SEC Charges Recidivist Robert Tye Cournoyer And His Entities for Fraudulent Securities Offerings

On May 10, 2024, the Securities and Exchange Commission (SEC) charged Robert Tye Cournoyer and the two entities he controlled for their alleged misappropriation of investor funds and false and misleading statements to investors.

Case Summary

Complaint

The Plaintiff, Securities and Exchange Commission (the "SEC"), files this Complaint against Robert Tye Cournoyer ("Cournoyer"), Green Equity Group, LLC ("Green Equity"), and RS Group Holdings, LLC ("RS Group") (collectively, "Defendants"), and alleges as follows:

Summary Of Compalint

Cournoyer, through his controlled entities, Green Equity and RS Group, raised over $1.2 million from numerous investors. Contrary to his promises, he misappropriated at least $755,000 of those funds. Except for a single $5,000 payment, the investors have not been repaid.

Cournoyer, the sole manager of Green Equity and RS Group, assured investors that their money would be invested in various projects, including a bottling plant, hemp and CBD products, and hand sanitizer production. Instead, he used a substantial portion of the investor funds for personal expenses, such as gambling, rent, and luxury items like designer watches and clothing, and also made significant cash withdrawals.

Cournoyer, through Green Equity's offering and marketing documents provided to investors, made other false and misleading statements. He falsely claimed to have graduated from the University of Florida's law school and touted his industry experience without disclosing that the SEC had previously charged him with fraud and that a court had sanctioned him for that conduct. Additionally, Cournoyer misrepresented that Green Equity was operational when it had been defunct since 2019.

As a result of the described conduct, the Defendants have violated, and unless restrained and enjoined, will continue to violate Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.

The SEC seeks the following against all Defendants: (i) permanent injunctions; (ii) disgorgement of all ill-gotten gains from the unlawful activities detailed in this Complaint under Sections 21(d)(3), (5), and (7) of the Exchange Act [15 U.S.C. § 78u(d)(3), (5), and (7)] together with prejudgment interest; (iii) civil penalties under Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act; and, with respect to Cournoyer, (iv) an order barring him from serving as an officer or director of a public company pursuant to Section 20(e) of the Securities Act and Section 21(d) of the Exchange Act; and (v) an injunction prohibiting him from participating in the issuance, purchase, offer, or sale of any security in an unregistered offering by an issuer pursuant to Section 20(b) of the Securities Act and Sections 21(d)(1) and 21(d)(5) of the Exchange Act.

Defendants

1. Robert Tye Cournoyer

Robert Tye Cournoyer, age 56, is the sole managing member of Green Equity and RS Group. From approximately May 2018 to May 2020, he lived in Dallas, Texas, and from May 2020 to May 2023, in Southlake, Texas.

As of December 2023, his last known residential address was in Arlington, Texas. In 2004, Cournoyer was enjoined from violating certain federal securities laws and from participating in any offering of penny stock (SEC v. GetAnswers, Inc., No. 03-cv-20048 (S.D. Fla., filed Jan. 2003)). Additionally, the SEC barred him from associating with any broker or dealer (In the Matter of Robert Cournoyer, Exchange Act Release No. 34-49720 (May 18, 2004)).

He filed for bankruptcy in September 2022 and did not respond to valid subpoenas issued by the SEC seeking information relevant to this investigation.

2. Green Equity Group, LLC

Green Equity Group, LLC is a Colorado limited liability company ("LLC") formed in November 2017, with principal places of business in Walsenburg, Colorado, and Dallas, Texas. Green Equity ceased operations in 2019 and did not respond to a valid subpoena issued by the SEC seeking information relevant to this matter.

3. RS Group Holdings, LLC

RS Group Holdings, LLC is a Nevada LLC formed in July 2018 with a principal place of business in Dallas, Texas. RS Group ceased operations in 2020 and did not respond to a valid subpoena issued by the SEC seeking information relevant to this matter.

Facts

I. Background

Cournoyer established Green Equity in November 2017 to explore opportunities in the hemp industry. Shortly after, he partnered with a Colorado-based hemp business (the "Colorado Business"). The Colorado Business agreed to identify hemp-related opportunities that Cournoyer, through Green Equity, would fund by attracting and soliciting investors.

In October 2018, the Colorado Business acquired a non-operational bottling facility (the "Bottling Plant") with plans to convert it into a bottling facility for CBD-infused products. This conversion was to be financed by Green Equity investors. While Green Equity contributed to the purchase of the Bottling Plant in 2018, the facility remained owned by the Colorado Business.

