SEC’s Obtains Final Judgment Against Justin Robert King For Carrying Out An Offering Fraud

The Securities and Exchange Commission (SEC) obtained a final judgment against Justin Robert King (“King”), an unregistered investment adviser on March 27, 2024. On December 21, 2020, the SEC filed a complaint against Defendants, King and Elevate Investments, LLC (“Elevate”), for carrying out an offering fraud.

Background

Defendants King and Elevate collectively engaged in an ongoing offering fraud, breaching federal securities laws. Since June 2019, King and Elevate have solicited investments in the Elevate Investment Fund ( "the Fund"), amassing at least $7.4 million from investors. However, the Fund did not legally exist; instead, investor funds were held in brokerage and bank accounts under the names of King, his spouse Shannon King (referred to as "S. King" and the “Relief Defendant”), and Elevate.

In their efforts to sell investments in the Fund, King and Elevate broadcasted materially false and deceptive information via Elevate's publicly accessible website.

First, the website claimed that King's trading had consistently yielded profits for his clients, citing a 61% return for all client accounts from June 2019 to June 2020. However, in reality, King's trading activity consistently incurred substantial losses across all associated accounts, a loss of $3.8 million from June 2019 to June 2020.

Furthermore, the website listed certain "Trusted Providers," including broker-dealers TD Ameritrade and Interactive Brokers. However, in reality, TD Ameritrade terminated the accounts of King and Elevate in July and August 2020, respectively, and neither King nor Elevate ever held accounts with Interactive Brokers.

Additionally, Defendants were depleting Fund assets. In the three months from September to November 2020 alone, King and Elevate raised $1.87 million from investors while incurring trading losses of $532,232. Furthermore, during the same period, King transferred $298,000 to the bank account of Relief Defendant S. King. Then, on December 1, 2020, King transferred an additional $100,000 to S. King's account.

As can be observed, through these actions, Defendants have violated and continue to violate the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Section 206(4) of the Advisers Act, and Rule 206(4).

Thus, on December 21, 2020, the SEC sought a Temporary Restraining Order to prevent Defendants King and Elevate from further violations of federal securities laws. Further, the Commission secured orders to freeze assets, mandate accounting, prevent document destruction, facilitate expedited discovery, and appoint a temporary receiver for Defendant Elevate. Additionally, the SEC sought an Order to Show Cause regarding a Preliminary Injunction and the Appointment of a Permanent Receiver, a determination of the Defendants' violation of federal securities laws, the imposition of permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

Defendants In the Case

Justin Robert King

Justin Robert King, aged 40, resides in San Juan Capistrano, California. As the founder and president of Elevate, King managed its brokerage and bank accounts. Before establishing Elevate, King engaged in securities trading for at least one other pooled investment vehicle and three other clients, alongside running an auto glass replacement company.

Despite this extensive involvement, King has never obtained any securities licenses, nor has he been registered with the Commission or associated with a registered broker-dealer or investment adviser.

King's past includes legal issues, as evidenced by his two felony charges for heroin possession in 2012 and subsequent guilty plea to two felony counts of possessing a narcotic drug in 2013, resulting in a three-year probation sentence.

Furthermore, King has a history of legal convictions, including a felony assault charge in 2004 and convictions for felony possession of marijuana with intent to deliver and money laundering in 2000.

Elevate Investments LLC

Elevate Investments LLC, a limited liability company based in Wyoming, claims its primary location is in Sheridan, Wyoming. On August 15, 2020, Elevate submitted a Form D to the SEC, seeking exemption from registration under Securities Act Rule 506(c) for a $100 million securities offering.

Relief Defendant Shannon Leigh King

Shannon Leigh King, aged 38, resides in San Juan Capistrano, California, and is the spouse of King. Despite this relationship, Elevate's website fails to disclose any affiliation between S. King and Elevate, nor is S. King listed as an affiliate of Elevate in the brokerage account applications.

Facts Of The Case

Fund Offering By King and Elevate

Since June 2019, King and Elevate have undertaken a securities offering totaling $100 million through establishing Elevate Investment Fund LLC (referred to as "the Fund"). In an August 15, 2019 filing with the SEC on Form D, Elevate and King declared that the offering adhered to Securities Act Rule 506(c).

Accordingly, King and Elevate had amassed a minimum of $7.4 million from investors by November 30, 2020.

Elevate maintained a publicly accessible website where King was identified as the founder and President. His photograph was prominently displayed, with no other individuals listed as employees or affiliates. Further, the website for Elevate asserted that "Elevate Investment Fund, LLC" functions as a "Master Fund" domiciled in Wyoming. However, no legal entity bearing "Elevate Investment Fund" existed under Wyoming or other state's laws. Instead, funds raised by Elevate and King from investors were channeled into brokerage and bank accounts controlled by King, registered under the names of King, Elevate, or S. King.

Furthermore, Elevate's website outlined plans for investing the Fund's assets according to an "Optimum Income Strategy". The Strategy was described as a hybrid approach merging managed futures, long/short equity, covered option writing, and market-neutral characteristics to generate a low-volatility, high-yield, uncorrelated return.

