Court Orders Relief Defendant Dor-Ann Stubos In Microcap Fraud Scheme To Pay Over $2 Million

The U.S. District Court for the Southern District of New York issued a final ruling on April 15, 2024, mandating relief defendant Dori-Ann Stubos to pay over $2.3 million in disgorgement and prejudgment interest.

Summary Of The Case

Stubos allegedly engaged in a sophisticated scheme to defraud retail investors by concealing his control of several small and thinly traded U.S. companies' stocks, including Petrosonic Energy Inc. and Ener-Core, Inc. Instead of holding shares in his name, he purportedly used foreign nominee companies to hide his control of these issuers and their stock.

Stubos allegedly violated U.S. securities laws by not registering his sales of shares with the Commission and by not disclosing accurate information about his control over the issuers. The lack of disclosure deprived investors of important information regarding the stock’s source they were purchasing. The scheme purportedly generated approximately $11 million in illicit proceeds for Stubos.

Additionally, Stubos allegedly funded various promotions to increase demand for the issuers' stock, without disclosing that the largest stockholder (presumably Stubos himself) was paying for these promotions while simultaneously selling the stock. These promotions were allegedly misleading and successful in the price increase and the issuers' stock trading volume, allowing Stubos to sell his shares in the market.

Furthermore, Stubos allegedly engaged in manipulative trading, directing purchases and sales of the issuers' stock between different foreign brokerage accounts controlled by his associates. This manipulative trading aimed to create the appearance of active market trading in the issuers' stock, thereby increasing investors' demand for the stock.

This comprehensive scheme involved multiple deceptive tactics aimed at defrauding investors and manipulating the market for the issuers' stock.

Violations Under the Securities Law

Stubos is alleged to have violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 9(a)(2) of the Securities Exchange Act of 1934, and Section 10(b) of the Exchange Act, as well as Rules 10b-5(a) and (c) thereunder. The SEC is seeking several forms of relief against Stubos, including:

permanently enjoining Stubos from engaging in the transactions, acts, practices, and business alleged in the complaint.
requesting Stubos to disgorge all ill-gotten gains from the unlawful conduct outlined in the complaint, along with prejudgment interest under Section 21(d) of the Exchange Act
barring Stubos from participating in any offering of a penny stock, under Section 20(g) of the Securities Act and Section 21(d) of the Exchange Act.
seeking a conduct-based injunction prohibiting Stubos, directly or indirectly (including through entities owned or controlled by him), from participating in the issuance, purchase, offer, or sale of any security. However, this injunction is not intended to prevent Stubos from purchasing or selling securities listed on a national securities exchange for his account.
requesting any other relief that the court deems appropriate in the matter.
sought additional relief against Dori-Ann Stubos, the "Relief Defendant," who allegedly received proceeds from Stubos's unlawful acts, practices, and schemes. The SEC argues that she should not be entitled to retain these illegally-derived proceeds.
seeking a temporary restraining order and a preliminary injunction to freeze assets held by Stubos and the Relief Defendant, preserving those assets necessary to satisfy a potential judgment against Stubos. The SEC also intends to seek a repatriation order to facilitate the prompt resolution of the case on its merits.

Defendant

George Stubos, the defendant in this case, is a 55-year-old Canadian citizen residing in Vancouver, Canada. He has a history of regulatory sanctions in the securities industry:

On June 28, 2007, the British Columbia Securities Commission (BCSC) barred Stubos from participating in the securities industry and acting as a director or officer of any issuer for two years. This sanction was imposed because Stubos traded in an issuer’s stock where he held positions as a director and insider, and he failed to file insider reports as required under Canadian law.

Additionally, the BCSC barred Stubos, an investment adviser at the time, from participating in any investor relations activities for two years.

Previously, on September 3, 1998, the Vancouver Stock Exchange (Exchange) barred Stubos from the Exchange for one year, followed by one year of supervision upon return to the industry. This sanction was imposed because Stubos executed trades in a client account without the client's permission. Additionally, he was ordered to pay fines and disgorgement for this misconduct.

These regulatory sanctions indicate a pattern of past misconduct and raise concerns about Stubos's integrity and compliance with securities laws and regulations.

