SEC Charges Connecticut Investment Adviser John A. Masanotti With Stealing Clients’ Money

On November 9, 2023, the Plaintiff, the United States Securities and Exchange Commission ("SEC" or "Commission"), lodge the subsequent allegations against defendants John A. Masanotti, Jr. ("Masanotti") and Middlesex Mortgage Group, LLC ("Middlesex"), along with relief defendant Mary A. Ferrara ("Ferrara"), and seeks a jury trial.

The SEC charged the Defendants with fraud for lying to investors while taking at least $5.9 million from investors from 2016 to the present. The defendants also allegedly used investor money to make Ponzi-like payments back to investors and stole some of their money for Masanotti’s own personal purposes.

Summary Of The Case

Masanotti and Middlesex, in a continuous scheme, have obtained a minimum of $5.9 million from investors through false statements and withholding of information, and have diverted millions for Masanotti's personal gain.

Starting from at least January 2016 until now, Masanotti has misled numerous investors, predominantly seniors, into providing him with substantial sums of money, pledging to invest these funds in a purported collective investment scheme managed by Middlesex, known as the Middlesex Fund or the MMG Fund (referred to as the "Fund").

Many of these Fund investors have sold securities from their retirement accounts to participate in the Fund.

In his presentations to investors, Masanotti detailed the Fund's purported activities, including trading in foreign currencies and securities, as well as investing in stocks through initial public offerings ("IPOs").

Masanotti boasted about his trading prowess to investors, claiming to utilize a profitable proprietary algorithmic trading method for currency futures. He even informed at least one investor of annual returns ranging from 10% to 20%.

However, investigations reveal that Masanotti made no investments in stocks or bonds on behalf of investors from 2016 to 2023, with his foreign currency trading efforts ceasing in 2016. Instead, investor funds were diverted to sustain a Ponzi-like scheme, funneling money into investors' hands and funding Masanotti's lavish personal expenditures.

To conceal the fraudulent nature of his investment scheme, Masanotti furnished investors with fabricated monthly account statements from Middlesex, displaying purported shares held in the Fund and fabricated investment returns. These statements were entirely fictitious.

Meanwhile, the bulk of the funds were utilized by Masanotti to finance his personal lifestyle, covering expenses such as mortgage payments for his wife's properties in Darien, Connecticut (referred to as the "Darien Property") and Bonita Springs, Florida (known as the "Florida Property"), settling credit card debts, and purchasing luxury vehicles and a country club membership.

In recent weeks, Masanotti has evaded and delayed investors seeking to withdraw their funds, citing a purported delay in receiving funds related to an IPO transaction until March 2024 and asserting that the missing funds are partly secured by insurance.

Moreover, in September 2023, Masanotti informed SEC staff that he had incurred significant losses trading cryptocurrencies. However, investigations show no evidence of Masanotti investing in any crypto assets on behalf of investors between 2016 and 2023.

Presently, the Defendants' and Relief Defendant's bank and brokerage accounts hold nearly no funds, despite Masanotti's wife, Relief Defendant Mary Ferrara, selling the Darien Property for $1.85 million on October 10, 2023. Notably, none of the proceeds from the sale appear to have been used to reimburse investors.

Violations

Through the actions outlined herein, the Defendants have contravened Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and the corresponding Rules 10b-5(a), (b), and (c).

Additionally, they have violated Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 (“Advisers Act”), along with Rule 206(4)-8.

Nature Of The Proceeding And Relief Sought

This action is brought forth by the Commission under the authority granted by Section 20(b) of the Securities Act, Section 21(d) of the Exchange Act, and Section 209(d) of the Advisers Act.

The Commission seeks immediate preliminary measures, including

a temporary restraining order against Defendants to halt any further breaches of federal securities laws
an injunction preventing Defendants from soliciting, accepting, or depositing additional funds from investors
an asset freeze to safeguard assets essential for satisfying future judgments against Defendants, and
additional equitable measures, such as preventing the destruction of documents and facilitating expedited discovery.

Furthermore, the Commission seeks a final judgment that:

permanently restrains Defendants from violating federal securities laws through the transactions, practices, and conduct described in this Complaint;
mandates Defendants to surrender any unlawfully obtained profits along with prejudgment interest, in accordance with Section 21(d)(7) of the Exchange Act;
compels the Relief Defendant, jointly and severally with Masanotti and Middlesex, to disgorge any unjust enrichment or unlawfully acquired gains, with prejudgment interest;
orders Defendants to pay civil penalties as outlined in Section 20(d) of the Securities Act, Section 21(d)(3) of the Exchange Act, and Section 209(e) of the Advisers Act; and
grants any other relief deemed just and appropriate by the Court.

