SEC Obtains Final Judgment Against John Feloni In $1.6 Million Securities Fraud

On February 8, 2024, the Securities and Exchange Commission (SEC) obtained final judgments against John Feloni and his company, Stock Squirrel, Inc. Among other things, the judgments order payment of over $2 million in disgorgement of ill-gotten gains, prejudgment interest, and civil penalties to be paid variously by the two defendants.

The SEC filed a complaint against Massachusetts-based company Stock Squirrel, Inc. and John Feloni, its president and CEO, for defrauding investors of approximately $1.6 million in an unregistered securities offering on September 29, 2023.

Case Summary

The SEC brings forth the following allegations against defendants John Feloni (“Feloni”) and Stock Squirrel, Inc. (“Stock Squirrel” and collectively referred to as “Defendants”):

From at least 2019 to April 2023, Feloni and Stock Squirrel allegedly misled roughly 180 retail investors, acquiring nearly $2.5 million. They purportedly falsely assured investors that the funds would be utilized for Stock Squirrel’s operations, primarily to develop a smartphone application (“Stock Squirrel App”) catering to the rapidly expanding youth market for financial services. Additionally, they asserted that Feloni would not draw a salary from Stock Squirrel.

Contrary to these claims, Feloni reportedly diverted about $1.6 million—equivalent to 66% of the total investor capital—towards personal expenses and unrelated payments, sustaining himself primarily through these funds throughout the duration of the purported scheme. In exchange for investors’ contributions, Feloni and Stock Squirrel issued stock in Stock Squirrel to investors and promised returns on investments reaching up to 20-24% within short time frames via promissory notes.

The alleged conduct by the defendants, if proven, constitutes violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.

The Commission seeks the following remedies based on these alleged violations:

permanent injunctions;
disgorgement of defendants’ illicit gains, plus prejudgment interest;
civil penalties;
a permanent injunction restraining Feloni, directly or indirectly— including through any entity under his ownership or control—from:

engaging in the issuance, purchase, offer, or sale of any security, or
conducting activities aimed at inducing or attempting to induce the purchase or sale of any security; however, such an injunction would not restrict Feloni from trading securities for personal investment;

a prohibition against Feloni’s involvement in any penny stock offerings; (f) an officer and director bar against Feloni; and
any other relief deemed just and appropriate by the Court.

Defendants

John Feloni, aged 64, lives in Somerville, Massachusetts. He holds the positions of President and CEO within Stock Squirrel, where he serves as the sole officer and director.
Stock Squirrel, Inc. is a Delaware Corporation headquartered in Somerville, Massachusetts, with its primary office located at Feloni’s residence. Neither Stock Squirrel nor its stock are registered with the Commission in any capacity.

Facts Of The Case

I. Feloni and Stock Squirrel Attracted Investments From Retail Investors Across Multiple States

Between at least 2019 and April 2023, Feloni and Stock Squirrel presented a purported investment opportunity to engage in Stock Squirrel’s business endeavors, primarily focused on developing the Stock Squirrel App for public release.

Through Stock Squirrel's website and communications with investors, they claimed that the app would enable users to buy fractional shares of stock from public companies when making purchases through those companies’ stores.

For instance, they described a scenario where a user spending $4 at an international coffee chain using a Stock Squirrel-linked debit card would trigger an automatic purchase of forty cents’ worth of fractional shares in the coffee company's public stock.

Feloni and Stock Squirrel reached out to approximately 180 investors residing in various states, including Massachusetts, Rhode Island, Maine, and Texas, through email, in-person meetings, and phone calls. While Feloni had personal connections with some investors, this was not the case for all.

In return for invested capital, typically ranging from $1,000 to $10,000, Feloni and Stock Squirrel provided investors with two instruments:

a promissory note bearing Feloni's signature and
shares of Stock Squirrel stock

These promissory notes generally promised a 10% interest to be paid within six months, with additional interest rates between 18 and 24% annually on any outstanding amounts after the due date. Notably, the promissory notes did not explicitly mention Stock Squirrel.

The quantity of stock allotted to each investor was documented in a one-page letter (the “Stock Letter”), affirming the investor's ownership of a specified number of shares in Stock Squirrel, Inc., a Delaware corporation. These letters, signed by Feloni both personally and in his capacity as President of Stock Squirrel, assured investors of their official ownership, pending the issuance of physical shares.

