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

Rule 415 and 144 Update Panel: Glimmer of Hope on Evergreen Requirement

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....

Private Placement Broker Registration - Finally?

I spoke on a panel last Friday at the American Bar Association's Section of Business Law's Spring meeting in Dallas (don't ask about my awesome travel experience on American Airlines). My fellow speakers and I updated the attendees on the new rules for smaller companies, including Rule 144 and Form S-3 changes.

For me a very interesting part of the discussion, though brief, was welcome. Namely, it appears that the vexing "finder" problem in the private placement arena may be improved sooner rather than later. For a number of years an SEC task force has been working with several different SEC divisions to encourage registration with the SEC of folks who act to find privately placed money for both public and private companies. Many, many "investment bankers" help companies raise money but are not registered as broker-dealers with the SEC. Technically, probably most if not all of them should be.

However, the SEC does not have significant resources to go after these violators in the absence of a complaint, which frankly rarely comes. This further encourages these players not to register. It is a little tougher for the finders in dealing with public companies, but in raising money for private companies, there is currently very little incentive to go through the rigorous process of registering, then maintaining a registration, as a broker-dealer.

Prior to 2001, there was a stronger argument for finders to claim an exemption from registration. The SEC no-action letters until then suggested that if an intermediary simply made an introduction of a money source to a company and then stepped away, no registration was necessary even if the intermediary pocketed a fee representing a percentage of the money raised. So long as he did not provide financial advice or help structure or negotiate the transaction, he was OK.

Starting in 2001, however, a group of no-action letters started to suggest that virtually no situation was OK if the intermediary took a percentage of the proceeds. Even if they introduce and step away. This led to some legitimate advisors turning to consulting arrangements paying flat fees regardless of the amount raised, which may or may not have reduced their exposure.

In any event, one of the fairly important challenges for smaller public companies raised by the SEC's Advisory Committee on Smaller Companies, whose recommendations were issued in April 2006, was that many smaller companies are afraid to work with unregistered intermediaries and the regulatory environment was, at best, unclear. The Committee suggested a modified and simplified form of registration for such players.

It now appears, at long last, that the various necessary SEC divisions which must collectively get comfortable with this seem to be ready to do so in the near term. It is not yet clear, but a much simpler registration process appears to be in the works. It is hoped that these "registered private placement brokers" would not need to maintain net capital like other broker-dealers, might not even have to maintain monthly "focus reports," etc. It is not yet clear how the state regulators will react, but of course it is hoped that they cooperate and see the benefit of more information being available about these intermediaries, and more certainty for issuers about who they are dealing with and whether they are operating within the law.

If this goes through, the next step would be to do the same for merger & acquisition brokers. Many of the same issues apply.

Keep those fingers crossed!

More Effective Dates

The SEC's website has indicated that:

a) The release providing increased availability of Form S-3 and Form F-3 "short form registration" for any full reporting company regardless of public float (but with certain limitations and excluding stock trading on the Pink Sheets or Bulletin Board) will be effective January 28.

b) The release entitled "Smaller Reporting Company Regulatory Relief and Simplification" which eliminates the "SB" forms and migrates all reporting companies back to the disclosure system under Regulation S-K, but retaining scaled disclosure for a now larger group of so-called "smaller public companies" will be effective February 4. Check with counsel as there are various transition provisions which do not require full adjustment immediately.

c) Remember: as previously posted, the changes to Rule 144 are retroactive and will be effective February 15.

Rule 144 Changes Effective February 15, 2008

On December 15, the SEC's release incorporating all the Rule 144 changes was published in the Federal Register. This means the changes will be effective on February 15, 2008. As a reminder, the new Rule 144 holding periods are retroactive, and relate to securities whether purchased before or after February 15.

In the next few days I will post a number of thoughts on the major change incorporated in the release concerning the so-called Worm/Wulff letters.

Greetings of the season to all!

SEC Offering More Sarbanes 404 Relief for Smaller Companies

The SEC intends to propose delaying for another year the need for smaller public companies to have outside auditors assess internal financial controls under Section 404 of the Sarbanes-Oxley Act, and expect it to start in 2009. According to published reports, you would still have to have management assess the controls. This is not official yet, but SEC Chairman Cox told Congress yesterday that they plan to do that early next year. This is great news for many who were scrambling about thinking auditor review would start with years ending after December 15, 2008.