Despite some initial efforts to make the plant operational, Green Equity and the Colorado Business abandoned the Bottling Plant project in 2019, and the facility never became operational.

II. Green Equity and RS Group Raised Money from Investors

Between March 1, 2019, and February 2, 2022, Cournoyer, through Green Equity and RS Group, raised approximately $1,277,000 from around 38 investors via investment contracts and notes, both of which qualify as "securities" under the Securities Act and the Exchange Act.

During this period, Cournoyer was the sole manager of Green Equity and RS Group and the sole signatory on the bank accounts where the investors' funds were deposited. Investors were entirely dependent on Green Equity's efforts to generate returns, with Cournoyer maintaining control over Green Equity, not the investors.

From at least January 2019 to July 2020, Green Equity offered and sold securities in the form of "membership units" (or portions of units), including "Founder Units," "Common Units," and "C Units," which were convertible to shares of common stock in a future public entity. Green Equity claimed it would use the funds for various projects, including the Bottling Plant, a CBD extraction facility, and hemp biomass purchases.

Investors provided money in exchange for Green Equity membership units. Subscription agreements signed by Cournoyer on behalf of Green Equity directed at least some investors to make payments to an RS Group bank account for their Green Equity investments. Investor funds were pooled in Green Equity (and RS Group) bank accounts, and their fortunes were collectively tied to Green Equity's efforts and expertise, including the Bottling Plant.

In addition to funds received from Green Equity investors, RS Group offered and sold "Cash Forward Contracts" to at least six investors between December 2019 and February 2020. These contracts purported to sell an interest in a certain number of acres of hemp biomass, which RS Group promised to process and sell, then repay the investor principal along with 100% interest.

Investors provided money in exchange for an interest in returns generated from the processed hemp biomass. These investor funds were pooled together by RS Group and Cournoyer.

RS Group investors relied solely on RS Group's efforts and expertise to generate profits. RS Group's cash forward contracts were debt instruments through which investors reasonably expected significant profit (i.e., 100% interest) based solely on RS Group's efforts.

III. The Defendants Engaged in Fraudulent and Deceptive Acts by Misappropriating Investor Money for Personal Use

Instead of using investor funds as promised for corporate projects, the Defendants misappropriated these funds for Cournoyer's personal use. Between March 1, 2019, and February 2, 2022, Green Equity and RS Group received approximately $1,277,000 from investors. Of this amount, Cournoyer misappropriated at least $755,000, using investor money for personal expenses such as gambling, rent for his personal residence, luxury purchases like designer watches and clothing, and substantial cash withdrawals. Additionally, Cournoyer transferred part of the $755,000 to another entity he controls, using those funds for similar personal expenses.

Cournoyer began gambling full-time in 2019 or 2020. Often, cash withdrawals, gambling expenses, residential lease payments, and luxury purchases occurred very close to (and sometimes on the same day as) investor deposits. In multiple instances, investor funds were deposited into bank accounts with a near-zero balance and were then spent within the same month on personal expenses. For example, on June 1, 2019, a Green Equity bank account had a balance of $501.37. That month, the account received at least $90,000 in investor deposits, which Cournoyer spent at locations such as the Mirage and the Bellagio in Las Vegas, Panerai luxury boutique in Las Vegas, Hugo Boss in Dallas, and for his personal residence's lease payment and personal credit card payments. By June 30, 2019, the account had an ending balance of $8,955.12.

Throughout this period, Cournoyer was the sole signatory on the bank accounts where Green Equity and RS Group investor funds were deposited, and he was the sole manager of these entities. During this time, Cournoyer did not have a personal bank account, indicating that he was using the corporate accounts for personal expenses.

Cournoyer knew, or was reckless in not knowing, that he was deceiving investors by falsely representing that their funds would be used for corporate endeavors when he actually intended to use a significant portion of those funds for personal expenses. This intent is evidenced by instances in which he spent investor funds on personal expenses soon after their deposit.

Cournoyer's fraudulent intent (scienter) can be imputed to Green Equity and RS Group because he was their sole manager. The amounts misappropriated were material because a reasonable investor considers the use of their money important to their investment decision. Here, investors believed that their funds would be used for business ventures as represented by Cournoyer, not for his personal expenses.

IV. The Defendants Made False and Misleading Statements

A. Defendants Made False and Misleading Statements about the Use of Investor Funds

Cournoyer, through Green Equity and RS Group, misled investors by stating that their funds would be used for corporate projects. These statements were false and misleading because, as alleged above, the Defendants misappropriated a significant portion of investor funds for personal use.

