SEC Obtains Final Judgment Against North Carolina Fund Manager Martin A. Sumichrast

On April 29, 2024, the U.S. District Court for the Western District of North Carolina entered final judgment against North Carolina resident Martin A. Sumichrast (“Sumichrast”).

On May 31, 2022, the Securities and Exchange Commission (SEC) charged Sumichrast with defrauding Stone Street Partners, LLC, a private fund he managed, and its investors by misappropriating fund assets and by engaging in several unauthorized transactions designed to benefit himself at Stone Street's expense.

Case Summary

Martin A. Sumichrast conducted a series of undisclosed and fraudulent conflict-of-interest transactions with Stone Street Partners, LLC (“Stone Street”), a private fund under his management, from March 2017 to March 2019.

Some of these transactions favored Sumichrast to the detriment of Stone Street and its investors.

Additionally, most of these transactions were principal transactions, for which Sumichrast failed to provide the necessary transaction-specific written notice or obtain the required consent.

Through these actions, Sumichrast violated, and unless restrained, will continue to violate, Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”); Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”); Rules 10b-5(a) and (c) thereunder; Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”); and Rule 206(4)-8 thereunder.

Defendants And The Related Parties

I. Martin A. Sumichrast (“Sumichrast”)

Sumichrast, aged 55, resides in Charlotte, North Carolina. From 2013 to 2020, Sumichrast acted as a manager of Stone Street. In this capacity, he provided advisory services to Stone Street concerning the valuation and investment in securities for compensation. Additionally, Sumichrast holds positions as the Chairman of the Board of Directors and CEO of cbdMD, Inc., a publicly traded company specializing in cannabis products. He previously held the position of president at cbdMD.

Furthermore, Sumichrast serves as a board member and CEO of Adara Acquisition Corp., a Special Purpose Acquisition Company (SPAC) incorporated in Delaware, with cbdMD as one of its sponsors. Adara went public through a $100 million IPO in February 2021 and is listed on the NYSE American stock exchange. Throughout his career, Sumichrast has been associated with various publicly traded companies, particularly those dealing in penny stocks.

II. Stone Street Partners, LLC (“Stone Street”)

Formerly known as Siskey Capital, LLC, Stone Street was a limited liability company based in North Carolina, with its main office in Charlotte. Initially established as Siskey Capital LLC in 2013, it rebranded as Stone Street in 2017.

Stone Street invested in public and private companies as a pooled investment vehicle. Stone Street officially dissolved by filing its Articles of Dissolution of Limited Liability Company on July 22, 2020. Sumichrast served as co-manager from 2013 until December 2016 and sole manager from December 2016 until its dissolution. Stone Street was never registered with the Commission in any capacity.

III. Washington Capital, LLC (“Washington Capital”)

Washington Capital is a Maryland limited liability company under the complete control of Sumichrast, owned either solely by him or jointly with his immediate family. According to Washington Capital, it primarily served as a vehicle for Sumichrast’s personal and family finances, without conducting business operations or employing staff. Sumichrast frequently utilized Washington Capital for personal transactions, including some relevant to this litigation.

IV. cbdMD, Inc. (“cbdMD”)

cbdMD is a North Carolina corporation headquartered in Charlotte. Specializing in products containing cannabidiol, cbdMD has Sumichrast as its CEO or Co-CEO throughout the pertinent period. He has been Chairman of its Board of Directors since 2019, previously serving as its president from 2016 until July 2019. cbdMD’s common stock is registered with the Commission under Section 12(b) of the Exchange Act and is traded on the NYSE American Stock Exchange under the ticker YCBD.

Stone Street Background

In 2013, Martin A. Sumichrast and Richard Siskey, a prominent business figure in Charlotte, North Carolina, established Stone Street. Over the period from 2013 to 2014, Stone Street amassed $3 million through the sale of Class B Unit interests to 16 investors. Subsequently, in 2015, an additional offering by Stone Street yielded $8.73 million from around 52 investors. Following the second offering, all existing investors were converted to Class A members, consolidating Stone Street's equity into a single class.