Defendants

John A. Masanotti, Jr., aged 68, resided in Darien, Connecticut from January 2016 to October 2023. He serves as the proprietor and managing member of Middlesex Mortgage Group, LLC, also recognized as Middlesex Group, LLC.

Masanotti lacks any securities licenses. Representing himself as the overseer of a collective investment vehicle for investors – referred to as the Fund – Masanotti functioned as an unregistered investment adviser and owed a fiduciary duty to the Fund.

In his capacity as an investment adviser, Masanotti was obligated to act in the Fund's best interests, ensuring full disclosure of all pertinent information and exercising due diligence to prevent any misleading practices.

Middlesex Mortgage Group, LLC is a limited liability company established in the state of Connecticut, and headquartered in Darien. It is under the ownership of John A. Masanotti, Jr., who serves as its managing member.

Relief Defendant

Mary A. Ferrara, aged 68, lived in Darien, Connecticut from January 2016 to October 2023. She is the spouse of Masanotti and a member of Middlesex Mortgage Group, LLC.

Ferrara solely owned the Darien Property, their primary residence. On October 10, 2023, Ferrara sold the Darien Property for $1,850,000. Additionally, she is the sole proprietor of the Florida Property, a secondary residence where she and Masanotti have also lived.

Defendant’s Violations Of Federal Securities Laws

A. Misrepresentation in Fund Solicitation by Masanotti

Commencing at least in January 2016, Masanotti initiated the solicitation of investments in the Middlesex Fund. Masanotti enticed investors by portraying the Fund as a collective investment vehicle engaged in trading foreign currency and investing in various securities, including stocks and bonds. Many investors did not formalize their investments through agreements, receipts, or any other documentation.

During a voluntary interview with Commission staff, Masanotti asserted that the Fund was established for foreign currency trading via a specific trading platform (referred to as the “Forex Firm”), and that he ceased using this account in late 2022. However, Commission records reveal no foreign currency transactions conducted by Masanotti through his Forex Firm account after 2016.

Masanotti's investor base comprised primarily friends and family, with many investing substantial sums, often in the hundreds of thousands of dollars, in the Fund over recent years. A significant portion of Fund investors were individuals in their 60s, either at or near retirement age. Collectively, Masanotti solicited investments totaling at least $5.9 million from January 2016 to the present.

While Masanotti tailored his pitch to each client, he consistently portrayed himself as experienced, emphasizing his sole decision-making authority in managing their investments, and assuring investors of profitability – claims that were not substantiated.

To sustain his scheme, Masanotti furnished clients with monthly account statements from Middlesex, detailing the purported shares each held in the Fund and their purported investment returns. Despite their appearance of authenticity, these statements were entirely fabricated. The Fund's holdings were represented on these false account statements as “MMG Fund (Class A Shares)”.

B. Masanotti Deceives Investors to Sustain His Fraudulent Scheme

Apart from fabricating information to secure initial investments from friends and family, Masanotti persisted in deceiving investors to perpetuate his fraudulent investment venture

For instance, a close associate ("Investor 1") and her spouse entrusted approximately $725,000 to the Fund in the summer of 2022. Masanotti assured Investor 1 of annual returns ranging between 10% and 20%, attributing this success to a highly profitable proprietary trading program for foreign currency exchange.

After making the initial investment, Investor 1 received repeated offers from Masanotti to participate in IPOs. According to Investor 1, Masanotti claimed to have purchased IPO shares in a cloud technology company for her Fund account in August 2022, boasting a profit of approximately 20% by December 2022.

However, Masanotti's assertions regarding Investor 1's investment in the Cloud Technology Company were unfounded. Public records indicate that although the stock initially experienced a surge in value upon its debut in August 2022, its price steadily declined over the subsequent three months, trading significantly below the IPO's opening price by December 2022. Hence, the profits claimed by Masanotti from this IPO during that period were unattainable.

Moreover, while bank records confirm Masanotti's receipt of Investor 1's $725,000 investment, there is no evidence demonstrating its allocation to the Fund, or indeed any investment at all. Instead, the funds seem to have been directly diverted to Masanotti or accounts under his control, subsequently misappropriated for personal use or disbursed to previous investors to sustain Masanotti's scheme.