Alert: S-3 Availability Limited to Exchange-Traded Stocks

Today the SEC approved the expanded availability of "short form" registration on Form S-3 (and F-3 for foreign companies), as well as changes to Regulation D. Unfortunately I was not able to listen in, so will have to play the replay at some point in the next few days. I have heard, however, that they decided to limit the availability of S-3 to companies trading on exchanges, in other words, no OTC Bulletin Board companies will be able to use short-form registration. In a piece of good news, however, they increased the percent of float a company can register on short-form registration to one-third of the float.

In the meantime I am looking into several aspects of the Worm/Wulff changes in the Rule 144 release and will have more to report on that soon.

Some Rule 144 Tidbits

Dear blogees: I have read the new Rule 144 release initially. There are a few things that are not clear to me that I am discussing with colleagues and others to report about later. In the meantime, here are some interesting tidbits, which should be taken together with my brief summary from the other day below:

1. Paying purchase price. They are not changing the prior 144(d) requirement that the holding period does not commence until the full purchase price is paid when shares are acquired by purchase.

2. New issuers. The new six-month holding period will only apply to issuers that have been subject to SEC reporting requirements for at least 90 days before the Rule 144 sale. Those considering a self-filing as a method to go public should take note. This should not effect those completing reverse mergers with shells subject to the reporting requirements.

3. Removal of Restrictive Legends. They made clear that they do not object if issuers remove legends from securities held by non-affiliates after all of the applicable conditions in Rule 144 are satisfied. Presumably this will mean after holding for one year. This is because, despite the reduction in the holding period to six months, the issuer must remain current in its filings for the next six months until one year.

4. No more Rule 144(k). The entire 144(k), which allowed resale without any restrictions after two years previously, is taken out and replaced by the rule that says all non-affiliates can sell in six months without restriction so long as the company remains current in its filings for the next six months.

5. Worm/Wulff Changes - Important Insight into "Nominal." Footnote 172 of the final release indicates that a real startup company, or as they also put it, a "company with a limited operating history," would not be deemed a shell company because its operations are not nominal. This is very different from the informal guidance we had previously received as to the definition of "nominal." This would seem to help very tiny newly public companies to avoid the prohibition on using Rule 144 if you are a shell company, since the SEC is declaring these tiny companies not to be shells. But it might have the unintended consequence of further encouraging the creation of so-called "footnote 32 shells" which I have written about many times in the past. For sure this will be the subject of much more in depth analysis over the months to come.

6. Form 144: Form 144 filings will be eliminated for non-affiliates. Affiliates will still have to file. In a change from the proposal, affiliates have to file Form 144 if the trade involves over $50,000 or 5,000 shares. They had proposed 1,000 shares. In addition, while we had thought they would not act to help affiliates who have to file both Form 144 and Form 4, in a piece of good news they said "we expect to issue a separate release in the future to provide affiliates that are subject to both the Form 4 and Form 144 filing requirements with greater flexibility in satisfying their requirements."

7. More on Worm/Wulff codification: As mentioned, they went for a one-year post reverse merger and release of Form 10 information holding period for former holders of a shell. There are several things that are unclear in the release that I am hoping to gain some clarity on in the near future. In the meantime, one clarification was good - they confirmed that the Form 10 information will be deemed filed (and the clock starting to tick on the one year period) when the initial filing is made with the Commission, even if they subsequently comment on the "super" 8-K filing and request changes. Kudos to Sichenzia Ross for requesting this clarification. Stay tuned on all this.

8. Adjustment to Regulation S. In response to comments, the release reduces the Regulation S "distribution compliance period" from one year to six months. Since that period in offshore offerings was always meant to be tied to the 144 holding period, this change made sense.

December 11 SEC Open Hearing to Approve Form S-3 Availability

The SEC has announced that there will be an open hearing of the Commission on Tuesday, December 11 at 10 am with the following agenda items included:

1. The Commission will consider whether to adopt amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act of 1933 to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to certain restrictions, including the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period.

2. The Commission will consider whether to adopt amendments to mandate electronic filing of Form D and revise the information requirements of that form. Form D is a notice required to be filed by companies that have sold securities without registration under the Securities Act of 1933 based on a claim of exemption under Regulation D or Section 4(6) of the Act. Form D filings are also required by most states.