Additionally, the website specified that Elevate would earn a performance fee for managing the Fund. It stated that Elevate did not impose fees based on Assets Under Management (AUM) and only collected a performance fee once investors had realized a 10% return on their investments. An example on the website illustrated that if the Fund achieved a 30% return, 20% would go to investors and 10% to management.

Materially False Statement Made By The Defendants

While offering and promoting investments in the Fund, Elevate and King presented three significant false and misleading assertions regarding the Fund, Elevate, and King himself.

Firstly, Elevate's website claimed that Elevate achieved a remarkable 61% return for all clients managed from its inception in June 2019 to June 2020, comparing favorably to the S&P 500 benchmark's -8%. Additionally, the website boasted a return exceeding $600,000 on a $1 million investment.

However, from June 2019 to June 2020, King and Elevate managed five brokerage accounts under various names, primarily engaging in short-term options trading. Despite the claimed 61% return, King's trading resulted in actual losses in every account, totaling over $3.8 million.

Secondly, Elevate's website highlighted King's trading prowess and outcomes. It emphasized King's extensive knowledge of the stock market, citing his in-depth evaluations, charting, technical analysis, and market understanding as distinguishing factors that made him one of the most successful traders in the industry. The website asserted that due to King's trading style, clients consistently profited year after year.

Contrary to these assertions, King's trading history did not align with the impressive returns promoted on the Elevate website. Since 2016, King had trading authority over at least eight brokerage accounts at TD Ameritrade (TDA) and Charles Schwab & Co. (Schwab). Although one additional account at Schwab held in his wife's name did not have explicit trading authority, it seemed King executed trades consistent with his trading in other accounts.

Thus, King's trading activities resulted in substantial realized losses across all accounts he controlled since 2016, as evidenced by detailed records.

Thirdly, Elevate's website promoted its association with prominent entities in the securities industry by listing them as "Trusted Providers," including TD Ameritrade, Charles Schwab, Interactive Brokers, and NinjaTrader. However, TD Ameritrade closed the accounts of Elevate and King in July and August 2020, while Interactive Brokers received account applications but didn’t approve any openings. Further, NinjaTrader has no documented business dealings with King or Elevate.

It’s important to note that the false and misleading statements made by Defendants to investors hold significant importance. A reasonable investor would find it crucial to know that the Fund did not achieve the promoted 61% rates of return, King's actual trading did not match the portrayal on the Elevate website, and Elevate lacked relationships with reputable brokerage firms.

Considering all this, one can conclude that King and Elevate were responsible for the statements on the Elevate website. This is because King served as the founder and president of Elevate, and the website represented him as such.

Defendants Engaged In A Fraudulent Scheme

In addition to misrepresenting critical information to investors, Defendants were implicated in a fraudulent scheme. How?

Initially, Defendants were actively encouraging investors to commit to the Fund, despite the non-existence of such an entity. However, all investor capital was directed into brokerage accounts registered under King's and Elevate's names.

Then, King opened Elevate's Schwab brokerage account, designating it under the name "Elevate Investments LLC." However, he established the account as a sole proprietorship and indicated in the application that he would utilize it for his and his relatives’ investments.

Furthermore, Defendants were diverting investor funds into accounts under the Kings' control.

Thus, by executing the fraudulent scheme, King transferred $1.2 million from the brokerage accounts of King and Elevate to bank accounts linked with the Kings since June 2019. But as per the offering's disclosed terms on Elevate's website, neither King nor S. King were legally entitled to these funds.

Defendants’ Ongoing Fraud

King and Elevate persisted in raising capital from investors. Within three months, from September through November 2020, they garnered $1.87 million from investors. Concurrently, they incurred trading losses amounting to $532,232.

Notwithstanding these setbacks, King transferred $298,000 to bank accounts under S. King's name. Additionally, on December 1, 2020, King transferred $100,000 to S. King's bank account.

King And Elevate - Advisers To Pooled Investment Vehicle

Elevate and King act as investment advisers for the Fund, presenting it as actively involved in securities investment, thus qualifying it as a pooled investment vehicle under Advisers Act Rule 206(4).

Elevate guided the Fund regarding securities investments. Additionally, Elevate's website specified that it earned compensation from the Fund, amounting to 50% of profits exceeding 10%.

Similarly, King was an investment adviser. He offered investment counsel to the Fund by exercising trading authority over his and Elevate's brokerage accounts. He was prominently featured on Elevate's website as the individual responsible for trading on behalf of the Fund. Furthermore, King received compensation by transferring investor funds to bank accounts held by himself, his spouse S. King, or entities under his control.

Defendants Acted With Negligence

King demonstrated a high level of scienter. He either knew or acted recklessly by disregarding the truth. He misrepresented the investors about his expertise, historical rates of return, and Elevate's affiliations with brokerage firms. All such statements were materially false and deceptive.

Furthermore, King's behavior exhibited negligence. As an investment adviser and fiduciary, King's actions deviated from the standard of care expected from a fiduciary. His conduct in marketing and selling securities issued by Elevate, while misrepresenting Elevate's performance metrics and relationships with reputable brokers, as well as his competence as an investment adviser, departed from the ordinary standard of care observed by individuals involved in the sale of securities.

