Where is the Regulation D Proposal?

The last of the SEC's six major proposals to ease the burden on smaller public companies has still not been released more than two months after it was announced back on May 23.

This proposal, which is supposed to include the right to have limited advertising if offerees include only a new type of "super accredited investor," appears to be in tweak central at the SEC. The proposal also is going to state that the standards to become an accredited investor will be increased and indexed for inflation starting in 2012 (it will be here before you know it, just ask my office landlord!).

We are hopeful that John White's promise to have everything for our "summer reading" will include this important proposal.

On a personal note, I wish to thank everyone who expressed concern about us following the steampipe explosion one block from our office on Lexington Avenue in Manhattan last week. All of us at FW&S are fine, thankfully, though certainly a bit shaken up! The office was only closed for a day, and now, but for continuing street closures, we are back to normal. Thank goodness technology allowed all of us to continue to work remotely even while the building was shut down.

I am off to a little R&R with the family and look forward to talking with you all again soon.

Feldman Weinstein and Smith Comment Letter Regarding S-3 Proposal

Below is our firm's comment letter with respect to the SEC's proposals on the availability of Form S-3 "short form registration" for all reporting companies. The letter has been submitted to the SEC and is available on their web site:

Subject: File No. S7-10-07
From: David N. Feldman, Esquire
Affiliation: Managing Partner, Feldman Weinstein and Smith LLP
July 19, 2007

FELDMAN WEINSTEIN AND SMITH LLP
420 Lexington Avenue New York, NY 10170
Telephone: 212-869-7000
Facsimile: 212-997-4242
www.feldmanweinstein.com

July 16, 2007

Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Attention: Nancy M. Morris, Secretary

Re: File No. S7-10-07, Securities and Exchange Commission Release No. 33-8812, RIN 3235-AJ89, Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3

Ladies and Gentlemen:

Feldman Weinstein and Smith LLP has the following comments on the Staff's proposed Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3.

Our law firm represents issuers, investment banks and institutional investors primarily in business combination and financing transactions, including reverse merger and PIPE transactions, giving our attorneys a front-row seat in observing the challenges which the current rules impose on smaller public issuers. Overall, the proposals represent a dramatic and positive set of steps to help smaller public companies raise necessary capital on a timely basis and at a lower cost of capital than the current regulations permit. We believe that the following points, presented in the Staff's request for comments, could result in further improvements:

The 20% of Float Limitation

The key concern we have with the proposed 20%-of-float limitation in the proposed rule is that it permits a smaller public company to raise funds at the lowest available cost of capital only as a residual artifact of its current share price and current ownership structure, not as a function of the needs of the business itself. Businesses, large and small, run on business plans, whether that is to increase a sales force, pay for research and development, or build a new assembly line. The cost of these growth plans is not a function of whether the founding shareholders still have a controlling stake in the business, or whether on one day in the last 60 days the stock price happened to spike above $75,000,000 in market float.

We believe that shelf-registered securities are the lowest cost form of equity available to any given public company, due to the speed of execution and the fact that the securities are immediately tradable in the hands of the purchasers. The Staff has traditionally taken the view that the simple filing of an S-3 shelf registration provides adequate notice to the marketplace of the scale of an issuer's financing plans or ambitions (and prospective dilution), and the market has been presumed to react appropriately. This will be just as true for the sub-$75,000,000 issuer as for a WKSI.

We believe that rather than imposing an arbitrary 20% of float limitation, it would be more useful to both issuers and to investors if the issuer was instead required to provide a more detailed use of proceeds than is currently required by Regulation S-K, such that if an issuer with a $20,000,000 market capitalization proposed to shelf-register $40,000,000 of securities, current and prospective investors in that company would have some idea whether that was intended to fund plant construction, clinical trial expenses, acquisitions (even if unidentified) or simply to increase executive compensation and perks. We believe this would solve the key challenge created by the 20% of float limit, which would make the new Form S-3 rule of the least benefit precisely to those issuers who have the greatest need for outside equity capital.