Relief Defendant

Dori-Ann Stubos, the relief defendant in this case, is a 55-year-old Canadian citizen residing in Vancouver, Canada. She is the wife of George Stubos, the defendant. It is alleged that George Stubos transferred, directly or indirectly, $1.3 million from his illicit stock sales for purchasing a house in Palm Springs, California, in the name of Dori-Ann Stubos.

As a relief defendant, Dori-Ann Stubos is not accused of engaging in any wrongful conduct herself. However, she is alleged to have received proceeds from her husband's illicit activities. The SEC seeks relief against her to prevent her from retaining these illegally derived proceeds.

Related Individuals And Entities

A. Morrie N. Tobin

Morrie N. Tobin, a 57-year-old Canadian citizen and former resident of Los Angeles, California, pleaded guilty on February 27, 2019, to charges of conspiracy to commit securities fraud and aiding and abetting securities fraud.

The SEC filed an action against Tobin on November 27, 2018, and on April 16, 2021, the District Court entered a final judgment against Tobin. The judgment enjoined him from future violations of the Securities Act’s registration provision and the antifraud provisions of the Securities Act and the Exchange Act and imposed a penny stock bar.

B. Petrosonic Energy Inc.

Petrosonic Energy Inc. ("Petrosonic") was a Nevada corporation headquartered in Los Angeles, California, purportedly engaged in petroleum refining during the Relevant Period. Its common stock was registered with the SEC under Section 12(g) of the Exchange Act.

The SEC suspended trading in Petrosonic's securities on September 20, 2018, due to the company's failure to file required periodic reports since September 30, 2016. Further, the Commission revoked the registration of Petrosonic's shares on August 22, 2019.

Petrosonic's securities were quoted on OTC Link, operated by OTC Markets Group, Inc., under the symbol "PSON", and the company filed periodic reports with the SEC under Section 13(a) of the Exchange Act and related rules during the Relevant Period.

C. Ener-Core, Inc.

Ener-Core, Inc. ("Ener-Core") is a Delaware corporation with its main office in Laguna Niguel, California. During the Relevant Period, Ener-Core purportedly designed and manufactured systems for continuous energy production. Its common stock was registered with the SEC under Section 12(g) of the Exchange Act in 2015. Ener-Core's securities were quoted on OTC Link under the symbol "ENCR" during the Relevant Period.

Case Background

Before selling stock, individuals who control the stock of public companies (the "control persons") are subject to certain requirements:

(a) They must register such sales with the SEC under Section 5 of the Securities Act.

(b) Alternatively, they can sell the stock under an applicable exemption from registration.

(c) They may also sell the stock under conditions outlined in SEC Rule 144, which includes limitations on the amount of stock a control person can legally sell.

Additionally, for public companies whose securities are registered under Section 12 of the Exchange Act, investors owning 5% or more of the company's stock must disclose their ownership interest publicly. Investors owning 10% or more of such company's stock must publicly disclose all of their trading in that stock, regardless of quantity.

These registration requirements, sale restrictions, and disclosure obligations serve as safeguards to:

1. Protect the market for purchases and sales of stock.

2. Inform investors about the nature of the stock they hold or are considering buying.

3. Provide transparency regarding the parties involved in buying or selling the stock.

Using Services Of The Sharp Group To Facilitate The Fraudulent Scheme

Stubos allegedly engaged the illicit services of Frederick L. Sharp and his employees, collectively known as "the Sharp Group," to facilitate each step of his fraud scheme. The SEC filed a suit against the Sharp Group operators for violating securities laws, as evidenced by SEC v. Sharp, (D. Mass. filed Aug. 5, 2021).

Further, Sharp and one of his employees, Courtney Kelln, faced criminal charges from the United States Department of Justice, as seen in U.S. v. Sharp, (D. Mass. filed Aug. 4, 2021).

Starting from at least 2010 and continuing after the Relevant Period, the Sharp Group allegedly conducted illegal stock sales in the public securities markets. They provided various services to assist their clients, including Stubos, the control persons of public companies, in concealing their identities during stock sales. Stubos allegedly used the Sharp Group's services to hide his identity and his controlling positions, deceitfully concealing the fact that he, as a control person, was selling large blocks of stock to unsuspecting investors.

