SEC Obtains Final Judgment Against Defendant Carl Smith For Fraudulent Scheme

On January 8, 2024, the U.S. District Court for the Southern District of New York issued a final consent judgment against stock promoter Carl Smith due to the misrepresentations he made to investors during the fundraising efforts for Nanobeak Biotech Inc.

Case Summary

The Plaintiff, the Securities and Exchange Commission ("Commission"), files this Complaint against Defendants J. Jeremy Barbera ("Barbera"), Carl Smith ("Smith"), and Nanobeak Biotech Inc. ("Nanobeak") (collectively, "Defendants"), and alleges the following:

Between December 2015 and December 2019 (the "Relevant Period"), Nanobeak and its former CEO, Barbera, solicited and sold Nanobeak securities using false and misleading statements. During this time, they sold securities to at least 37 investors, raising approximately $3.6 million.

Barbera deceived investors by claiming that Nanobeak, in collaboration with scientists at the National Aeronautics and Space Administration ("NASA") and a nationally recognized research university ("University A"), had developed a sensor device capable of detecting cancer and drug use through a breathalyzer test. In reality, Nanobeak never developed such technology.

Barbera also made false and misleading statements about law enforcement agencies using the sensor device, the work conducted by University A, the likelihood of a Nanobeak initial public offering ("IPO"), and the use of investor proceeds. While some funds were used for corporate purposes, between 2016 and 2019, Barbera diverted at least $1.6 million, or nearly 45% of the raised funds, for his personal use.

In April 2019, Nanobeak's board of directors forced Barbera to resign as CEO. Despite this, Barbera continued to serve as a board member and employee of Nanobeak. He then recruited Smith, a stock promoter, to help raise funds from investors under the guise of benefiting Nanobeak. Smith falsely claimed to be a Nanobeak employee, assured investors that their funds would solely benefit Nanobeak, and denied accepting any compensation or commissions for stock sales. In fact, Smith was never an employee of Nanobeak and personally received at least $173,000 of the funds raised in 2019.

Violations

Through the aforementioned conduct and further allegations detailed herein, Defendants have violated Section 17(a) of the Securities Act of 1933 ("Securities Act") , and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Additionally, Smith has aided and abetted Barbera's violations of Securities Act Section 17(a), and Exchange Act Section 10(b) and Rule 10b-5 thereunder.

Unless restrained and enjoined, Defendants are likely to engage in the acts, practices, transactions, and courses of business described in this Complaint or in similar acts, practices, transactions, and courses of business.

Nature Of The Proceedings And Relief Sought

The Commission brings this action under the authority granted by Sections 20(b) and 20(d) of the Securities Act and Section 21(d) of the Exchange Act.

The Commission seeks a final judgment that:

permanently enjoins the Defendants from violating the federal securities laws and rules as alleged in this Complaint;
orders the Defendants to disgorge all ill-gotten gains received as a result of the alleged violations and to pay prejudgment interest on those amounts;
requires the Defendants to pay civil money penalties in accordance with Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act ;
grants any other and further relief the Court deems just and proper.

Defendants

I. Nanobeak

Nanobeak is a closely held corporation organized under Delaware law, with its principal place of business in New York, New York. Originally formed as a California corporation in 2009, Nanobeak was converted into a Delaware limited liability company in 2014 and later restructured as a Delaware corporation under the name “Nanobeak, Inc.” in 2015. In July 2019, the company was renamed “Nanobeak Biotech Inc.”

II. Barbera

Barbera, 61, resides in New York, New York. He served as Nanobeak’s CEO from 2009 until July 2019. In July 2014, the Commission charged Barbera with securities fraud in SEC v. MSGI Technology Solutions, Inc. et al., No. 14-cv-5820 (S.D.N.Y.) ("2014 Commission Action"). On August 1, 2014, the court entered a final judgment by consent against him, enjoining him from future violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder, imposing a penny stock bar and an officer and director bar, and ordering him to pay a $100,000 civil penalty.

III. Smith

Smith, 78, resides in Sarasota, Florida.

Facts

I. Background

In December 2013, NASA and Nanobeak entered into a licensing agreement to develop an application for a patented breath sensor device invented by a NASA scientist. Originally designed to detect diabetes through breath analysis, the license granted to Nanobeak restricted its development to cancer and narcotics detection. In March 2014, Nanobeak entered into a Space Act Agreement with NASA’s Ames Research Center (ARC), agreeing to pay ARC scientists to research the effectiveness of the sensor device for detecting acetone in human breath under various conditions.