Believing the authenticity of their monthly account statements from Middlesex, certain investors in the Fund occasionally sought to withdraw funds or make partial withdrawals from what they perceived as profits generated through their association with Middlesex.

For example, another investor ("Investor 2") requested a $60,000 withdrawal from her Fund account in March 2023. Relying on Masanotti's account statements, Investor 2 believed her Fund account held a significantly higher balance than $60,000. However, as of now, Masanotti has failed to fulfill Investor 2's request to access the $60,000 in her Fund account.

Similarly, a different investor ("Investor 3") initially invested $150,000 in the Fund with Masanotti and received periodic small payments, eventually recovering the entire principal. However, due to Masanotti's provision of fictional monthly account statements, Investor 3 believed he held a $300,000 balance in the Fund, reflecting profits earned over the years. Consequently, in early 2023, Investor 3 sought a withdrawal from his Fund account. However, Masanotti's responses were consistently evasive, and Investor 3's request went unfulfilled.

In June 2023, Masanotti ceased sending monthly account statements to many Fund clients, citing delays in an IPO transaction expected to conclude in March 2024, assuring investors of full reimbursement.

During an interview with Commission staff, Masanotti claimed to have incurred significant losses trading cryptocurrency on an unidentified online platform in the spring of 2023. He alleged, without evidence, to have notified Fund investors of these losses. However, there is no indication that Masanotti engaged in any cryptocurrency trading between 2016 and 2023, and no investors have reported receiving such notifications from him.

C. Masanotti Diverted Investor Funds to Sustain His Family's Lifestyle

In addition to the multitude of falsehoods and omissions presented to investors concerning the security of their investments, the nature of investments to be undertaken with their funds, and the purported safety of said investments, Masanotti misused the assets of the Fund. He breached his fiduciary obligation to the Fund, with the aim of enriching himself and upholding his family's standard of living.

From January 2016 to October 2023, bank accounts under Masanotti's control, held in the name of Middlesex or in the name of his family members, received approximately $5.9 million from investors.

Subsequently, Masanotti utilized millions from the Fund's assets for personal gain, alongside his family's, and to satisfy obligations to earlier investors, maintaining the illusion of the Fund's profitability.

For instance, bank records for August 2019 indicate that on August 1, 2019, a Middlesex account received a $30,000 deposit from a couple of investors. Throughout that month, Masanotti initiated transfers totaling $29,500 from the Middlesex account to accounts held in his and his wife's name. These funds were then disbursed to cover various expenses, including luxury car payments exceeding $3,000, nearly $10,000 in mortgage payments, and dues for a country club.

Over the duration of the scheme, Masanotti redirected more than $3 million from the Fund's assets to benefit himself and his family, a clear violation of his fiduciary duty to the Fund.

D. Depletion of Investor Funds and Liquidation of Major Assets by Masanotti and Ferrara

On October 16, 2023, the Commission staff engaged in a phone conversation with Masanotti. During this exchange, Masanotti indicated that the sale of the Darien Property, in which Relief Defendant Mary Ferrara was involved, would be finalized imminently, specifically on October 18, 2023.

When questioned by the Commission staff regarding the confirmation of this closing, Masanotti clarified that Ferrara had signed the necessary documents for the transaction, as the property was solely under Ferrara's name. However, he expressed uncertainty about the completion of paperwork by other involved parties.

Subsequent property records obtained by the Commission staff revealed that the closing on the Darien Property had actually occurred on October 10, 2023, with the property being sold for $1.85 million.

Correspondence reviewed by the Commission staff demonstrated that Masanotti and Ferrara were engaged in a group text message exchange with the listing agent responsible for the Darien Property. On October 10, 2023, the listing agent queried Masanotti and Ferrara about the closure, to which Ferrara, copying Masanotti, responded affirmatively, stating that the attorney's paralegal had confirmed the completion of the transaction and the forthcoming wire transfer of funds.

Bank records corroborated that by the time Masanotti conversed with the Commission staff on October 16, 2023, Ferrara had already received a wire transfer totaling $1,733,734 (after brokerage fees), representing the proceeds from the sale of the Darien Property. A significant portion of these funds was promptly directed toward settling multiple mortgages on the Darien Property.

