*Beauty Is in the eye of the stock promoter.
SEC v. Sierra Brokerage, et al.
Many of the arguments in the case are procedural, but the basis of the case involves Tsai, who created shell companies for reverse mergers. As part of the process, Tsai would distribute the shares to his buddies to spread out the holdings in order to qualify for OTC trading. Tsai also had stock powers from these people that allowed him to redistribute the shares in the reverse merger.
Tsai’s ability to reclaim the shares at a reduced price constituted “control” over the shareholders in addition to his control over the company and made them all “affiliates.” According to the SEC and the court, this made him an underwriter and Rule 144 unavailable. Thus, the distribution was a violation of the registration requirements of the 33 Act.
But wait, there’s more. His failure to report the shares he controlled via the stock powers was a violation of Section 13(d) and Section 16(a) of the 34 Act (requirements to file Schedule 13Ds and Forms 3, 4 and 5).
If you want to draw broader lessons:
- Spreading out securities holdings without an effective registration violates the 33 Act
- The ability to repurchase shares demonstrates control
- The ability to repurchase shares constitutes beneficial ownership and pecuniary interest for purposes of the Williams Act and Section 16 disclosure and short swing profit rules
- The SEC still does not like reverse mergers