SEC Charges Jerry D. Guess For Offering Fraud

On May 14, 2024, the Securities and Exchange Commission (SEC) filed charges against Jerry D. Guess, a convicted felon, and his company, Guess & Co. Corporation, Inc. ("Guess & Co."), alleging that they engaged in a fraudulent stock offering of Guess & Co.

Case Summary

From June 2021 to April 2022, Defendant Jerry D. Guess, a convicted felon, and his company, Guess & Co. Corporation, Inc. ("Guess & Co." or "the Company"), carried out a fraudulent offering of Guess & Co. stock ("the Offering").

During the Offering, the Defendants made numerous false and misleading statements of material facts to at least 57 prospective investors in at least 12 states and one foreign country to entice them to invest in Guess & Co. stock.

The Defendants falsely claimed that Guess & Co. was a diversified company involved in energy, health care, technology, and real estate, reporting millions in revenue from 2019 to 2021 and projecting billions in revenue for 2021 and 2022.

In reality, Guess & Co. had no operations, customers, or business revenue aside from selling 19 computers to electronics resale shops for $14,654.

Although no investors have purchased Guess & Co. stock to date, permanent injunctions, an officer and director bar against Guess, and civil penalties are necessary to protect the public and prevent the Defendants from future violations of federal securities laws.

Violations And Relief Requested

By committing the acts alleged in this Complaint, the Defendants have directly and indirectly engaged in, and unless restrained and enjoined by the Court will continue to engage in, activities that violate the anti-fraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)].

The Plaintiff, the Securities and Exchange Commission ("SEC"), brings this action in the public interest to prevent the Defendants from repeating their fraudulent conduct in the future. The SEC seeks permanent injunctions against each Defendant, an officer and director bar against Guess, civil penalties against each Defendant, and any other equitable and ancillary relief the Court deems appropriate.

Defendants

1. Jerry D. Guess

Jerry D. Guess, age 39, is the founder, president, chief executive officer, chairman, and a shareholder of Guess & Co. Throughout the Offering, he served as president and chairman of Guess & Co. He was the chief executive officer of Guess & Co. for the first seven months of the Offering, until December 2021, when he appointed another individual to that position. Guess resumed the role of chief executive officer in July 2022. During the Offering and as recently as March 2024, Guess resided in Falls City, Nebraska.

2. Guess & Co. Corporation, Inc.

Guess & Co. Corporation, Inc. is a North Carolina corporation. Since February 2021, Guess & Co. has frequently moved its principal place of business, often due to eviction threats for non-payment of rent. Its principal locations have included Osage Beach, Missouri; Overland Park, Kansas; Topeka, Kansas; La Vista, Nebraska; Kansas City, Missouri; Raleigh, North Carolina; and Olathe, Kansas. Guess & Co. claims to be a diversified energy, health care, technology, and real estate company focused on revitalizing rural America. It has incorporated over 100 subsidiaries, none of which has conducted any operations.

Guess’s History

In 2006, Guess was convicted of misdemeanor check fraud in Indiana (State v. Guess, 37D01-0503-FD-000038, Ind. Sup. Ct. 2006).

In 2008, Guess was sued in the U.S. District Court for the Western District of North Carolina for allegedly defrauding a real estate developer out of $375,000 in connection with an advanced fee loan scheme he operated (Portales Place Property, LLC v. Guess, 3:08-cv-143, W.D.N.C. 2008). After failing to appear for a contempt hearing, the court issued an Order of Arrest for Criminal Contempt, and Guess fled to Canada in May 2008. He remained a fugitive in Canada until 2011, when he was deported to the United States.

In 2011, Guess pled guilty to charges of wire fraud and filing false tax returns brought by the U.S. Attorney for the Western District of North Carolina in connection with the advanced fee loan scheme. In 2012, he was sentenced to a 51-month prison term and ordered to pay restitution of $2,371,401 (U.S. v. Guess, 3:10-CR145, W.D.N.C. 2010). His supervised release was terminated in 2015, but his sentence was extended by nine months for failing to comply with the terms of his release. His sentence was extended by another nine months for the same reason in 2016. He was released from prison in 2017.

Guess Controlled Guess & Co.

Guess founded and exercised complete control over Guess & Co. During 2021 through 2022, the company had between five and twenty employees and a board of directors consisting of seven or eight members, including Guess, Individual No. 1, and five or six outside directors. Guess had the exclusive authority to hire, promote, or fire employees and oversee their daily activities, most of which were clerical tasks such as entering invoices into the company's internal accounting system. He personally recruited all the outside board members, and the board essentially functioned as a rubber stamp for his decisions.

