On Thursday, December 27, 2018 the Securities and Exchange Commissionbegan operation within its plan during a federal government shutdown. They say they have “staff available to respond to emergency situations involving market integrity and investor protection.” That meansthat out of the 4,426 active staff employees of the SEC, 175 will be retained to protect life or property, 110 of them, who are engaged in law enforcement, will continue working, and only one employee will be working part time on investor protection.The SEC”will be available to answer questions about fee calculations for filings during the partial shutdown, but they will not respond to other questions.”

The Investment Adviser Registration Depository system will continue to accept filings but the Division of Investment Management will not be available to provide advice. Certain SEC systems, which are contracted out to third parties, will remain in operation, including EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system that allows companies to electronically file initial public offerings and other crucial documents. The shutdown will have no impact on those services, but with the SEC not responding to those filings, it could cause a delay in several IPOs, as well as a lasting impact on the state of the IPO market in 2019.Smaller businesses, particularly those in need of an infusion of capital to continue operating, will bear the brunt of any IPO delays.

These limited and curtailed services will affect different investors in different ways, depending on their needs and objectives. The most critical harm to all investors could be that the SEC will only retain a few staff employees to review complaints from investors, but they will not be in a position to respond to those complaints, questions, or requests for information.

Market Watch reports that If the shutdown were to continue for a prolonged period, companies could end up with financial statements that have gone stale. That means they have reached a point where the quarterly financials included have become so old that the issuer needs to provide numbers for the subsequent quarter. Those numbers need to be audited to be included in a prospectus, creating another potential holdup.

However, the weak stock market in late 2018 and early 2019 signals that investors are being cautious, which may force new IPOs to devalue their prices.Also, the delay in IPO approvals may be a blessing for some IPOs, because, as the stock market strengthens, going into spring, the values may increase.

Navigating the securities markets can be difficult and confusing for those who do not work in it constantly. Without available help from the SEC, it can be more of a challenge.Fortunately, the law office of Wilson, Bradshaw & Cao will not be shutdown, but will be available to assist investors and business owners with professional legal advice on the securities market.

See: https://www.nyventurehub.com/2015/09/09/new-sec-guidance-on-what-constitutes-general-solicitation/

Rule 502(c) prohibits:

(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television and radio; and

(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

See: https://www.equitynet.com/crowdfunding-terminology/general-solicitation

A pre-existing relationship between the issuer and a potential investor is strong evidence that general solicitation has not taken place. A relationship is pre-existing if the relationship was formed before a securities offering commences, or when it was established through a registered broker-dealer or investment adviser before the registered broker dealer or investment adviser participated in the offering.

A pre-existing relationshipmay arise in business, social settings, or any other context. The general rule is that the pre-existing relationship must be of some duration and substance. The SEC defines a substantive relationship as “[a relationship] in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”

The relationship must be established from actual effort to get to know the person, rather than“just checking some box” or waiting a set amount of time.

See: https://www.wealthforge.com/insights/what-constitutes-a-pre-existing-substantive-relationship-in-a-506b-offering

The SEC has stated in past no-action letters that a third-party broker-dealer may establish a pre-existing relationship with a potential investor by sending the potential investor a generic form that providesenough information for evaluation of the potential investor’s financial circumstances. The generic form may not reference the offering the issuer is undertaking. See: http://www.wnj.com/files/Publication/a941cb2d-f6db-40da-9cb0-85b44f514c70/Presentation/PublicationAttachment/ba8ac6ec-6388-4a90-b2facb6b5b30328d/FAQ_Regarding_the_Private_Placement_of_Securities_under_Regulation_D_Rule_506.pdf

On February 14, 1975, Commissioner of Corporations of the State of California, Willie R. Barnes, issued a release on Repurchase Offers that commented on Section 25507 (b) of the Corporate Securities Law of 1968.(link to release)This release also discussed Rule 260.507 of the California Code of Regulations in the context of the rule’s requirements for issuing an offer under Section 25507 (b).

Section 25507 (b) bars suit if the buyer receives a written offer approved by the Commissioner before the suit begins. The written proposal must contain:

• an offer to repurchase the security for cash price (payable on delivery of the security);
• a cash offer to pay the buyer an amount recoverable by him under Section 25503 (link to 25503); or
• an offer to rescind the transaction by putting the parties back in the same position they were in before the transaction.