Feloni and Stock Squirrel failed to register the offering of Stock Squirrel stock or promissory notes with the Commission. Generally, they issued Stock Squirrel shares to investors at a rate of five million shares per ten thousand dollars invested.

II. Defendants Misrepresented The Utilization Of Investor Funds For Stock Squirrel's Development

Feloni, in interactions with investors and potential investors, detailed Stock Squirrel's business progression, outlining its operations and financial allocations. He explicitly or implicitly assured that investor contributions would fuel Stock Squirrel's advancement, especially in the development of the Stock Squirrel App.

However, Feloni and Stock Squirrel deceitfully withheld from investors and potential investors that:

Feloni intended, and indeed utilized, the bulk of investor funds for personal expenses and unrelated payments, and
Feloni employed funds from subsequent investors to reimburse earlier investors. These significant omissions rendered Feloni's and Stock Squirrel’s statements materially deceptive.

Defendants were cognizant, deliberately disregarded, or displayed negligence in failing to acknowledge that Feloni diverted the majority of investor funds for personal expenses and unrelated payments, detached from Stock Squirrel's business. Feloni, as Stock Squirrel's sole officer and director, exerts full control over the company, thus attributing his actions to Stock Squirrel by virtue of his authority.

As described above, Defendants made explicit false representations to investors regarding the allocation of funds purportedly for Stock Squirrel's development. Throughout these communications, Defendants deceitfully omitted that Feloni diverted the majority of investor funds for personal use. Despite receiving these communications, several individuals proceeded to invest in Stock Squirrel.

On June 19, 2020, Feloni and Stock Squirrel dispatched a series of emails to investors and potential investors, outlining various features planned for the Stock Squirrel App, services aimed at public companies, and engagements with multiple marketing, public relations, and legal firms. Subsequently, on July 17, 2020, one investor invested $2,000, and on August 3, 2020, another investor invested $5,000, both after receiving these emails.

Commencing June 24, 2020, Feloni and Stock Squirrel circulated emails to investors and potential investors, accompanied by an “Executive Summary Overview” of Stock Squirrel, detailing the company's business strategy and anticipated expenditures, including:

Establishing a user database to market services
Initiating marketing endeavors such as "Squirrel Fest"
Engaging marketing and public relations firms
Contracting vendors for a loyalty and reward program
Resultantly, on August 14, 2020, an investor invested $2,500 in Stock Squirrel following receipt of these communications.

In a July 6, 2020 email to an investor, Feloni asserted, "I'll be putting a lot of money into tech development."

On December 30, 2020, Feloni and Stock Squirrel sent emails to at least three investors, claiming plans to engage a new customer acquisition agency with experience in youth-focused markets. Subsequently, on January 19, 2021, an investor invested $1,000 after receiving this communication.

On December 17, 2022, Feloni and Stock Squirrel disseminated emails to investors, outlining extensive plans for Stock Squirrel's future ventures, including compliance measures and diverse business expansions. Consequently, on December 19, 2022, an investor invested $10,000 in Stock Squirrel after receiving these emails.

Around January 2023, Feloni personally met with a group of investors and prospects, affirming he received no salary from Stock Squirrel and reiterated plans for investor funds to bolster the company's growth, particularly regarding the Stock Squirrel App. Subsequently, on January 23, 2023, an investor invested $10,000 after participating in this discussion.

III. Feloni Diverted Investors’ Funds For Personal Benefit

Between 2019 and April 2023, Feloni and Stock Squirrel amassed around $2.5 million from investors, alongside approximately $350,000 from alternative sources. Notably, most investors channeled their investments via checks made out to Feloni personally, as per his instructions, rather than to Stock Squirrel.

Feloni subsequently deposited these checks into his personal bank accounts. Additionally, some investors opted for cash payments, which Feloni similarly directed into his personal accounts, while others conducted wire transfers directly to Feloni’s personal accounts.

Numerous investors annotated the memo lines of their checks, indicating their funds were intended for Stock Squirrel investment, exemplified by entries such as:

On March 18, 2021, an investor issued a $5,000 check to Feloni with a memo line specifying, “Stock Squirrel 2.5m shares common stock.”
On March 26, 2021, another investor forwarded a $5,000 check to Feloni, designating in the memo line, “Stock Squirrel common stock 2.5m shares.”
On May 1, 2021, an investor inscribed “Stock Squirrel Investment” on a $10,000 check made out to Feloni.

