SEC Charges Convertible Note Dealer Aryeh Goldstein For Failure to Register

On January 23, 2024, the Securities and Exchange Commission (SEC) announced the filing of an enforcement action against Aryeh Goldstein, a resident of Florida and New York, along with two entities he controls: Adar Bays, LLC in Florida, and Adar Alef, LLC, operating in both Florida and New York.

The action addresses their failure to register as securities dealers in connection with their convertible note financing business, which involved acquiring and selling securities from over 100 microcap companies.

The parties have agreed to settle the charges, with Goldstein and his entities agreeing to pay $1.25 million in monetary relief and to surrender or cancel all remaining shares of public companies allegedly acquired through their unregistered dealer activities.

Case Summary

The Securities and Exchange Commission (SEC) filed an enforcement action against Aryeh Goldstein, a resident of Florida and New York, along with two entities he controls: Adar Bays, LLC, based in Florida, and Adar Alef, LLC, operating in Florida and New York.

The action pertains to their failure to register as securities dealers in connection with their convertible note financing business, which involved acquiring and selling securities from over 100 microcap companies.

The parties have agreed to settle the charges. As part of the settlement, Goldstein and his entities will pay $1.25 million in monetary relief and will surrender or cancel all remaining shares of public companies allegedly acquired through their unregistered dealer activities.

The Defendants

1. Aryeh Goldstein

Aryeh Goldstein, 51 years old, resides in Miami Beach, Florida. He is the sole owner and Managing Member of Adar Bays, LLC, and Adar Alef, LLC, and exercised control over both during the relevant period. Goldstein has never been registered with the Commission as a dealer or in any other capacity.

2. Adar Bays, LLC

Adar Bays, LLC, is a limited liability company formed in Florida in 2014 and based in Miami Beach, Florida. Solely owned and controlled by Goldstein as its Managing Member, Adar Bays was used to facilitate convertible debt financing transactions and related stock sales. The company has never been registered with the Commission as a dealer or in any other capacity.

3. Adar Alef, LLC

Adar Alef, LLC, a Nevada limited liability company, was originally formed in New York by Goldstein in 2018. In 2020, it became a Nevada LLC and was subsequently registered to do business in Florida. Owned and controlled by Goldstein, its sole Managing Member, Adar Alef was used to facilitate convertible debt financing transactions and related stock sales. It has never been registered with the Commission as a dealer or in any other capacity.

Facts Of The Case

I. The Defendants’ Convertible Debt Financing Business

Adar Bays entered the convertible debt business in 2014. Convertible debt agreements between a public company borrower and a lender like the Defendants include provisions allowing the lender to convert unpaid debt into newly-issued discounted stock of the public company borrower if the borrower fails to meet its repayment obligations. Convertible debt lenders can then sell these discounted shares to investors on the open market, typically at a substantial profit. Lending money to penny stock companies through convertible debt agreements made up the majority of the Defendants’ business during the relevant times.

Adar Bays was established in 2014 specifically to lend money to distressed penny stock companies via convertible debt agreements. In 2018, Adar Alef was created to enter new convertible debt agreements, while Adar Bays continued handling existing deals.

The Defendants grew their business primarily through word-of-mouth. As they entered more convertible debt agreements with penny stock companies, additional companies sought them out directly and through third parties for convertible debt financing. Public disclosures of the borrower companies' convertible debt agreements with the Defendants further increased awareness of their business.

Over time, the Defendants entered into convertible debt agreements with at least 134 different issuers. During this period, they converted large amounts of unpaid issuer debt into discounted stock, generating trading profits from these investment returns. While they traded in their own account to generate these profits, they also facilitated the entry of newly-issued stock into the securities markets.

II. The Anatomy of the Debt Financing Agreements

The Defendants extended cash loans to penny stock companies through Stock Purchase Agreements (SPAs) that typically gave the issuer a six-month window to repay the loan in cash. Although issuers could theoretically repay within the first six months, the SPAs imposed a substantial premium for cash repayment—usually 140% of the amount due, plus additional charges and interest. After this initial six-month period, issuers typically lost the right to repay in cash without the Defendants' consent.

Following the six-month cash repayment period, the Defendants generally had the right to convert the amount due under the SPA into newly-issued shares of the issuer’s stock. The stock the Defendants received was significantly discounted, usually 30% to 50% off the lowest trading price in the days preceding the conversion. For example, if an issuer’s shares were trading at a low of $0.04 per share before the conversion, a 50% discount would make it $0.02 per share. The number of shares the Defendants received at conversion was calculated by dividing the total amount due under the SPA by the discounted share price. For instance, if an issuer owed $1,000 and the discounted share price was $0.02 per share, the Defendants would receive 50,000 shares ($1,000 divided by $0.02). When the Defendants sold the discounted stock at, for example, a market price of $0.04 per share, the sale proceeds would be $2,000, yielding a $1,000 profit.