Specifically, regarding the use of proceeds from selling Green Equity’s "C units," at least two 2020 Green Equity subscription agreements stated: "The company will use proceeds of this purchase for the benefit of expanding the bottling plant, [and] for general expenses for corporate endeavors. In addition, if necessary, proceeds will be used to pay for expenses incurred for corporate operations." Similarly, a 2019 Green Equity investor presentation, which Cournoyer sent to at least one investor, claimed that the "Founders Units" and "Common Units" would be used to purchase a 127-acre Colorado property with the Bottling Plant on site, "pursue a public entity," and "secure biomass."

RS Group’s cash forward contracts, offered and sold between at least December 2019 and February 2020, sold an interest in "acres of hemp biomass" and promised to repay investors their "principal amount with an interest of 100%" after RS Group processed and sold the hemp biomass. Cournoyer told at least one RS Group investor that funds raised through these contracts would be the seed money needed to enter into agreements with farmers in Montana to grow hemp.

These statements about the use of investor funds were false and misleading. As alleged above, between at least March 1, 2019, and February 2, 2022, the Defendants misappropriated a significant portion of investor funds for Cournoyer’s personal expenses instead of using the funds as described.

Cournoyer knew, or was reckless in not knowing, that his statements about the intended use of investor funds were false and misleading at the time they were made to investors and potential investors. As the sole manager of Green Equity and RS Group and the sole signatory on their bank accounts, he had direct knowledge of how the funds were used.

Cournoyer signed the Green Equity subscription agreements and the RS Group cash forward contracts on behalf of each entity and transmitted them to investors using a Green Equity email address. His fraudulent intent (scienter) can be imputed to Green Equity and RS Group because he was their sole manager.

The statements about the use of investor funds were material to investors because reasonable investors would consider it important that the Defendants did not use their funds on the Bottling Plant and other CBD-related projects but instead used a significant portion for personal expenses.

B. Cournoyer and Green Equity Made False and Misleading Statements About Green Equity’s Business

Despite the Bottling Plant project being abandoned in 2019 and never becoming operational, and Green Equity not conducting any business activities since 2019, Cournoyer continued to mislead investors and solicit investments by making false and misleading statements about Green Equity’s business activities after 2019.

Specifically, between January 2019 and July 2020, Cournoyer, through Green Equity, sold securities in the form of membership units via Green Equity subscription agreements that he signed and sent to investors, claiming the funds would be used “for the benefit of expanding the bottling plant, [and] for general expenses for corporate endeavors.” Further, in April 2020, Cournoyer emailed potential investors, stating that additional funds were needed to “get our facility up and running,” which would temporarily “produc[e] high grade hand sanitizer” in response to the Coronavirus pandemic, promising investors that they would “see revenues almost immediately.”

In January 2021, Cournoyer emailed an investor, claiming that “sanitizer production [was] underway” at the Bottling Plant and that he was working to partner with casinos to sell hand sanitizer and provide CBD coffee. These statements about Green Equity’s ongoing business activities were false and misleading because the company had not conducted any business since 2019.

Cournoyer knew, or was reckless in not knowing, that his statements about Green Equity’s business activities were false and misleading at the time they were made to investors and potential investors, given that he had not worked with the Colorado Business on the Bottling Plant project since 2019. Cournoyer's fraudulent intent (scienter) can be imputed to Green Equity because he was its sole manager.

The statements about Green Equity’s business activities were material to investors because reasonable investors considering investments in Green Equity after 2019 would find it important to know that Green Equity had not conducted any business since 2019.

C. Cournoyer and Green Equity Made False and Misleading Statements Regarding Cournoyer’s Background

Cournoyer and Green Equity also provided false and misleading information to investors about Cournoyer’s educational background and industry experience.

In June 2019, Cournoyer emailed a 2019 Green Equity investor presentation to at least one investor, claiming that he had obtained a Juris Doctor degree from the University of Florida. This statement was false, as Cournoyer did not hold a Juris Doctor degree from the University of Florida.

The 2019 presentation also asserted that Cournoyer had “over twenty-five years of experience in private equity,” including on Wall Street, and that he held Series 3, 7, and 63 licenses. These claims were misleading because the presentation omitted the crucial facts that Cournoyer had been barred by the SEC and enjoined by a federal court for violating federal securities laws.

Cournoyer knew, or was reckless in not knowing, that his statements about his education and industry experience were false and misleading. He was aware that he did not have a law degree from the University of Florida and knew about his own disciplinary history.