We do understand the Staff's stated concern that smaller companies have relatively less liquidity (Release at page 14) and that there may be an adverse result to existing shareholders from a flood of new shares onto the existing market. Although we believe that all of an issuer's shareholders would in fact benefit from owning shares in a strongly-capitalized business rather than one where the executive officers spend too much of their time scrounging for funds from one small private placement after the next, we understand that there can be a reasoned difference of opinion on this subject.

If the Staff prefers to retain a mathematical limit, we find great merit in the Staff's idea (Release at page 31, second bullet point) to use a percentage of dollar trading volume as an alternative test for the amount of securities that could be shelf-registered. We do not think this should be in place of the market float test, but rather it should be a greater-of alternative test, where an issuer could raise in any 12 months the greater of 20% of its float OR 25% of its annualized trading volume.

This would positively address the needs of the more-liquid issuers for capital while assuaging the Staff's concerns about large issuances by illiquid companies. We think that the most appropriate look-back period for determining annualized trading volume would be the same 60 calendar day period used in the public float calculation, as both price and volume are equally potent indicators of market acceptance for a particular issuer's securities at a recent point in time.

A further alternative would be to harmonize the Staff's recent reinterpretation of Rule 415 (addressed further below) with the current initiative. In reassessing Rule 415's application to resale registrations by selling securityholders, the Staff determined that allowing any issuer to register up to one-third of its public float for resale is reasonable. We believe the proposed limit on use of Form S-3 to 20% of an issuer's public float each year is not related to any other standard applied in other aspects of securities regulation. While any percentage cutoff is by its very nature arbitrary, we believe it makes more sense to increase the amount permitted to be registered in a primary offering to at least be equivalent to what the Staff permits in resale registrations.

Therefore, we propose that the Commission permit a smaller reporting company to be able to register up to one-third of its public float each year, rather than 20%, or such higher amount as the Commission or its Staff may determine is permitted in general under Rule 415.

Valuation of Securities Being Issued

One issue that we believe should be clarified in either the final amendment to Form S-3 or in the final issuing release is the valuation of the securities that may be issued under the 20% limit (assuming the Commission elects to maintain that requirement as proposed). At the bottom of page 15 of the Release, the Staff notes "the 20% limit would apply to the amount of common stock warrants that a company could sell. . ."

It is not clear what the Staff means by that. Is it the cash (or equivalent) purchase price of the warrant itself, the aggregate exercise price of the warrants, or the difference, if any, between the exercise price and the market price of the underlying common stock at the time the warrants are first issued? In a world where most deals for micro-cap stocks include a warrant component, this is an important point. It is especially important to have clear guidance on this subject as transactions are often sold as units of common stock and warrants, without any expressed allocation of the unit purchase price between the various components of the unit.

Blue Sky Concerns

The Staff makes an excellent point in the Release at page 35, second bullet point, concerning the lack of a Blue Sky exemption for OTC Bulletin Board issuers. This factor has made the existing shelf registration regime nearly useless for those OTCBB issuers who currently have a float in excess of $75,000,000, who have been eligible to use Form S-3 for primary offerings all along.

In our representation of investment banks, this problem has regularly killed transactions.
The whole point of the shelf registration is to allow virtually instantaneous reaction to market conditions. The lack of any equivalent process at the state level has essentially limited their use to transactions where all of the investors are either located offshore or resident in a state such as New York where only a non-substantive notice filing is required. Otherwise, the speed which is the hallmark of shelf offerings is entirely lost.

We suggest that the solution would be for the Commission to assert its authority to make all S-3 (or F-3) registered securities covered securities for purposes of Section 18(b). Given the continuous disclosure requirements that now apply to all OTCBB companies, this would not in any way subvert the congressional intent behind Section 18(b).

Resale Registrations

Respectfully, we do not see the rationale for excluding resale registrations from this proposal. The Staff seems to indicate that they are concerned about indirect primary offerings taking place. We believe that any concerns about this have already been fully addressed by the Staff's reinterpretation of Rule 415 (which is briefly addressed at the end of these comments). Given the continuous disclosures now being made by all reporting issuers, there does not seem to be any additional need to require issuers that have completed a private placement to go through a cumbersome S-1 registration. Therefore, we propose that a further S-3 resale registration be permitted for up to one-third of an issuer's public float each year, or such higher amount as the Commission or its Staff may determine is permitted in general under Rule 415.