In late 2013, shortly before signing the Space Act Agreement, Barbera met with "Individual A," the chief scientist for Exploration Technology at the ARC laboratory where Nanobeak's research was conducted. Barbera introduced himself, claiming, "we’ve got $1 million for NASA." Eventually, Barbera took a sensor device from ARC. According to Individual A, the sensor device did not actually detect cancer or narcotics but was merely a model of what the sensor was expected to look like.

Subsequently, Barbera arranged for Nanobeak to make initial payments to NASA under the Space Act Agreement. Since 2014, Nanobeak paid NASA approximately $340,000 for the initial work performed at ARC, but no additional payments were made to further the research. By late 2017, all work on the proposed technology at ARC had ceased due to Nanobeak’s failure to fully fund the research.

Nanobeak also had an agreement with "University A," under which Nanobeak paid the university approximately $1 million. In return, University A provided Nanobeak with information about bio-markers potentially relevant to Nanobeak's sensor device. However, University A’s scientists did not conduct any original research for Nanobeak.

Note: Under the National Aeronautics and Space Act [51 U.S.C. § 20113], NASA may enter into research and development agreements with private companies, which pay NASA scientists to conduct research.

II. Barbera Solicited and Sold Nanobeak Securities

A. Barbera Successfully Solicited Investors While Serving as Nanobeak’s CEO

Throughout the relevant period, Barbera solicited investors to purchase Nanobeak stock and promissory notes. To persuade investors, he made numerous false and misleading statements about Nanobeak, its sensor technology, its plans for an IPO, and the use of investor funds.

Barbera used a consistent sales pitch when soliciting investors for Nanobeak stock and promissory notes. He claimed to several investors, including “Investor 1,” “Investor 2,” “Investor 3,” and “Investor 4,” that Nanobeak was collaborating with scientists at NASA and University A to develop a sensor device capable of detecting lung cancer and drug use (marijuana or opioids) and that the device was nearly or fully operational.

For instance, beginning around December 2016, Barbera told Investor 1 that Nanobeak’s technology was initially developed by NASA to monitor astronauts' health in space and that research was being conducted at University A and by a “team in California” (likely referring to ARC).

Barbera also showed at least two investors, Investor 2 and Investor 3, what he claimed was a prototype of the sensor device, stating it would be sold to police departments. Additionally, he told Investor 2 that Nanobeak had agreements with local sheriff’s departments in Florida and Colorado, and that law enforcement was interested in purchasing Nanobeak’s sensor technology for drug enforcement.

When soliciting investors, Barbera presented at least one investor, Investor 2, with revenue projections indicating that Nanobeak would become profitable soon, showing earnings of over $20 million in 2019. Barbera also assured investors that meeting short-term financing needs would enable Nanobeak to achieve profitability. Based on this representation, Investor 1 provided Barbera with $90,000, which was intended for Nanobeak’s business expenses. However, a portion of these funds was used for Barbera’s personal purposes.

Barbera also informed investors that Nanobeak was seeking funds to cover the anticipated costs of its impending IPO. He told at least one investor, Investor 2, that Nanobeak’s share value would increase significantly with the IPO. From 2016 to 2019, Barbera repeatedly assured this investor that the product was nearing completion and that significant developments were imminent. In 2019, Barbera projected the IPO would take place by the end of 2019 or early 2020.

Overall, Barbera sold Nanobeak stock to 28 investors and Nanobeak promissory notes to nine investors, with at least one investor purchasing both. The promissory notes promised up to a 100% return within one year, using Nanobeak stock as collateral. Other notes promised a 10% interest rate over six months to two years, followed by principal repayment, with the option to convert the note’s value into Nanobeak stock.

From December 2015 to December 2019, Barbera and Nanobeak sold approximately $3.6 million in Nanobeak securities to 37 investors.

B. Barbera Misrepresented His Role at Nanobeak, the Planned IPO, and the Sensor Development Status While Soliciting a Wealthy Investor

In late 2019, after Nanobeak had removed Barbera as CEO but while he was still a board member, Barbera engaged in a series of phone calls with "Individual B," who he believed to be a wealthy investor, regarding a potential investment in Nanobeak.

