One of the most important issues in a Pink Sheet company is to find paths to raise new money. Naturally, free trading stock has more marketability than restricted stock. A Pink Sheet company cannot file a registration statement with the SEC because they lack the necessary PCAOB audited financials.
In fact, if it was a former shell company, it cannot even sell stock privately to investors and ask them to wait a year to sell under Rule 144 because Rule 144 is not available for a former shell company.
One innovative solution some companies have tried is to do what is called a "Gypsy Swap."
In a Gypsy Swap, the company has a shareholder with free trading stock to sell his stock to a new, cash investor. The money goes to the company and the company issues restricted stock to the shareholder who had the free trading stock originally. The old shareholder keeps his stock position, the new investor gets free trading stock, and the company gets the money.
The SEC does not look kindly on end runs around Section 5 of the Securities Act of 1933. This is the section that requires new sales of stock to be registered with the SEC. Consequently, the SEC has taken the position for a number of years that Gypsy Swaps are violations of Section 5 and the shares received by the new investor are restricted securities under Rule 144(a)(3).
In Zacharais v. SEC, the Circuit Court of D.C. agreed with the SEC, finding that the new investor and the original shareholder were "underwriters," or participants in the distribution.
A majority of the Court held that the appropriate measure of the disgorgement penalty is 100% of the proceeds of the sales.
The Court found that as the securities in question had appreciated, the company may not have had to disclose the risk that the buyers would rescind the transaction, causing the company material liability. The Court remanded this issue to the SEC.
What is important to you here? Easy, do not do Gypsy Swaps. If you do, you may face rescission if the stock is down, disgorgement penalties and SEC sanctions.
In fact, if it was a former shell company, it cannot even sell stock privately to investors and ask them to wait a year to sell under Rule 144 because Rule 144 is not available for a former shell company.
One innovative solution some companies have tried is to do what is called a "Gypsy Swap."
In a Gypsy Swap, the company has a shareholder with free trading stock to sell his stock to a new, cash investor. The money goes to the company and the company issues restricted stock to the shareholder who had the free trading stock originally. The old shareholder keeps his stock position, the new investor gets free trading stock, and the company gets the money.
The SEC does not look kindly on end runs around Section 5 of the Securities Act of 1933. This is the section that requires new sales of stock to be registered with the SEC. Consequently, the SEC has taken the position for a number of years that Gypsy Swaps are violations of Section 5 and the shares received by the new investor are restricted securities under Rule 144(a)(3).
In Zacharais v. SEC, the Circuit Court of D.C. agreed with the SEC, finding that the new investor and the original shareholder were "underwriters," or participants in the distribution.
A majority of the Court held that the appropriate measure of the disgorgement penalty is 100% of the proceeds of the sales.
The Court found that as the securities in question had appreciated, the company may not have had to disclose the risk that the buyers would rescind the transaction, causing the company material liability. The Court remanded this issue to the SEC.
What is important to you here? Easy, do not do Gypsy Swaps. If you do, you may face rescission if the stock is down, disgorgement penalties and SEC sanctions.
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