Shell Company Exclusion

We do not understand why former shell companies need to wait a full year before being able to avail themselves of short-form registration. Since the Commission is proposing to permit former holders of shell company shares to be able to sell them in as little as 90 days under the proposed amendments to Rule 144, one presumes the Commission now feels comfortable that sufficient information about the merged company has been disseminated within that time frame, particularly due to the revised so-called "super" Form 8-K reporting requirements adopted two years ago. We strongly urge you to reconsider this time frame and limit it to 90 days.

Coordination with Other Recent Commission Initiatives

Rule 415 Reassessment. While not published for requested comments in the proposal, we believe that the instant proposal to revise the eligibility requirement to use Forms S-3 and F-3, together with the companion proposal to amend Rule 144 (Release 33-8813), are an appropriate opportunity to take another look at the Division of Corporation Finance staff's recent re-interpretation of Securities Act Rule 415.

Contrary to the spirit embedded in the proposed amendments to Form S-3 and Rule 144, which are both intended to make capital formation easier and cheaper for issuers, the Division of Corporation Finance, in its informal reinterpretation of Securities Act Rule 415 over the last 12 months, has gone in the opposite direction, making capital formation materially more costly to issuers, by denying legitimate investors the ability to timely exit from an investment. Unfortunately, this re-interpretation has already resulted in many potential nonabusive PIPE transactions being abandoned.

The new proposals will help ameliorate the problem created by this re-interpretation, but other problems, such as the inability to tack the holding periods on cash exercise of warrants, and therefore sell warrant shares without registration, will not go away. The entire thrust of the Rule 415 interpretation, from a policy perspective, seems counter to the spirit of the well-thought out new proposals.

Therefore, we propose that the Commission, as part of the new proposals, codify and modify its interpretation of Rule 415 to permit at least 50% of an issuer's actual outstanding shares to be registered for resale at one time, and more if other considerations exist.

We are extremely pleased to see the Commission turn its attention to adopting a number of the recommendations made by the Advisory Committee on Smaller Public Companies.
In general, the proposal (as well as its five companion proposals which relate primarily to implementation of the Committees recommendations) will provide an extremely significant advance in striking a more appropriate balance between careful regulation and removing unnecessary impediments to capital formation. From the proposed shortened holding periods for Rule 144, to the suggested improvements in Regulation D and expansion of the availability of scaled disclosure for smaller public issuers, these are truly the changes that all participants in the small and microcap markets have been awaiting at least since the establishment of the Committee.

Thank you for your consideration of our comments in this matter.

Respectfully submitted,

Feldman Weinstein and Smith LLP
420 Lexington Avenue, Suite 2620
New York, NY 10170

Feldman Weinstein and Smith Comment Letter Regarding Rule 144 Proposals

Below is our firm's comment letter with respect to the SEC's proposals on Rule 144. The letter has been submitted to the SEC and is available on their web site:

Subject: File No. S7-11-07
From: David N. Feldman, Esquire
Affiliation: Managing Partner, Feldman Weinstein and Smith LLP

July 19, 2007

FELDMAN WEINSTEIN AND SMITH LLP
420 Lexington Avenue
New York, NY 10170
Telephone: 212-869-7000
Facsimile: 212-997-4242
http://www.feldmanweinstein.com/

July 19, 2007

Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Attention: Nancy M. Morris, Secretary

Re: File No. S7-11-07, Securities and Exchange Commission Release No. 33-8813, RIN 3235-AH13, Revisions to Rule 144 and Rule 145 to Shorten Holding Period for Affiliates and Non-Affiliates

Ladies and Gentlemen:

Feldman Weinstein and Smith LLP has the following comments on the Staff's proposed Revisions to Rules 144 and 145.

Our law firm represents issuers, investment banks and institutional investors primarily in business combination and financing transactions, including reverse merger and PIPE transactions, giving our attorneys a front-row seat in observing the challenges which the current rules impose on smaller public issuers. Overall, the proposals represent a dramatic and positive set of steps to help smaller public companies raise necessary capital on a timely basis and at a lower cost of capital than the current regulations permit.