During these calls, Barbera falsely claimed to be Nanobeak’s current CEO and stated that the company was raising capital and planning an IPO. He also misled Individual B about the development status of Nanobeak’s sensor device, claiming that work at University A and ARC was nearly complete.

For example, Barbera falsely stated that a clinical trial involving 450 participants at University A for Stage 1 lung cancer was ongoing, with 333 participants already involved, and that the trial would conclude in six months. He also asserted that the sensor device could detect cancer and would be tested for drug usage. Barbera claimed that the hardware of the sensor remained the same, and only the software needed adjustments to detect different drugs or diseases. Using high-pressure sales tactics, Barbera mentioned that he had recently secured a large investor in England and that Nanobeak required minimal additional funds to complete its research.

Barbera made several other false and misleading statements to Individual B, similar to those he had told actual investors. Specifically, he claimed that:

Nanobeak’s sensor device would be on the market in 2020.
Investor funds would be used for clinical trials at University A and technology development at NASA.
Nanobeak was working towards an IPO in the following year and was in discussions with various banks, including a specific well-known large commercial bank.
Nanobeak had agreements with Colorado and Florida to market the sensor and was negotiating a similar agreement with the Los Angeles Police Department for using the sensor to detect marijuana, THC, fentanyl, and heroin.

Barbera also misrepresented his professional experience, falsely claiming to be a former NASA scientist. In reality, he is not a trained scientist and had previously testified that he only worked as a research assistant through a NASA-affiliated program in New York.

Furthermore, Barbera did not disclose his involvement in the 2014 Commission Action during these calls with Individual B. Finally, Barbera offered to send and eventually sent a video purporting to demonstrate the sensor device by a NASA scientist.

III. Barbera's Statements to Investors and Prospective Investors Were False and Misleading

Barbera’s representations to investors and Individual B were false and misleading. According to Individual A, Nanobeak’s sensor device was far from being commercialized. Individual A also stated that adapting the original NASA diabetes sensor for other conditions would be "too complicated." Both Individual A and other ARC personnel confirmed that the diabetes testing technology was nowhere near completion, and no progress had been made on the cancer detection and drug testing uses for which Nanobeak held a license.

Furthermore, Nanobeak’s agreement with NASA was limited to ARC scientists researching the sensor device’s effectiveness in detecting acetone in human breath. ARC scientists confirmed that the device was far from being commercially viable. The sensor device’s inventor stated that it was designed solely to diagnose diabetes, not cancer or drug use.

More critically, by late 2017—two years before his conversations with Individual B—Barbera knew his statements to investors were false because all NASA research on the sensor device’s efficacy for diabetes detection had ended with inconclusive results. There were no tests for cancer or drug detection.

Barbera's claims about Nanobeak’s agreements with law enforcement agencies were also misleading. Nanobeak had no agreements to sell the sensor device to law enforcement agencies. The few existing agreements with some local sheriff’s departments were only to accept free samples of the sensor once it became functional and available. Nanobeak had no agreements with the states of Colorado or Florida, only the referenced agreements with some local sheriff’s departments.

Barbera’s statements about research at University A were equally false and misleading. While Barbera paid University A to conduct some research, University A did not conduct clinical trials for Nanobeak or test an actual device, contrary to what he told Individual B.

The demonstration video Barbera sent to Individual B was also misleading. Individual A described the video as “shocking” in its deceptiveness, noting that the sensor shown was likely just the model NASA had given to Barbera, not a functional sensor. Additionally, the purported scientist in the video was not a NASA employee and had no involvement in the sensor research.

Barbera’s statements about Nanobeak’s financial projections and IPO plans were similarly misleading. According to Individual A, Barbera knew that Nanobeak was not paying NASA for the necessary research, meaning Barbera knew or should have known that Nanobeak could not meet the manufacturing deadlines he promised. Despite Barbera’s claims of an impending IPO, Nanobeak never took any meaningful steps towards achieving one.

IV. Barbera Used Investor Funds for His Personal Benefit

When investors purchased Nanobeak securities, the proceeds were deposited into Nanobeak’s bank account. However, only a portion of these funds was used for research projects. Barbera used a significant amount of these funds for his personal benefit.

