The Securities and Exchange Commission (SEC) rules and regulations are in place to ensure investors are protected, and markets are fair and efficient. Failure to produce current information can result in a company running afoul of federal securities laws and limit the company’s ability to sell stock. Depending on the situation, noncompliance or a violation of securities laws can also result in the company and its leaders being subjected to liability. In this blog post we will discuss what happens if you’re not SEC compliant.
Specifically, a company may face the following consequences if they are not SEC compliant: rescission, Section 12(k) suspension, or Section 12(j) revocation.
In the event a company does not comply with the registration requirements set forth in the Securities Act, investors might be entitled to the right of rescission. Rescission means the company would have to return the investor’s investment, in addition to any interest accrued. This can be especially difficult for startup companies that have used the capital raised toward operations.
Section 12(k) Suspension
Disregarding the SEC’s regulations concerning filing can result in a Section 12(k) suspension of trading. With this penalty, the SEC requires that all trading activity must cease for up to ten (10) days — this is to protect investors and the public interest. While a 12(k) suspension is only a temporary penalty, the price of an offering can usually decrease sharply as a result because of a lack of confidence in management.
Once the suspension period ends, a broker-dealer is usually not permitted to buy or sell the previously suspended stock until specific requirements are met. Before soliciting or resuming quotations, Form 211 must be filed with FINRA, confirming that the broker-dealer has satisfied the necessary requirements to comply with Rule 15c2-11 and FINRA Rule 6432.
Section 12(j) Revocation
Revocation proceedings under Section 12(j) of the Securities Exchange Act of 1934 can be commenced when an SEC reporting company fails to comply with its reporting obligations or is delinquent in satisfying any of the SEC’s requirements. Unlike a Section 12(k) suspension which is temporary, a 12(j) revocation prohibits broker-dealers from effecting transactions with the issuer’s securities.
A Section 12(j) revocation is a death sentence for a reporting company and can end all public trading in its stock. Companies have few options available when facing a Section 12(j) proceeding. With the assistance of an experienced securities litigation attorney, they may be able to argue relevant exculpatory facts to the SEC or at an administrative proceeding and submit all missing Form 10-Ks and 10-Qs. A company may also be able to resume trading by preparing a Form 10 registration statement to re-register the stock. This option is time-consuming, costly, and uncertain; companies should ensure they remain current in their obligations to avoid suspension or revocation in the first place.
Avoiding Noncompliance Consequences to Your Company
To avoid any of the above adverse consequences and the resulting harm to your company, it primarily comes down to taking the SEC’s reporting obligations seriously. Not only can your company be at risk if it is delinquent in its filings — but officers, directors, and others could be banned from serving in their positions depending on the circumstances. Ensuring compliance simply means making sure your company is in the right and the required filings are timely made.
Contact an Experienced New York Securities Attorney to Learn More
The SEC’s rules and regulations for SEC compliance can be confusing to understand. It’s best to have a skilled attorney on your side who can best advise you regarding SEC compliance matters and other securities issues. Brinen & Associates provides a wide range of legal services for securities matters in various industries including making sure you’re SEC compliant. Call (212) 330-8151 or send us a message to schedule a consultation.