We wish to strongly commend the Commission for proposing the following:

1. The reduction in the holding period under Rule 144 for unregistered securities in most cases to six months.

2. The changes to and codification of the so-called Worm/Wulff letters
relating to shares of shell companies to allow the availability of public sale under Rule 144 no later than six months following a reverse merger and availability of so-called Form 10 information. Requiring successor control persons of former shell companies to register shares of the former shell has always been a concern of shell founders, and the proposal would eliminate this fear.

3. Clarification and codification of interpretations permitting tacking of holding periods for conversions and exchanges of securities and cashless exercise of options and warrants.

We believe that the following points, presented in the Staff's request for comments, could result in further improvements:

Tolling Provision for Hedged Positions (Proposed Rule 144(d)(3)(xi)).

1. The proposed provision would increase the cost of capital for issuers. We believe the proposed provision requiring a tolling of the holding period for so long as a holder is engaged in certain hedging transactions (but no longer than one year from date of acquiring the securities) is ill-advised and unnecessary. We believe some members of the Staff may be of the view that hedging a stock position is both without cost and without risk to the investor. Nothing could be further from the truth. Hedging is both costly (the investor has to pay a counterparty to assume risks initially assumed by the investor) and not foolproof. In selling borrowed shares, the investor is subject to the constant risk of a costly buy-in.

Essentially, a hedged investor and non-hedged investor are investing in two different deals entirely, with a different cost basis and different potential return profile. The fact the two investors make parallel but different investment decisions out of the same underlying transaction (the issuer is indifferent), based upon a free market, does not ipso facto turn the hedged investor into an underwriter, nor does it suggest he had no investment intent at the time of purchase. At times the Commission has acknowledged the market benefits of short-selling and other risk-hedging techniques, but some of its regulatory policies, such as the instant proposal, seem to directly counteract these benefits.

Hedging transactions by investors are of direct benefit to the issuers: a reduced-risk investment will provide a lower cost of capital to the issuer, which the Commission states is the primary objective of the proposed rule change (Release at pages 71 and 72). Given the continuous disclosure available to the capital markets today (particularly Form 8-K Item 3.02), and the overwhelming prevalence of program and institutional trading in the equity markets, we respectfully disagree with the notion that only people who hold a security for six months (or a year) are not underwriters.

We believe there is very little practical basis remaining for distinguishing between primary offerings by issuers and after-market trading. We are hopeful that you will determine that the proposed six-month holding period for non-affiliates of reporting companies be applied to all such investors.

2. The provision, if adopted, should be limited only to the offsetting long securities. Even if the Commission determines to retain proposed Rule 144(d)(3)(xi) as initially proposed, we believe it should be revised to make clear that the one-year holding period will only apply to the hedged portion of the position. Many investors acquire significant stakes in a particular issuer, and are able to hedge only a very small portion of that holding, whether because few shares are available to borrow, the absence of an options market, or other reason. These investors should not be penalized as to their entire position due to a small hedged position. A practical alternative would be to specify that the offsetting long position to any put equivalent position would have to be held for one year in order to be eligible to be sold under Rule 144.

3. If the proposed Rule 144(d)(3)(xi) is adopted, we request further guidance in order to ensure compliance. If the Commission determines to adopt the proposed rule, it is not clear from the proposing release (page 21) what information a subsequent purchaser or a selling broker-dealer must obtain from the original purchaser in order to have a reasonable basis to believe that the correct holding period has been completed. If a seller represents and warrants in writing that it has not held a put equivalent position for at least the previous six months, is that sufficient, or will some further investigation or submission of trading records be required?

We recommend a four-month holding period for all securities of reporting companies.

The Commission does not need to look far for a good example of an effective market that appears to be working well with a universal four-month holding period for unregistered securities held by non-affiliates of reporting companies. The Canadian markets adopted a four month holding period for all securities of reporting companies approximately two years ago (NI 45-102), following a two-year experiment in which only larger companies (roughly equivalent to S-3 eligible issuers) were subject to a four month hold.

