British Columbia weighs in...

A fellow blogger clued me in to this. Our British Columbian neighbors to the north are concerned about protecting the reputation of the province's issuers, investment dealers, and other market participants who legitimately trade on the U.S. OTCBB and Pink Sheets, and they may soon have better legal tools to improve disclosure of OTC issuers with connections to B.C.

Canada has produced some amazing companies who have gone public through reverse mergers and other IPO alternatives. Unfortunately, Canada has also spawned a good number of questionable players involved in shady shells and deals. Indeed, a significant number of footnote 32 shells (shell companies that claim they intend to develop a real business to avoid shell restrictions) emanate from Canada. In part this is due to the fact that the regulatory oversight of the securities world up there is more lax than here in the U.S.

The B.C. Securities Commission, the independent provincial government agency responsible for regulating trading in securities within the province, has proposed rules intended in part to discourage the manufacture and sale of shell companies that may be used for less than legitimate purposes.

Several new proposed initiatives in proposed instrument 51-509 ("Issuers Quoted in the U.S. Over-the-Counter Markets") have been announced. The instrument is designed to avoid abusive practices involving companies that have a significant connection to B.C. and trade in the U.S. over-the-counter markets, by providing for greater disclosure requirements and the restriction of once available exemptions under Canadian securities law. These initiatives are focused on OTCBB and Pink Sheet listed issuers not cross-listed on other more senior markets, such as the New York Stock Exchange or the Toronto Stock Exchange in Canada.

Impacted most will be the Pink Sheet issuers, now potentially subjected to reporting requirements once only strictly voluntary.

For more information on the proposed instrument, see BCSC's website.

Thanks to summer associate Matthew Kutner for help in preparing this blog entry.

News Flash! KKR Going Public Through Reverse Merger

I am putting together a more comprehensive piece, but wanted to get the word out there. Kohlberg Kravis Roberts, the famed private equity firm, featured in the classic book and movie Barbarians at the Gate, is going to go public in a reverse merger, without raising new funds.

Technically they are taking over majority control of an affiliated public entity which trades in Amsterdam. The combined company will re-emerge with a New York Stock Exchange listing. KKR filed over a year ago to do a traditional IPO a la Blackstone, which has both appreciated and seen the frustrations of being public. KKR has now given up on this and are going to complete a reverse merger with this operating business.

This is similar to the approach the New York Stock Exchange itself took in 2006 when it went public through a reverse merger with Archipelago Holdings, Inc., a much smaller public company.

While you wait for more from me, here's a useful link:

http://www.businesssheet.com/2008/7/kkr-s-reverse-merger-ipo-means-henry-kravis-can-t-cash-out-just-yet

Tip of the Week: Are You Sure You Should Go Public?

There are five major advantages to going public. The desire to benefit from some or all of these should be the reason you want to make the move from private to public. Take a look at the following list and see if these advantages will improve your company’s long term prospects; however, don’t forget to compare these to the disadvantages of being a publicly traded company.
Advantages:

1. Access to Capital

It is easier to raise money when you are a public company. Two reasons for this are the disclosure of financial information and ease of creating liquidity for investors. With all this said, going public solely to obtain one round of financing can lead to trouble.

2. Liquidity

Liquidity provides investors the opportunity to move toward an exit by being able to turn their investments into cash. Investors aren’t the only ones looking for an exit strategy—one of the main reasons for bringing a private company public is so the company founders, former investors and senior executives holding stock positions can take money out of the business without selling it outright or losing practical control. The challenge in this new found liquidity is to avoid a big rush of share sales by company insiders. Tip to senior executives—Don’t get greedy!

3. Growth through Acquisitions or Strategic Partnerships

Another popular reason for going public is to pursue a strategy of growth through acquisitions, joint venture, or strategic partnership. A public company can often use stock as currency in the package of consideration that is provided to the company being acquired or partnered with. This allows a company to retain its cash for other purposes.

4. Stock Options for Executives

Attracting talented senior management is not easy. Public companies can use stock options and other equity incentives as part of a compensation package to draw in talented executives. Options attract those who lead public companies because they align management’s incentives with company performance as judged by the market.

5. Confidence in Management

Public companies require a lot of information to be filed with the SEC. This information helps shareholders feel knowledgeable about the company’s operations and challenges. With this said, one must remember that even public company filings can be misleading or fraudulent—so be careful.

Disadvantages

1. Emphasis on Short-Term Results

A public company must concentrate on making wise decisions and how those decisions will be perceived by analysts. The management must keep its eye on stated goals as short-term results become more important than the long-term goals every company must pursue to build shareholder value.

2. Public Disclosure

All of a company’s problems have to be revealed, including the loss of a major customer, strong personal and/or family ties an executive has to a vendor, or if financial statements are being restated. Also, disclosure requirements make it more difficult to keep important information away from competitors. Tip—Be consistent and as quick and determined to disclose the bad information as well as the good.

3. Fraud & Greed

Fraud and greed are a part of corporate America, and in some respects public companies have more incentive to engage in questionable practices. This stems from the enormous amount of pressure put on executives to meet or exceed Wall Street’s expectations of their performance.

4. It’s Expensive

Companies going public need to prepare for significant additional costs because for some companies, these costs are the difference between positive and negative net income.

