Dec. 18, 2019), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.

How to Comply with Rule 144 as a Non-Affiliate

What is Rule 144?

Rule 144 under the Securities Act of 1933 is enforced by the Securities and Exchange Commission (“SEC”). When a shareholder acquires restricted securities or holds control securities, the shareholder must find an exemption from the SEC’s registration requirements in order to sell the securities in a public marketplace. One exemption is found under Section 4(a)(1), allowing shareholders to sell restricted or control securities in a public sale when specific conditions laid out in Rule 144 are met.

The specific conditions that must be met to rely on Rule 144 depend on whether or not the holder is an affiliate; this depends on the control that the individual/company has on the issuer company. Typically, affiliates are officers, directors, and 10% shareholders. Their shares are called “Control Securities” and have restrictions placed in them when sold to non-affiliates.

How do shareholders acquire restricted securities?

Shareholders often acquire restricted securities in two ways:

1. Private placement offerings, Regulation D offerings, or employee stock option plans, as compensation for services rendered or in exchange for providing start-up capital to the Company.[1] These are unregistered, private transactions that restrict stock from being sold in the public marketplace.
2. The shareholder buys securities from a controlling person or affiliate. Even if the securities were not restricted in the affiliate’s hands, they become restricted through the sale because they are control securities.

When securities are restricted, a restrictive legend is usually stamped on the back of the stock certificate, prohibiting its sale in the public marketplace unless they are registered with the SEC or are exempt from the registration. When a buyer acquires control securities, the stock certificate is not usually stamped with a restrictive legend but the restrictions still apply.

Rule 144 Non-Affiliate Conditions

For a non-affiliate to sell their restricted stock on the public marketplace using Rule 144, they must meet these conditions:

1. The shareholder must satisfy the holding period by holding the shares for a certain period of time.[2] If the company is a “reporting company” and is subject to the reporting requirements of the Securities Exchange Act of 1934, then the seller must hold the securities for at least six months. If the company is not subject to reporting requirements, then the shares must be held for at least one year.
   • Tacking can help a non-affiliate shareholder satisfy the holding period. If an individual or entity purchases restricted securities from another non-affiliate, the shareholder can tack on their holding period to the non-affiliate’s holding period.
2. There is adequate current information about the company publicly available. For reporting companies, this means compliance with the periodic reporting requirements of the Exchange Act.[3] For non-reporting companies this means that company information is publicly available, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements.[4]

Rule 144 can be used to sell restricted or control securities of the company in the public marketplace, provided certain conditions are met. If you’re an affiliate within the meaning of Rule 144, then you will be subject to additional requirements. Oftentimes the company’s transfer agent will require a Rule 144 legal opinion letter stating that these requirements have been satisfied before the restrictive legends can be removed.

Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help individuals remove the restrictive legends on the back of their stock certificates in order to sell the securities in the public marketplace by providing Rule 144 legal opinions. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

[1] Rule 144(a)(3).

[2] Rule 144(d).

[3] Rule 144(c)(1).

[4] Rule 144(c)(2).

August 13, 2019

The Securities and Exchange Commission (“SEC”) charged Antonio Bravata, a repeat securities law violator, with securities fraud after learning that Bravata was offering securities of a company he owned and controlled while serving his sentence for another Ponzi scheme. The SEC was able to put a stop to the securities offering before any money was raised.

According to the SEC, a Ponzi scheme “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

Bravata was serving out the end of his 5-year federal prison sentence on home confinement as a result of a previous investment fraud with BBC Equities when his latest scheme to defraud investors of their money was uncovered by the SEC. Antonio Bravata was offering securities in a company called Primo World Ventures, LLC (Primo) that he had formed with the help and guidance of his father, John Bravata. John Bravata is currently incarcerated for masterminding the BBC Equities $50 million Ponzi scheme that his son, Antonio Bravata, had also been a part of.

Exactly like the BBC Equities scheme, Antonio Bravata planned to use the money given to him by new investors to pay off old investors, all while taking the biggest cut for himself.

Primo was very similar to BBC Equities, as Antonio Bravata modeled the Primo offering documents off of those that had previously been given to the investors of BBC Equities. The main difference was that with Primo, Antonio Bravata’s name was nowhere to be found. Both Antonio Bravata and John Bravata concealed their involvement in the company behind the façade of an extensive team of analysts, lawyers, and professionals who did not actually exist. In reality, Antonio Bravata was a one man show who ran day-to-day operations, filed Primo’s articles of organization, prepared the offering documents, and obtained permission from a financial institution to hold Primo securities in IRA accounts. While John Bravata advised his son and a former BBC Equities salesman assisted, the involvement of other executives or professionals was simply an attempt to create legitimacy where there was none.

The SEC uncovered the fraud before Antonio Bravata was able to complete any sales of Primo securities, saving many potential investors from losing their money and stopping Antonio Bravata’s plan.

The SEC does not tolerate Ponzi schemes and it remains constantly vigilant to potential schemes. Oftentimes officers can find themselves in a position where they are tempted to pay off prior investors with new investor funds and a company can quickly find itself in a scenario where it unknowingly commits a securities violation. Our firm can readily identify potential issues with securities offerings and prepare compliant investment documentation. More commonly, if you find yourself involved in an investment offering that promises big, consistent returns up front with little to no risk, you may have a Ponzi scheme on your hands.

Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help companies prepare compliant offering materials and individuals make secure investments. Additionally, if you or your company has received a subpoena from the SEC, we can assist you. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

SOn December 21, 2018, the Securities and Exchange Commission (“SEC”)announced settled charges against New York-based investment advisers American Portfolios Advisers Inc. (“APA”) and PPS Advisors Inc. (“PPS”), and PPS’s CEO Lawrence Nicholas Passaretti. The advisers selected mutual fund share classes inconsistent with their client disclosures. As a result, the firms and the CEO will pay an amount exceeding $1.8 million and the payment amounts will be returned to injured investors.

APA invested advisory clients in mutual fund share classes that charged 12b-1 fees instead of share classes of the same funds that were less expensive and available. APA’s disclosure did not adequately inform its clients of the conflict of interest presented by its share class selection practices. According to the charging order, APA received $850,000in avoidable fees as a result of its investment practices. APA incorrectly stated that its investment adviser representatives (“IARs”) either did not receive 12b-1 fees, or alternatively, only selected the more expensive share classes when less expensive classes of the same funds were not available. Further, by investing clients in mutual fund share classes that charged these fees in place of less expensive share classes of the same funds, APA violated its duty to seek best execution for those transactions.

PPS and its CEO, Lawrence Nicholas Passaretti, committed similar disclosure violations as APA when they also invested advisory clients in mutual fund share classes that charged 12b-1 fees, even though less expensive share classes of the same funds were available without fees. According to theSEC’s order, PPS failed to disclose that its IARs had a conflict of interest because of the additional compensation IARs receivedwhen investing advisory clients in a fund’s fee-paying share class instead of an available, less expensive share class of the same fund. PPS also incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients. Similar to APA’s actions, PPS’s invested in mutual fund share classes that charged fees, which was inconsistent with PPS’s duty to seek best execution for those transactions.

Chief of the SEC Enforcement Division’s Management Unit,C. Dabney O’Riordan,said, “Advisers must be vigilant in disclosing all conflicts of interest arising from compensation received based on investment decisions made for clients. The documents these advisers provided to clients were incorrect and investors were harmed. We are continuing our efforts to stop these violations and return money to harmed investors as quickly as possible.”

If you have questions about your company’s compliance with federal securities laws or are unsure if your company is providing adequate disclosures to investors, call Wilson, Bradshaw& Cao, LLP today.