Text of My Request for Interpretive Guidance to the SEC on Rule 144(i)

A number of blogees have emailed me asking if I can post the letter I sent to the SEC requesting interpretive guidance with respect to whether or not the “evergreen” requirement in new Rule 144(i) is retroactive. I hereby do so. I have been informed that the SEC has received and is reviewing the letter, though it is not clear when a response will come. Until then, I will reserve further comment on the matter. Thus, the letter.

FELDMAN WEINSTEIN & SMITH LLP
420 Lexington Avenue
New York, New York 10170
T: (212) 869-7000
F: (212) 997-4242
www.feldmanweinstein.com

Thomas Kim, Esq.
Associate Director and Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549

Gerald Laporte, Esq.
Director of Small Business Policy
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549

June 12, 2008

Re: Interpretive Letter Request Regarding Securities Act Rule 144(i)

Gentlemen:
We are writing on behalf of a number of our law firm’s clients to request interpretive guidance that the specific language of amended Rule 144 under the Securities Act of 1933, as amended (“Rule 144”), that makes the exemption thereunder unavailable if the issuer was at any time in the past a shell company and has not completed all its periodic report filings in the 12 months preceding the date of intended sale, is not retroactive to issuers that ceased to be a shell prior to the effectiveness of the amendments on February 15, 2008 (Release No. 33-8869, dated December 6, 2007 (the “Release”)).

We believe that the interpretive guidance described below would facilitate the process by which issuers that ceased to be shell companies prior to the effectiveness of the amendments conduct private offerings.

Background of the Issue

In adopting the changes to Rule 144, the Commission appeared to express some concern about reverse mergers with shell companies. Under the new Rule 144(i), if a company ever was a shell company, the company must have completed all its periodic Commission filings for the last 12 months or Rule 144 is simply not available. This means that any company that was ever a shell remains subject to this, even if it has not been a shell for many decades.

Problems Presented

This “evergreen” requirement to stay current creates several problems. The first problem presented is in connection with fashioning registration rights if a company might be considering a private offering of securities. In the past in private investments in public equity (“PIPEs”) and other private placements, companies generally were required to register the applicable securities in a resale registration statement and keep that registration statement effective until the earlier of (i) the sale of all shares that were registered; and (ii) such time as the holder could sell without any restrictions under Rule 144. Prior to the rule change, for non-affiliates in most cases this period was two years.

Post-rule change, this period (other than with respect to sales of securities by shell companies) for non-affiliates is now one year (since even though one can start to sell in six months, the company must remain current for the next six months, thus creating a potential restriction). In a situation involving a company that was ever a shell, this period now never ends.

This is true because even five, ten or more years after a company ceases to be a shell, under the new rule a holder cannot utilize Rule 144 if the company is not current in its filings at the time of sale. Thus, it is quite confusing to determine how to deal with these registration rights, and investors have not been able to properly address this concern to their satisfaction.

The second and more vexing problem this creates is the removal of restrictive legends. Stock certificates issued to private placement or PIPE investors, as well as any holder who acquires shares from a company that are unregistered or “restricted” contain a legend on the back of the certificate stating that the shares cannot be sold unless registered or an exemption from registration applies. Freely tradable shares have no such legend and delivering the unlegended stock certificate to a brokerage firm generally provides free tradability.

It is common to have the legend removed at the time of a sale where a holder seeks to sell utilizing the exemption under Rule 144. That process is somewhat cumbersome and an occasionally time-consuming process which involves the company, the transfer agent and company counsel giving an opinion, among other things. In the past, a Form 144 also had to be filed. Thankfully this requirement has since been eliminated for non-affiliates and smaller sales by affiliates under the new rule.

Convention has developed allowing the legend to be removed when the holder has held the shares long enough so that they can be sold without any restrictions under Rule 144, rather than in connection with a sale. Removing the legend in advance is advantageous because it saves time at the time of sale by avoiding the difficult process described above. Occasionally, a company also may refuse to remove a legend at the time of sale or counsel may have issue with delivering an opinion. Removing the legend in advance takes away this very real concern for investors.

Impact of Evergreen Requirement

Unfortunately, a holder of shares in a company that was ever a shell now can never have his or her legend removed in advance of a sale. This is because if a year has passed and no volume restrictions apply, there remains forever another restriction: that at the time of sale the company must have been current for the past year. Since one cannot know this in advance, it is impossible to remove the legend until the time of sale. If the legend was removed any earlier, and a holder sought to sell at a later time, and the company was not current, the holder would be in violation of Rule 144.

This limitation paints every former shell with a “scarlet letter,” suggesting that the Commission believes these companies forever require greater regulatory oversight. If the Staff determines to apply retroactivity to this restriction, it will apply to Berkshire Hathaway, Occidental Petroleum, Texas Instruments, Blockbuster Entertainment, Tandy Corp. (Radio Shack), Waste Management, Jamba Juice, Muriel Siebert and every former special purpose acquisition company (SPAC), even if it raised $1 billion. One hopes, as requested below, that the Staff can confirm that this was not the Commission’s intention in adopting this particular change.

In future discussions with the Staff it is hoped that we can address the question of whether any legitimate investor protection goal is served by this significant restriction which continues to apply many years after a company ceases to be a shell. The hope is for the Commission to consider taking another look at the evergreen aspect of this new rule with the possibility of limiting it in a future rulemaking.

Request for Interpretive Guidance to Ensure Evergreen Requirement is not Retroactive

In this request for interpretive guidance we seek a much more limited goal, namely an interpretation by the Staff that the requirement for a former shell to remain current for the past 12 months as a condition to utilizing Rule 144 to effect a sale be declared inapplicable to companies that ceased to be shells prior to the effectiveness of the new rule changes on February 15, 2008 and that this portion of the amended rule is not retroactive.

All other aspects of the Rule 144 changes benefit the investor and public company community through retroactivity, as the shortened holding periods and elimination of certain forms are positive changes. However, the requirement to remain current creates an additional burden on shareholders of public companies. Former shell companies which completed transactions pursuant to which they ceased to be a shell prior to the effectiveness of the rule did so with no knowledge or anticipation that a rule such as this might be passed in the future. It is conceivable that some of these holders might have reconsidered investing in a former shell if they were aware that this restriction might apply in the future.

It is simply unfair to retroactively burden investors and companies with a restriction that impacts what was done prior to the rule’s adoption. A determination of inapplicability of the rule for these particular companies is also a reasonable interpretation of the rule.

These former shells, including the well-known companies listed above, will now learn that if they conduct any private offering of securities, it will be impossible to remove a restrictive legend on shares that are not registered. This is not what any of these issuers signed up for when they went public through a reverse merger with a shell company, nor what their investors assumed when completing their investments. I am hopeful the Staff can confirm that the Commission did not intend for the rule change to apply to famed investor Warren Buffett, whose reverse merger occurred decades ago without any knowledge or ability to anticipate this burden.

I thank you for your consideration of this interpretive guidance, which would be a significant step in rectifying any impression that the Commission’s intent was to burden all former shell companies, even those so far-removed as Occidental Petroleum from the 1950s.

Please do not hesitate to contact me at (212) 869-7000 with any questions or requests for further information with respect to the matters set forth in this letter. I look forward to your response.

Sincerely yours,

David N. Feldman

Cc: Honorable Christopher Cox, Chairman, Securities & Exchange Commission
John White, Director, Division of Corporation Finance, Securities & Exchange Commission

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