The first item is much more important than the second. It is the other major linchpin in the SEC's response to the work of its Advisory Committee on Smaller Public Companies (the other being the changes to Rule 144). Allowing smaller public companies to have "shelf" registrations to issue shares that are immediately tradeable is a major step forward in giving these issuers some of the benefits that have always been available to larger companies.

I'm looking forward to hearing how the final proposal will be shaped.

Alert: Rule 144 Final Release Out; Shell Holders Can Sell in One Year

Today the SEC published the final Rule 144 release. I have not yet read it fully. It takes effect 60 days after publication in the Federal Register, which presumably will be soon.

The big news: Worm/Wulff is officially lifted. They did change from their original proposal and now will allow former holders of shell shares the right to sell after one year following a merger and release of "Form 10 information." This is still huge, as holders now have an exit that was previously cut off.

The other big news: The new Rule 144 changes, including the new six month holding period, are retroactive and apply to securities acquired before or after the effective date of the changes.

More after I have read the whole thing in a few days.

SEC Approves Reduction in Rule 144 Holding Period

At an open hearing yesterday, the Securities and Exchange Commission approved three of the six proposals relating to improving the regulatory environment for smaller public companies. The remaining three proposals are expected to be addressed (and presumably approved) in the near future. The changes were touted by SEC Chairman Cox as showing the Commission’s “focus on removing obstacles of growth” for smaller companies, and in the words of SEC Division of Corporation Finance John White, their desire to “promote the growth and vitality of smaller public companies.” These changes are the SEC’s response to recommendations of its Advisory Committee on Smaller Public Companies.

Here is a brief summary of the two most important changes, based on the staff presentations at the SEC hearing. The final adopting releases are not yet available.

Rule 144 Goes to Six Months- No Tolling for Hedging

The SEC approved a significant change in the holding period under Rule 144, reducing the various existing holding periods to six months. Affiliates can sell after holding six months but will be subject to volume limitations as currently. Non-affiliates can sell without volume limitations after holding six months, but the company will need to remain current in its SEC filings for the next six months, and after one year non-affiliates can sell without limits regardless of whether the SEC filings are current. Holding periods for non-reporting companies will remain at one year.

In a significant change from the Commission’s proposal announced in May, they will not require holders to toll or stop the holding period for any period in which the holder is engaged in certain hedging activities.

In addition, Form 144 was eliminated for non-affiliates, and the threshold for affiliates has been raised to being required only if the sale is for at least 5,000 shares or $50,000.

The staff mentioned codifying certain staff interpretations, presumably including the so-called Worm/Wulff letters, but unfortunately the details were not discussed at the hearing – we will need to wait for the final adopting release itself, which may take a number of days or even weeks.

The staff also did not mention whether or not the new rules will be retroactive, but we are hopeful that they will be.

John White indicated the staff believes that the reduced Rule 144 holding period will lead to a significant reduction in the discount on the sale of restricted securities in transactions such as PIPEs.

Regulation S-B to be Scrapped; Scaled Disclosure Available to More

As proposed in May, the SEC has approved migrating all small business filers to the larger Regulation S-K system, eliminating the SB forms including Forms 10-QSB, 10-KSB, SB-2 and 10-SB. However, the scaled disclosure currently available will remain and be codified in Regulation S-K. Finally, all filers with a public float of under $75 million will be eligible for scaled disclosure, increasing by thousands the number of companies that will be eligible.

The proposal suggested that the $75 million public float number be indexed for inflation, but based on comments they have decided not to index the amount.

For the transition, companies will be able to keep using the existing SB forms for the next year, or migrate back to Regulation S-K sooner. They have prepared a “plain English” booklet to help the 3500 companies currently reporting under Regulation S-B understand and ease the transition.

Listen in Thursday Morning

As mentioned, the SEC will hold an open hearing on Thursday at 10 am to approve a number of the new smaller public company proposals, including the big changes to Rule 144. Instead of going to Washington, you can listen in on the webcast. Just go to www.sec.gov and you should see a box directing you to the webcast that morning.

SEC Will Approve Rule 144 and Other Changes on November 15

Last night the SEC posted a notice that there will be a meeting of the Commission on November 15. That meeting, among other things, will be to consider (a) adoption of the new Rule 144 changes, (b) eliminating Regulation S-B and migrating the scaled disclosure requirements from that regulation back to Regulation S-K and eliminating all the SB forms and (c) allowing private companies to avoid becoming public involuntarily merely because they have many shareholders as a result of employee stock options and the like.

