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. Promoters communicate with broker-dealers, issuers, shareholders, potential investors and other market participants to increase awareness of and interest in an Issuer and its securities.
Investor Relations activities are not illegal or problematic when performed in compliance with federal and state securities laws. Because issuers and Promoters ignore or are not aware of the laws applicable to investor relations activities, they often find themselves the subject of criminal actions by the Justice Department and civil actions by the SEC.
Some investor relations activities are intended to provide disclosures about an issuer to its Shareholders. A Promoter can provide investors with previous disclosures of factual information concerning the issuer, and copies of disclosures that have been filed with the Securities and Exchange Commission ("SEC"), FINRA or prepared by registered brokers or investment dealers, or published in journals, newspapers or journals.
SEC Disclosure Requirements.
Generally, Investor Relations Activities by their very nature are expected to significantly impact the trading price and volume of an issuer's securities, and therefore are deemed material. As such, both SEC reporting and non- reporting issuers as well as Stock Promoters have an obligation to provide disclosure of the terms of any agreement or arrangement, oral or written, for investor relations services. Additionally, disclosures of the background, ownership, business and place of business of the Promoter providing investor relations services, the relationship between the Issuer and the Promoter providing the services, and whether the Promoter owns, directly or indirectly, any of the Issuers securities, or any right or intent to acquire them are required.
Disclosure of the Promoter's services should also be made by the Issuer including:
(i) the period during which the investor relations services will be provided,
(ii) a general description of the investor relations activities to be carried out,
(iii) the cost of the services to the Issuer, and
(iv) all direct and indirect consideration, including the timing of payments and source of funds provided to the Promoter.
Disclosure Requirements of the Promoter
Section 17(b) ("17(b)") of the Securities Act of 1933, as amended (the "Securities Act") provides the disclosure requirements relevant to compensation paid to investor relations providers. 17(b) requires full disclosure of the Stock Promoter's compensation and services. Stock Promoters often serve a dual role acting as both a Stock Promoter and a Finder. The use of unregistered Finders also creates liability for both reporting and non-reporting issuers who engaged a Finder. Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act") generally requires any person who effects securities transactions to register with the SEC as a broker-dealer. Finders, like Stock Promoters may become involved in various securities transactions including matters other than raising capital, which includes reverse mergers, direct public offerings, go public direct transactions and funding of public shells.
17 (b) requires disclosure of:
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.
Application of Section 5
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 as "free trading".
Application of Section 15
Section 15 of the Securities Exchange Act of 1934 (the "Exchange Act") requires a person acting as a "broker" or a "dealer" in securities transactions 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 a 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.
Actions of the Stock Promoter including improper touting of an issuer's securities can impact an issuer's eligibility for electronic trading from Depository Trust Company ("DTC"). Often improper investor relations activity results in DTC placing a "Chill" or "Global Lock" on the issuer's securities making it impossible for the affected issuer to establish an active market in its securities.
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