The Sharp Group purportedly concealed their clients' identities through services such as forming and providing offshore nominee companies that held shares for undisclosed control persons, arranging for clients to deposit stock in offshore trading platforms to obscure their association with public company penny stocks, and providing and administering an encrypted communication network through specialized devices called "xPhones".

The xPhones were solely for communication within the Sharp Group's encrypted network, with users employing code names and numbers. Stubos purportedly utilized all these Sharp Group services in executing his fraudulent scheme.

Additionally, the Sharp Group allegedly provided further services to its clients to advance their fraudulent schemes, including administering a proprietary accounting system referred to as "Q," facilitating the transfer of proceeds from illegal stock sales, routing payments through convoluted methods to conceal their source, and creating fabricated documents to mask the nature and source of payments.

Thus, Stubos allegedly utilized these additional Sharp Group services in executing his fraudulent scheme. He was identified by the code names "Lion" and "77" in the xPhone messages and in the Q accounting system.

Defendant’s Petrosonic Fraud

Stubos allegedly engaged in fraudulent activities related to Petrosonic, facilitated by the Sharp Group. Here's a breakdown of the fraudulent actions outlined:

Control of Petrosonic

Stubos became a client of the Sharp Group in 2012 and promptly transferred his controlling position in Petrosonic to them. By late March and early April 2012, the Sharp Group received approximately 2.6 million purportedly unrestricted shares of Petrosonic into Stubos' Q account.

After a forward stock split in May 2012, Stubos held around 29.6 million purportedly unrestricted shares of Petrosonic with the Sharp Group. Later in 2012, Stubos transferred an additional 14.6 million restricted shares of Petrosonic to the Sharp Group.

As of December 31, 2012, Petrosonic had 70.3 million shares outstanding, and Stubos, through the Sharp Group, held 56% of its outstanding shares, establishing him as an affiliate of Petrosonic

Nominee Companies and Stock Splitting

The Sharp Group provided various nominee companies to hold Stubos' penny stock. Stubos allegedly directed the Sharp Group to split the stock into blocks of less than 5% of the total outstanding stock, each held in the name of a nominee company. This tactic was employed to avoid reporting requirements, restrictions, and scrutiny by brokerage firms and other market participants.

Knowledge of Reporting Requirements

In February 2013, Stubos demonstrated his awareness of the 5% ownership reporting requirement in an encrypted xPhone message exchange with Sharp. Stubos instructed Sharp to split the stock into less than 5% ownership to avoid scrutiny. Further, Stubos clarified that 3.5 million shares would be less than 5% based on the outstanding shares following a previous stock issuance.

Depositing Shares into Overseas Brokerage Accounts

In April 2012, the Sharp Group began depositing Stubos' Petrosonic shares into various nominee companies' overseas brokerage accounts. By December 31, 2012, Stubos, using the Sharp Group's services, accounted for approximately 98% of all Petrosonic stock deposits made with any brokers worldwide, constituting the majority of the float. These unrestricted shares should have been restricted because Stubos retained their control and ownership.

Overall, Stubos allegedly utilized the services of the Sharp Group to conceal his control and ownership of Petrosonic shares, manipulate stock ownership percentages, and evade reporting requirements and restrictions, all in furtherance of his fraudulent scheme.

Misleading Stock Promotion

Stubos allegedly engaged in a series of deceptive practices related to stock promotions of Petrosonic from 2012 through 2014:

Secret Funding Of Promotions

Stubos secretly funded multiple stock promotions of Petrosonic to generate investor interest, increase demand for the stock, and drive up its price and trading volume. He concealed his involvement in funding these promotions by using the Sharp Group to pay various stock promoters, thus obscuring his role.

Additionally, he funneled Sharp Group proceeds to a Washington state corporation he controlled to pay U.S. promoters, including many of the same promoters paid via the Sharp Group.

Use Of Foreign Entities For Promotions

Stubos utilized a foreign entity created by the Sharp Group, known as the "Belize Nominee," to hire stock promoters. He requested Sharp to set up the Belize Nominee, allowing Stubos to interact with promoters without having discoverable communications linked to himself.

