The DealFlow Report last week brings us the story of another attorney accused of issuing false legal opinions to get restrictive legends removed from stock certificates where the shares allegedly were not registered, nor was an exemption from registration available which would have permitted the removal of the legends. This particular attorney was quite experienced and reasonably well known among the smallcap securities bar. The lawyer settled with the SEC and agreed to a fine and to never issue securities opinions again. He neither admitted nor denied liability.
What should purchasers of shares and company executives do to help prevent this illegal activity (if it is true)? One would think you should not need to confirm that a legal opinion from a fully licensed attorney should be able to be relied upon. Sometimes, when this happens, it appears to be the lawyer in cahoots with company management. So this means boards must attempt to be vigilant to ensure that company counsel is on the up and up, as best as they are able within reason.
If you are buying shares and getting a clean certificate without a legend, it is not unreasonable to ask the attorney for the information that backs up his opinion. Truthfully, the SEC generally will not go after the buyer of shares to try to undo a transaction, but you never know.
One thing to look for: if the attorney is being paid very little cash and lots and lots of stock, he may have more incentive to remove legends, in particular on his own shares. Not that paying attorneys in stock is bad, it's just one sign that an incentive for mischief is greater.
For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog by David N. Feldman, Esq., Partner of Richardson & Patel LLP.
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