SEC Charges Tyrone Johnny Lacy, Jr. In Fraudulent “Free-Riding” Scheme

On May 13, 2024, the Securities and Exchange Commission (SEC) charged 25-year-old Tyrone Johnny Lacy, Jr. (“Lacy”) from Sefner, Florida, with orchestrating a fraudulent “free-riding” scheme. Lacy exploited credits provided by certain broker-dealers to purchase over $300,000 in securities without having the necessary funds to cover the costs.

Case Summary

The plaintiff, the Securities and Exchange Commission (“Commission”), files this Complaint and alleges the following:

This case pertains to a “free-riding” trading scheme orchestrated by defendant Tyrone Johnny Lacy, Jr. (“Lacy” or “Defendant”), a resident of Seffner, Florida. In typical free-riding schemes, Lacy fraudulently exploited “instant deposit” credits provided by two broker-dealer firms to trade securities without actually funding the brokerage accounts. If the trades were profitable, Lacy would keep the profits; if unprofitable, the brokerage firm would incur the losses.

To carry out the scheme, Lacy initiated electronic deposits from his bank accounts into his brokerage accounts, despite knowing his bank accounts lacked sufficient funds. He then bought and sold securities in these accounts, using the “instant deposit” credits provided by the brokerage firms, which allowed him to trade before the funds were actually deposited.

As part of this scheme, Lacy falsely represented his profession, salary, and available cash to one brokerage firm. He made $270,000 in unfunded deposits across two brokerage accounts, all of which were reversed due to insufficient funds. Based on these false deposits, Lacy traded approximately $330,000 in equity and exchange-traded securities, causing one brokerage firm to lose over $1,500 due to unfunded trading losses and personally obtaining over $1,600 in illicit gains.

By engaging in this conduct, Lacy is liable and, unless enjoined, is likely to continue violating Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.

Violations

Through his actions, Lacy has directly or indirectly violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

Relief Sought

The Commission seeks the following relief against the Defendant:

permanent injunctive relief;
a conduct-based injunction prohibiting Lacy from:

directly or indirectly trading securities in any brokerage account he owns, controls, or has access to without having settled cash equal to or greater than the amount of the securities trades, and
opening a brokerage account without first providing the relevant brokerage firm(s) with a copy of the Commission’s filed complaint in this matter and any judgment obtained against him;

disgorgement, including pre-judgment interest; and
civil monetary penalties

The Defendant

Tyrone Johnny Lacy, Jr.

Tyrone Johnny Lacy, Jr., age 25, resides in Seffner, Florida. During the relevant period, as defined below, he was employed as a warehouse and backroom worker for various retailers and a consumer electronics distributor.

Facts Of The Case

From at least October 1, 2022, to October 26, 2022 (the “Relevant Period”), Lacy engaged in fraudulent activities, including making false and misleading statements to multiple brokerage firms.

A. Lacy Engages in Free-Riding Conduct at Broker A

On or about November 19, 2021, Lacy submitted an online application to open an account at Broker A, which subsequently opened an account in his name. This account provided "instant buying power" for pending bank deposits, allowing Lacy to trade securities before his bank deposits settled into the account.

Using Broker A’s online platform, Lacy linked his Broker A account to his bank accounts at Bank X and Bank Y. In October 2022, Lacy initiated three Automated Clearing House deposits totaling $70,000 from his account at Bank X into his Broker A account. Specifically, he initiated (i) a $20,000 deposit on October 3 and (ii) two $25,000 deposits on October 4 and 5. At the time, Lacy’s account at Bank X did not have sufficient funds to cover these deposits.

On October 6, 7, and 10, 2022, these deposits were rejected due to insufficient funds in Lacy’s Bank X account. By initiating these $70,000 in unfunded deposits, Lacy implicitly falsely represented that there were sufficient funds in his Bank X account. He knew, or was reckless in not knowing, that these statements were false.

These false statements to Broker A were material, as a reasonable broker-dealer firm would consider them in deciding whether to allow Lacy to maintain and trade in the account. From October 3 to 10, 2022, Lacy used Broker A’s “instant buying power” to make approximately $2,700 in securities purchases, including orders for common stock in Public Company A, Public Company B, and Public Company C.

On October 10, 2022, Lacy sold these securities at a net profit. On October 19, 2022, he used Broker A’s online platform to withdraw $183 from his Broker A account and deposit it into his account at Bank Y.

Lacy acted with scienter regarding his free-riding conduct at Broker A. He knew, or was reckless in not knowing, that his account at Bank X lacked sufficient funds when he initiated the unfunded deposits and subsequently traded securities. Additionally, Lacy was aware of free-riding schemes before and during the Relevant Period.

B. Lacy Engaged in Free-Riding Conduct at Broker B

On or about October 23, 2022, Lacy submitted an online application to open an account at Broker B, which was subsequently opened in his name. In his application, Lacy made false statements, claiming: (1) an annual income of $180,000; (2) a liquid net worth of $500,000; and (3) that he was an “accounting professional.” These statements were false, as Lacy did not have an annual income of $180,000, a liquid net worth of $500,000, nor was he an accounting professional. He knew or was reckless in not knowing that these statements were false when made.