Promotions of Petrosonic falsely indicated that the Belize Nominee, rather than Stubos (an affiliate of Petrosonic), had funded the promotions and related marketing materials.

Payments To Promoters

From June 2012 through October 2014, Stubos directed at least $3.3 million in payments to various promoters from his illicit Petrosonic trading proceeds. These payments were made without disclosing Stubos' affiliation with the issuer in the promotions, rendering them misleading.

Pattern Of Deceptive Promotions And Sales

Each time Petrosonic promotions increased its stock price and trading volume, Stubos allegedly sold his shares into the market through the Sharp Group-administered nominee companies, profiting from the promotions. This pattern of misleading promotions followed by sales was repeated multiple times.

Overall, Stubos' conduct involved orchestrating deceptive stock promotions, concealing his involvement in funding these promotions and profiting from them by selling his shares into the market. This pattern of behavior aimed to manipulate the market for Petrosonic stock, deceiving investors and generating significant profits for Stubos.

Defendant’s Partnership With Tobin

In 2013, Stubos allegedly partnered with Morrie Tobin as part of the Petrosonic scheme. Tobin's role in the partnership involved raising money for Petrosonic from private investors. As a result of Tobin's efforts, private investors provided an influx of $3 million to Petrosonic. Subsequently, Stubos' promotional activities and corresponding stock sales experienced a significant increase.

In exchange for Tobin's services related to the private investments, Stubos purportedly paid Tobin approximately $3.4 million. These funds were generated from Petrosonic trading proceeds, suggesting that Stubos compensated Tobin for facilitating the private investments with a portion of Petrosonic's stock sales profits.

Stubos’ Manipulation Of Petrosonic Stock Price

Stubos allegedly carried out manipulative trading practices to influence Petrosonic's stock price while selling millions of Petrosonic shares through the Sharp Group. This manipulation aimed to deceive investors by creating the appearance of an active market in Petrosonic stock.

Specifically, Stubos purportedly directed Sharp Group traders through encrypted messages to strategically buy Petrosonic stock on multiple occasions to support or inflate its price.

For example, on September 9, 2013, Stubos instructed a Sharp Group trader to cease selling Petrosonic stock and instead provide support at a previous low price. Records show that on September 9, Stubos purchased 13,000 shares and sold 72,117 shares. These buy and sell orders were executed from different Sharp Group nominees' brokerage accounts in different countries to avoid detection. By purchasing small amounts of Petrosonic stock, Stubos allegedly manipulated its price upward or maintained it, allowing him to profit from subsequent sales.

As a control person of Petrosonic, owning more than 50% of its outstanding stock, Stubos was required to disclose his holdings on filings with the SEC. Additionally, he was obligated to disclose all his Petrosonic stock trading activities and adhere to limitations on the amount of Petrosonic stock he could sell. However, during the Relevant Period, Stubos purportedly failed to disclose his control over Petrosonic stock and did not register any of his sales of Petrosonic shares with the Commission as required by securities laws.

Stubos’ Ener-Core Fraud

Stubos allegedly engaged in a fraudulent scheme involving the sale of securities of Ener-Core from 2013 through 2014. Here's a breakdown of the fraudulent activities outlined:

Acquisition Of Ener-Core Shell

In April 2013, Stubos acquired a public shell company, which later became Ener-Core, from another client of the Sharp Group for $325,000. A shell company typically has minimal business operations and non-cash assets for an extended period.

Control Of Ener-Core Stock

Upon acquiring the Ener-Core shell, Stubos gained control of its outstanding stock. Sharp Group accounting records indicate that Stubos' account received virtually all the purportedly unrestricted and restricted shares of Ener-Core issued by the company. By June 2013, Stubos controlled 99.7% of Ener-Core's unrestricted stock.

Transfer To Nominee Companies And Stock Splitting

Beginning in May 2013, the Sharp Group transferred Stubos' Ener-Core shares to nominee companies it supplied. These shares were strategically split into blocks of less than 5% of the total outstanding stock for each nominee shareholder. The shares were then deposited with brokerage firms in preparation for market sale.

Payments To Stock Promoters

From November 2013 through October 2014, Stubos directed at least $1.1 million in payments to stock promoters, including many used in promoting Petrosonic. Similar to Petrosonic, promotional newsletters for Ener-Core misleadingly stated that the Belize Nominee was the paying party for the promotions.

