Today's Rule 415 Update
As of midday today, the internal guidance at the SEC has not yet been issued, but it is still anticipated imminently. As mentioned below, the hope is that David Lynn's appearance on January 25 at a PIPE conference in NY will provide information. Also, Deputy Director of Corporation Finance Marty Dunn is speaking at Northwestern University Law School's conference on securities law, which runs Jan 24-26. I expect to get reports from that appearance as well. I'll hold off on further blogging on this topic untiil there's some news.
Very soon I hope this will cease to be the "415 blog" and move back to its original purpose!
Very soon I hope this will cease to be the "415 blog" and move back to its original purpose!
posted by David N. Feldman at
1/16/2007 06:48:00 PM
9 Comments:
An adverse 415 ruling pretty much destroys the case for "Virgin" shells, no?
I disagree rather strongly. Or better to say an adverse 415 ruling has the risk of destroying the case for pretty much all financings in connection with reverse mergers, whether with a shell that trades or doesn't.
If, for example, the SEC were to say a post-reverse merged shell can only register 30% of its nonaffiliate stock (ie "float"), even in a trading situation, that will represent a ridiculously low number of shares, since the former owners of the trading shell post-merger own a very small percentage, and the former affiliates of the shell are deemed affiliates for 90 days following the transaction on top of that.
The hope, of course, is that the ruling will not be adverse in that manner as to reverse mergers, and either a percentage of outstanding stock test will be adopted, or a facts and circumstances test will apply allowing companies after a reverse merger to go above whatever percentage of float is decided upon.
In that situation, in fact, the virgin shells might be more attractive. Why? Because the SEC's main concern is the sudden and dramatic dilution to holders of tradeable shares from a resale registration. After a merger with a trading shell that's a real concern indeed. After a merger with a virgin shell, no one has tradeable shares, therefore the concern is not present. The senior staff I met with acknowledged as much and indicated they understand the value of the virgins and frankly prefer a shell that does not trade prior to a merger.
Sorry for the long-winded answer, hope it helps, and thanks for the chance to clarify this important point.
Thanks. It would seem to me that the value of trading otcbb shells will decline a bit from the $400,000-600,000 range we've seen in the past year. However, I believe they will still trade at double the rate of the 10-SB's because they are already up and trading with a symbol, a shareholder base and, most importantly, a free trading float. The problem I see with Virgin 10-SB's is that there is no float until a registration is filed and declared effective. You can do the merger, do a PIPE and even get the symbol up and trading, but how do the PIPE guys know what the true value of their investment is when the market literally doesn't exist because there is no float. I'm not arguing against 10-SB's here, I'm thinking about starting a few myself. If any market will be destroyed by 10-SB's it won't be the OTCBB's, it'll be the Pinks. Just my opinion, but your bias in favor of 10-SB's vs. otcbb's seems a bit unwarranted.
Is it possible to make 10-SB's a little more attractive by adding shareholders (through 504's for example) and letting them age a year or so? It would seem that a 10-SB shell would be more attractive to a potential buyer/merger candidate if it already had 50+ sharholders.
One last thing, have you heard much from the SEC re Footnote 32 issues? What, really, are the adverse consequences of being declared a shell after the fact? Thanks. Great blog.
hi david,
your blog made the CCG Bookmarks
see you in NY next week
Olivia Tong
Anonymous - first thanks for the compliments! As to your comment, there is a place for both trading and non-trading shells, the only question is what value each has and what transactions are appropriate for each. Realize that even in a trading shell, when a PIPE is getting closed on the same date as a reverse merger (which is very common) the trading price of the shell at that point, prior to closing when you are pricing the PIPE, is meaningless. It is trading based on a deal that has not been fully disclosed and is still speculative as to whether it will close. And, typically, the shares in the shell trade minimally, even after the announcement of the deal. So I think PIPE guys always have the issue of valuation whether the shell is trading or not. They get around it by negotiating essentially a hybrid between a private and public valuation, and the public trading price is basically ignored.
The fact that there is no float in a virgin shell following the merger prior to registration does not matter to virtually all PIPE investors. All they care about is that the stock is trading by the time their shares are registered, which it will be. A few investors have a requirement in their fund to be able to mark their investment to market every day, and in those rare cases you do in fact need a trading shell.
But what does trading in a shell really buy? About 3-4 months of trading prior to registration. In too many deals there is insider trading prior to the announcement. After closing the "float" you describe represents maybe 5% of the total stock during that four months, and typically one person or group controls about 2/3 of that, and they are not selling soon. Thus maybe 1-2% of the stock is actually trading. In addition, these shareholders invested in some other company, and now want nothing but out. So often there is downward pressure on the stock after a merger. Having some trading still may be helpful, but does it really justify the significantly higher price? In my humble opinion it does not, and it is purely the perception of the importance of the ticker that drives the differential in the market.
You cannot do a 504 into a reporting company (I believe, haven't checked) so that wouldn't work in a virgin shell, which is fully reporting. My hope is to convince the staff to offer some relief under Worm/Wulff for non-affiliate, non-promoter purchasers of shell shares directly from the shell.
What I have heard about footnote 32 is that the enforcement staff is focusing on it, and where it will come out is not necessarily as the shell is going public with a pretend business (or a real business but with an undisclosed goal of creating a shell), but rather in a registration attempt after a merger, when transfers of shares and other transactions will be questioned.
Thanks for the informative comments. My point re a 504 into a 10-SB was that a virgin shell with 50 sharholders as opposed to 4 would be seem to be much more attractive to a merger candidate because it would be "otcbb ready" in terms of a shareholder base. Maybe you can't do a 504 specifically, but you could certainly sell equity to however many shareholders you like after the registration is effective, the same way that you could do a PIPE into a publicly reporting trading company. Would there be a reason that a 10-SB would be more attractive with only 3-8 shareholders? What am I missing?
From the public filings I've read, it seems as though these 10-SB's are "trading" for roughly $100,000-&200,000 and 1-2% of the post merged equity. Is that consistent with your experience and do you believe that these figures go higher? Thanks again and I want you to know that I've told about a dozen people (investors, traders, attorneys) to bookmark your blog.
Thanks for the plugs Anonymous! Most guys with the virgin shells are seeking around $1-1.5 million in equity, or about $200,000 in cash, either way (disclaimer: I am a principal in six virgin shells). So it's less about percentage than value, since it varies dramatically based upon the size of the company merging in.
As to shareholder base, different virgin shell guys do it differently. Some want to get a bunch of shareholders in right away, others, particularly those who are in the business of raising money, presume they will bring in the 40-50 shareholders unofficially required by the OTCBB as part of the PIPE in connection with the reverse merger, then register enough of their shares to satisfy the NASD.
Thanks Mr. Feldman. The more I think about it the more convinced I am that you would have to decide how many shareholders you wanted PRIOR to filing the 10-SB. If you filed the 10-SB and then tried to sell more equity to increase the shareholder base, wouldn't you be in violation of Rule 419, or at least bound by 419 in terms of escrowing the money, reconfirmation of the merger by proxy, etc.?
Nothing would prevent you from organizing, incorporating and capitalizing the company with say 4-6 original holders for a few thousand bucks, and then bringing in 30-50 accredited investors at a higher price prior to submitting the 10-SB. I guess the only downside would be the extra time it would take. Forming with 4-6 guys and keeping it that way does have the virtue of speed.
Anonymous- actually you can add shareholders at anytime without the 419 restrictions as long as the offering to the holders is a private placement. So you're actually better off waiting until the 10-SB is effective so as not to complicate the SEC filing of the Form 10-SB.
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