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Raising Capital Under the New SEC Rule 506 (c)

By Gisella Rivera

Effective September 23, 2013, issuers can use general solicitation and advertising in an offering of its securities provided that each and every purchaser is an accredited investor (“Rule 506(c)”). To satisfy its obligation to verify an investor’s accredited investor status, an issuer can:

If a purchaser of the offered securities subsequently turns out not to be an accredited investor, the offering will not lose its exemption from registration if the issuer can prove that it has taken reasonable steps to verify accreditation (such as the safe harbor steps described above) and did not know, at the time of the purchase, that the investor is not an accredited investor. To determine whether the steps taken to verify an investor’s accredited investor status are reasonable, issuers should analyze the facts and circumstances of the purchaser and the transaction on a case-by-case basis…

Major Changes to Rule 144 - Small Businesses Rejoice

By Ira R. Halperin

On November 15, 2007, the Securities and Exchange Commission (SEC) voted unanimously to adopt several rule amendments designed primarily to enable smaller companies to raise capital more effectively and ease some of the historically burdensome reporting and disclosure requirements. In particular, the SEC adopted certain amendments to Rule 144 under the Securities Act of 1933, as amended (the Securities Act), most significantly the shortening of the minimum holding period from one year to six months for resales of “restricted securities” (securities acquired in unregistered, private sales from the issuer or an affiliate of the issuer, which is a person or entity who is controlling, controlled by or under common control with the issuer) of “reporting companies” (issuers subject to the reporting requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended (the Exchange Act)).

Section 5 of the Securities Act generally requires that stock and other securities be registered with the SEC prior to their offer or sale, unless the transaction or the securities themselves are exempt from registration. Rule 144, originally adopted by the SEC in 1972, provides a safe-harbor setting forth when, and under what conditions, restricted securities may be resold into the public marketplace without registration under the
Securities Act…

Internal Control Guidance For Small Companies

By Ira R. Halperin

On July 30, 2002, President Bush signed into law the Sarbanes Oxley Act of 2002 (“SOX”). Rule 404 of SOX requires public companies to annually provide investors with an assessment of the quality of their internal control over financial reporting. Accelerated filers, typically large public companies, were required to comply with the requirements of Rule 404 for its first fiscal year ending on or after November 15, 2004. Smaller public companies, as non-accelerated filers, are required to comply with the requirements in their first fiscal year ending on or after July 15, 2007.

Much has been written about the tremendous cost, both in out-of-pocket expenses and the diversion of management’s time and energies, which large companies have incurred in complying with these requirements. This has created much concern about the ability of smaller companies, which typically have significantly less financial and management resources, to comply, and the resulting impact on their businesses. In this regard, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) has recently taken a step to aid these filers in meeting their obligations in complying with Rule 404.

In 1992, COSO published Internal Control – Integrated Framework (the “Framework”), a multi-volume report establishing a common definition of internal control. The Framework provides a means for organizations to assess and improve their control systems. The Framework has been widely accepted as the internal control standard for public companies and auditors trying to comply with SOX. However, after a flood of complaints that the Framework was not well suited for smaller companies, in January 2005 COSO initiated a project designed to provide guidance for implementation by these organizations(1)

In late October 2005, COSO released its exposure draft. In it COSO indicated that while there are some differences in approach, many of the techniques and concepts of good control are the same whether dealing with a large company or a small company. The exposure draft is intended to explain how smaller companies can achieve effective internal controls in a more efficient manner.

The exposure draft is not a checklist and does not suggest that the same set of controls must be implemented in every company or even would work for every company. However, the draft proposes twenty-six fundamental principles, derived from the five sections of the Framework (control environment, risk assessment, control activities, information and communication, and monitoring) that smaller companies should address in enacting an effective internal control system over financial reporting. The guidance includes examples of approaches that other companies have taken to incorporate the principles. COSO suggests that company management review the various approaches and consider the cost effectiveness of each to their organization.

COSO emphasizes that each individual company should determine the most appropriate and feasible methods for accomplishing each of the twenty-six fundamental principles. When a certain principle is not being met it should be discussed with top management and the company’s board of directors to decide if the internal control implemented is effective. Achievement of these principles demonstrates that controls are in place throughout the company.

While the COSO report will not alleviate the Rule 404 compliance burden on small companies, it will at least provide guidance and a better understanding of the various approaches that these companies may consider. COSO is seeking comments on the exposure draft through the end of the year and hopes to issue final guidance during the first quarter of 2006.

The basic principles are:

  1. Integrity and Ethical Values;
  2. Importance of Board of Directors;
  3. Management’s Philosophy and Operating Style;
  4. Organizational Structure;
  5. Commitment to Financial Reporting Competencies;
  6. Authority and Responsibility;
  7. Human Resources;


  1. Importance of Financial Reporting Objectives;
  2. Identification and Analysis of Financial Reporting Risks;
  3. Assessment of Fraud Risk;


  1. Elements of Control Activity;
  2. Control Activities Linked to Risk Assessment;
  3. Selection and Development of Control Activities;
  4. Information Technology;


  1. Information Needs;
  2. Information Control;
  3. Management Communication;
  4. Upstream Communication;
  5. Board Communication;
  6. Communication with Outside Parties;

Section 5 – MONITORING

  1. Ongoing Monitoring;
  2. Separate Evaluations;
  3. Reporting Deficiencies;

Three additional principles have been identified by COSO relating to the roles that different parties play in the internal control. The roles and responsibilities are directly taken from the 1992 guidance.Section 6 – ROLES AND RESPONSIBILITIES

  1. Management Roles;
  2. Board and Audit Committee Roles;
  3. Other Personnel.
1. PricewaterhouseCoopers was engaged by COSO to conduct the project. In addition, because of similar initiatives at the SEC and PCAOB, those organizations each provided observers to the project to ensure coordination.