Guest Blogger Tim Keating Weighs in on Rule 144(i) Changes...Let the Debate Begin

Intro from me: I have asked my good friend and client Tim Keating, with whom I have a respectful disagreement as to the impact of certain aspects of the recent SEC changes to Rule 144, to write a piece setting forth his view of the issue to be posted here, and he has offered the below. Take a read since, as you know, I always do my best here to offer a fair and balanced view of all issues relating to the RM world. I may wait to respond until after the SEC provides a response to my request for interpretive guidance on this issue:

SEC Rule 144 Changes:
The Glass is Half Empty for Reverse Merger Sponsors

Timothy J. Keating
President, Keating Investments, LLC


July 17, 2008 - Last month, I delivered a speech to the Reverse Merger Conference in Los Angeles titled: “Self-Filings: The New Preferred Private-to-Public Path.” My thesis was that certain of the rule changes to Rule 144 that went into effect on February 15, 2008 were clearly not understood by most of the participants in the PIPEs/reverse merger industry and disastrous for reverse merger sponsors. My good friend David Feldman argues that the changes to Rule 144 which shortened the waiting period from one year to six months were the best thing that has happened to the PIPEs industry in many years. Since I primarily look at the world through the lenses of a reverse merger sponsor, I wholeheartedly disagree. In fact, I see the Rule 144 change glass as half empty—at best.

For reverse merger sponsors, there are three major causes for concern in the Rule 144 changes.

First, the SEC explicitly created a doctrine of “separate, but not equal” by adding an extra six-month holding period to PIPE investments made at the time of a reverse merger. Based on excellent disclosure reforms codified in law in 2005, there is no conceivable justification or rationalization for this extra waiting period. One can only conjecture that certain senior SEC staffers still have a visceral allergic reaction to reverse mergers and felt compelled to “do something” to maintain an official taint on this activity.

Second, and far worse, the SEC’s change to the definition of a shell company contained in Footnote 172 (which states that a “start up” company or one with limited operations is not a shell company) on the one hand will benefit a handful of tiny public companies. On the other hand, it has flung Pandora’s Box wide open by providing massive financial incentive to scammers through the creation of hundreds of phony public companies. By not thinking through the unintended consequences of certain aspects of this footnote, the SEC has unwittingly fostered an environment for small cap stock fraud like never before.

Third, and worst of all, Section 144(i) now states that if a company was ever a shell company, and is not current with its financial filings, then its restricted securities held by persons who acquired such securities when the issuer was a shell or former shell can never be freely traded. What does this mean? Providing that a former shell issuer is current with all of its required SEC filings over the previous 12 months, an investor in a shell or former shell can still sell under Rule 144 beginning one year after the reverse merger is completed (or pursuant to an effective resale registration statement). But if a former shell issuer fails at any time to file a periodic report and thus is no longer current with its SEC reporting requirements, under these circumstances (and this is the part that the PIPEs/reverse merger community is not grasping), an investor in a shell or former shell cannot sell under Rule 144 even if the investor has held the stock for more than a year after the reverse merger. This restriction remains in effect unless and until the former shell issuer becomes current with its SEC reporting requirements. This operative word is “ever” (as in ever a shell company), and the law is retroactive. Investors in companies that were once shells and that “go dark” by delisting and/or trading on the Pink OTC Market are screwed forever unless of course they are fortunate enough to have sold their stock when the issuer was current in its SEC filings. Shares held by a shell or former shell investor will never be freely tradable under the new Rule 144(i), and we surmise that no attorney would be willing to opine to have the restrictive legend removed from such certificates other than in connection with an actual 144 sale when the issuer is current in its reporting obligations. The simple consequence is that investors in shell and former shell companies no longer ever have stock that is freely tradable as was the case under old Rule 144(k).

David Feldman has written a letter to the SEC requesting interpretive guidance that the new Rule 144(i) not be applied retroactively. Who knows whether this retroactive relief will be forthcoming? Even if this relief is granted, without further rule changes, it does nothing to help repeal the rule going forward.

In 2007, there were nine traditional IPOs that raised less than $25 million in new capital. Also in 2007, there were 222 reverse mergers, 107 of which involved a simultaneous PIPE financing. In other words, over 90% of the companies that went public last year did so through the combination of a reverse merger and PIPE.

Even though the SEC may not like reverse mergers, it should nonetheless adopt a neutral stance as to how capital is formed, take immediate action to provide a bright line definition of a shell, create a level playing field that does not disadvantage honest reverse merger sponsors, halt trading in stocks that merge with Footnote 172 shells (which are simple to identify) and equalize the Rule 144 holding period for any PIPE investor to six months. If the SEC truly wants to deter reverse merger activity over the long term, it should form a blue ribbon committee to explore and understand the reasons why the U.S. small cap IPO has nearly become extinct. Antiquated and irrelevant rules will surely figure in the findings.

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

What's Important

Heading back from our family's annual summer trip, which was incredible bonding time as usual. My two kids, nephew and one of my daughter's friends made it extra special.

There is simply nothing more important in life than the joy of your loved ones. For some people it is a favorite sister or cousin. Some raised by grandparents. Some revel in their spouse, children or grandchildren.

In our American culture summertime offers the opportunity to enjoy what's important. Make the most of it. I recently lost a close friend I've known since high school back in the 1970s, who succumbed to cancer at a way too early age leaving a wife and two young kids. As we watch too many folks taken from us too early, remember that every day is a gift.

Back to RM world this coming week...interesting things coming up..