Guess also controlled the company's finances and made all final decisions regarding expenditures. He determined how and from whom the company sought to raise capital. Guess was responsible for drafting, approving, and distributing all communications to prospective investors, including business plans and private placement memoranda associated with the 2021-2022 stock offering. He also drafted and approved the Form D and Amended Forms D filed with the SEC in 2021 and 2022 and oversaw the content of the company's website.

Board members and employees did not participate in drafting or distributing offering documents, SEC filings, or emails to prospective investors. Guess frequently conducted business remotely from his residence in Falls City, Nebraska, which included sending and receiving emails (including to prospective investors), managing the company's bank accounts online, and coordinating with employees on company-related activities.

The Defendant’s Fraudulent Offering Of Guess & Co. Stock

From at least June 2021 to April 2022, Guess and Guess & Co. conducted a fraudulent securities offering of Guess & Co. stock to at least 57 prospective investors in at least 12 states and one foreign country.

In October 2021, Guess & Co., through Guess, filed a Form D with the SEC, disclosing a $125 million offering of Guess & Co. stock. This amount was increased to $250 million in the January 2022 Amended Form D.

During this period, Guess sent unsolicited emails to these prospective investors, inviting them to purchase shares of Guess & Co. stock. The recipients included investment banks, investment advisers, brokers, dealers, and hedge funds. Guess was solely responsible for sending these solicitation emails.

In the emails, Guess claimed that Guess & Co. was “committed to revitalizing and serving Rural America through energy, health care, technology, and real estate.” He invited recipients to invest in the company's stock or to contact him for more information. In some emails, Guess requested specific investment amounts, often around $1 million. To at least 25 prospective investors, he provided versions of Guess & Co.’s business plan or private placement memorandum, either as attachments or via cloud access.

The business plan and private placement memorandum, which were written or approved by Guess, contained false and misleading statements of material fact. At least five prospective investors responded to Guess seeking additional information, and at least three had further discussions with Guess about investing in Guess & Co. stock.

In addition to directly soliciting investors, Guess asked at least four investment banks and an investment adviser to help solicit investors for Guess & Co. stock, and requested two of these firms to invest themselves. He emailed these firms, briefly describing Guess & Co.’s purported business lines and seeking their assistance in raising funds. In at least three emails, he specified target investment amounts, ranging from $7.5 million to $50 million, and provided three of the firms with the Guess & Co. business plan, which contained false and misleading statements of material fact. All the firms either declined to participate or did not respond to Guess.

Defendant’s False And Misleading Statements

In emails, business plans, private placement memoranda, the Guess & Co. website, and in the Form D and Amended Forms D filed with the SEC, the Defendants made false and misleading statements about Guess & Co.’s business operations and annual revenue for the years 2019 through 2021.

Business Operations

In their communications, Guess & Co.'s business plans, private placement memoranda, and website, the Defendants described Guess & Co. as a “diversified energy, health care, technology, and real estate company focused on revitalizing and serving Rural America” and positioning itself as a leader in these areas. The website claimed that Guess & Co. “provides technology, real estate, energy, and health care solutions to communities, small businesses, corporations, and governments.”

The business plans and private placement memoranda claimed that Guess & Co. had “core” revenue operations involving “providing micro-grids; developing and operating mega rural hospitals; developing and operating data centers and providing cloud solutions; and developing and operating master-planned Class A mixed-use real estate communities to convert rural areas into new smart cities incorporated as municipalities.” They also claimed to have a wide range of “non-core” revenue operations, including consulting services, reselling equipment, trading commodities, operating private prison facilities, providing intelligence and security services, payment processing, litigation support, call center support, and capital financing to private companies, municipalities, and Native American tribes. Additionally, the business plans stated that Guess & Co. “plans to become publicly traded via direct listing on Nasdaq and has reserved the symbol: GACO.”

From 2019 until April 2022, when Guess appears to have stopped soliciting investors, Guess & Co. did not operate any of the businesses described in their offering documents and marketing materials. The company’s only customers during this period were four electronics resale shops, to whom Guess & Co. sold 19 computers for approximately $14,654. The first sale occurred in November 2021, about five months after the Offering began, when Guess & Co. sold two computers for $450. The remaining 17 computers were sold between January and April 2022.

According to internal records, Guess & Co. purportedly sold $9.8 million worth of products and services to six customers from 2019 to 2021, labeling these sales as “monthly advisory fees,” “annual engagement fees,” and “Unified Cloud Solutions.” However, these transactions were not legitimate, if they occurred at all. Five of the purported customers were entities owned and controlled by Guess, while the sixth was owned and controlled by Individual No. 1. The Defendants could only produce a sales contract for one of these transactions.

Guess & Co. employees and board members saw no evidence of employees or contractors capable of providing cloud solutions or that these purported customers had any operations. Guess & Co. received no payments from these six purported customers during the relevant period and had not received any payments through at least October 2023.