Manipulation Of Trading And Sale of Stock

Stubos allegedly continued to direct all trading in Ener-Core using the Sharp Group. He sold the stock during each promotional campaign orchestrated to profit from the demand he had created. From June 2013 through October 2014, Stubos sold 9.4 million shares of Ener-Core into the market, generating $2.9 million in net trading proceeds.

Overall, Stubos purportedly engaged in a fraudulent scheme involving Ener-Core, utilizing similar tactics to those employed in the Petrosonic scheme. He allegedly manipulated the market for Ener-Core stock, orchestrated promotional campaigns, and profited from the demand he created by selling shares in the market.

Manipulative Trading

Stubos allegedly engaged in manipulative trading practices to inflate the price of Ener-Core stock and create a false appearance of active trading in the market before aggressively selling shares. Here's a summary of the manipulative trading activities described:

Direction To Start Buying and Selling

From August 23 through September 3, 2013, there was no trading in Ener-Core stock. Stubos directed a Sharp Group trader via encrypted messages to start buying and selling the stock on his behalf To create the appearance of trading activity. He instructed the trader to execute trades of approximately 15-20k shares per day between $1.30 - $1.50 to make it look natural.

Buy And Sell Orders

Nearly every day from September 5 through September 27, 2013, the Sharp Group trader bought and sold Ener-Core stock ranging from approximately 8,000 to 15,000 shares. These trades were made through different overseas brokerage accounts held in the names of different nominee companies to give the appearance of different shareholders trading the stock. The buy and sell quantities often matched exactly.

Purpose Of Trading

Stubos explicitly stated in encrypted messages with Sharp Group personnel that the purpose of the trading was to create the appearance of active trading in Ener-Core stock at increasing prices. He instructed the trader to "keep...on painting that tape" on September 25, 2013, referring to a deceptive trading practice aimed at increasing interest in the stock.

The Success Of Manipulative Trading

Stubos' efforts were successful, as reflected in Ener-Core's price and trading volume for September 2013 compared to the previous month. The manipulative trading led to increased trading activity and higher prices for Ener-Core stock, creating a false appearance of market activity.

Overall, Stubos allegedly manipulated the market for Ener-Core stock by directing deceptive trading practices to inflate its price and create the illusion of active trading before aggressively selling shares in the market.

Transfers To Relief Defendants

Stubos reaped substantial profits from his fraudulent schemes involving Petrosonic and Ener-Core, totaling millions of dollars. Here's a breakdown of the profits and transfers:

Petrosonic Profits

Stubos sold over 23 million shares of Petrosonic, generating approximately $18.5 million in net trading proceeds. After accounting for costs and distributions to Tobin, Stubos' Q account (the "LION Account") received approximately $10 million in net profits derived from Petrosonic trading.

Ener-Core Profits

Stubos dumped 9.4 million shares of Ener-Core into the market, generating $2.9 million in net trading proceeds. Approximately $930,000 of those proceeds were transferred to the LION Account.

Personal Benefits

Stubos used the LION Account for his benefit, directing over CAD 1.5 million payments to himself and his venture capital firm. He also received over CAD 1.9 million in cash and gold coins into the LION Account.

Transfers to Panamanian Account

Stubos directed the Sharp Group to wire approximately $3.6 million from the LION Account to an account he controlled at a Panamanian broker-dealer firm (the "Panamanian Account"). This included transfers of $553,500 in July 2013 and $1,252,000 in January 2014.

Property Purchase

In May 2014, wires totaling approximately $1.3 million were sent from the Panamanian Account to a title company in California to purchase a property in Palm Springs, California, in the name of Dori-Ann Stubos, George Stubos' wife. This transfer effectively transferred illicit sale proceeds from Stubos to Dori-Ann Stubos for no legitimate purpose or consideration.

Overall Stubos utilized various accounts and transfers to benefit himself and his associates, including directing substantial profits from his fraudulent stock sales to personal accounts and using illicit proceeds to purchase property.