Sumichrast and Siskey were appointed as co-managers of Stone Street, as outlined in the fund’s private placement memorandum (PPM) and operating agreement. Stone Street lacked a formal board, trustee, or independent governing committee, granting Sumichrast and Siskey broad discretion over its operations and investment strategies. However, the Operating Agreement imposed various duties on them, requiring approval from a majority of Stone Street’s Class A members for any related party transactions.

The Operating Agreement, particularly Section 5.5, stipulated:

"Related Party Transactions. Any contract or transaction involving the LLC and a Member, Manager, Officer, or Affiliate thereof, necessitates Approval of the Members."

"Approval of the Members" was defined as endorsement by vote or written consent of the majority holders of the issued and outstanding Class A Units. Additionally, the PPM specified that transactions involving Richard Siskey or Martin Sumichrast required approval from a majority of the Units' holders.

Apart from the explicit disclosure obligations under the Operating Agreement, Sumichrast and Siskey were bound by fiduciary duties to Stone Street as its investment advisers and managers. Following Siskey's death by suicide in December 2016, amid an investigation into an unrelated Ponzi scheme he operated, Sumichrast assumed sole management of Stone Street.

Sumichrast’s Conflicts Of Interest

Following Siskey’s passing, Sumichrast initiated numerous transactions that favored his personal interests, often to the detriment of Stone Street and its investors. Each of these transactions fell under the category of related party transactions as defined in the Operating Agreement and PPM.

Sumichrast failed to disclose, nor did he seek consent from Stone Street or its investors, regarding the details of these transactions or the inherent conflicts of interest between his actions and the interests of Stone Street and its investors.

A. Increase In Sumichrast’s Remuneration

According to Stone Street’s PPM, both Sumichrast and Siskey were entitled to an annual salary of $100,000 from Stone Street. In January 2017, Sumichrast received his $100,000 salary for that year. However, in March 2017, following Siskey’s demise, Sumichrast allocated an additional $100,000 to himself from Stone Street’s funds. This pattern continued with Sumichrast granting himself a $200,000 annual salary in 2018 and 2019.

All payments were routed through Stone Street to Washington Capital. To cover the 2018 increment, Sumichrast directed Stone Street to sell securities valued at approximately $200,000. It’s important to note that Stone Street would have lacked the necessary funds to fulfill Sumichrast’s increased salary demands without this securities sale.

Thus, Sumichrast never disclosed these additional payments to himself nor sought approval from Stone Street or its investors for such actions.

B. Sumichrast Utilizes Stone Street Funds to Bolster cbdMD’s Financial Position

Stone Street initially invested in cbdMD in 2015, acquiring approximately five million cbdMD shares by the time Siskey passed away in December 2016.

In October 2017, cbdMD successfully executed a Regulation A+ offering, leading to its shares being listed on the NYSE American Exchange thereafter.

Before this public stock offering, Sumichrast was informed by cbdMD’s underwriter that reducing certain debts would enhance the attractiveness of cbdMD’s shares.

Consequently, in preparation for this offering, Sumichrast orchestrated a series of transactions between Stone Street and cbdMD to enhance cbdMD’s financial position for bolstering the prospects of its eventual stock offering. However, many of these transactions favored cbdMD to the detriment of Stone Street.

Sumichrast personally benefited from cbdMD going public. As per his January 2017 employment agreement with cbdMD, Sumichrast was eligible for a discretionary bonus determined solely by cbdMD’s Board. In January 2018, cbdMD rewarded Sumichrast with a discretionary bonus of $240,000, citing his achievements in the previous year.

i. Sumichrast Directs Stone Street to Acquire cbdMD Shares

On July 18, 2017, Sumichrast orchestrated Stone Street’s purchase of 56,500 cbdMD shares from cbdMD for $223,175, equating to $3.95 per share. The proceeds from this transaction and sales to other investors were utilized by cbdMD to reduce its outstanding line of credit.