The Commission has accepted its Canadian counterpart's judgment on registered offerings (the MJDS system and automatic effectiveness of Form F-10 filings) for more than a decade, and we are hopeful it also can be comfortable following their findings and actual experience with respect to resales of unregistered equity securities by non-affiliates after a universal four-month holding period for reporting companies.
It is clear to us that holding for 120 days should in all circumstances remove any doubt that the holder is not an underwriter and had investment intent at the time of purchase. Yet simultaneously it could mean the elimination of literally hundreds of registration statements by PIPE investors willing to wait that long for the ability to resell without registration. Most PIPE investors are not willing to wait six months, and will still insist on a registration of some shares even before they are able to sell under the Commission's six-month proposal. As evidence of this, the typical PIPE agreement requires registration to be completed within 120 days before penalties begin to be paid.

We request clarification of the Worm/Wulff Codification.

We request clarification of the much-appreciated proposal with respect to Worm/Wulff. It appears the Commission is proposing the ability to sell control securities which are not restricted securities of a former shell company as soon as 90 days following the availability of Form 10 information. Any restricted securities, whether or not control securities, it would appear, will start their holding period on the date of availability of Form 10 information and thus the holder would wait, in most cases, six months following the availability of that information.

Unfortunately, in virtually all shell companies, control securities are restricted and not registered, as SEC Rule 419 places significant restrictions on any attempt to register. Thus, we are aware of no real-world circumstances where the 90 day period would actually apply.

We assume the authors of the proposal intended for the 90-day period to be applicable in some circumstances and believed that this represents sufficient time for the Form 10 information to be disseminated and absorbed. Therefore, we propose that non-affiliates of shell corporations be permitted to sell shares starting 90 days after release of Form 10 information, so long as on the day of sale they have held the shares for at least six months (in other words the holding period would commence upon the earlier of acquisition of shares and release of Form 10 information). We would further propose that affiliates and promoters of shells (and transferees from affiliates and promoters) commence their holding period upon release of the Form 10 information and wait for six months thereafter.

Coordination with Other Recent Commission Initiatives

We are extremely pleased to see the Commission turn its attention to adopting a number of the recommendations made by the Advisory Committee on Smaller Public Companies.

In general, the proposal (as well as its five companion proposals which relate primarily to implementation of the Committees recommendations) will provide an extremely significant advance in striking a more appropriate balance between careful regulation and removing unnecessary impediments to capital formation. From the proposed increased availability of Forms S-3 and F-3, to the suggested improvements in Regulation D and expansion of the availability of scaled disclosure for smaller public issuers, these are truly the changes that all participants in the small and microcap markets have been awaiting at least since the establishment of the Committee.

Thank you for your consideration of our comments in this matter.

Respectfully submitted,
Feldman Weinstein and Smith LLP

Yes I'm on Facebook

I have been in touch with more and more of my business contacts through Facebook, yes Facebook. They now grant access to anyone, not just college kids posting underage drinking photos. I do believe that it could herald a new era of business networking, so I have embraced it.

In fact, I have started a discussion group on there called "Reverse Merger and APO Specialists." I am hopeful that the group will complement this blog, as there anyone has the opportunity to create or respond to any topic related to our RM world.

If you are already a Facebook member, you can go to the group with this link:
http://upenn.facebook.com/group.php?gid=2566607023

If not, you should consider joining Facebook, which is of course free.

I look forward to some spirited discussion threads!

The New SEC Regulation D Proposal - Why We Care

I have had a chance to review the SEC’s proposed overhaul of Form D and proposal to require electronic filing of the form going forward. While you might think this stuff is highly technical and seemingly not that important other than for the form-philes among us (not me friends), in many ways it is. [Note: the more substantive proposal regarding a new proposed "super accredited investor" standard with limited advertising and solicitation permitted has not yet been published.]

The goal of the proposal seems to be to make preparing and filing Form D so easy even a CEO can do it, theoretically even without an attorney (heaven forbid). But given that you have to go obtain Edgar codes, make decisions about what Rule you are filing under, determine who is a promoter of the company and so on, I think lawyers will still need to provide critical advice on the form. However, one look at the proposed new form and you will see it is indeed much simpler and shorter and should not take one long to complete in the proposed new online filing system.