These misrepresentations about Cournoyer’s background were material to investors because reasonable investors would consider it important to know that Cournoyer did not have a law degree from the University of Florida and that he had previously been enjoined by a court and sued and barred by the SEC for securities law violations.

V. Green Equity and RS Group Offered and Sold Securities

According to Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a "security" encompasses “any note, stock,” and “investment contract.” An investment contract involves: (i) an investment of money, (ii) in a common enterprise, (iii) with an expectation of profits derived from the efforts of others.

A. Green Equity Membership Units Are Securities

Green Equity membership units qualify as investment contracts because:

Investors made an investment of money in exchange for the units.
Green Equity investors’ funds were pooled in Green Equity (and RS Group) bank accounts, linking their fortunes to Green Equity’s efforts and expertise in various projects, including the Bottling Plant.
Investors relied entirely on Green Equity’s efforts to generate returns.

B. RS Group’s Cash Forward Contracts Are Securities

RS Group’s cash forward contracts also qualify as investment contracts because:

Investors made an investment of money in exchange for returns generated from processed hemp biomass.
Investor funds were pooled together to enable RS Group to enter into hemp biomass agreements with Montana farmers.
Investors depended solely on RS Group’s efforts and expertise for the purchase, processing, and sale of the hemp biomass.

Additionally, RS Group’s cash forward contracts are considered notes because they were understood to be debt instruments. RS Group investors reasonably expected a significant profit (i.e., 100% interest) based solely on RS Group’s efforts.

VI. The Defendants’ Actions Involved the Offer, Sale, and Purchase of Securities Using Interstate Commerce

The misstatements described here were made by the Defendants to persuade investors to buy the aforementioned securities. These false statements were included in written communications soliciting investments, such as agreements, emails, and investor presentations provided to potential investors.

Thus, the Defendants’ actions, including their material misstatements and Cournoyer’s deceptive conduct, occurred in the offer or sale of securities as defined by Section 2(a)(1) of the Securities Act and in connection with the purchase or sale of securities as defined by Section 3(a)(10) of the Exchange Act.

In connection with the conduct outlined in this Complaint, the Defendants, either directly or indirectly and individually or in concert with others, utilized methods or instruments of transportation or communication in interstate commerce, including emails containing false and misleading statements, and used interstate commerce to solicit and obtain funds from investors.

Claims For Relief

1. First Claim For Relief: Fraud—Violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder (Against All Defendants)

The SEC reasserts and incorporates by reference paragraphs 1 to 69, as if fully set forth herein.

Through their conduct described above, the Defendants, directly or indirectly, in connection with the purchase or sale of a security, and by means of interstate commerce, mail, or the facilities of a national securities exchange, knowingly or with severe recklessness:

Employed devices, schemes, or artifices to defraud;
Made untrue statements of a material fact or omitted to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading;
Engaged in acts, practices, or courses of business that operated or would operate as a fraud or deceit upon any person.

By these actions, the Defendants violated, and unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

2. Second Claim For Relief: Fraud—Violation of Section 17(a) of the Securities Act (Against All Defendants)

The SEC reasserts and incorporates by reference paragraphs 1 to 72, as if fully set forth herein.

Through the conduct described above, the Defendants, directly or indirectly, in the offer or sale of securities using means or instruments of transportation or communication in interstate commerce, or by use of the mails:

Employed devices, schemes, or artifices to defraud;
Obtained money or property by means of untrue statements of a material fact or by omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading;
Engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchaser.

Regarding violations of Section 17(a)(1), the Defendants acted intentionally, knowingly, or with severe recklessness. For violations of Sections 17(a)(2) and 17(a)(3), the Defendants acted at least negligently.

By these actions, the Defendants violated, and unless restrained and enjoined, will continue to violate Section 17(a) of the Securities Act.

Relief Sought

I

Find that the Defendants committed the violations alleged in this Complaint;

II

Issue an injunction, in accordance with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining the Defendants from violating, directly or indirectly, the laws and rules they are alleged to have violated in this Complaint;

III

Order the Defendants to disgorge any and all ill-gotten gains, together with pre-judgment interest, derived from the improper conduct described in this Complaint;

IV

Order the Defendants to pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act in an amount to be determined by the Court, plus post-judgment interest;

V

Prohibit Cournoyer from acting as an officer or director of a public company pursuant to Section 20(e) of the Securities Act and Section 21(d) of the Exchange Act;

VI

Issue an injunction permanently restraining and enjoining Cournoyer from directly or indirectly, including, but not limited to, through any entity owned or controlled by him, participating in the issuance, purchase, offer, or sale of any security in an unregistered offering by an issuer, provided that such injunction would not prevent him from purchasing or selling securities for his own personal account;

VII

Grant any other relief that this Court may deem just or appropriate.