Despite the inherent related party nature of this transaction due to Sumichrast's association with cbdMD, he failed to disclose the transaction or his conflict of interest, including his potential financial gain through a discretionary bonus from cbdMD, to Stone Street or its investors. Moreover, Sumichrast did not seek their consent regarding Stone Street’s acquisition of additional cbdMD shares.

ii. Sumichrast Strengthens cbdMD Further Through Stone Street’s Acquisition of NuGene International, Inc. Preferred Stock

In July 2017, to bolster cbdMD’s financial position before its public offering, Sumichrast prompted Stone Street to procure near-worthless securities from I’M1, LLC, a majority-owned subsidiary of cbdMD. Under cbdMD’s control and included in its consolidated financial statements, the subsidiary had previously engaged in a consulting agreement with NuGene International, Inc., an unrelated cosmetics company. Under this agreement, cbdMD had obtained 2.5 million NuGene common shares, valued at approximately $650,000.

At the time of the consulting agreement, NuGene was a publicly traded company listed on the pink sheets but was burdened with substantial debt and faced significant financial distress. NuGene’s Form 10-K filed in 2016 disclosed doubts about its ability to continue as a going concern. Additionally, it failed to submit its quarterly report on Form 10-Q within the stipulated timeframe, further indicating financial instability.

On June 30, 2017, cbdMD exchanged its NuGene common shares for 65 shares of NuGene’s Series B Convertible Preferred Stock, each with a stated value of $10,000. These preferred shares were convertible to common shares at a conversion rate of $0.26 per common share or the 30-day trading average, whichever was lower, potentially yielding 2.5 million NuGene common shares upon converting all 65 preferred shares.

On July 31, 2017, Sumichrast directed Stone Street to purchase the NuGene convertible shares from I’M1 for $475,000, comprising $200,000 in cash and a $275,000 promissory note, fully repaid in 2018. The purchase price was unilaterally determined by cbdMD without third-party valuation. This cash injection into I’M1 further fortified cbdMD’s financial position ahead of its public offering, as I’M1’s financials were part of cbdMD’s consolidated financial statements.

Sumichrast neglected to disclose this related party transaction to Stone Street and its investors or seek their consent. Instead, the transaction disadvantaged Stone Street while benefiting cbdMD and, ultimately, Sumichrast. Stone Street received 65 non-marketable convertible preferred shares of a failing company, convertible into millions of thinly traded common shares, but their conversion would have significantly diluted the market price for common shares. Notably, Stone Street’s audited financials for 2017 and 2018 valued the NuGene shares at $0, indicating that Sumichrast’s decision resulted in Stone Street paying $475,000 for essentially worthless assets.

C. Stone Street’s Dealings With Washington Capital, LLC

i. Sumichrast Initiates Stone Street’s Loan to Washington Capital

On July 1, 2017, Sumichrast directed Stone Street to extend a $70,000 loan to Washington Capital, an entity owned and controlled by Sumichrast's family. Following this transaction, Washington Capital’s indebtedness to Stone Street exceeded $300,000. Despite the related party nature of this transaction, Sumichrast neither sought the necessary consent from a majority of Stone Street’s shareholders for the $70,000 loan nor disclosed his conflict of interest.

By January 1, 2018, Washington Capital’s outstanding principal and interest owed to Stone Street reached $325,777. On the same date, Sumichrast arranged for Stone Street and Washington Capital to execute an agreement whereby Washington Capital repaid the entire loan balance by transferring 651,553 shares of Kure Corp. to Stone Street. Kure Corp., a private vaping company, counted Sumichrast as its fifth largest shareholder and former member of the board of directors. Sumichrast also maintained a financial relationship with Kure, assisting the company in its acquisition efforts. The valuation of Kure stock for loan repayment lacked third-party assessment or any attempt at accurate valuation.

