Massive Dilution The Securities and Exchange Commission this week announced enforcement actions against 10 companies that failed to make required disclosures about financing deals and other unregistered sales that diluted their stock.
Companies are required to file a Form 8-K when shares of common stock are sold in transactions that are not registered with the SEC and constitute at least five percent of the total stock held by their shareholders. They must also report when they’ve entered into a financing agreement not made in the ordinary course of business. These disclosures enable investors to be aware that stock dilution has occurred as a company issues additional shares in a financing transaction or other unregistered sale that has the effect of reducing the earnings per share and an investor’s percentage of ownership in the company.
SEC investigations found that each of the 10 companies it named failed to make the required 8-K disclosure for a stock dilution scenario. Three of the companies also failed to use accurate numbers when later reporting the dilution of their common stock in quarterly or annual reports. The companies all agreed to settle the SEC’s charges, and the agency assessed a total of $350,000 in penalties.
According to the SEC’s orders instituting settled administrative proceedings against the companies, the following disclosure regulations are at issue:
Under Item 1.01 of Form 8-K, a registrant must disclose within four business days its entry into a material definitive agreement.
Under Item 3.02 of Form 8-K, a smaller reporting company must disclose within four business days the unregistered sales of equity securities unless they constitute less than five percent of the number of last reported shares outstanding of the class of equity securities sold.
In Form 10-Q or 10-K (quarterly or annual reports), issuers must disclose the number of outstanding shares of their common stock as of the latest practicable date, and the information must be true, correct, and complete.
Companies named by the SEC for these disclosure lapses include: APT MotoVox Group (which agreed to pay a penalty of $25,000; CoroWare ($25,000); ERF Wireless ($50,000); Green Automotive Company ($50,000); MineralRite ($25,000); Mondial Ventures ($50,000); Monster Arts ($25,000); Red Giant Entertainment ($25,000); Seaniemac International ($50,000); and Worthington Energy ($25,000). The companies consented to the SEC’s orders without admitting or denying its findings.