The false statements in Lacy’s application to Broker B were material, as a reasonable broker-dealer firm would rely on them in deciding whether to allow Lacy to open an account and trade securities. As the person who submitted the application, Lacy had ultimate authority over these false statements.

Lacy’s account at Broker B included "same day trading" instant deposit credit, allowing him to trade securities before his deposits from his banks settled into his Broker B account. Using Broker B’s online platform, Lacy linked his account to his account at Bank Y and an account with a money-transfer application ("Application") linked to an account at Bank Z.

On October 24 and 25, 2022, Lacy initiated two $100,000 deposits to his Broker B account. He knew or was reckless in not knowing that his Bank Z account lacked sufficient funds to cover these deposits. In the weeks leading up to these transactions, Lacy had used the Application to initiate approximately 20 transactions, all for amounts far less than $100,000, which were declined due to insufficient funds in his Bank Z account. When he initiated the two $100,000 deposits, his Bank Z account had a balance of $7.09. Lacy had access to this balance through the Application. Two days after each deposit, Bank Z reversed them due to insufficient funds.

By initiating $200,000 in unfunded deposits from his Bank Z account to his Broker B account, Lacy implicitly falsely represented that there were sufficient funds in the Bank Z account to cover these deposits. These false statements were material, as a reasonable broker-dealer firm would use them to decide whether to allow Lacy to maintain an account and trade securities.

Before the reversals by Bank Z, on October 25 and 26, 2022, Lacy used Broker B’s “same day trading” credit to make approximately $329,000 in securities purchases. On October 25, 2022, he initiated purchase orders for common stock in Public Company D and Public Company E and bought shares of Exchange Traded Fund A. On October 26, 2022, he initiated purchase orders for common stock in Public Company B, Public Company F, Public Company G, and Public Company H. These orders resulted in Lacy purchasing common stock in Public Company D, Public Company B, Public Company F, Public Company G, and Exchange Traded Fund A.

On October 25 and 26, 2022, Lacy sold these securities at a net profit using Broker B’s online platform. On October 25, 2022, he transferred $1,478 from his Broker B account to his account at Bank Y. As a result of Lacy’s scheme, Broker B lost $1,516.57, which includes Lacy’s $1,478 withdrawal and $48.57 in unpaid margin interest.

Lacy acted with scienter regarding his free-riding conduct at Broker B. He knowingly made false representations about his annual income, liquid net worth, and profession in his account application. Additionally, when he initiated deposits on October 24 and 25 and traded securities based on these deposits, he knew or was reckless in not knowing that his Bank Z account lacked sufficient funds. Lacy was aware of free-riding schemes before and during the Relevant Period.

Lacy’s scienter during the Relevant Period, with respect to free-riding conduct at Broker A and Broker B, is further evidenced by a series of additional unfunded deposits he made at other broker-dealer firms. Specifically, Lacy initiated unfunded deposits at Broker C in August 2022, Broker D in October 2022, Broker E in October 2022, Broker F in October 2022, Broker G in October and November 2022, and Broker H in December 2022.

C. Lacy’s Conduct Was in Connection With the Purchase or Sale of Securities

Lacy's actions, as described above, were directly related to the purchase or sale of securities. He fraudulently initiated unfunded deposits from his bank accounts to his brokerage accounts and utilized the credit provided by the broker-dealers to trade securities.

Claims For Relief

From at least October 1, 2022, to October 26, 2022 (the “Relevant Period”), Lacy engaged in fraudulent activities, including making false and misleading statements to multiple brokerage firms.

Fraud By Defendant Lacy: Violations of Section 10(b) of the Exchange Act and Rule 10b-5

By engaging in the conduct described above, Lacy, knowingly or recklessly, in connection with the purchase or sale of securities, through the use of interstate commerce or the mails, directly or indirectly:

employed devices, schemes, or artifices to defraud;
made untrue statements of material facts or omitted material facts necessary to make the statements made, in light of the circumstances, not misleading; and
engaged in acts, practices, or courses of business that operated or could operate as a fraud and deceit upon the purchasers of such securities, as described in detail above.

As a result of the foregoing, Defendant Lacy has violated, and unless enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5.

Prayer For Relief

The Plaintiff respectfully requests that the Court enter a Final Judgment:

Finding that Defendant violated the statutes and rules detailed in this Complaint.
Permanently restraining and enjoining Defendant Lacy, and all persons in active concert or participation with him, from directly or indirectly violating the statutes and rules outlined in this Complaint.
Permanently restraining and enjoining Defendant Lacy, and all persons in active concert or participation with him, from: (a) directly or indirectly trading securities in any brokerage account he owns, controls, or has access to, unless it contains settled cash equal to or greater than the amount of the securities trade(s), and (b) opening a brokerage account without first providing the relevant brokerage firm(s) with a copy of the Commission’s filed complaint and any judgment obtained against him in this matter.
Ordering Defendant Lacy to disgorge all ill-gotten gains derived from his illegal conduct as described in this Complaint, along with prejudgment interest thereon, pursuant to Sections 21(d)(5) and 21(d)(7) of the Exchange Act.
Ordering Defendant Lacy to pay a civil monetary penalty pursuant to Section 21(d)(3) of the Exchange Act.
Retaining jurisdiction over this action to implement and enforce the terms of all orders and decrees that may be entered.
Granting such other and further relief as this Court may deem just, equitable, and appropriate in connection with the enforcement of federal securities laws.