Key Takeaways For Investors

1. Due Diligence is Crucial

Investors should thoroughly investigate the backgrounds of company executives and the history of the business. In this case, false claims about Cournoyer’s education and experience misled investors, highlighting the importance of verifying such information independently.

2. Scrutinize the Use of Funds

Ensure that there is clear, verifiable information on how invested funds will be used. The misappropriation of funds for personal use by Cournoyer underscores the need for transparency and accountability in fund allocation.

3. Beware of Unrealistic Promises

High returns with minimal risk are often red flags. RS Group’s promise of 100% interest on cash forward contracts should have been a warning sign. Investors should be cautious of investments that seem too good to be true.

4. Legal and Regulatory Compliance

Understanding securities laws and ensuring that the investment vehicles comply with regulations is critical. The case shows that Cournoyer’s actions violated several securities laws, which ultimately harmed investors.

5. Monitor Ongoing Business Activities

Regular updates and evidence of progress in the company's projects are vital. The false claims about the bottling plant’s operations and other business activities after 2019 highlight the need for investors to demand regular, detailed progress reports.

6. Know the Management’s Integrity

The integrity of those managing the investments is paramount. Cournoyer’s deceptive practices and personal misuse of funds illustrate the risks associated with dishonest management. Investors should look for signs of integrity and honesty in the leadership team.

7. Understand the Investment Structure

Knowing whether the investment constitutes a security and the associated legal protections can provide a layer of safety. Both Green Equity’s membership units and RS Group’s cash forward contracts were securities, and their mismanagement led to significant legal repercussions.

8. Legal Recourse and Protections

Being aware of the legal recourses available if fraud is suspected is essential. The SEC's involvement and the subsequent legal actions against Cournoyer and his entities show that regulatory bodies can and do take action against fraudulent activities.

By keeping these key takeaways in mind, investors can better protect themselves from potential fraud and make more informed investment decisions.

Key Takeaways for Financial Market Practitioners and Management

1. Importance of Transparency and Honesty

Maintaining transparency and honesty in all communications with investors is crucial. Cournoyer’s false statements about his background and the use of funds led to significant legal consequences. Practitioners and management must ensure all disclosures are accurate and truthful.

2. Rigorous Compliance with Securities Laws

Adhering strictly to securities laws and regulations is essential. The violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act in this case underscore the importance of compliance. Ensuring all securities offerings and communications meet legal requirements protects both the company and its investors.

3. Effective Use of Investor Funds

Properly managing and utilizing investor funds as promised is a fundamental responsibility. Misappropriating funds for personal use, as seen with Cournoyer, not only breaches trust but also violates legal obligations. Management must establish and follow stringent controls over the use of funds.

4. Regular and Accurate Reporting

Providing investors with regular, detailed, and accurate updates on business activities is vital. False claims about ongoing projects and business activities can lead to loss of investor confidence and legal actions. Accurate reporting helps maintain transparency and trust.

5. Ethical Leadership and Integrity

The integrity of the leadership team is paramount. Cournoyer’s deceptive practices highlight the risks associated with unethical behavior. Leaders must demonstrate high ethical standards and integrity to foster a trustworthy environment.

6. Investor Education and Protection

Educating investors about the risks and realities of investments can help prevent misunderstandings and build trust. Practitioners should ensure that investors have a clear and accurate understanding of what they are investing in and the associated risks.

7. Adequate Internal Controls and Audits

Implementing strong internal controls and regular audits can help detect and prevent misappropriation of funds. Ensuring that there are checks and balances in place can protect the company and its investors from fraudulent activities.

8. Responsibility to Address Misconduct

Promptly addressing any misconduct within the organization is essential. Ignoring or failing to address fraudulent activities can lead to severe legal and financial repercussions. Practitioners and management must take immediate action to rectify any issues.

9. Consequences of Non-Compliance

Understanding the severe consequences of non-compliance with securities laws is critical. The legal actions and penalties faced by Cournoyer and his entities highlight the importance of adhering to legal and ethical standards in all business operations.

By learning from these takeaways, financial market practitioners and management can enhance their practices, foster investor trust, and ensure compliance with legal and ethical standards.

Gayatri GuptaMay 13, 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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