Also, it appears they are proposing allowing the electronic filing with the SEC to count for purposes of filing with the states as well, subject of course to the states accepting this, which the SEC states in the proposal they hope will happen (they suggest “one-stop” filing with them). The question is, will this eliminate state filings if you file a Form D? Eliminate state filing fees (not likely)? Eliminate the need for state blue sky review at all in Regulation D offerings (very not likely)? The poor blue sky lawyers took enough of a hit when Congress preempted state securities regulation of offerings on larger exchanges back in 1996.

This is also a lost opportunity for Edgar filing companies (sorry Shai!). They would have had quite a boon formatting and filing these as they do for all our other SEC filings, but it looks like the Commission is determined to make it easy enough to file yourself after you obtain Edgar codes.

The other goal of the proposal is to organize, gather and make available data and search capabilities of all filed Forms D, which currently is virtually impossible to obtain. If this goes through, anyone will now be able to view and download anyone’s Form D rather than waiting and ordering it on paper. Thus you can see what your competitors are doing more easily, see what investment banks are acting as placement agents for offerings, etc. There are some other changes that could be rather significant, and here they are:

1. They propose that the form no longer require disclosure of owners of 10% or more of the company’s stock, only officers, directors and promoters. The feeling is this information is either contained in offering materials for investors or is available to them. This allows private companies to keep this information confidential from the public.

2. The proposal suggests that the form be revised to ask you to provide a revenue range and industry classification, mostly for data collection purposes. However you will be able to decline to provide the revenue information.

3. The form will still be filed within 15 days after the first sale. The only required amendments will be to correct mistakes of fact or changes in the situation (but not just more closings or minor changes in offering size or changes in revenue).

4. If your offering lasts more than a year, a once a year update filing will be required.

5. They propose requiring the inclusion of the identifying “CRD” number of any broker who receives compensation in the transaction. This may not bode well for unregistered brokers trying to earn fees, and is likely to be the subject of comment.

6. Here’s one to rejoice about: they propose eliminating the information about use of proceeds and offering expenses. That was always the most annoying and seemingly unnecessary part of the form.

7. The electronic filing would be signed like other Edgar filings, with a conformed (ie typed) signature on the filing and a requirement for the company to obtain and retain for five years a manual signature.

8. They propose making clear that the electronic filing of Form D does not in and of itself constitute general solicitation in violation of Regulation D. In the past the form had room for footnotes and other things that might have been deemed to constitute solicitation. The new form will be drop-down menus and have no real room for “free writing,” so filing will not be deemed solicitation.

9. Here’s a tip- don’t plan to go to lunch while online preparing this, as the new proposed filing system would time you out if you are inactive for one hour and no previous work would be saved.

10. One request for comment is whether public companies should be exempt from Form D filing as long as the same information is in a Form 8-K filing or periodic filing such as Form 10-Q or 10-K. I say yes!

Anyway, life for securities lawyers will certainly be a little bit simpler if this new proposal is adopted. And it will be interesting so see, as happened in the reverse merger business with the passage of new rules in 2005 that required identifying shells and shell mergers, what data can be collected and become available as to the extent of the private placement market and information about issuers, agents and the like.

I hope you're enjoying the summer!

Our "Summer Reading" Courtesy of the SEC

Greetings blogees from the City of Brotherly Love where I am to visit my issue (as we lawyers say).

SEC Division of Corporation Finance chief John White promised back in April that the new proposals to help smaller public companies would be ready for our "summer reading." True to his word, after the May 23 announcement of the highlights of the rule proposals, five of the six rule proposals can now be found on the SEC website at http://www.sec.gov/rules/proposed.shtml.

The proposals are:

1. Smaller Reporting Company Regulatory Relief and Simplification - this is the elimination of Regulation S-B and migration of all issuers to the original Regulation S-K disclosure system and forms while maintaining scaled disclosure for smaller public companies

2. Exemption of Compensatory Employee Stock Options from Registration under Section 12(g) of the Securities Exchange Act of 1934 - this allows a private company to issue many hundreds of options to employees without accidentally crossing the line requiring them to become a reporting company.