III. Defendants Were Not Registered with the SEC as Dealers

Since at least 2014, the Defendants regularly engaged in numerous Stock Purchase Agreements (SPAs) with various penny stock companies. They exercised their conversion rights to obtain large amounts of deeply discounted stock and then sold this stock in the market, often for a profit. The Defendants used interstate commerce means or instruments to buy and sell securities, including placing trades on national securities exchanges through a broker and communicating with borrower companies and brokers via national telephone and electronic communications networks.

Through this conduct, the Defendants acted as dealers without registering with the SEC or associating with a registered dealer. To register as a dealer, one must file an application using Form BD and meet statutory requirements that involve maintaining high professional standards.

SEC registration requires the dealer to provide crucial information about its business, including the names of direct and indirect owners and executive officers, arrangements with other persons or entities, the identities of those who control the business, the states in which the dealer operates, and any past criminal or regulatory actions against the dealer or its affiliated persons. Additionally, financial information, such as bankruptcy history, must be disclosed. Registered dealers must join a self-regulatory organization or a national securities exchange, which assists the SEC in regulating their activities. Furthermore, registered dealers are subject to inspections by SEC staff and the Financial Industry Regulatory Authority (FINRA) to ensure compliance with securities laws.

IV. Defendants Bought and Sold Penny Stocks

Almost all the stock bought and sold by the Defendants were penny stocks, which did not qualify for any exceptions from the definition of a “penny stock,” as outlined in Exchange Act Section 3(a)(51) and Exchange Act Rule 3a51-1 (15 U.S.C. Section 78c(a)(51); 17 C.F.R. Section 240.3a51-1). As such, the Defendants participated in offering penny stocks to investors by acting as securities dealers engaged in the buying and selling of these stocks.

Claims For Relief

Violations of Section 15(a)(1) of the Exchange Act (Against All Defendants)

The Commission re-alleges and incorporates by reference the allegations set forth in paragraphs 1 through 23 above.

Through the conduct described above, the Defendants used the mail or other means of interstate commerce to effect transactions, induce, and attempt to induce the purchase and sale of securities as part of their regular business. They did this without being registered with the Commission as broker-dealers and without being associated with a registered broker-dealer entity.

As a result, the Defendants violated, and unless enjoined, will likely continue to violate Section 15(a)(1) of the Exchange Act.

Prayer For Relief

The Commission respectfully requests that this Court:

I. Permanent Injunction

Enter a permanent injunction restraining each of the Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with Defendants 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 in conduct of similar nature and objective, in violation of Section 15(a)(1) of the Exchange Act [15 U.S.C. § 78o(a)(1)].

II. Disgorgement

Order Defendants to disgorge ill-gotten gains and/or unjust enrichment received directly or indirectly, with pre-judgment interest thereon, as a result of the violations alleged herein, pursuant to Exchange Act Sections 21(d)(5) and 21(d)(7) [15 U.S.C. §§ 78u(d)(5) and 78u(d)(7)].

III. Civil Penalties

Impose appropriate civil penalties upon Defendants pursuant to Section 21(d)(3) of the Exchange Act.

IV. Penny Stock Bar

Issue an Order restraining and enjoining Defendants from participating in the offering of any penny stock, including engaging in activities with a broker, dealer, or issuer for the purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock, under Exchange Act Section 21(d)(6).

V. Cancellation of Stock and Conversion Rights

Order the Defendants to surrender for cancellation any remaining stock and conversion rights under any debt financing agreements entered into since 2014.

VI. Retain Jurisdiction

Retain jurisdiction over this action in accordance with the principles of equity and the Federal Rules of Civil Procedure to implement and carry out the terms of all orders and decrees that may be entered.

VII. Further Relief

Grant such other orders for further relief as the Court deems just and proper.

Key Takeaways For Investors

The Commission respectfully requests that this Court:

1. Importance of SEC Registration

The case underscores the necessity for entities involved in securities transactions to be registered with the SEC as broker-dealers. Engaging in securities transactions without proper registration can lead to severe legal consequences.

2. Risks of Convertible Debt Agreements

Convertible debt agreements can be lucrative but also carry significant risks. Investors should be aware that such agreements often involve distressed companies and can result in substantial profits if the stock price appreciates, but they also come with the risk of substantial losses.

3. Disclosure and Transparency

The case highlights the importance of transparency and disclosure in securities transactions. Investors should ensure that the entities they are dealing with are compliant with all regulatory requirements and provide full disclosure of their business practices.

4. Due Diligence on Penny Stocks

Penny stocks are often associated with higher risk due to their low market capitalization and liquidity. Investors should perform thorough due diligence before engaging in transactions involving penny stocks to avoid potential fraud and manipulation.

5. Impact of Legal Actions

Legal actions and enforcement by regulatory bodies like the SEC can significantly impact the operations and financial standing of companies involved. Investors should be cautious of companies under investigation or litigation, as these issues can lead to penalties, disgorgement of profits, and operational disruptions.

6. Role of Interstate Commerce

The case illustrates how the use of interstate commerce, such as electronic communications and trading on national exchanges, is integral to securities transactions. Investors should be aware that these activities are heavily regulated to ensure market integrity and investor protection.

