U.S. OTC ISSUERS WITH CONNECTION TO BC BECOME SUBJECT TO BC REGULATORY REQUIREMENTS

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On September 15, 2008, the new BC Instrument 51-509 – Issuers Quoted in the U.S. Over-the-Counter Markets (“51-509”) will come into force. According to the British Columbia Securities Commission (the “BCSC”), 51-509 was adopted primarily to improve disclosure and compliance by United States Over-the-Counter (“OTC”) issuers with significant connections to British Columbia (“BC OTC Issuers”), discourage the manufacture and sale of OTC shell companies for abusive purposes, disrupt abusive promotions and hold dealers responsible for their trading activities in the OTC market.

Issuers subject to the new rules will be required to comply with British Columbia’s continuous disclosure requirements for reporting issuers, including timely disclosure of material changes and many other requirements. Directors and officers of these issuers will be required to file personal information forms disclosing their qualifications and backgrounds and file insider reports.

BC OTC Issuers that report under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) will be able to use the documents they file with the U.S. Securities and Exchange Commission (the “SEC”) to satisfy most of the 51-509 continuous disclosure requirements. BC OTC Issuers whose securities are quoted on the Pink Sheets LLC that do not report under the Exchange Act will be required to comply with applicable financial statement, disclosure and other reporting requirements or will be in breach of British Columbia law.

Once the new filing requirements are in force, the BCSC has stated that it intends to carry out continuous disclosure reviews of BC OTC Issuers. Significant non-compliance will likely result in, among other things, a cease trade order of the issuer’s securities in British Columbia, and possibly other sanctions. Further, the BCSC has gone to lengths to show that they are co-operating with the SEC in this new endeavor, and we expect that sanctions imposed by the BCSC on a BC OTC Issuer will likely result in increased SEC scrutiny of the company and its insiders.

For the rest of the article please go to:

http://www.cwilson.com/newsletters/securities/slb-aug08.htm

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PART 3 – RESALE OF PRIVATE PLACEMENT SECURITIES

Resale of Seed Stock

10 (1) The exemptions in securities legislation from the registration requirement or the prospectus requirement does not apply to a trade of a security of an OTC reporting issuer on or after the ticker-symbol date, if the security was acquired on or after September 15, 2008 and before the ticker-symbol date, except for the exemption in section 2.16 of National Instrument 45-106 Prospectus and Registration Exemptions.

(2) A person must not trade a security of an OTC reporting issuer that the person acquired on or after September 15, 2008 and before the ticker-symbol date unless:

(a) the certificate representing the security carries the legend, or the ownership statement issued under a direct registration system or other electronic book entry system relating to the security bears the legend restriction notation, set out in subsection 11(2),

(b) the person trades the security through an investment dealer from an account at that investment dealer in the name of that person, and

(c) the investment dealer executes the trade through the OTC Bulletin Board or Pink Sheets.

If you would like to review all of the possible rule changes please go to:

http://www.bcsc.bc.ca/policy.aspx?id=6544

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First of all, get the company you are vending into the OTCBB shell audited BEFORE you try to buy the shell. Here are the reasons. As much as you distrust Americans they distrust you more. So if you can’t provide a business plan of the company with audited financials no one will believe you have a real deal and they will not sell you their shell. Most Sellers understand they have to perform proper due diligence on the Buyer prior to selling the shell in case something goes wrong after the transaction. Think of it from our point of view. If there is an investigation into a foreign Company trading on the OTCBB chances are the Seller is the one who is going to take the heat from the SEC because he lives in the US and you are thousands of miles away and out of jurisdictional reach of the SEC.

Secondly, why would anyone spend $600,000 on a shell but not $20,000 to $40,000 on an audit prior to the purchase of the shell. This one I am still trying to figure out. Now I know there are brokers or consultants out there that want to buy a shell and later identify the company they are going to vend in but, unless you are a licensed broker-dealer or can demonstrate a history of previous successes, most likely no one is going to take a flyer on a future unnamed company that is going to end up in their shell at some later date.

Lastly, you don’t have to purchase a 90% plus delivery shell. The PERCENTAGE OF OWNERSHIP DOESN’T MATTER! A Buyer can take any shell that has over 51% and perform a reverse stock split in conjunction with the reverse merger and end up with a 99% shell. If I sell you a 90% delivery shell with 100,000,000 shares you still have 10,000,000 shares left in the float after you purchase the shell which means you still have to perform a reverse stock split. So, unless your needs include free trading shares of stock, the percentage of delivery doesn’t matter as long as you are getting at least 51% of the shares.