3. Electronic Filing and Simplification of Form D - they are proposing to streamline Form D in Regulation D transactions and to permit its filing electronically.

4. Revisions to Rule 144 and Rule 145 to Shorten Holding Period for Affiliates and Non-Affiliates- this is the big one which shortens the Rule 144 holding period in most cases to six months. The proposal includes significant relief from the Worm/Wulff restrictions on holders of shell shares, suggesting that they can use Rule 144 no later than six months after a reverse merger.

5. Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3 - also big, this permits any reporting company to do a "shelf registration" of shares to be issued in the future, but only a primary offering of up to 20% of the company's float in any 12-month period.

The last proposal, relating to a new class of "super accredited" investor and allowing limited advertising and solicitation, should be out in the next few days.

If I have not said it enough before, one cannot overstate the importance and significance of these proposals to the PIPE and reverse merger worlds, as well as all smaller public issuers. While Rule 415 is still a factor (see most recent blog entry below), this is indeed the dawn of a new era in the small and microcap world.

Now we have a job to do faithful blogees. Two things. First, we must make sure that the SEC receives as many helpful comments as possible. The comment procedure for each proposal is listed right below the actual proposal on the SEC site, and in general we have 60 days from when the proposals are published in the Federal Register (assume you must finish by mid-late August).

Some may comment on the fact that they are proposing tolling the 144 holding period for any time that a holder is hedging the stock, which could hurt some PIPE players. Others may feel that limitation on the proposed S-3 availability for one year after being a shell is worthy of comment. Still others may suggest that an adjustment to and codification of the Rule 415 interpretation accompany these dramatic proposals. The Worm/Wulff relief, while dramatic, seems to suggest that some should have the ability to sell in as little as 90 days, but in fact 144 does not in practicality kick in until 6 months. This should be clarified.

Second, and this is the real big one. We all have to step up and make sure that those whose abuse of the rules and system led to the crackdown on the penny stock world 17 years ago do not, once again, rear their heads to ruin it for all of us. This is part of what caused the Rule 415 mess in the first place; the fact that a few extreme players took things too far, resulting in the SEC taking action that hurt everyone, even those playing well with others.

I remember as a kid in sleepaway camp that everyone in the bunk or group was expected to be responsible for everyone else. If one kid misbehaved, the entire bunk was punished. Was that fair? Not totally. Did it encourage strong group support and dynamics? Yes. Do we need to do that on Wall Street? No. However, unfortunately regulators often take an approach that swings a pendulum far in a direction opposite where a problem occurred (e.g. Sarbanes-Oxley) to hurt a much larger group than the group which was bad.

The SEC's resources are limited. My hope is that each of us who want to preserve not only the ability to get these proposals passed, but to make sure that the SEC does not regret doing so, will stay on the high road. Do your best to avoid doing business with shady characters. Do background checks on potential business partners. Be careful of Footnote 32 shells which look legitimate (see prior entries). If you see an extreme player, don't hesitate to contact the SEC; their Enforcement Division will take anonymous tips.

As we expand what some are calling the golden age of reverse mergers and APOs, there is more than enough money to be made in taking companies public without cutting corners and breaking the rules. High road, high road, high road folks.

Is the Rule 415 Issue Still Relevant? (hint: yes)

Some are wondering if the new Rule 144 proposals, in particular shortening the holding period before being able to sell without registration in most cases to six months, essentially moot the entire Rule 415 brouhaha. The short answer: well yes and no.

There is no question that shortening the Rule 144 holding period will meaningfully ameliorate the risk undertaken by PIPE investors under the SEC's new interpretation of Rule 415. As we recall, the SEC has sought to limit the percentage of a company's public float that can be registered for resale at one time if a company has less than a $75 million market capitalization and is not eligible for short-form S-3 registration for resale. PIPE investors, who initially purchase restricted securities, depend on this resale registration to get their shares to be tradable. Under the new interpretation, if they purchase greater than 30% of the company's public float, they have to wait 6 months from the time they sell substantially all the shares under the first registration before being allowed to do another. Assuming this may be a significant time period, in order to sell any shares that have not been registered, an exemption from registration, such as Rule 144, has to apply. The SEC staff believes that if one is seeking to register a large number of shares in a resale registration, it is probably a "hidden" primary offering that should have been done on a form, and under restrictions, that apply to a primary (such as a public offering undertaken by a company).