Similar annotations were made on checks ranging from $1,000 to $5,000 on various dates between February 2022 and January 2023.

Throughout the period of investor influx, Stock Squirrel's finances intermingled entirely with Feloni's personal finances. Notably, Stock Squirrel possessed no active bank accounts or assets under its name.

In this duration, Feloni and Stock Squirrel neglected to uphold records regarding Stock Squirrel’s financial status or business-related expenses, relying solely on Feloni’s personal bank account statements. Furthermore, they failed to document the principal or accrued interest on the promissory notes issued to investors.

Out of the $2.5 million garnered from investors, Feloni diverted roughly $1.6 million for personal expenditures or expenses unrelated to Stock Squirrel’s operations. Notable examples include:

Cash withdrawals and self-issued checks amounting to approximately $1 million.
Brokerage account deposits totaling $287,000, utilized for personal stock and stock option trading.

Personal living expenses exceeding $594,000, comprising:
$92,000 for personal rent
$111,000 for food and dining
$23,000 for liquor store purchases
$23,000 for health care and wellness
$20,000 for insurance payments
$56,000 for retail purchases, encompassing cigars, jewelry, electronics, and sporting goods.

IV. Defendants Encouraged Investors to Extend Their Investments

Commencing on November 13, 2020, Feloni and Stock Squirrel initiated email communications with specific investors, urging them to prolong their investment commitments by “rolling over” their promissory notes, thereby deferring Feloni’s repayment obligations.

These emails contained deceptive assertions that omitted Feloni’s diversion of the majority of investors’ funds for personal expenditures unrelated to Stock Squirrel’s operations, including:

A November 13, 2020 email, asserting Feloni’s desire for investors to extend their promissory notes due to his purported allocation of funds toward engineering endeavors for the Stock Squirrel App.
A November 17, 2020 email, stating Feloni’s request for investors to extend their promissory notes, citing a critical juncture in the Stock Squirrel App’s development and the importance of maintaining liquidity.

Several investors complied with Feloni’s requests to extend their promissory notes, with some receiving additional shares of Stock Squirrel stock as incentives.

V. Defendants Utilized Fresh Capital From Subsequent Investments To Settle Obligations To Earlier Investors

Feloni and Stock Squirrel allocated approximately $242,000 of newly acquired investor funds to satisfy the principal owed to approximately 25 pre-existing Stock Squirrel investors who demanded repayment in line with the terms of their promissory notes.

Many of these repayments to investors exhibited characteristics reminiscent of a Ponzi scheme. On multiple instances, Feloni and Stock Squirrel received a check from a new investor, depositing it into one of Feloni’s personal bank accounts with an insignificantly low or even negative balance. Shortly thereafter, Feloni issued a check from the same account to repay a prior investor, often exceeding the account’s balance before the influx of new funds. Examples include:

On October 24, 2022, Feloni deposited a $10,000 investor’s check into his personal bank account with a previous balance of $204.69. Within one day, he issued a $6,000 check to partially reimburse a previous investor.
On November 4, 2022, Feloni deposited a $25,000 investor’s check into his personal bank account with a previous balance of $21.33. Within three days, he issued a $4,000 check to partially reimburse a previous investor while also cashing multiple checks made out to himself, totaling $11,500.
On December 9, 2022, Feloni deposited a $15,000 investor’s check into his personal bank account with a previous balance of $101.03. Within three days, he issued a $6,000 check to partially reimburse a previous investor.

Claims

I. Securities Fraud Involving Violations of Section 17(a) of the Securities Act

Defendants have:

devised or are devising tactics, schemes, or stratagems to deceive;
acquired money or assets by disseminating untrue statements regarding significant facts or by omitting pertinent facts crucial for ensuring the veracity of the statements made; or
undertaken or are undertaking transactions, conduct, or business strategies that functioned as fraudulent or deceitful acts against the purchasers of said securities.

By virtue of the aforementioned actions, Defendants have contravened, and unless restrained, will persist in contravening, the provisions stipulated in Securities Act Section 17(a).

II. Securities Fraud Involving Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder

Defendants have:

employed or are employing methods, stratagems, or contrivances to deceive;
disseminated or are disseminating untrue statements of significant facts or have omitted to disclose material fact(s) necessary for ensuring the accuracy of the statements made; or
undertaken or are undertaking actions, practices, or business conducts that operate as fraudulent or deceitful acts against specific individuals

By virtue of the aforementioned actions, Defendants have violated, and unless restrained, will persist in contravening, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

III. Unregistered Offers And Sales Of Securities Involving Violations of Section 5(a) and 5(c) of the Securities Act)

Defendants, in the absence of a valid registration statement concerning that security, engaged in the following actions:

utilized interstate commerce communication channels or postal services to vend securities through any form of prospectus or other mediums;
dispatched or caused to be dispatched, via mail or interstate commerce channels, any such security with the intention of sale or delivery post-sale; and
utilized interstate commerce communication channels or postal services to propose the sale, through the utilization of a prospectus or alternative means, of securities for which no registration statement had been lodged.

By virtue of the aforementioned actions, Defendants contravened, and absent injunction, will continue to contravene, Sections 5(a) and 5(c) of the Securities Act.

Relief Sought

The Commission respectfully demands that the Court:

Issue a permanent injunction preventing Defendants and any individuals in active concert or participation with them, who receive actual notification of the injunction through personal service or other means, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in the aforementioned conduct, or similar conduct violating Sections 5(a), 5(c), and 17(a) of the Securities Act (a), e(c), and q(a)], and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Issue a permanent injunction preventing Feloni, directly or indirectly, including but not limited to through any entity under his ownership or control, from (i) participating in the issuance, purchase, offer, or sale of any security, or (ii) engaging in activities aimed at inducing or attempting to induce the purchase or sale of any security; provided, however, that such injunction shall not prohibit Feloni from engaging in securities transactions for his personal account.

Order Defendants to disgorge their unlawfully obtained profits, plus prejudgment interest, in accordance with Exchange Act Sections 21(d)(3), (5), and (7).

Order Defendants to pay civil monetary penalties as per Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act

Direct that Feloni be barred from serving as an officer or director of any publicly traded company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act.

Order that Feloni be prohibited from participating in any penny stock offering pursuant to Section 20(g) of the Securities Act and Section 21(d) of the Exchange Act.

Retain jurisdiction over this case to enforce and carry out the terms of all orders and decrees that may be issued.

Grant any other relief that the Court deems just and equitable.

Key Takeaways For Investors

Investors should take heed of several key takeaways from this case:

I. Diligence in Due Diligence

It's crucial for investors to conduct thorough due diligence before investing in any opportunity. This includes researching the company, its executives, and the investment offering itself. Scrutinizing financial documents, verifying claims, and seeking independent advice can help investors avoid falling victim to fraudulent schemes.

II. Skepticism of Promises

Investors should approach investment opportunities with a healthy dose of skepticism, especially when promises of high returns in short periods are made. Unrealistic or overly optimistic projections should raise red flags, prompting investors to dig deeper and question the legitimacy of the investment.

III. Beware of Unregistered Offerings

Unregistered securities offerings can be a sign of potential regulatory violations. Investors should ensure that any investment offering complies with securities regulations and is properly registered with the appropriate regulatory authorities. Failure to do so could result in legal consequences and financial losses for investors.

IV. Watch for Red Flags

Certain warning signs, such as commingling of funds, lack of transparency, and unusual financial transactions, should prompt investors to exercise caution. Paying attention to these red flags and conducting thorough investigations can help investors identify potential scams and protect their investments.

V. Legal Recourse

In cases where investors fall victim to fraudulent schemes, legal recourse may be available. Regulatory bodies like the Securities and Exchange Commission (SEC) play a vital role in investigating and prosecuting securities fraud. Investors who believe they have been defrauded should report the incident to the relevant authorities and seek legal advice to explore their options for recourse.

Overall, investors should approach investment opportunities with caution, conduct thorough due diligence, and remain vigilant for signs of fraud or misconduct. By staying informed and proactive, investors can mitigate risks and safeguard their investments against fraudulent schemes.

Gayatri GuptaApril 30, 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.

Securities Lawyer Blog