The legal and regulatory landscape for MicroCap investing is ever-evolving, including challenges involving compliance with the rules of the U.S. Securities and Exchange Commission (SEC) and securities exchanges including Nasdaq and NYSE. Procopio Capital Markets and Securities practice leader Christopher Tinen addressed several key issues impacting MicroCap investors in 2024 in a live panel discussion at the Planet MicroCap Showcase in Las Vegas on April 30, 2024.

Mr. Tinen’s focus was to educate listeners on key developments in the MicroCap market, including deal structures MicroCap issuers are seeing in the current market, including warrant repricings, warrant coverage on equity offerings, and onerous warrant terms, emerging issues in compliance with Nasdaq, NYSE listing standards and areas to watch for uplistings, and the recent rule changes governing reverse mergers and the SEC’s view on shell status.

Below are some highlights from Mr. Tinen’s remarks as well as a video link to the entire presentation.

Topic: How exchanges are dealing with challenging market conditions and the gyrations underwriters make clients go through.

Tinen: I think that it’s a challenging market for all participants, including exchanges. They have a minimum quality that they want to maintain if you’re Nasdaq or a NYSE, and you want to make sure that your companies have a certain level of quality. I know they’re managing those expectations, and for us especially as issuer counsel, we’re trying to meet those ever-shifting demands of the market alongside the exchanges. I counsel clients to just communicate, be upfront with the exchanges, talk about the problems you’re going through, and try and work through them hand in hand with the exchanges.

Topic: How Nasdaq has changed its policy, going from a pre-approval of deals prior to a deal getting done to a somewhat self-policing by the industry of getting deals.

Tinen: There’s not really a framework for unwinding a transaction which has already gone to market. I think we’re seeing kind of a rethinking, especially at the Nasdaq level, of how they manage this intake process. And it can be very challenging. You’ve completed the deal, you’ve raised the money. I’ve had Nasdaq reach out six months later and say, “check the math here,” or “let me see your distribution list.” And then you have to go back and make sure the bank has done it.

Topic: Whether reverse mergers, with shell companies or not, remain as popular as they were a decade ago.

Tinen: We’re still seeing them. There’s been some guidance put forth by the SEC on SPAC transactions, and some of that has started to be applied to reverse merger transactions. But there still are deSPACs getting done and there are still reverse mergers getting done. Then there’s a question of whether the SEC is going to essentially apply some of those SPAC rules to reverse merger transactions. You have to be more strategic about building a deal. You have to look at a consolidation and some synergies between the existing business and the target. A completely different business shift is very difficult to pull off in this market.

Topic: A broker dealer trend in handling Reg D private placements on their platforms, with them doing Reg A and acting as the broker of record as well as acting as placement agents.

Tinen: We’ve done Reg A’s less to necessarily go public. There’s a cottage industry with some of these different verticals and platforms. We have a client in the racehorse industry that kind of does do these serial Reg A’s and it’s a little bit of a different space. I think the banking community hasn’t necessarily embraced that as a path. Until that happens, you’re not going to see that many Reg A’s go public. But the compliance infrastructure is pretty sound. I mean, there are these smaller broker dealers that are doing the 50-state blue sky survey, and there’s a handful of states which have issuer dealer registration issues that are really tricky and they can kind of circumvent that. So there is an infrastructure in place if there is [investor] buy-in.

Topic: What to look out for in engagement letters for issuers.

Tinen: Certainly the exclusivity, certainly the scope. Most of them are as broad as possible, covering equity or debt securities. But if there are alternative transactions, short of using a bank that you would consider if there’s private money, then you want to look at that in the engagement process.

Topic: Thoughts on using crowdfunding platforms.

Tinen: You have to manage your cap table. If you go that route, private equity looks at a thousand people on your cap table and their heads can spin. You have to be careful if you’re going to go down that path and you have to stick to it. You’ve got to go with non-voting securities or something to put those folks in a bucket to where they won’t impact subsequent transactions, like a go public transaction. If you have multiple thousand shareholders each holding a hundred bucks, taking them through the go public process is difficult.

Christopher Tinen was joined on the panel by Lowenstein Sandler’s Steven Skolnick, and Sheppard Mullin’s Richard Friedman with Lynne Bolduc of FitzGerald Kreditor Bolduc Risbrough LLP as the moderator. The video is available on Planet MicroCap’s YouTube page.