7. Consequences of Non-Compliance

Non-compliance with securities laws can result in severe penalties, including disgorgement of profits, monetary penalties, and permanent injunctions. Investors should prioritize compliance to mitigate legal and financial risks.

8. Monitoring by Regulatory Authorities

The involvement of regulatory authorities like the SEC and FINRA in monitoring and inspecting registered dealers ensures that investors are protected from fraudulent activities. Investors should favor dealing with entities that are subject to such regulatory oversight.

By understanding these key takeaways, investors can better navigate the complexities of securities transactions, particularly in the realm of convertible debt and penny stocks, and make more informed decisions.

Key Takeaways For Financial Market Practitioners and Management

The Commission respectfully requests that this Court:

1. Strict Adherence to SEC Registration Requirements

Financial market practitioners must ensure that their firms are properly registered with the SEC if they are acting as broker-dealers. Failure to register can result in significant legal actions and penalties.

2. Regulatory Compliance

Continuous compliance with securities regulations is critical. Management should implement robust compliance programs and regularly audit their operations to ensure adherence to all applicable laws and regulations.

3. Transparency in Business Practices

Transparency in dealings, especially when it involves convertible debt agreements and penny stocks, is essential. Clear disclosure of business practices to investors and regulatory bodies can prevent legal issues and build trust.

4. Risk Management in Convertible Debt Financing

Convertible debt financing involves inherent risks, particularly with distressed companies. Practitioners should have strong risk management frameworks to evaluate and mitigate these risks effectively.

5. Due Diligence

Rigorous due diligence processes should be in place when entering into agreements with penny stock companies or any high-risk entities. This includes thorough background checks and financial assessments to avoid potential fraud and reputational damage.

6. Impact of Legal and Regulatory Actions

Management should be aware that legal and regulatory actions can have severe operational and financial repercussions. Proactively addressing any compliance issues can mitigate the impact of such actions.

7. Effective Use of Interstate Commerce

The case highlights the role of interstate commerce in securities transactions. Firms should ensure that their use of electronic communications and trading platforms complies with all relevant regulations.

8. Proactive Engagement with Regulatory Authorities

Maintaining open and proactive communication with regulatory bodies like the SEC and FINRA can help address compliance issues before they escalate into enforcement actions.

9. Training and Awareness

Regular training programs for employees on compliance, ethics, and regulatory requirements can prevent inadvertent violations and foster a culture of integrity within the organization.

10. Documentation and Record-Keeping

Proper documentation and record-keeping are essential for demonstrating compliance and facilitating audits by regulatory authorities. Firms should ensure that all transactions and communications are well-documented.

11. Reputation Management

Non-compliance and legal issues can significantly damage a firm's reputation. Practitioners should prioritize ethical practices and compliance to maintain their reputation and trust with investors and stakeholders.

12. Monitoring and Internal Controls

Implementing robust internal controls and monitoring systems can detect and prevent regulatory breaches. Regular reviews and updates to these systems are necessary to adapt to evolving regulations and market conditions.

By understanding these key takeaways, financial market practitioners and management can enhance their compliance strategies, mitigate risks, and ensure sustainable and lawful operations in the financial markets.

Gayatri GuptaMay 17, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

Securities Lawyer Blog

SEC Charges Convertible Note Dealer Aryeh Goldstein For Failure to Register

Case Summary

The Defendants

1. Aryeh Goldstein

2. Adar Bays, LLC

3. Adar Alef, LLC

Facts Of The Case

I. The Defendants’ Convertible Debt Financing Business

II. The Anatomy of the Debt Financing Agreements

III. Defendants Were Not Registered with the SEC as Dealers

IV. Defendants Bought and Sold Penny Stocks

Claims For Relief

Violations of Section 15(a)(1) of the Exchange Act (Against All Defendants)

Prayer For Relief

I. Permanent Injunction

II. Disgorgement

III. Civil Penalties

IV. Penny Stock Bar

V. Cancellation of Stock and Conversion Rights

VI. Retain Jurisdiction

VII. Further Relief

Key Takeaways For Investors

1. Importance of SEC Registration

2. Risks of Convertible Debt Agreements

3. Disclosure and Transparency

4. Due Diligence on Penny Stocks

5. Impact of Legal Actions

6. Role of Interstate Commerce

7. Consequences of Non-Compliance

8. Monitoring by Regulatory Authorities

Key Takeaways For Financial Market Practitioners and Management

1. Strict Adherence to SEC Registration Requirements

2. Regulatory Compliance

3. Transparency in Business Practices

4. Risk Management in Convertible Debt Financing

5. Due Diligence

6. Impact of Legal and Regulatory Actions

7. Effective Use of Interstate Commerce

8. Proactive Engagement with Regulatory Authorities

9. Training and Awareness

10. Documentation and Record-Keeping

11. Reputation Management

12. Monitoring and Internal Controls

Listing Criteria For NasdaqFor a company to list its securities on Nasdaq, it must satisfy the following criteria:

Licensed in District of Columbia, State of Colorado, US District Court for the District of Columbia, US District Court for the District of Colorado, with pro hac vice Admission for the State of Maryland and Virginia.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria: