Investor Relatio
ns 101
Investor relations involves the publication of information about a public company to increase its stock price and trading volume. The person who publishes this information is sometimes referred to as a “Stock Promoter”. Stock Promoters use a variety of media to publish information including spam email, internet and direct mail newsletters, stock websites and press releases. While investor relations activity is not illegal, Stock Promoters are often the target of criminal actions by the Justice Department and civil actions by the SEC.
Section17(b) (“17(b)”) of the Securities Act of 1933, (the “Securities Act”) is an anti-fraud statutes that requires publishers of information to provide full disclosure of their compensation including:
i. the type of consideration (securities or cash) and if compensation is in securities, the promoter must disclose whether the securities are restricted or unrestricted;
ii. the amount of securities or cash paid;
iii. the sources of the compensation (directly and indirectly) and if compensated by a third party shareholder or corporate entity, the shareholder or control persons of the entity must be identified by their individual names; and
iv. If a corporate entity is the publisher of the information, the control persons of the corporate entity must be disclosed.
17(b) also requires that the compensation be disclosed in every press release, as well as other published documents, including emails or faxes. The disclosure must state the relationship of the payer to the company being promoted. In the case of the SEC reporting company that engages a Stock Promoter, the issuer should disclose the transaction and compensation in its periodic filings.
Stock Promoters are often paid for their services with shares of the companies they
promote. Stock Promoters receive free trading shares through a variety of methods; however, the shares are rarely registered and issued in compliance with the securities laws. These bogus methods include the issuance of free trading shares in reliance upon Rule 504 of the Securities Act, third party shareholder transfers, and debt conversion and other convertible securities such as promissory notes. If an issuer participates in investor relations activity or arranges for a third party shareholder to pay for investor relations services with its shares, the shares are restricted securities. The issuance of shares to the Stock Promoter under these circumstances becomes an offering made on behalf of the issuer and unless the shares are registered they are restricted securities.
Section 5 of the Securities Act makes it unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy any security, unless a registration statement has been filed as to such security.” In the case of stock promoters paid in securities they must either obtain registered stock or sell their shares in compliance with Rule 144. Section 5 imposes strict liability for sellers of unregistered securities even where they have obtained a legal opinion from a securities attorney to opine their securities are “free trading”.
Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires a person acting as a “broker” or a “dealer” in securities transaction to register with the SEC. Both brokers and dealers are persons who are “engaged in the business” of buying and selling securities. Brokers arrange securities transactions for others, whereas, dealers purchase and sell securities for their own accounts. For purposes of the Exchange Act, persons are “engaged in the business” of buying and selling securities if they demonstrate a “regularity of participation” in securities transactions. Participation in a single, isolated transaction is insufficient to require registration. Nevertheless, the SEC and the courts interpret the phrase “engaged in the business” broadly.
In determining whether a person has acted as an unregistered dealer, the primary question is whether they receive securities as compensation as a regular part of their business. If the stock promoter receives stock compensation from their clients routinely in exchange for services, they are a dealer and subject to the broker dealer registration provisions.
In determining whether a person has acted as an unregistered broker, other factors are considered, including whether the person i) solicited investors; ii) advised investors as to the merits of an investment; iii) received commissions or transaction-based remuneration; (iv) is selling, or previously sold, the securities of the same or other issuers; and (v) made investment recommendations. If the stock promoter has any contact other than making an introduction to investors or broker dealers he risks being deemed an unregistered broker.
The failure to be properly registered as a broker-dealer may subject that person to potential liability, including criminal penalties, fines, suspension, and disbarment. The potential harm to the company includes investor rescission rights. Investors have a rescission right, meaning that they could demand repayment of their entire investment without setoff or deduction. The company could also be subject to sanctions and penalties from federal securities regulators as an aider and abettor of the activities of the unregistered broker-dealer including fines, prohibition on future securities offerings, and criminal actions.
For further information about this article, please contact an SEC attorney at (561) 416-8956 or by email at info@securitieslawyer101.