Yes, Virginia, There are No Form 10 Shell Resale Registrations…

I wanted to comment on lawyer Virginia Sourlis’ attempt to complete a resale registration inside a Form 10 shell while it was still a shell, which was recently covered by the Reverse Merger Report. Several years ago, Virginia set up a number of Form 10s that she now owns. She then decided to file a resale registration for dozens of owners of shares of her shell. If one could get this through, the world would change dramatically as stock in a Form 10 shell would be able to trade while waiting for a deal. But unfortunately it appears not to be so.

As I understand it, the SEC told her she cannot do a resale registration while the company is a shell except pursuant to SEC Rule 419, which would require significant restrictions that she apparently did not want. She argued that the rule seems only to apply to an attempt by the company to register shares it wants to sell to the public, and not an attempt by a shareholder to register shares to be resold. A plain reading of the rule indeed could lead one to make this interpretation.

There are certainly times when the SEC takes an interpretive position which, if ever challenged, might not be upheld in court. One example – when that Rule 419 was first passed in 1992, I tried almost immediately, in 1993, to file a Form 10 shell. Their response: you can’t do this because of Rule 419. My response: they were wrong. But my client did not want to make an enemy of the SEC and we withdrew the filing. It took a number of years before others decided to fight the fight and win, and now we have the hundreds of Form 10 shells being used effectively and with the SEC’s blessing.

Years ago I had the conversation with the SEC about Virginia’s issue. They made clear to me that their position is and will be that Rule 419 applies equally to resale registrations regardless of what you think the words in the rule say. Don’t try it, they said, because we will fight you on it. My policy: don’t try to tell the SEC their interpretation is wrong.  At least not formally. We sometimes try to change things or clarify things through more formal no-action letters or rulemaking requests, but that is different.

Virginia announced that she was withdrawing her attempt at putting through a resale registration because of the dire situation of the economy and stock market. I give her credit for giving it a try, but short of fighting the regulators in court, I think it unlikely she will get one through. A better idea: let’s begin the process of overhauling Rule 419. I have started discussing this with smart people I know. I think it might be doable over the next few years. And I hope Virginia helps us!

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