Rule 415 and 144 Update Panel: Glimmer of Hope on Evergreen Requirement
By David Feldman at 26 June, 2008, 8:36 am
Sorry, in this entry I’m going to use a bit of securities-lawyer speak, so I apologize in advance for those who were smart enough to skip law school.
I just attended a “webinar” put on by DealFlow Media on Rule 415, Rule 144, Form S-3 and Rule 145 changes, interpretations and the like. I attended in particular because former Associate Chief Counsel of the SEC’s Division of Corporation Finance Carol McGee was on the panel. She is now at Alston & Bird, but is well known as one of the key architects of the SEC’s increased enforcement of its position on Rule 415 which resulted in limiting the amount of shares that can be registered for resale following a PIPE or similar transaction.
Ms. McGee defended what they did on 415, that it was a response to some players getting somewhat out of hand registering 2 or 3 times the public float. The reaction (my view overreaction) of the staff, as I have laid out in prior posts, was to limit registration to 1/3 of the non-affiliate stock unless other circumstances exist.
Frankly there was not much new information about 415, as Ms. McGee went through the chronology of what led to the new interpretation and standards and answered a few questions about specific situations. As to 415 applied after reverse mergers, she agreed that in those cases with very little float it often made sense for the staff to be more flexible, which in many cases they have been (though lately there have been some anecdotal cases of them being tough).
More interesting was the Rule 144 discussion, which did include a fair amount of talk about 144(i) and the new rules relating to reverse mergers. First, more and more folks believe there may be an ability to remove a restrictive legend on stock, even in the presence of the “evergreen” requirements to remain current, because Rule 144 is not the only way to be exempt from registration. Other methods exist and these were discussed.
As to the evergreen requirement, Ms. McGee admitted there have been a number of questions about it and said there “may eventually be some rethinking about it.” Other panelists saw this as good news – that she believes there may be another look taken at this. Another panelist talked about the “thorn in our side” resulting from the issues raised in Rule 144(i).
I posted a question and they asked it – I let them know (and I have not posted this here till now) that I have submitted a request for interpretive guidance to ask the SEC staff to determine that the new requirement to stay current only apply to companies that cease to be shells after the new rule was effective – in other words, that this part of the rule not be retroactive to companies that completed reverse mergers long before the rule was changed this past February. The panelists seem to believe that it might be difficult to get such relief, but I remain hopeful and we shall see.
I asked if the panelists believed that the Worm/Wulff letters were superseded by the new rule. They said, as I also believe and have been told by SEC staff, that the interpretation that Rule 144 is never available to former shell shareholders has been superseded since 144 now is available one year after a reverse merger and release of Form 10 information, but that other aspects of the letters, such as the prohibition on selling shares privately to a third party under Section 4(1), still apply.
OK….
In the above entry where you say: “more and more folks believe there may be an ability to remove a restrictive legend on stock, even in the presence of the “evergreen” requirements to remain current, because Rule 144 is not the only way to be exempt from registration. Other methods exist and these were discussed.” Could you shed some light as to what some of those other methods that were discussed were?
Thank You.
The most common is to obtain an opinion that the shareholder is not an “underwriter” under Securities Act Section 4(1) and the sale is therefore exempt from registration even if Rule 144 is not available. We have done this a number of times since the passage of the new rule.