Key Takeaways For The Investors

1. Importance of Due Diligence by Broker-Dealers

Brokerage firms must perform thorough due diligence on new account applications to verify the accuracy of the information provided. This case highlights the risks associated with relying on unverified statements from account holders.

2. Fraudulent Activities and Their Consequences

Engaging in fraudulent schemes, such as free-riding, can lead to significant legal consequences, including civil penalties, disgorgement of ill-gotten gains, and permanent injunctions against further trading activities. Investors should be aware that illegal activities are rigorously pursued by regulatory bodies like the SEC.

3. Material Misrepresentations

Providing false information about income, net worth, or professional status can lead to severe repercussions. Investors should always provide accurate information to avoid potential legal issues.

4. Regulatory Oversight

The SEC actively monitors and enforces compliance with securities laws. This enforcement serves to protect market integrity and investor interests. Investors can have confidence that fraudulent activities are taken seriously and acted upon.

5. Risks of Leveraging Credit

The use of "instant buying power" or other forms of credit for trading securities carries significant risks, particularly if the underlying funds are not available. Investors should exercise caution and ensure they have sufficient funds before engaging in leveraged trades.

6. Impact on Brokerage Firms

Fraudulent activities can result in financial losses for brokerage firms. This case emphasizes the importance of robust risk management practices and internal controls within these firms to detect and prevent fraudulent transactions.

7. Legal and Financial Repercussions

Defendants in such cases can face significant financial penalties, including the disgorgement of profits and payment of civil monetary penalties. Investors should understand that fraudulent behavior not only has legal implications but also financial ones.

8. Investor Awareness

This case serves as a reminder for investors to be vigilant and informed about the integrity and legality of their trading practices. Engaging in or turning a blind eye to fraudulent activities can have serious consequences.

By understanding these key takeaways, investors can better navigate the complexities of the securities market, maintain compliance with regulatory standards, and uphold the integrity of their investment activities.

Key Takeaways for Financial Market Practitioners and Management

1. Rigorous Due Diligence and Verification

Financial institutions must implement stringent verification processes for new account applications to ensure the accuracy of the information provided by clients. This includes verifying income, net worth, and professional status to prevent fraudulent accounts from being opened.

2. Enhanced Risk Management

Firms should strengthen their risk management frameworks to detect and mitigate fraudulent activities. This involves monitoring for suspicious transactions and ensuring that trading activities are backed by sufficient funds.

3. Importance of Internal Controls

Robust internal controls are essential to prevent and identify fraudulent activities. This includes implementing systems to flag unusual deposit patterns and insufficient fund transactions, as well as conducting regular audits of trading accounts.

4. Legal and Regulatory Compliance

Adhering to securities laws and regulations is crucial. Practitioners must stay informed about regulatory requirements and ensure their firms comply with them to avoid legal repercussions and maintain market integrity.

5. Responsibility and Accountability

Management must foster a culture of responsibility and accountability within their organizations. Employees should be aware of the legal and ethical standards expected of them and understand the consequences of violating these standards.

6. Client Education and Transparency

Financial firms should educate their clients about the risks and responsibilities associated with trading on credit. Transparency about the terms and conditions of trading accounts can help prevent misunderstandings and fraudulent behavior.

7. Responding to Fraudulent Activities

In the event of fraudulent activities, firms must act swiftly to investigate and address the issues. This includes cooperating with regulatory bodies and taking corrective actions to prevent future occurrences.

8. Technological Solutions

Leveraging advanced technological solutions, such as machine learning and artificial intelligence, can enhance the detection of fraudulent activities. These tools can analyze transaction patterns and identify anomalies that might indicate fraud.

9. Collaboration with Regulatory Bodies

Financial firms should maintain open lines of communication with regulatory bodies like the SEC. Collaboration can aid in the timely detection and resolution of fraudulent activities, ensuring a safer market environment.

10. Impact on Firm Reputation and Financial Health

Fraudulent activities can significantly damage a firm's reputation and financial health. Proactive measures to prevent fraud can protect the firm's reputation and maintain investor confidence.

11. Continuous Training and Development

Regular training for employees on compliance, ethics, and fraud detection is essential. Continuous professional development helps staff stay updated on best practices and emerging threats in the financial industry.

By incorporating these key takeaways, financial market practitioners and management can enhance their operational integrity, protect their clients, and contribute to the overall stability and trustworthiness of the financial markets.

Gayatri GuptaMay 15, 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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