Sumichrast failed to obtain the necessary consent from Stone Street’s shareholders or disclose his conflict of interest before executing this related party transaction.

ii. Sumichrast Facilitates Stone Street’s Acquisition of Restricted cbdMD Stock From Washington Capital

On July 1, 2018, Sumichrast orchestrated Stone Street’s purchase of 150,000 restricted shares of cbdMD stock from Washington Capital in a private placement, amounting to $645,000 or $4.30 per share. Stone Street remitted $45,000 in cash to Washington Capital, with the remaining $600,000 secured by a security agreement and to be repaid via a promissory note carrying a 5% per annum interest rate.

Sumichrast neglected to provide prior written disclosure of this transaction to Stone Street or its investors, nor did he secure their consent. The transaction price of $4.30 per share lacked independent valuation and appeared disproportionately high. Notably, it constituted a 16% premium over the preceding day’s $3.70 closing price for freely traded cbdMD common shares. Considering that Stone Street acquired a non-controlling block of restricted shares, an illiquidity discount should have been applied, resulting in a lower, more appropriate price for the restricted shares.

D. Sumichrast Initiates Stone Street’s Loans to Kure

In April 2018, Sumichrast directed Stone Street to extend an $80,000 loan to Kure, which was duly repaid later the same month. Notably, at the time of this loan, Sumichrast held shares in Kure, represented Kure in merger negotiations with Isodiol International Inc. (from whom he received warrants), and had recently received $100,000 in compensation for his services to Kure.

Subsequently, in March 2019, Stone Street provided Kure with a $50,000 bridge loan. By October 2019, this loan was converted into Kure stock at a rate of $0.10 per share. Sumichrast failed to obtain the necessary consent from a majority of Stone Street’s shareholders prior to these related party transactions and did not disclose his conflict of interest.

SEC Claims

A. Count I - Fraud Involving Violations of Section 17(a)(1) of the Securities Act

Between March 2017 and March 2019, Sumichrast utilized various means of interstate commerce and postal services to perpetrate fraudulent acts in connection with the offer and sale of the securities outlined above. These acts included the use of deceptive devices, schemes, and strategies designed to deceive purchasers of said securities, as elaborated upon earlier.

Defendant Sumichrast knowingly, intentionally, and/or recklessly employed the aforementioned fraudulent devices, schemes, and strategies.

In executing such actions, the defendant acted with the scienter, demonstrating an intent to deceive, manipulate, or defraud, or exhibiting a blatant disregard for the truth.

Consequently, defendant Sumichrast has directly and indirectly contravened Section 17(a)(1) of the Securities Act and absent intervention, is likely to persist in such violations.

B. Count II - Fraud Involving Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act

Between March 2017 and March 2019, Sumichrast utilized various means of interstate commerce, including postal services, in connection with the offer and sale of the securities detailed above. Through these means, Sumichrast directly and indirectly:

Obtained money and property through the use of false statements of material fact and the omission of material facts necessary to prevent the statements made from being misleading, considering the circumstances under which they were made; and
Engaged in transactions, practices, and business behaviors that constituted and operated as acts of fraud and deceit upon the purchasers of said securities, as previously delineated.
As a result of the aforementioned actions, Sumichrast has directly and indirectly contravened Sections 17(a)(2) and 17(a)(3) of the Securities Act and in the absence of intervention, is likely to persist in such violations.

C. Count III - Fraud Involving Violations of Section 10(b) of the Exchange Act And Rule 10b-5(a) and (c) Thereunder

Between March 2017 and March 2019, Sumichrast, in relation to the purchase and sale of the securities detailed above, utilized interstate commerce and postal services. Through these channels, Sumichrast directly and indirectly:

Employed deceptive devices, schemes, and tactics to defraud; and
Undertook actions, practices, and business patterns that constituted and functioned as fraudulent activities and deception upon the purchasers of said securities, as previously outlined.