If you would like further explanation please feel free to call me direct at:

Ventana Capital Partners

Ralph Amato

858-729-0075

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The one exception has been OTCBB shells with free trading shares.  These shells are difficult to find and have been very popular this year.  Currently, there seems to be a shortage of these types of shells in the marketplace.  Experienced Consultants and Buyers understand the value of the free trading shares and how they can be used to in conjunction with private placements to raise capital.  Therefore, they do not have a problem paying a premium for these types of shells.

Stay tuned!  It will be interesting to see if we can meet or exceed the number of reverse merger transactions that were closed in 2006. 

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SEC Gets Tough 

The SEC first tightened the screws when they passed a new rule in 2000 requiring ALL OTCBB shells to become fully reporting.  The SEC introduced additional rules that went effective in August of 2005 requiring shell companies to file an 8K within four days of a change of ownership (i.e. upon merging with an operating company).  The 8K transactions are often triggered by one of the two following scenarios:

• a “reverse merger,” in which a private business merges into the shell company, with the shell company surviving and the former shareholders of the private business controlling the surviving company; or
• a “back-door registration,” in which the shell company merges into a formerly private company, with the formerly private company surviving and the shareholders of the shell company becoming shareholders of the surviving company.

If you want read a great article that articulates the changes concerning this issue go to: http://www.duanemorris.com/alerts/alert1921.html

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OTCBB Shells

Over the Counter Bulletin Board (OTCBB) shells are public companies that are fully reporting. In other words they file quarterly reports (10Q) and annual reports (10K) with the Securities and Exchange Commission (the “SEC”). The Companies are audit reviewed quarterly and fully audited one a year by a PCAOB certified CPA firm. They are considered a “shell” because they have minimal operations. OTCBB shells have to adhere to the same stringent rules and regulations mandated by the SEC as their counterparts who are listed on NASDAQ, AMEX and the NYSE.

The cost to acquire an OTCBB shell can be anywhere between $500,000 and $1,000,000. The price fluctuation has to do with several variables: i.e. liabilities, number of shareholders, free trading shares, etc.

Pink Sheet Shells

Pink Sheet Shells (PSS) are public companies that are NOT fully reporting. Therefore, they have no one that is “watching over them” on behalf of the investing public. They have no audited financials and there is usually very little information about their history available to a prospective Buyer. So why do Buyers want them? First of all, PSS sell for $170,000 to $200,000, considerably cheaper than an OTCBB shell. Secondly, they are already approved for trading by the NASD. However, to gain listing on the OTCBB the Buyer of the PSS must have the new company complete a two year audit by a PCAOB certified CPA firm and then file a Form 10 registration statement with the SEC. What most Buyers do not understand is that the SEC loathes Pink Sheet deals because it is near impossible for the new Buyer to supply the history of the PSS prior to his purchase. The SEC surely will ask the registrant to supply all documentation from inception of the shell. The result is a long drawn out process that will take several months and cost the Buyer hundreds of thousands of dollars in attorney fees. And there is no guarantee your registration statement will go ‘effective” (gain approval). Now if you can find a PSS with documentation from its inception (and I am yet to find one) then you can complete your registration process in three to four months.

The real question is “how much time do you have and how soon do you want to raise capital for your company”. Raising capital via a PIPE transaction for an OTCBB shell that is fully reporting is more viable than raising capital at a steep discount for a PSS.

Don’t be penny wise and dollar foolish. The purchase of an OTCBB shell is quicker and a cleaner transaction. Purchasing a PSS is a lot like buying a “pig in a poke” whose meaning is “An offering or deal that is foolishly accepted without being examined first”.

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The 35 companies have been quoted on the Pink Sheets over-the-counter stock service. They are not listed on any exchange or on the OTC Bulletin Board, the SEC said.
The SEC estimated that 100 million such stock-trading e-mail messages are sent each week, often triggering dramatic spikes in share prices and trading volumes before the spamming stops and investors lose their money, the SEC said.

“When spam clogs our mailboxes, it’s annoying,” SEC Chairman Christopher Cox said in a statement. “When it rips off investors, it’s illegal and destructive. Today’s trading suspensions, and actions that will follow, should send a clear message to spammers: the SEC will hold you accountable.”

The SEC said it continues to investigate the source of the spam. Please read the SEC Press Release regarding this action:
http://www.sec.gov/news/press/2007/2007-34.htm
Please read other related stories:
http://www.cnbc.com/id/17517940
http://www.forbes.com/security/2007/03/08/sec-spam-stock-tech-security-cx
http://www.marketwatch.com/news/story/sec-suspends-trading-35-penny/story.
http://www.theregister.co.uk/2007/03/08/
http://news.morningstar.com/news/ViewNews.asp?

