And the Rule 144 proposal comments are in...

This past Tuesday was the deadline to submit comments to the extremely fantabulous SEC proposal to shorten the holding periods for restricted securities under Rule 144 in most cases to six months. As we all know, this change (along with the changes to Form S-3 availability and other things) has already had a major impact on deal and market activity in the small and microcap worlds.

And the verdict is, other than one former SEC staffer who thinks some abuses will occur, every other commenter (there are several dozen) is very positive on the proposed changes to Rule 144, viewing them as a reasonable balance between investor protection and ease of capital formation. This from very large law firms, the influential Jesse Brill of the Corporate Counsel, and several law firms working heavily with smaller public companies. This means it seems very likely that the proposals will be adopted, and hopefully without too many changes. We also hope this will happen soon!

Here are some interesting suggestions from the commenters that I think are worth noting:

1. Cash/Cashless exercise. One of my friendly competitors has suggested that there should be no difference in availability of Rule 144 in warrant exercises based on whether or not the warrants are "cashless." Some warrants have to be exercised for cash, others allow you to trade some "in the money" warrants as the purchase price for others, without cash. The SEC has in the past suggested that the 144 holding period can tack in a cashless but not cash exercise. The commenter says there is no reason for the difference, and I agree. A large law firm suggested a middle ground, proposing that there be no tacking in a cash exercise only if the cash purchase price is de minimis, i.e. less than 1% of the market value of the shares.

2. Shells that are not blank checks. Another of my friendly competitors represents small, even pre-revenue, pre-asset type companies that go public. The SEC proposes allowing holders of shares of a shell company to be able to sell under 144 generally six months after the reverse merger and availability of the "super" Form 8-K. This is a major change from their prior position that 144 is never available for holders of shares of a shell, that the shares must be registered to be sold. A shell company is defined as having no or nominal assets (other than cash) and no or nominal operations. The problem is some of his clients fit this definition but yet are real start-up or early stage companies with real business plans and no intention to market themselves as a shell. Under current rules, 144 is available to them, but the proposal will inadvertently sweep them in and require them to wait six months after the going public event, even if they have held their shares for several years.

I believe this is a logical recommendation and I hope the Commission will address it. My impression is that the staff seeks to move away from the old definition of "blank check" company (a development stage company with no business plan, or whose business plan is to acquire another business) and use the shell company definition above in all its regulation of the reverse merger and IPO alternative world. Hopefully this inconsistency can be addressed.

3. Regulation S. As mentioned in an earlier posting, a number of commenters are suggesting the SEC change the holding period for securities acquired in an offshore offering pursuant to Regulation S. This makes sense. A group of large law firms from London put in a letter strongly supporting this.

4. Voluntary Filers. An interesting comment that I have a little problem with came from big law firm Fried Frank. The proposed rules require longer holding periods for companies that are not required to file reports with the SEC under the Securities Exchange Act of 1934. But the law firm points out that many companies file voluntarily, in many cases because of contractual obligations or provisions of trust indentures. Some companies that trade on the Pink Sheets also file voluntarily. Their proposal is to treat voluntary filers the same as mandatory ones.

Here I respectfully disagree. Voluntary filers are not subject to the other investor protection features of the '34 Act, such as insider filings by affiliates, proxy regulation, the requirement to file Forms 8-K when material events happen between filings and the like. Voluntary filers generally just file 10-Q and 10-K forms and nothing else. I'm not sure that substitutes for the additional protection of all these other requirements. And it would seem a bit unfair for these companies to benefit from the shorter holding period without having to satisfy these other obligations. And finally, I find that voluntary filers are more likely to be a little less careful in preparing the forms, knowing that the filing is not technically subject to SEC review or scrutiny.

5. Form 4/144? Leave it to brilliant man Jesse Brill of the Corporate Counsel. The SEC had asked if somehow filing of Form 144 by affiliates could be combined with filing of Form 4 which is required two days after any sale or purchase by an officer, director or 10% holder. Brill suggests a new form, called Form 4/144, to be used to satisfy both obligations together. It takes Form 4 and adds a few features from the Form 144, but not everything. He suggests requiring it to be filed by 10 pm on the day of the sale, earlier than Form 4. He even attached his idea of what the form could look like. Seems like a good compromise to me.

6. More "no tolling" comments. Good news that more law firms, including major firm Cleary Gottlieb, put in a strong disagreement with the SEC's proposal to limit availability of Rule 144 when a holder has been hedging the stock. Maybe, just maybe, the SEC will take these comments to heart and realize there is no reason to have this restriction that will simply erase many of the benefits they are seeking to achieve from these proposals.

7. Retroactive? One commenter requested that the SEC make clear that the operation of the shorter holding period would be retroactive, rather than randomly picking a date after which the rules would apply. I agree. As the commenter pointed out, a company conducting multiple closings of an offering could actually have some investors with one Rule 144 application before the effectiveness of the rule and another application after, which obviously makes no sense. Hopefully they will make it retroactive.

All in all, good stuff. Now let's hope the staff will sharpen their pencils quickly so we can have certainty that the opportunity to implement these great ideas will not be lost.