In addition, interestingly for all involved with foreign private issuers, the SEC seems ready to approve a rule accepting financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board without reconciliation to generally accepted accounting principles as used in the United States when contained in the filings of foreign private issuers with the Commission.

In the notice regarding Rule 144 they say they are also going to codify certain staff interpretations, which we assume means they are going to adopt the changes to Worm/Wulff which we have all been hoping for. I am hopeful the staff adopts in its final release that which is substantially the same as the proposal, namely that all shareholders in a shell would have the availability of Rule 144 resale after 6 months have passed since a reverse merger and release of full information on the merged company. Given the increased disclosure requirements imposed by the SEC since 2005, and the much greater transparency of transactions as a result, it would seem allowing sale six months later is very reasonable.

Stay tuned! Everything's about to change for the better....

Waiting on the Sunshine Notice from the SEC

If the full 5-member Securities and Exchange Commission is holding a public hearing, they are required to give 10 days' public notice, which is typically listed in the SEC's website under "upcoming events." Given John White's statement last week that they are planning for the new small business proposals to be adopted before the end of the year, I am watching (well not every minute, gotta practice law after all) to see when we will have that 10 day notice with an agenda.

John had indicated that he wanted to underpromise and overdeliver, which leads me to believe that it is very possible the announcement is imminent. They may decide to approve all six proposals in one hearing, or it's possible they will split them up to two different hearings. And given how positive the comments have been overall, it is very likely the proposals will be approved without significant changes (though many of us wish certain changes will get a serious look as indicated in prior posts).

In every deal we are working on now, clients ask, "If they approve the Rule 144 shorter holding period, will it be retroactive?" Answer: I don't know, and I have asked multiple senior SEC staffers that question and they have not, shall we say, provided meaningful guidance on the issue. But it would seem logical that it should be retroactive. Fingers crossed on that, and on timing hopefully soon!

John White: New SEC Small Business Proposals Expected to Reach "Finish Line This Year"

That is the headline from today's SEC Small Business Conference, which I attended in Washington along with about 75 others in person and many others listening in a webcast. In his introduction, the Chief of the Division of Corporation Finance made clear he'd like to get the new small business proposals approved and finalized before New Year's. That said, it looks like it could be even quicker than that, because prior to making his pronouncement, he said, "Chairman Cox always tells us, under promise and over deliver." The sooner the better we say!

In general, the day was a true love fest between the regulators and the panelists and audience (not always the case at these things!). Clearly most of us in the hustings are extremely pleased that the Commission has made a priority of passing a number of the recommendations of the Advisory Committee on Smaller Public Companies, and while any criticisms generally were limited to issues around the edges, all the panelists were very positive with regard to these changes.

Some other highlights from the event:

1. SEC Chairman Cox spoke eloquently about the importance of small business in America, and the fact that government is often "getting in the way" of smaller companies. He views the mission 0f encouraging and promoting capital formation in these businesses as "vitally important."

2. A panel spoke about the proposed Regulation D changes, in particular the beginning of allowing limited advertising to a newly defined group of "super-accredited investors." Many hoped they'd go further, but the panel indicated this is a "first modest step" in moving away from banning all general solicitation, with the hope it could go further down the road.

3. That same panel supported reducing the integration safe harbor from 6 months to 3 months.

4. Then a panel convened on the Rule 144 and Form S-3 changes, led by White and Advisory Committee member Steven Bochner. Bochner described this as an "extraordinary time" in securities regulation. White said he had never seen the Commission so focused on the needs of small business. They had taken, with the Chairman's help, a realistic approach to making proposals that could actually get done in a reasonable time frame.

5. With regard to the S-3 proposal, panelists were mostly pushing to go higher than the 20% of public float limit on how many shares can be registered on S-3 for smaller companies. White's answer/non-answer seemed to suggest that was not going to change. Then they suggested S-3 be available not only for primary offerings, but for resale registrations as well, and with a limit. White did not address or challenge this point, leading one to think maybe, just maybe, they might reconsider this.

6. In their discussion of the Rule 144 changes, the challenge, as indicated in many comment letters, related to tolling the proposed 6 month period for the period of time that a holder is hedging the stock. Again, not sure this is going to change in the final.