In its application, we have seen the SEC be firm on the 30% rule in many cases, but much more flexible in others. In particular, we are seeing them permit companies to go well beyond the 30% in many post-reverse merger situations. The SEC staff indicated, when announcing their new 30% standard back in January, that they acknowledge that there is typically very limited float following a reverse merger, and thus they would try to allow a reasonable number of shares to trade. True to their word, we have seen situations where as much as 50% of the company's outstanding stock, not just float, has been allowed to be registered for resale following a reverse merger.

So assume you can register some shares in a PIPE following a reverse merger (or any PIPE for that matter), and that takes about 3-4 months. If you know that the balance of the shares will be freely tradable without restriction (assuming the investor is not an affiliate and the company remains current in its SEC filings for up to a year) just 2-3 months later, wouldn't that eliminate the issue? To a large extent yes.

But there are other issues. Here are some:

1. In the past the ability to register all the shares issued in an investment within 3-4 months (sometimes less) has been an attractive feature of PIPEs. Even an additional 2-3 months is a long time for some investors, and it likely still will have an impact on PIPE pricing and the amount of discount to the public trading price (or expected trading price in a reverse merger scenario) that an investor will request. It may even continue to cause some deals not to happen because the investor simply does not want to wait six months to become unrestricted.

2. If the investor has more than 20% of the stock he might be presumed to be an affiliate. In that case, even under the new Rule 144 proposal, that investor would be limited in his ability to sell in many cases to 1% of the outstanding stock each 90 days for as long as he remains an affiliate.

3. Then there is the problem of warrants, a popular feature of PIPE investments. If one has a 3-year warrant issued at the time of a PIPE investment, the Rule 144 holding period (even if reduced to six months) does not begin until the warrant is exercised for cash. Thus, if a year or so has passed since the issuance of the warrant, when the investor desires to exercise, he must wait an additional six months (under the proposal) before being able to sell. Prior to the Rule 415 problem, the shares underlying the warrants typically were registered so they could be sold immediately upon exercise. Some warrants have a "cashless" exercise feature that allows an investor essentially to trade "in the money" warrants as the exercise price for other warrants.
As an example, if an investor has 100 warrants to purchase shares at $2.00, and the stock is trading at $4.00, the investor can simply swap 50 of the warrants as the exercise price for the other 50. Cashless exercise warrants have a benefit of "tacking" the holding period of the warrants and stock, so that as long as under the proposal one holds a warrant for six months, then exercises with a cashless feature, the shares could be sold. And thankfully the SEC has included in its Rule 144 proposal clearer guidance that this tacking indeed does apply. However, some investors do not like to have to give up part of their warrants for a cashless exercise. In other cases companies really want the money from the exercise, not the cashless. So cashless exercise may not solve the problem.

As I stated in a recent conference, I believe that while well-intentioned, the staff killed a flea with a sledgehammer in its approach to Rule 415. I also have real questions as to both the legal and policy underpinnings of the interpretation, as I have had to really scratch my head to understand 1) why investors are more protected when a company does a primary offering than when it does a secondary offering and 2) why the mere fact that an investor purchases a larger percentage of a company's stock somehow creates a presumption that they are an underwriter.

I understand Congress may be questioning the SEC commissioners about this in the near future, if they have not already. Indeed, it seems counter to the whole policy shift favoring careful reduction in the regulatory burdens of smaller public companies so magnificently proffered in the SEC's fabulous new rule proposals (see entries below). Maybe, hopefully, now is the time, as the Commission works to help small companies to reduce their costs in complying with regulation and enhance their ability to raise capital, to take another look at 415.

Happy July to all, I hope you are all working on constructive yet thoughtful comments to the SEC proposals.