Annual Revenue

In 2021 and 2022, the Defendants provided prospective investors with purported figures for Guess & Co.’s annual revenue from business operations for the years 2019, 2020, and 2021. According to Guess & Co.’s business plans and private placement memoranda, the reported revenue was $120,978 for 2019. For 2020, some documents reported revenue of $1,141,982, while others reported $5,783,912. For 2021, the reported revenue was $7,630,216. Additionally, the Form D filed in October 2021 and the Amended Form D filed in January 2022 claimed that Guess & Co. earned annual revenue ranging from $5 million to $25 million.

All these revenue figures were false. As previously mentioned, Guess & Co. had no actual sales between 2019 and 2021, other than the sale of two computers for $450 in November 2021.

Guess & Co.’s Financial Projections

The Guess & Co. business plans distributed to prospective investors between June 2021 and March 2022 contained false and misleading statements regarding quarterly and annual revenue and net income projections for 2021 and 2022.

The business plans, published in June, July, October, and December 2021, as well as March 2022, projected:

$4 billion in annual revenue for 2021 and 2022
$575 million in annual net income for 2021 and 2022
$1 million to $4 billion in quarterly revenue for 2021
($22.5 million) to $598 million in quarterly net loss/income for 2021

These projections were materially misleading due to omitted material information. The Defendants had no reasonable basis to believe these projected figures, as Guess & Co. had no customers or revenue apart from a few computer sales. The company lacked the necessary facilities and employees to manufacture, distribute, or provide the purported products or services, making the projections of millions or billions in revenue and net income unfounded.

In a November 1, 2021 email to Guess & Co. employees, Guess stated they needed to generate an average daily revenue of $100 million in the remaining 40 business days of 2021 to achieve $4 billion in annual revenue. He sent a similar email on December 6, 2021, indicating they needed to generate $200 million in daily revenue in the remaining 20 business days to reach the same goal. These emails implicitly acknowledged that Guess & Co. had not generated any revenue in 2021.

Guess and Guess & Co. did not succeed in selling any shares of stock in the Offering.

Claims Against The Defendant

I. Fraudulent Scheme In The Offer And Sale Of Securities: Violations Of Section 17(a)(1) of the Securities Act

The SEC repeats, realleges, and incorporates by reference paragraphs 1 through 55 as if fully stated herein.
By engaging in the acts and conduct described in this Complaint, the Defendants, directly or indirectly, in the offer or sale of securities, using means or instruments of transportation or communication in interstate commerce and the mails, utilized devices, schemes, or artifices to defraud.

The Defendants engaged in the fraudulent conduct described above either intentionally or with severe recklessness.

As a result, the Defendants, directly or indirectly, violated, are violating, and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act.

II. Transactions, Practices, And Courses Of Business That Operated Or Would Operate As A Fraud And Deceit In The Offer And Sale Of Securities: Violations of Section 17(a)(3) of the Securities Act

The SEC repeats, realleges, and incorporates by reference paragraphs 1 through 55 as if fully stated herein.

By engaging in the acts and conduct described in this Complaint, the Defendants, directly or indirectly, in the offer or sale of securities, using means or instruments of transportation or communication in interstate commerce and the mails, engaged in transactions, practices, or courses of business that operated or would operate as a fraud and deceit upon the purchaser.

The Defendants engaged in the fraudulent conduct described above intentionally, with severe recklessness, or negligently.

As a result, the Defendants, directly or indirectly, violated, are violating, and, unless enjoined, will continue to violate Section 17(a)(3) of the Securities Act.

Prayer For Relief

The SEC respectfully requests that this Court:

Find that the Defendants committed the violations charged and alleged herein.
Issue a permanent injunction restraining and enjoining the Defendants, their officers, agents, servants, employees, attorneys, and those in active concert or participation with them, who receive actual notice of the Order, by personal service or otherwise, from directly or indirectly engaging in the transactions, acts, practices, or courses of business described above, or similar conduct, in violation of Section 17(a) of the Securities Act.
Issue a permanent conduct-based injunction enjoining Guess, his officers, agents, servants, employees, attorneys, and those in active concert or participation with them, who receive actual notice of the Order, by personal service or otherwise, from directly or indirectly participating in the issuance, purchase, offer, or sale of any security, including through any entity owned or controlled by Guess or Guess & Co., provided that this injunction does not prevent Guess from purchasing or selling securities listed on a national exchange for his personal account.
Issue a permanent conduct-based injunction enjoining Guess & Co., its officers, agents, servants, employees, attorneys, and those in active concert or participation with them, who receive actual notice of the Order, by personal service or otherwise, from directly or indirectly participating in the issuance, purchase, offer, or sale of any security, including through any entity owned or controlled by Guess or Guess & Co.
Permanently prohibit Guess from serving as an officer or director of any company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) or that is required to file reports under Section 15(d) of the Exchange Act, pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act.
Issue an Order imposing appropriate civil penalties on the Defendants pursuant to Section 20(d) of the Securities Act.
Retain jurisdiction over this action in accordance with the principles of equity and the Federal Rules of Civil Procedure to implement and enforce the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.