Barbera essentially treated Nanobeak’s bank account as his own. For example, he used investor funds for:

$37,000 on jewelry, clothing, food, gifts, and beauty products
$5,400 on spa and salon purchases
$5,160 on Amazon purchases
$4,400 on pet-related expenses
$14,482 on self-storage units
$7,000 on food purchases
Additional amounts to pay personal utility bills and car payments

Moreover, payments totaling approximately $477,000 were made from Nanobeak’s bank account to Barbera’s two ex-wives, his mother, and his daughters, with no apparent business purpose.

V. Smith Participated in Barbera’s Fraud

After being forced to step down as CEO in April 2019, Barbera continued to raise funds from investors with the help of Smith, a stock promoter. Between April and December 2019, Smith solicited investors by falsely claiming he was a Nanobeak employee and that he was not receiving compensation for selling investments. In reality, Smith did not work for Nanobeak and retained a portion of the investors' funds for himself.

Smith repeated many of the same falsehoods that Barbera had used. For instance, in approximately September 2019, Smith, pretending to be a Nanobeak employee, told an existing investor, Investor 5, that Nanobeak had developed a breathalyzer device capable of detecting cancer and drug use, had partnerships with NASA and University A, and had agreements with law enforcement agencies in several states to use the device.

Additionally, in 2019, Smith and Barbera solicited Investor 4 to purchase Nanobeak stock. After learning about the 2014 Commission Action, Investor 4 asked Smith about it, and Smith falsely assured Investor 4 that Barbera had done nothing wrong.

Smith also falsely assured investors that all their money would go directly to Nanobeak and that he would not receive any compensation or commission. In reality, at least $173,000 of investor money was transferred to a bank account controlled by a company Smith owned.

Funds that investors put into Nanobeak through Smith were used for payments to Barbera, food, plane tickets, legal fees, and cash withdrawals. Overall, Smith raised approximately $700,000 from investors for Nanobeak.

Claims For Relief

I. Violations of Securities Act Section 17(a) (All Defendants)

The Defendants, directly or indirectly, individually or collectively, in the offer or sale of securities and through the use of transportation or communication means in interstate commerce or the mails, have engaged in the following:

Knowingly or recklessly employed devices, schemes, or artifices to defraud.
Knowingly, recklessly, or negligently obtained money or property through false statements or omissions of material facts necessary to make the statements, under the circumstances they were made, not misleading.
Knowingly, recklessly, or negligently engaged in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon the purchaser.

By virtue of the above, the Defendants, directly or indirectly, individually or collectively, have violated and, unless enjoined, will continue to violate Securities Act Section 17(a).

II. Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder (All Defendants)

The Defendants, directly or indirectly, individually or collectively, in connection with the purchase or sale of securities and through the use of interstate commerce, the mails, or national securities exchange facilities, have knowingly or recklessly:

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

By virtue of the above, the Defendants, directly or indirectly, individually or collectively, have violated and, unless enjoined, will continue to violate Exchange Act Section 10(b) and Rule 10b-5 thereunder.

III. Aiding and Abetting Violations of Securities Act Section 17(a) (Smith)

As previously stated, Barbera violated Securities Act Section 17(a).

Smith knowingly or recklessly provided substantial assistance to Barbera in his violations of Securities Act Section 17(a).

By reason of the foregoing, Smith is liable under Securities Act Section 15(b) for aiding and abetting Barbera’s violations of Securities Act Section 17(a) and, unless enjoined, will continue to aid and abet these violations.

IV. Aiding and Abetting Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder (Smith)

As previously stated, Barbera violated Exchange Act Section 10(b) and Rule 10b-5 thereunder.

Smith knowingly or recklessly provided substantial assistance to Barbera in his violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder.

By reason of the foregoing, Smith is liable under Exchange Act Section 20(e) for aiding and abetting Barbera’s violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder, and unless enjoined, will continue to aid and abet these violations.

Prayer For Relief

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

I. Permanently enjoining Barbera, Smith, and Nanobeak, along with their agents, servants, employees, attorneys, and all persons in active concert or participation with any of them, from directly or indirectly violating Securities Act Section 17(a), Exchange Act Section 10(b), and Rule 10b-5 thereunder;

II. Ordering Defendants to disgorge all ill-gotten gains they received, directly or indirectly, with pre-judgment interest thereon, as a result of the alleged violations

III. Ordering Defendants to pay civil monetary penalties under Securities Act Section 20(d) and Exchange Act Section 21(d)(3);

IV. Granting any other and further relief this Court may deem just and proper.

Final Judgment

Smith agreed to the entry of a final judgment that permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The final judgment also requires Smith to pay a civil money penalty of $100,000 and orders the disgorgement of $173,875, along with $23,470.59 in prejudgment interest.