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The following information has been compiled using statistics from the OTCBB activity reports.  To the best of our ability here is what we have been able to uncover.  This will give our readers an idea of where the OTCBB is heading.

In the first three quarters (nine months) of 2006 approximately 130 OTCBB Companies graduated from the OTCBB to exchange listings on AIM (London) NASDAQ, American or New York Stock Exchange.  Additionally, Over 300 companies moved from pink sheets to the OTCBB.

During the same time period, 262 securities were delisted from exchanges (like the NASDAQ, American and New York Stock Exchange) to the OTCBB and 307 OTCBB companies were demoted from the OTCBB to “other OTC” markets, like the pink sheets.

There were 3,304 securities quoted daily on the OTCBB in July 2006 compared with 3,245 in July 2005.

The OTCBB continues to thrive.  During July 2006 over 37 billion shares traded in just under 1,000,000 transactions.  This is an amazing number considering that
broker dealers can not recommend OTCBB stocks to their customers because it violates the penny stock rules (recommending stocks under $5 per share).

Additional information can be found on the OTCBB website. A wealth of data is available there, including companies that have “graduated” to other exchanges, new additions to the OTCBB and other market statistics (click on “Market Statistics” and choose the data you want).

The OTCBB website is a great resource for information on OTCBB companies.  The site allows investors to research SEC filings, view stock charts, news and depth of trades on individual OTCBB listings.

While the “boiler rooms” and the pump and dumps have been replaced with more sophisticated types of illegal trading the SEC is cracking down hard on offenders.  Just this past week the SEC arrested 13 people including a husband and wife attorney’s (See article).  In a second, but unrelated, story W. Zehil, a former McGuireWoods law firm partner, was arrested on fraud charges for allegedly making almost $18 million in illegal trading profits in the securities of his clients.
(See article).

For more information . . .

. . . check out the Over-the-Counter Bulletin Board website (www.otcbb.com)

. . . visit the National Association of Securities and Dealers website (www.nasd.com) and/or

. . . visit the Securities and Exchange Commission website (www.sec.gov)

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So how did this ugly duckling transform itself into a swan? Over the past several years there have been several changes made by the Securities and Exchange Commission (the “SEC”) that actually helped to legitimize the reverse shell merger.

The Over the Counter Bulletin Board (OTCBB) was established in 1990. The SEC mandated the OTCBB as an electronic trading medium that revealed real-time quotes, volume, etc., which is identical to a stock exchange but the securities were not listed on an exchange.

The concept was great, but in reality there were some problems. Initially, the SEC did not require OTCBB companies to report any information on their company or its financials. No reporting, no compliance. Companies were not required to file quarterly (10Q) or annual reports (10K). This led to wide spread stock scams and established a reputation for shells that was less than desirable.

These scam artists were finally eradicated in the late 1990’s when the National Association of Securities and Dealers (the “NASD”) and the SEC took action by requiring all securities trading on the OTCBB to file quarterly and annual reports with the SEC. Now all OTCBB companies had to become “fully reporting” just like NASDAQ, American and NYSE listed companies. The only difference between a stock trading on the OTCBB and NASDAQ was that the OTCBB companies did not meet the exchange listing requirements – earnings, net assets and stock price.

These new rules had a positive effect on the marketplace. Prior to the new rules taking effect there were over 7,000 securities trading on the OTCBB. Afterwards, the number dropped to just over 3,300.

SOX and the OTCBB

The debacles of companies like Enron and WorldCom in the early 2000 led Congress to overreact and pass Sarbanes Oxley (SOX) legislation in 2002. The new rules almost put an end to companies listed on the OTCBB. Though the new stringent rules were designed for compliance purposes for large companies they did not take into account the cost factor for small OTCBB companies. The SEC has extended the start date for certain SOX compliance issues for smaller companies for the past five years. Today it appears that both Congress and the SEC are leaning towards some type of exemption for small public companies. Also, after the new rules were implemented it made it very clear that anyone involved in stock manipulation scam was going to jail. Since then the reputation of the OTCBB has slowly risen into positive territory.

The OTCBB is operated by NASDAQ and the NASD. Today there are approximately 3,300 securities listed on the OTCBB. They must adhere to the same stringent SEC reporting requirements as companies that are listed on an exchange.

Today, reverse mergers have replaced the small IPO. Last year (2006) there were more reverse mergers closed than IPO’s.

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