Rule 6490 requires issuers to complete and file a document with FINRA at least 10 business days prior to the record date of the intended corporate action. FINRA approval must be received prior to the corporate action becoming effective. In addition, FINRA may request additional documents, conduct detailed and selective reviews of the issuer’s submissions and cause the issuer to delay the announcement of its corporate action. This is particularly problematic for reverse merger companies that may not have all documents requested by FINRA.
A FINRA review will be triggered if any of the five factors set forth in Rule 6490 are thought to be present:
? FINRA believes the forms are incomplete, inaccurate or filed without the appropriate corporate authority;
? The issuer is not current in its reporting obligations with the Securities and Exchange Commission;
? Persons involved in or related to the corporate action are the subject of pending or settled regulatory action or are under investigation by a regulatory body or are the subject of a pending criminal action related to fraud or securities law violations;
? Persons related to the corporate action are likely involved in fraudulent activities involving securities or may pose a threat to investors;
? There is significant uncertainty in the settlement and clearance process for the issuer’s securities.
Issuers will be charged fines for failure to comply with the rules. Some of these fines include:
? Timely Rule 10b-17 Notification 10 business days before the Action – filing fee $200
? Late filing, but filing at least 5 calendar days before the Action – $1,000
? Late filing, but filing at least 1 business day before the Action – $2,000
? Filing on or after the Action date – $5,000.
After FINRA clearance of corporate actions under Rule 6490, issuers should expect a full review by Depository Trust Company (“DTC”) and will be required to provide an opinion from their SEC lawyer as to the tradability of shares held in CEDE & Co. As a result of this review, issuers may find themselves losing DTC eligibility and eventually being added to the DTC Chill list. It should come as no surprise to issuers accepting funding from toxic funders if their securities end up on the DTC Chill list after FINRA refuses to process the reverse splits they contemplate.