7. Commissioner Paul Atkins, a Bush appointee to the SEC, spoke at lunch about some of the same things that Chairman Cox relayed in the morning.

All in all, a good day and very positive feedback to the SEC, which hopefully will lead to a smooth and near-term process for moving to action on these proposals.

Feldman Weinstein & Smith SEC Comment Letter re Smaller Reporting Company Regulatory Relief and Simplification

This is our firm's comment letter to the SEC's proposed elimination of Regulation S-B and migrating all current S-B reporters to a scaled disclosure version of Regulation S-K:

FELDMAN WEINSTEIN & SMITH LLP

420 Lexington Avenue

New York, NY 10170

Telephone: 212-869-7000

Facsimile: 212-997-4242

www.feldmanweinstein.com

September 17, 2007

Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Attention: Nancy M. Morris, Secretary
Via e-mail: rule-comments@sec.gov

Re: File No. S7-15-07, Securities and Exchange Commission Release Nos. 33-8819 34-56013 39-2447, RIN 3235-AJ86, Smaller Reporting Company Regulatory Relief and Simplification

Ladies and Gentlemen:

Feldman Weinstein & Smith LLP has the following comments on the Staff's proposed Smaller Reporting Company Regulatory Relief and Simplification.

Our law firm represents issuers, investment banks and institutional investors primarily in business combination and financing transactions, including reverse merger and PIPE transactions, giving our attorneys a front-row seat in observing the challenges which the current rules impose on smaller public issuers. Overall, the proposal appears to further the Commission's goal of helping smaller public companies raise necessary capital on a timely basis and at a lower cost of capital than the current regulations permit. We believe that the following points could result in further improvements:

Raise the Cut-Off for Definition of Smaller Public Company

We agree with other commenters that the Commission should consider adopting the proposal of the Advisory Committee on Smaller Public Companies to allow scaled disclosure for those with up to $787 million of equity market capitalization. These companies represent the lowest six percent (6%) of all companies in terms of market cap. Many of these companies are involved in rapid growth, and the ability to reduce the costs of compliance would seem to be appropriate.

Give Smaller Public Companies a Choice of Forms

It has always been true that a small business issuer had the choice of using the forms specified in Regulation S-B or S-K. Over the last 15 years professionals and executives in smaller companies have grown comfortable with the S-B forms. If an issuer chose to use the S-K forms, however, it was subject to the broader disclosure requirements of that regime.

We propose offering smaller public companies a choice. We suggest leaving Regulation S-B and the S-B forms in place, allowing an issuer to continue to use those forms if it chooses. In addition, the Commission can go forward with the amendments to Regulation S-K to permit scaled disclosure on S-K forms if the issuer chooses. Assuming the Commission did not intend to make any changes to the substantive disclosure requirements for smaller companies, it should not be difficult to harmonize the changes. If a concern exists, a default can be that to the extent there is a conflict between Regulation S-B and the amendments to Regulation S-K, one or the other would control.

Our experience is that issuers we deal with generally do not feel tainted by using the S-B forms. In truth, moving everyone back to the S-K forms but then requiring that a box be checked on those forms indicating the company is a smaller public company would likely have the same risk of taint as using the S-B forms.

In addition, respectfully we do not agree with the argument that this relief is necessary to avoid having lawyers and accountants learn two disclosure systems. By retaining scaled disclosure, even within Regulation S-K advisors will effectively still have to learn two systems.

This concern, apparently based on anecdotal reports, to our knowledge is not widespread, and does not seem to justify requiring all small and microcap market participants to learn a new system.

If the Commission is not inclined to allow two systems, maybe a trial period of three years with both would make sense, after which it could be determined whether in fact issuers voluntarily migrate back to Regulation S-K. If a significant number in fact do so, then the Commission's theory would be proven. If not, it might consider going back to the current S-B regime.

For Real Relief, Allow Exclusion of Non-Material Information

In our Managing Partner David Feldman's testimony to the Advisory Committee in 2005, he suggested replacing Regulation S-B with a Regulation D-type disclosure for unaccredited investors. This would mandate retaining the forms, and including all the information that would be required to be in the comparable report or registration statement, but could exclude information which is not material. We still believe this is worth considering.

The Commission might be concerned that this leaves issuers in charge of deciding what information is material. But there are many instances within current Regulation S-B where issuers must do exactly that, in places where the issuer must disclose, for example, litigation if material.