Subos’ Sale Of Additional Issuers’ Penny Stocks

Stubos' involvement in fraudulent schemes extended beyond Petrosonic and Ener-Core to include other penny stock issuers, such as Homie Recipes, Inc. and Synergy CHC Corp. Here's an overview of his activities involving these additional issuers:

Homie Recipes, Inc.

In 2013, Stubos transferred unrestricted stock of Homie to the Sharp Group. The stock was distributed to Sharp Group-administered nominee companies in blocks of less than 5% of the company’s outstanding stock.

By December 2015, Stubos expressed dissatisfaction with the cost of maintaining Homie and its stock in Sharp’s custody. Sharp suggested that Stubos could sell the Homie shell company to another client.

Subsequently, in August 2017, Sharp managed the sale of Homie and its stock to another client of Stubos, and Stubos received a payment of $260,000 for the shell. The client who purchased Homie changed its name and sold its stock in connection with promotional activities.

Synergy CHC Corp (Synergy)

Stubos appears to be involved in a similar scheme involving Synergy. Encrypted xPhone messages between Stubos and Kelln, a Sharp Group employee, indicate Stubos' awareness of the illegality of his actions and his concern about being discovered. For example, on September 16, 2014, Stubos messaged Kelln, expressing his concerns.

These additional instances demonstrate Stubos' pattern of engaging in fraudulent activities involving the manipulation and sale of penny stocks, further illustrating the extent of his involvement in securities fraud.

Final Judgment

Previously, the court issued a consented final judgment against George Stubos, ordering him to pay disgorgement totaling $5,367,926 and prejudgment interest amounting to $806,108. On April 15, 2024, Dori-Ann Stubos, also under consent, was jointly and severally held liable with George Stubos in the final judgment, requiring her to disgorge $1,775,000 in benefits acquired as a result of George Stubos' actions, along with $533,108 in prejudgment interest. This ruling marks the conclusion of the litigation surrounding this case.

Important Takeaways For The Investors

Several important takeaways for investors emerge from the case involving George Stubos:

Be Cautious Of Penny Stocks

Penny stocks, which trade at low prices and typically have limited liquidity, can be susceptible to manipulation and fraudulent schemes. Investors should exercise caution when investing in penny stocks and thoroughly research the companies and their financials before making investment decisions.

Watch For UndisclosedControl

Stubos concealed his control over the companies whose stocks he manipulated and sold, depriving investors of important information. Investors should be wary of undisclosed control persons or affiliates significantly influencing a company's operations or stock price.

Beware Of Misleading Promotions

Stubos funded misleading stock promotions to create artificial demand for stocks he sold. Investors should be skeptical of promotional materials that tout a stock's potential without providing full and accurate information about the issuer and its business prospects.

Understand Regulatory Requirements

Stubos violated numerous securities laws by failing to register his stock sales and disclose his control over the companies. Investors should familiarize themselves with regulatory requirements governing stock sales and disclosures to assess the legitimacy of investment opportunities.

Be Cautious Of Manipulative Trading

Stubos engaged in manipulative trading to inflate the prices and trading volumes of the stocks he sold, creating a false appearance of market activity. Investors should be vigilant for signs of market manipulation, such as unusually high trading volumes or suspicious trading patterns.

Seek Transparency And Accountability

Transparency and accountability are essential for maintaining investor confidence in the financial markets. Investors should support regulatory efforts to enforce securities laws and hold individuals accountable for fraudulent activities that harm investors and undermine market integrity.

Gayatri GuptaApril 22, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Requirements	Equity Standard	Market Value of Listed Standard	Net Income Standard
Listing Rules	5505(a) and 5505(b)(1)	5505(a) and 5505(b)(2)	5505(a) and 5505(b)(3)
Stockholders Equity	$5 million	$4 million	$4 million
The market value of publicly held shares	$15 million	$15 million	$ 5 million
Operating History	Two years	N/A	N/A
The market value of listed securities	N/A	$50 million	N/A
Net income from continuing operations (in the latest fiscal a year or in two of the last three fiscal years)	N/A	N/A	$750,000
Publicly held shares	1 million	1 million	1 million
Bid Price	$4	$4	$4)
Closing Price	$3	$2	$43
Corporate Governance	Yes	Yes	Yes
Total Shareholders	300	300	300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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