White Collar

Avoiding Trouble: Proper Disclosure of Beneficial Owners and Executive Officers at Microcaps

By: Lucosky Brookman
Avoiding Trouble: Proper Disclosure of Beneficial Owners and Executive Officers at Microcaps

Failing to properly disclose accumulating beneficial ownership exceeding 5% and concealing the identity of true executive officers guiding corporate strategy poses substantial regulatory risks for microcap companies and complicit individuals. Proactive steps to ensure transparency on principals and leaders will prevent violations.

Beneficial Ownership Reporting Requirements Under Section 13(d)

Section 13(d) of the Securities Exchange Act requires any investor acquiring beneficial ownership exceeding 5% of any class of registered voting equity securities to promptly file a detailed Schedule 13D disclosure form.

Schedule 13Ds require disclosing the identity and background of the filer along with plans or proposals to exert control or influence corporate policies. Accurate 13D filings aim to inform public markets regarding potential changes in control or activist initiatives.

Disguising Control Accumulations Using Complex Networks and Nominees

However, sophisticated microcap investors sometimes skirt these 13D filing requirements through using nominees and complex multi-layered fund structures to disguise rapidly accumulating ownership and control levels clearly requiring public disclosure on Schedule 13D.

Similarly, true executive officers guiding corporate strategy may go completely undisclosed to public markets, often under the guise of bogus consulting or advisory contracts. This tactic allows influential individuals to avoid needed transparency and public scrutiny of their backgrounds and qualifications.

Substantial SEC Enforcement Risks When Undisclosed Control and Officers are Uncovered

These types of failures to disclose major controlling beneficial owners and principals guiding operations present substantial regulatory enforcement risks for companies and complicit insiders when eventually uncovered, including:

  • - Civil and administrative charges for violating beneficial ownership reporting, even if inadvertent or negligent
  • - Allegations of affirmatively misleading investors and markets by hiding material control parties and principals
  • - SEC action to suspend unregistered securities if issued to undisclosed control persons

Best Practices for Mitigating Exposure on These Issues

Performing diligent legal assessment of beneficial ownership coupled with guiding proper public filings provides protection. This allows discretely curing any disclosure gaps with the SEC before problematic scrutiny arises.

Establishing governance and transparency around formal officer roles is also prudent. Proactively ensuring beneficial owners and real executive officers are fully disclosed will prevent violations and potential penalties.

Please contact Lucosky Brookman if we can assist with assessing your microcap firm's ownership disclosures and executive appointments for any gaps needing remediation. Our experienced securities attorneys regularly help clients navigate regulatory compliance in these areas.