One could still retain the requirement on certain items to retain all information, such as in Management's Discussion and Analysis of Financial Condition or Plan of Operation, or in Executive Compensation. But the slavish requirement to answer every item, regardless of whether a reasonable investor would consider the information important, is one of the ways smaller issuers waste time and money in their compliance obligations.

Limiting disclosure to material information would be a major step forward in recognizing the unique needs of smaller issuers, making it more attractive for them to consider going public and obtaining all the benefits thereof, make capital formation easier, make the U.S. securities markets more competitive and in no way jeopardize investor protection, as the only information not provided is that which is not material.

Conclusion

We are extremely pleased to see the Commission turn its attention to adopting a number of the recommendations made by the Advisory Committee on Smaller Public Companies. In general, the proposal (as well as its five companion proposals which relate primarily to implementation of the Committees recommendations) will provide an extremely significant advance in striking a more appropriate balance between careful regulation and removing unnecessary impediments to capital formation. From the proposed shortened holding periods for Rule 144, to the suggested improvements in Regulation D and broader availability of short-form registration, these are truly the changes that all participants in the small and microcap markets have been awaiting at least since the establishment of the Committee.

Thank you for your consideration of our comments in this matter.

Respectfully submitted,

Feldman Weinstein & Smith LLP 420 Lexington Avenue, Suite 2620 New York, NY 10170 www.feldmanweinstein.com

SEC Small Business Forum next week..

"The SEC hosts an annual forum that focuses on the capital formation concerns of small business. Called the SEC Government-Business Forum on Small Business Capital Formation, this gathering has assembled annually since 1982, as mandated by the Small Business Investment Incentive Act of 1980. A major purpose of the Forum is to provide a platform for small business to highlight perceived unnecessary impediments to the capital-raising process."

This quote from the SEC website describes the annual meeting I will be attending next week in Washington. This forum is particularly notable for its ability to forecast future action by the SEC as it relates to small business. For example, at last year's forum, then Corporation Finance Associate Director Marty Dunn suggested the possibility of shortening the Rule 144 holding periods and making Form S-3 available for some smaller companies on a limited basis. Sure enough, 8 months later the Commission proposed those very two changes.

The SEC staff uses the forum as a way to get a sense of market reaction to their possible actions. Of course they have other methods of gathering that information as well, and since there is no charge for the forum, it certainly attracts, shall we say, a wide range of audience members. My impression is there are some on the staff who are slightly annoyed that there is a statutory mandate for them to hold this conference, whereas most see it as an opportunity to connect with those "in the hustings" getting things done to gauge their concerns. SEC Chairman Cox also will be speaking.

After the conference I'll come back and report if anything exciting took place. For example, I'm hoping they might announce a timetable for when the various small business proposals (144, etc.) may be set for final approval.

And the Rule 144 proposal comments are in...

This past Tuesday was the deadline to submit comments to the extremely fantabulous SEC proposal to shorten the holding periods for restricted securities under Rule 144 in most cases to six months. As we all know, this change (along with the changes to Form S-3 availability and other things) has already had a major impact on deal and market activity in the small and microcap worlds.

And the verdict is, other than one former SEC staffer who thinks some abuses will occur, every other commenter (there are several dozen) is very positive on the proposed changes to Rule 144, viewing them as a reasonable balance between investor protection and ease of capital formation. This from very large law firms, the influential Jesse Brill of the Corporate Counsel, and several law firms working heavily with smaller public companies. This means it seems very likely that the proposals will be adopted, and hopefully without too many changes. We also hope this will happen soon!

Here are some interesting suggestions from the commenters that I think are worth noting:

1. Cash/Cashless exercise. One of my friendly competitors has suggested that there should be no difference in availability of Rule 144 in warrant exercises based on whether or not the warrants are "cashless." Some warrants have to be exercised for cash, others allow you to trade some "in the money" warrants as the purchase price for others, without cash. The SEC has in the past suggested that the 144 holding period can tack in a cashless but not cash exercise. The commenter says there is no reason for the difference, and I agree. A large law firm suggested a middle ground, proposing that there be no tacking in a cash exercise only if the cash purchase price is de minimis, i.e. less than 1% of the market value of the shares.