Rule 260.507 sets forth requirements related to an offer’s content. These requirements include thatan offer mustbe in writing and that an offer mustcontain necessary information about the offeree’s investment decision related to the offer.

Selective Offers

Rule 260.507 details the application requirements when seeking the Commissioner’s approval of an offer. Item 6(a) of the application form requires disclosure of any offer made to less than all investors as to whom liability may exist. Substantial unfairness results when offers are only made to selected shareholders, and there is only sufficient justificationfor partial repurchase offers in unusual circumstances. Lacking sufficient funds to meet offers if all shareholders accept is not a sufficient basis for according preferences to selected investors.

Valuation of Consideration

Item 6(b) of the application form requires a showing of the basis for the value of the initial consideration paid by the buyers when the initial consideration was not cash, but a cash repurchase offer is anticipated. It is unsatisfactory to consider the valuation of the consideration as merely nominal in particular circumstances. These situations include reorganizations, recapitalizations, or employee stock options.

Rescission

Section 25507 (b) states that when rescission is to be offered, the rescission must put the parties in the same situation they were in before the transaction occurred.Often, an offer will be considered illusory or misleading unless the obligations of the offeror and offeree (and sometimes third parties) are described. The obligations must include specific provisions stipulating the time frame when performance of an offer must be completed.

An offeree can commence an action under the statute if the offeree rejects the offer on the basis that offered damages or rescission are insufficientwhen there is reasonable doubt about the sufficiency of the offer. This condition is only imposed if the consideration paid by the offeree is not monetary, or if rescission is offered.

The Commissioner will generally require that adequate protection is afforded to securities and other transmitted property. The offer must be sent within thirty days after Commissioner approval. The specified time period could be extended if a showing Is made within a reasonable time after Commissioner approval.

Required Warnings in Offers

If all offerees accept and the total assets of the offeror are not enough to meet cash demands, a repurchase offer will generally not be approved. Information furnished to the offeree must include descriptions of situations where possible acceptances may jeopardize the offeror from continuing in business or where possible acceptances may imperil the interests of the offeree. Further, the offer must provide adequate warning to those who reject the offer if they discover that the issuer is finding it difficult or impossible to continue in business after rejection.

The Commissioner may impose a condition that operates to void the offer ifthe issuer is disabled from continuing business because of acceptances. This revives the right of offerees to assert their civil remedies.

Thirty Day Waiting Period

Section 25507 Subdivision (b)(3) provides a statutory “waiting period” of thirty days after the receipt of the offer when the offer cannot be accepted by the buyer. The purpose of the provision is to give the offerees adequate time to think about their interests in the matter whenconsidering potential complexities. This condition does not preclude an offereefrom rejecting the offer prior to the specified time period. The offeree may deem termination to be in his best interests and in this situation, the statutory waiting period does not serve public interest.

Legend Conditions

Subsection 8 D(9) stipulates that the possibility of an imposition of a legend condition must be disclosed in the offer. However, this disclosure is not mandatory where the facts are such that the imposition of a legend condition is a remote possibility.

The SEC suspended trading in the securities of Simex, Inc. due to concerns about inaccurate and
insufficient information in the marketplace regarding the company’s products and services and purported regulatory approvals. The SEC order was entered pursuant to Section 12(k) of the Exchange Act.

See: https://www.sec.gov/litigation/suspensions/2018/34-84460.pdf

Earlier this month, Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit, said that
the SEC “does not endorse or qualify custodians for cryptocurrency” and warned investors to be “skeptical of those attempting to sell digital assets” that make claims about future SECactions. Cohen stated that to allay confusion, the SEC will announce official actions regarding digital assets through official government sources. Examples of official government sources include agency press releases, the Federal Register, an agency’s official government website(SEC.gov, Investor.gov, or
CFTC.gov), or authorized public statements by the agency’s leadership.

See: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-watch-out-false-claims-about-sec

The SEC can suspend trading in stock for 10 days and can enjoin a broker-dealer from soliciting
investors until the broker-dealer has met reporting requirements. Pursuant to rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation can be issued unless they have “strictly complied with all provisions of the rule.”

The SEC’s Office of Investor Education and Advocacy has issued materials to educate investors,
including an Investor Bulletin on initial coin offerings and a mock ICO website. Additional information is available on SEC.gov/ICO and Investor.gov.

If you have questions about SEC regulation of cryptocurrency transactions and complying with rule 15c2-11, call the Bradshaw Law Group before publishing statements that may lead to SEC enforcement action.