Grant such further relief as the Court deems appropriate.

Key Takeaways For Investors

1. Due Diligence is Crucial

Investors should thoroughly investigate companies before investing. The case of Guess & Co. highlights the importance of verifying claims made by companies about their business operations and financial health.

2. Beware of Misleading Information

The Defendants provided false and misleading information regarding the company’s business operations and financial projections. Investors should be cautious of overly optimistic projections and verify them against credible sources.

3. Regulatory Filings Need Scrutiny

The Defendants filed misleading Form Ds with the SEC, which underscores the need for investors to critically evaluate regulatory filings and not take them at face value.

4. Importance of Transparency

Transparent and accurate communication from companies is vital. The lack of transparency in Guess & Co.’s operations and finances should serve as a red flag for investors.

5. Operational Red Flags

The constant change of business addresses and lack of real operations or customers at Guess & Co. are significant red flags. Investors should be wary of companies with unstable operations or those that frequently move locations.

6. Executive Background Checks

Guess's criminal history and previous fraudulent activities were crucial in this case. Investors should perform background checks on company executives to ensure they have a clean and trustworthy history.

7. Legal Recourse and Protections

The SEC’s intervention and the legal actions taken, such as permanent injunctions and civil penalties, demonstrate the protections available to investors. It’s essential to be aware of the regulatory bodies and legal avenues available for recourse.

8. Risk of High Returns

Promises of extraordinarily high returns, like those made by Guess & Co., should be viewed with skepticism. Investors should be cautious of investment opportunities that seem too good to be true.

9. Role of Independent Verification

Relying solely on information provided by the company can be risky. Independent verification of a company’s claims by third-party sources can help mitigate the risk of fraud.

10. Financial Health Indicators

The discrepancy between Guess & Co.’s claimed revenue and actual minimal sales highlights the need for investors to look for concrete financial health indicators, such as actual sales data, customer base, and operational capabilities.

Key Takeaways For Financial Market Practitioners and Management

1. Rigorous Compliance and Ethics

Financial practitioners and management must prioritize ethical conduct and ensure strict adherence to compliance standards. The fraudulent actions of Guess & Co. demonstrate the severe consequences of unethical behavior.

2. Enhanced Due Diligence

Financial professionals should implement thorough due diligence processes when evaluating companies for investment or advisory purposes. This includes verifying financial statements, business operations, and executive backgrounds.

3. Transparency and Accurate Reporting

Management must ensure that all communications, including business plans, private placement memoranda, and regulatory filings, are accurate and transparent. Misleading information can lead to legal actions and damage reputations.

4. Robust Internal Controls

Establishing and maintaining robust internal controls is crucial to prevent fraud. This includes regular audits, proper oversight mechanisms, and clear policies for financial reporting and compliance.

5. Risk Management

Practitioners should be vigilant about identifying and mitigating risks associated with potential investments. Red flags, such as inconsistent financial reports or rapidly changing business addresses, should be investigated thoroughly.

6. Importance of Background Checks

Conducting comprehensive background checks on company executives and key personnel is essential. The history of fraudulent activities by Guess should have been a significant warning sign.

7. Regulatory Scrutiny

Financial market practitioners should understand that regulatory bodies like the SEC actively monitor and take action against fraudulent activities. Ensuring compliance with all regulatory requirements is critical.

8. Investor Protection

Management should prioritize the protection of investors by providing clear, accurate, and honest information. Building trust through transparency and integrity is fundamental to long-term success.

9. Communication Protocols

Establish clear communication protocols for interacting with investors and regulatory bodies. All information disseminated should be reviewed and approved to ensure accuracy and compliance.

10. Training and Education

Regular training and education for employees and management on ethical standards, compliance, and the importance of accurate reporting can help prevent fraudulent activities and promote a culture of integrity.

11. Responsibility and Accountability

Encourage a culture of responsibility and accountability within the organization. Leaders should set the tone for ethical behavior and ensure that all employees understand the importance of honest and transparent business practices.

12. Legal and Financial Repercussions

The severe legal and financial repercussions faced by Guess & Co. highlight the importance of maintaining ethical standards. Management should be aware that fraudulent actions can lead to significant penalties, loss of reputation, and long-term business damage.

By integrating these takeaways into their practices, financial market practitioners and management can help ensure ethical conduct, protect investors, and maintain the integrity of financial markets.

Gayatri GuptaMay 16, 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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