King's mental state is attributed to Elevate due to his control over the company.

Charges Against The Defendants

Fraud Concerning Buying Or Selling Of Securities

Defendants King and Elevate made numerous material misrepresentations and omissions of significant information to investors in Elevate. These included misrepresentations regarding the historical rate of return of the Fund, King's track record as a financial manager, and the associations between Elevate and various brokerage firms.

Furthermore, Defendants King and Elevate orchestrated a fraudulent scheme wherein they persuaded investors to commit funds to the Fund, only to divert those assets into accounts registered under their names. Subsequently, they transferred these assets to accounts controlled by King and S. King.

By engaging in such actions, Defendants King and Elevate, directly or indirectly, in connection with the buying or selling of securities, and through the use of interstate commerce, postal services, or national securities exchange facilities: (a) employed fraudulent devices, schemes, or strategies; (b) made untrue statements of material facts or omitted to disclose material facts necessary to prevent the statements from being misleading; or (c) participated in activities or business practices that either were or could be perceived as fraudulent or deceptive by other parties.

In committing the described actions, Defendants King and Elevate violated, and unless restrained and prohibited, will continue to violate, Section 10(b) of the Exchange Act.

Fraud Concerning Offer Or Sale Of Securities

Through the actions outlined above, Defendants King and Elevate acquired funds or assets through deceptive statements made to investors during the offering or sale of investments in the Fund, while also failing to disclose crucial information regarding Elevate and King.

Furthermore, Defendants King and Elevate orchestrated a fraudulent scheme wherein they encouraged investors to invest in the Fund, only to redirect Fund assets into accounts registered under their names. Subsequently, they transferred these assets to accounts controlled by King and S. King.

By participating in the described activities, Defendants King and Elevate, either directly or indirectly, in the sale of securities using interstate commerce, communication instruments, or mail services, (a) employed deceptive devices, schemes, or strategies; (b) acquired funds or assets through false statements of material facts or by failing to disclose material facts necessary to prevent the statements from being misleading; or (c) engaged in transactions, practices, or business activities that either were or could be perceived as fraudulent or deceptive by the purchaser.

Defendants King and Elevate, acting with intent, obtained funds or assets through false statements of material facts or by omitting to disclose material facts essential to prevent the statements made, given the circumstances under which they were made, from being misleading. Alternatively, Defendants King and Elevate displayed negligence.

Thus, by engaging in such actions, Defendants King and Elevate violated, and unless restrained and prohibited, will continue to violate, Section 17(a) of the Securities Act.

Fraud Involving Pooled Investment Vehicle

Defendant King and Elevate, through the actions described earlier, while serving as investment advisers to a pooled investment vehicle, either directly or indirectly, through the use of mail or interstate commerce:

(i) made false statements of material facts or omitted material facts necessary to prevent the statements made, given the circumstances under which they were made, from being misleading to any investor or potential investor in the pooled investment vehicle; and

(ii) engaged in activities, practices, or business approaches that were deceitful, deceptive, or manipulative concerning any investor or potential investor in the pooled investment vehicle.

Specifically, King and Elevate furnished investors in the Fund with substantially inaccurate and deceptive information regarding the historical performance of the Fund and other accounts managed by King, as well as Elevate's associations with brokerage firms.

Thus, as Elevate's proprietor and president, King's failure to exercise due diligence, coupled with his awareness and recklessness, is attributed to Elevate.

Through the actions described earlier, King and Elevate breached, and unless restrained and prohibited, will continue to breach, Section 206(4) of the Advisers Act.

The Final Judgment Obtained By The SEC

On March 27, 2024, the SEC secured a definitive ruling against Justin Robert King, an unregistered investment adviser charged by the SEC with executing an offering fraud.

King agreed to a definitive judgment permanently prohibiting him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Section 206(4) of the Advisers Act of 1940 and Rule 206(4)-8 thereunder.

The conclusive judgment against King marks the end of the legal proceedings. Elevate, which is currently under receivership, had previously consented to a final judgment for its involvement in the scheme, and King’s wife, a relief defendant, consented to a judgment mandating the repayment of transferred funds.

Key Takeaways For Investors

The key takeaways for investors from the above case are as follows:

Verify Credentials Of Investment

Investors must go into details and check investment advisers’ credentials and registration status before entrusting them with their funds. Unregistered advisers may not follow regulatory standards and can engage in fraudulent activities.

Due Diligence on Investment Opportunities

Before investing, investors must conduct comprehensive due diligence on the investment opportunity, including researching the entity offering the investment, reviewing its track record, and confirming the existence of the investment vehicle.

Beware of Unrealistic Returns

Investors must be wary of investment opportunities promising excessively high returns. They should critically evaluate the historical performance claims provided by investment advisers and scrutinize any discrepancies.

Check For Questionable Practices

Investors must be cautious of questionable practices like misleading and false claims on public platforms, in this case, the Defendants website. Reasonable investors while undertaking thorough due diligence would be able to identify false and misleading claims.

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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