My Meeting with the SEC on January 3 - More Good News on 415

Happy New Year to all!

On Tuesday, January 3, 2007, I met with Martin Dunn, Deputy Director of the SEC’s Division of Corporation Finance (Corp Fin) and David Lynn, Chief Counsel of Corp Fin. Subject to signoff from their boss John White, the Director of Corp Fin, these two, with the assistance of other staffers, have been formulating the Staff’s response in the Rule 415 matter. They are aware that I am blogging on this meeting, and have asked only that I clarify that we had "discussions not pronouncements" and that nothing has been finalized yet.

I apologize for some of the technical language for the non-lawyers, but here are the headlines:

Rule 415 Status: In the internal guidance to be issued, the staff intends to focus on two areas, disclosure and the primary vs. secondary offering analysis. In the latter case, a percentage is going to be set as a threshold. If you seek to register an amount below that percentage, it will be a very good sign that you have a valid secondary offering and the registration can proceed. Otherwise you need to provide ameliorating factors, most important of which appears to be keeping the ownership of any one investor as low as possible. The percentage threshold has not yet been decided upon, nor has it been decided whether the percentage will be based on “float” or outstanding shares.

Second Registration: Assuming the percentage to be registered will be limited, a big question has been, how quickly can a second registration for additional shares be filed? The staff understands the need for the market to have clear guidance on this point, and intends to provide it. The hope is that a second registration can take place relatively quickly, such as within 60-90 days after the first.

PIPE Structure is Irrelevant: To correct certain statements circulating in the marketplace (and possibly representing an evolution of their thinking), they indicated that PIPE structure is not at all relevant, and they have no problem whether the deal is a common, debt or preferred instrument. What does matter is the ultimate percentage of the company the investors will receive on a fully diluted basis.

Rule 144 Period to Shorten? It appears the staff is ready to seek a rulemaking to reduce the Rule 144 holding period from one year to six months. This would be a major development and reduce the negative impact of limiting registration, but is expected to take up to a year to complete. They may, however, seek to bring back a tolling of the holding period in connection with shorting activities.

Form S-3 for OTCBB Companies? The staff is moving toward seeking a rulemaking to allow short form registration on Form S-3 for all reporting companies for up to 20% of their stock per year in a primary offering sold at the market. Mr. Dunn initially floated this idea in a speech this fall.

Post-Reverse Merger Registrations Different? The staff appeared receptive to treating registrations immediately following reverse mergers differently than other registrations currently in their sights. The hope is, if they must limit, they will focus on limiting registration to a percentage of the outstanding stock rather than the stock held by non-affiliates.

Worm/Wulff Relief for Non-Affiliates? The staff appeared receptive to considering some relief under the so-called Worm/Wulff letters for certain non-affiliate holders of shares. Stay tuned on this one. If so, this could further enhance the utility of so-called “virgin” shells.

Self-Filings More Attractive: It appears the staff will look more favorably on registrations done as self-filings following a PIPE completed into a previously private company. This is because the PIPE transaction, in their mind, has been "completed," and this might create the opportunity to register a larger percentage of the stock.

Timing: I know I have predicted relief deadlines before without success, but it really does appear that the internal guidance will be released this month. At that time the staff intends to appear at conferences and get the word out since, as we all know, Wall Street abhors uncertainty.

It appears, at long last, we are on the verge of much greater certainty in these transactions.

For more info, do not hesitate to get in touch with me.