Bank records further revealed that between 2016 and 2023, Masanotti had disbursed over $600,000 towards mortgage payments for properties in Ferrara's name, including the Darien Property and the Florida Property.

Ultimately, Masanotti indulged in a luxurious lifestyle at the expense of the Fund, simultaneously deceiving investors about their purported account balances and investment returns through Middlesex.

Claims

The Defendants:

Either directly or indirectly, in the process of offering or selling securities, acquired money or assets by making false statements of material fact or omitting essential facts necessary to prevent the statements from being misleading.
Have made or are making untrue statements of material fact or have omitted to state material facts necessary to make the statements not misleading.
Engaged or currently engaged in any transaction, practice, or business conduct that functions as a fraud or deceit upon a client or potential client.
While serving as investment advisers to a pooled investment vehicle, they either directly or indirectly, engaged in acts, practices, or business courses that were fraudulent, deceptive, or manipulative. Defendants also disseminated false statements of material facts and/or neglected to disclose material facts essential to prevent the statements from being misleading to investors or potential investors in the pooled investment vehicle.

Further, the complaint alleges that the Relief Defendant received proceeds acquired through deceitful means from investors for investment purposes with Masanotti and Middlesex. Also, the Relief Defendant lacks legitimate entitlement to these assets. It would be inequitable and against principles of fairness for the Relief Defendant to retain such assets.

Consequently, the Relief Defendant shares liability with Masanotti and Middlesex for unjust enrichment and should be compelled to reimburse her portion of the unjustly acquired profits, the exact amount of which will be determined by the Court. Furthermore, the Court should establish a constructive trust over the unlawfully acquired assets currently held by the Relief Defendant.

Relief Sought By The SEC

In the complaint filed by the SEC, the SEC requests that the court should:

Issue a temporary restraining order and preliminary injunction to: (a) prevent Defendants from further breaching the Securities Act, the Exchange Act, and the Advisers Act; (b) freeze Defendants' and Relief Defendant's assets; (c) forbid Defendants from soliciting, accepting, or depositing any funds acquired from current or potential investors; (d) mandate Defendants to preserve pertinent documents and prohibit their alteration or destruction; and (e) authorize expedited discovery to commence promptly.

Issue a Final Judgment permanently restraining and enjoining Defendants, as well as their agents, employees, attorneys, and any other individuals acting in concert with them, from directly or indirectly engaging in the described conduct or similar acts with the same purpose and effect, in violation of:

Section 17(a) of the Securities Act
Section 10(b) of the Exchange Act and
Sections 206(1), (2), and (4) of the Advisers Act and Rule 206(4)-8 thereunder.

Issue a Final Judgment ordering Defendants to disgorge any unlawfully obtained profits or unjust enrichment, with prejudgment interest, to fulfill the remedial objectives of the federal securities laws.

Issue a Final Judgment against the Relief Defendant, directing her to disgorge all unfairly acquired gains and/or unjust enrichment, jointly and severally with Masanotti and Middlesex, with prejudgment interest, to fulfill the remedial objectives of the federal securities laws.
Issue a Final Judgment requiring Defendants to pay civil penalties following Section 20(d) of the Securities Act, Section 21(d) of the Exchange Act, and Section 209(e) of the Advisers Act.

Maintain jurisdiction over this action to execute and enforce the terms of all orders and decrees that may be issued; and

Grant any other relief deemed just and proper by this Court.

Key Takeaways For Investors

1. Conduct Due Diligence

Investors should thoroughly research investment opportunities and the individuals or entities offering them. This includes verifying credentials, conducting background checks, and scrutinizing investment strategies and promises of returns.

2. Beware of Red Flags

Investors should be wary of any investment opportunity that promises unusually high returns with little to no risk. Additionally, discrepancies in account statements or delays in fund withdrawals should raise concerns.

3. Understand Investment Vehicles

Investors must have a clear understanding of the investment vehicles they are putting their money into. They should be aware of the types of securities being traded, the investment strategy employed, and any associated risks.

4. Seek Professional Advice

When in doubt, investors should seek guidance from qualified financial advisors or legal professionals who can provide unbiased advice and help assess the legitimacy of investment opportunities.

5. Report Suspected Fraud

If investors suspect fraudulent activity or believe they have been victimized by investment fraud, they should promptly report it to the appropriate authorities, such as the Securities and Exchange Commission (SEC), to help prevent further harm and hold perpetrators accountable.

Gayatri GuptaApril 29, 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

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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