Key Takeaways For Investors

I. Due Diligence is Crucial

Investors should thoroughly investigate any company they are considering investing in. This includes verifying the claims made by the company's representatives and seeking independent verification of the company’s technology, partnerships, and financial health.

II. Beware of Misleading Statements

Be cautious of overly optimistic projections and promises of high returns, especially when they are not backed by concrete evidence. In this case, false claims about the sensor technology and partnerships with prestigious organizations like NASA and University A were used to mislead investors.

III. Check the Track Record of Executives

Investigate the backgrounds of the company's executives. Past involvement in fraudulent activities or securities violations, as seen with Barbera's previous judgment, is a significant red flag.

IV. Understand the Use of Funds

Investors should have a clear understanding of how their funds will be used. In this case, a significant portion of the funds was diverted for personal use by Barbera, rather than for the development of the company's technology.

V. Look for Proper Corporate Governance

Effective oversight by the company’s board of directors and transparent business practices are essential. The continuation of Barbera’s involvement in Nanobeak despite his forced resignation as CEO indicates poor corporate governance.

VI. Verify Employment Claims

Be skeptical of claims about the company’s personnel. Smith falsely presented himself as an employee of Nanobeak, which should have been a warning sign for potential investors.

VII. Legal and Regulatory Actions

Pay attention to any legal or regulatory actions against the company or its executives. Such actions can provide critical insights into the company’s conduct and potential risks.

VIII. Impact of Fraud on Investments

Understand that involvement in fraudulent schemes can lead to significant financial penalties and disgorgement orders, as demonstrated by the penalties and disgorgement ordered against Smith. This can severely impact the financial standing of the company and its ability to deliver promised returns.

IX. Importance of Regulatory Compliance

Ensuring that a company complies with securities laws and regulations is crucial. Violations can result in severe consequences, including permanent injunctions and financial penalties, which can ultimately affect the company’s viability and investor returns.

Key Takeaways For Financial Market Practitioners and Management

I. Rigorous Compliance Programs

Establish and maintain comprehensive compliance programs to ensure adherence to securities laws and regulations. Regularly train employees on ethical practices and legal requirements to prevent misconduct and promote a culture of integrity.

II. Transparency and Accurate Reporting

Commit to transparency and accuracy in all communications with investors. Avoid making false or misleading statements about the company’s products, financial status, or partnerships. Accurate disclosure is essential for maintaining investor trust and regulatory compliance.

III. Effective Corporate Governance

Implement strong corporate governance practices, including having an independent and active board of directors to oversee management activities. This ensures accountability, mitigates conflicts of interest, and enhances decision-making processes.

IV. Background Checks

Conduct thorough background checks on key executives and employees, especially those in positions of trust. Past involvement in fraudulent activities or securities violations is a significant red flag that should be carefully considered.

V. Proper Use of Investor Funds

Ensure that investor funds are used for their intended purposes and are properly accounted for. Misuse of funds, as seen in this case, can lead to severe legal and financial consequences, damaging the company’s reputation and investor confidence.

VI. Monitoring and Auditing

Regularly monitor and audit financial activities and transactions to detect and prevent fraudulent activities. Internal controls and independent audits are critical for maintaining financial integrity and compliance.

VII. Legal and Regulatory Vigilance

Stay informed about legal and regulatory actions and updates that may impact the company. Proactively address any potential legal issues to mitigate risks and avoid enforcement actions.

VIII. Effective Communication Channels

Establish clear and effective communication channels for reporting and addressing unethical or illegal activities within the organization. Whistleblower protections and anonymous reporting mechanisms can help identify and resolve issues early.

IX. Investor Relations

Foster strong relationships with investors by providing regular, honest updates about the company’s progress and challenges. Building trust through consistent and truthful communication can enhance investor loyalty and support.

X. Responsibility and Accountability

Emphasize the importance of responsibility and accountability at all levels of the organization. Leadership should set the tone for ethical behavior and ensure that all employees understand their role in maintaining the company’s integrity and reputation.

Gayatri GuptaMay 22, 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