Sumichrast knowingly, intentionally, and/or recklessly participated in the aforementioned deceptive devices, schemes, and tactics, as well as fraudulent actions, practices, and business patterns. In conducting such behavior, Sumichrast acted with the scienter, demonstrating an intent to deceive, manipulate, or defraud, or displaying a significant reckless disregard for the truth.

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

D. Count IV - Fraud By An Investment Adviser Involving Violations of Sections 206(1) and 206(2) of the Advisers Act

Throughout the relevant period, Defendant Sumichrast operated as an investment adviser as defined in Section 202(a)(11) of the Advisers Act.

Directly or indirectly, utilizing the mails or any means of interstate commerce, Defendant Sumichrast: (a) knowingly or recklessly employed deceptive devices, schemes, or strategies to defraud; or (b) engaged in transactions, practices, or business patterns that functioned as acts of fraud or deceit upon a client or potential client.

As a result of the aforementioned actions, Sumichrast has contravened and, absent intervention, is likely to continue to contravene Sections 206(1) and 206(2) of the Advisers Act.

E. Count V - Fraud By An Investment Adviser Involving Violations of Section 206(3) of the Advisers Act

Throughout the relevant period, Defendant Sumichrast functioned as an investment adviser as defined in Section 202(a)(11) of the Advisers Act [15 U.S.C. § 80b-2(a)(11)].

Directly or indirectly, utilizing the mails or any means of interstate commerce, Defendant Sumichrast, while acting as principal for his own account, knowingly executed transactions involving the sale or purchase of securities with a client. However, he failed to provide written disclosure to the client prior to the completion of such transactions regarding his role and obtain consent from the client for such transactions

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene Section 206(3) of the Advisers Act.

F. Count VI - Fraud By An Investment Adviser Involving Violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 Thereunder

Throughout the relevant period, Defendant Sumichrast served as an investment adviser to a pooled investment vehicle as defined by Rule 206(4)-8 of the Advisers Act.

Directly or indirectly, utilizing the mail or any means of interstate commerce, Defendant Sumichrast:

Made statements of fact that were untrue and/or omitted material facts necessary to prevent the statements made, under the circumstances, from being misleading, to investors and potential investors in a pooled investment vehicle; and
Engaged in other actions, practices, and business patterns that were fraudulent, deceptive, or manipulative concerning investors and potential investors in a pooled investment vehicle.

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene, Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

Final Judgment

The defendant is enjoined and restrained from violating Sections 206(2) and (3) of the Investment Advisers Act of 1940, and orders him to pay disgorgement of $225,000, prejudgment interest of $50,000, and a civil penalty of $75,000.

Key Takeaways For Investors

Here are some key takeaways for investors from the case:

1. Transparency and Disclosure

The case underscores the importance of transparency and full disclosure in investment transactions. Investors should be wary of any lack of transparency or undisclosed conflicts of interest.

2. Due Diligence

Investors should conduct thorough due diligence before investing, especially in situations involving related-party transactions or where conflicts of interest may exist. Understanding the background and affiliations of individuals and entities involved in the investment is crucial.

3. Regulatory Compliance

Compliance with securities laws and regulations is essential. Investors should ensure that investments and transactions are conducted in accordance with applicable laws and regulations to protect their interests.

4. Risk Assessment

Investors should carefully assess the risks associated with their investments, including the potential for fraud or misconduct. Vigilance and skepticism can help investors identify red flags and avoid fraudulent schemes.

5. Legal Recourse

In cases of suspected fraud or misconduct, investors have legal recourse through regulatory authorities and the judicial system. Seeking legal advice and assistance can help investors pursue remedies and recover losses resulting from fraudulent activities.

6. Diversification

Diversifying investment portfolios can help mitigate risks associated with individual investments or fraudulent activities. Spreading investments across different asset classes and securities can help minimize the impact of losses from any single investment.

Gayatri GuptaMay 1, 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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