Update on Effort to Remove "Evergreen" Requirement from Rule 144(i)
By David Feldman at 20 August, 2009, 6:17 am
Many have asked what is happening with our advocacy efforts with the SEC to follow up on the petition for a rulemaking with the SEC that I filed along with eight other law firms back in October 2008. As most of you know, the changes to Rule 144 effected in February 2008 included a provision, which we have dubbed the “evergreen” requirement, stating that if a shareholder of a company that was ever a shell company wishes to sell their shares publicly without SEC registration under the exemption available under SEC Rule 144, the company must be current in its regular SEC filings for the 12 months prior to the sale. This causes a variety of problems, including difficulty fashioning registration rights in private offerings and the inability to remove the restrictive legend on the back of the stock certificate prior to an actual sale. In addition, it paints a “scarlet letter” on all former shell companies, as this requirement continues literally forever – famous former shells like Blockbuster Entertainment, Texas Instruments and Berkshire Hathaway are now burdened by this restriction decades after their reverse mergers.
Our petition for rulemaking requested that the evergreen requirement continue for just one year following a reverse merger and release of disclosure concerning the post-merger company. Unfortunately, after we filed it on October 1, 2008, the Madoff scandal and US election overtook the SEC and we have a sense that the request was tabled. Since then there is a new SEC Chair, Mary Schapiro, and new Director of the Division of Corporation Finance, Meredith Cross.
In order to try to get the issue more front and center, I recently sent a letter directly to Ms. Cross reiterating the importance of the Commission’s addressing this issue. Copies were sent to all the SEC commissioners and other senior officials. I cannot predict what, if anything, will happen now. But as with our prior efforts on issues such as Rule 415 and the Worm/Wulff letters, I intend to respectfully but persistently pursue this change, or at least some change, in this restriction.
I am hopeful that in hindsight Ms. Cross and her staff will conclude that the permanent requirement does not serve investors’ interests and will recommend to the Commission to reverse it. There is no rational justification for suggesting that a former shell be burdened by this restriction many, many years after being a shell company. In fact this could make it more difficult for these companies to raise capital and grow. That seems completely opposite to the intention behind the Rule 144 changes, which was to help remove impediments to capital formation.
Stay tuned, let’s hope that lots of good things happen in Fall 2009.
good luck, thanks for all you work
Thanks Mike!
David, please forgive me for being simple on the regulatory construction of this new rule – 144 -I happened to work initially for a Congressional Committee and then in private practice before a different federal regulatory agency than the SEC, where regulatory due process and administrative review of rules actually meant something, and the regulatory drafters were accordingly concerned at least with minimum consistency, anti-confusion and anti-vagueness standards. I realize the SEC has a hard job, but here are my suggestions.
First, corporations, on the day they are born (incorporated) are “shells” under the new rule. It is exceedingly rare to put assets into a corporation on the day that it becomes a corporation under state law. So it seems to me that the language of the rule covers every corporation, and no corporation can ever use Rule 144 under the current scenario.
Second, there is a concept in most jurisprudence that would not allow retroactiive application of a regulation that causes penalty without overriding social benefit. For people who paid good money to buy stock in an operating company prior to these rules, why should they be penalized by not allowing their stock to trade freely? They invested with knowledge that their stock would have legends lifted one year after purchase. So those legends should be able to lifted. Period.
Third, there is a rule of construction and federal court case law that says you must read footnotes as well as the final rule making release in interpreting the meaning and effect of the rule. Footnote 172 states that the Rule is not meant to capture bona fide start up operating companies. So that says to me that if a company was a legitimate operating companyan and issued stock, and then had troubles, it should not fall under the new rule. It also says that new operating companies should not fall under the new rule. So why should there be this in terrorum confusion?
Fourth, I would suggest there is an anti-contradiction doctrine under jurisprudence , where the left hand can’t take away what the right hand has giveth. Paragraph (i)(1)(i). seems to say that if you have more than nomimal operations, you be able to take advantage of the rule. Then Paragraph (i) (2) (ii) , through an “or” in the negative, seems to say that notwithstanding that you meet the first, we’ll take it away in the second. If you are not highly aware of what you are reading, you’ll miss this completely. It makes no sense from a policy standpoint, and it is a landmine waiting to happen for the reasonably diligent.. Couple this with the meaning of Footnote 172, and you are really confused. How can this be good or responsible policy?
I honestly believe if the US Court of Appeals in DC got a hold of this Rule, they would strike it for confusion and vagueness. I ,for one, am the first to want to weed “bad apples” out of the system.but I really don’t think this Rule does the job.I would be more inclined to impose severe penalties upon spam and bad press. I would penalize newspapers for printing advertisements on companies that tout their stock — freedom of the press is limited by concerns of social harm. I would impose more restrictions and qualifications on officers of pink and otcbb companies, and make sure they have lawyers retained before they offer stock or get posted.on the pink sheets or the OTCBB. I would even opt for some sort of SEC qualification standard for lawyers to represent these companies. If ou don’t have enough money for a decent SEC lawyer, then maybe you ought to be restricted.
But, constitutionally and statutorily vague regulations simply don’t resonate with me. Between us all, responsible private practitioners, responsible companies and capital raisers, and responsible regulators and SROs, I think we can all do a better job and constitutionally sound job.
Best regards,
Paula Argento, Esq.
Argento International Law Firm
1250 Connecticut Avenue, NW Suite 200
Washington, DC 20036
202-538-2473 (tel)
argentolaw@ahoo.com
Bio at Linked In for Paula Argento, Esq.
Paula, thanks so much for the thoughtful insights!
David