2. Shells that are not blank checks. Another of my friendly competitors represents small, even pre-revenue, pre-asset type companies that go public. The SEC proposes allowing holders of shares of a shell company to be able to sell under 144 generally six months after the reverse merger and availability of the "super" Form 8-K. This is a major change from their prior position that 144 is never available for holders of shares of a shell, that the shares must be registered to be sold. A shell company is defined as having no or nominal assets (other than cash) and no or nominal operations. The problem is some of his clients fit this definition but yet are real start-up or early stage companies with real business plans and no intention to market themselves as a shell. Under current rules, 144 is available to them, but the proposal will inadvertently sweep them in and require them to wait six months after the going public event, even if they have held their shares for several years.

I believe this is a logical recommendation and I hope the Commission will address it. My impression is that the staff seeks to move away from the old definition of "blank check" company (a development stage company with no business plan, or whose business plan is to acquire another business) and use the shell company definition above in all its regulation of the reverse merger and IPO alternative world. Hopefully this inconsistency can be addressed.

3. Regulation S. As mentioned in an earlier posting, a number of commenters are suggesting the SEC change the holding period for securities acquired in an offshore offering pursuant to Regulation S. This makes sense. A group of large law firms from London put in a letter strongly supporting this.

4. Voluntary Filers. An interesting comment that I have a little problem with came from big law firm Fried Frank. The proposed rules require longer holding periods for companies that are not required to file reports with the SEC under the Securities Exchange Act of 1934. But the law firm points out that many companies file voluntarily, in many cases because of contractual obligations or provisions of trust indentures. Some companies that trade on the Pink Sheets also file voluntarily. Their proposal is to treat voluntary filers the same as mandatory ones.

Here I respectfully disagree. Voluntary filers are not subject to the other investor protection features of the '34 Act, such as insider filings by affiliates, proxy regulation, the requirement to file Forms 8-K when material events happen between filings and the like. Voluntary filers generally just file 10-Q and 10-K forms and nothing else. I'm not sure that substitutes for the additional protection of all these other requirements. And it would seem a bit unfair for these companies to benefit from the shorter holding period without having to satisfy these other obligations. And finally, I find that voluntary filers are more likely to be a little less careful in preparing the forms, knowing that the filing is not technically subject to SEC review or scrutiny.

5. Form 4/144? Leave it to brilliant man Jesse Brill of the Corporate Counsel. The SEC had asked if somehow filing of Form 144 by affiliates could be combined with filing of Form 4 which is required two days after any sale or purchase by an officer, director or 10% holder. Brill suggests a new form, called Form 4/144, to be used to satisfy both obligations together. It takes Form 4 and adds a few features from the Form 144, but not everything. He suggests requiring it to be filed by 10 pm on the day of the sale, earlier than Form 4. He even attached his idea of what the form could look like. Seems like a good compromise to me.

6. More "no tolling" comments. Good news that more law firms, including major firm Cleary Gottlieb, put in a strong disagreement with the SEC's proposal to limit availability of Rule 144 when a holder has been hedging the stock. Maybe, just maybe, the SEC will take these comments to heart and realize there is no reason to have this restriction that will simply erase many of the benefits they are seeking to achieve from these proposals.

7. Retroactive? One commenter requested that the SEC make clear that the operation of the shorter holding period would be retroactive, rather than randomly picking a date after which the rules would apply. I agree. As the commenter pointed out, a company conducting multiple closings of an offering could actually have some investors with one Rule 144 application before the effectiveness of the rule and another application after, which obviously makes no sense. Hopefully they will make it retroactive.

All in all, good stuff. Now let's hope the staff will sharpen their pencils quickly so we can have certainty that the opportunity to implement these great ideas will not be lost.

And yet more comments...

As the dog days of August sadly wind down, someone had to rain on the party. A law professor and former SEC staffer has suggested that the Rule 144 holding periods should not be reduced as per the SEC proposal. He believes investors will be less protected even though capital formation will be enhanced. Of course we disagree. If you also disagree, let's make sure the weight of comment letters is in favor of this dramatic and positive change!

The Small Business Administration also has weighed in on the Form S-3 proposals. They believe there should be a further extension in time before smaller companies have to comply with the onerous Section 404 "internal financial control" requirements of Sarbanes-Oxley. I think, however, this is not likely to happen.

In addition, as with our letter, the SBA suggests that the proposal to limit the use of Form S-3 to 20% of the public float should be increased, and that the form should be allowed to be used for certain secondary offerings as well. Both the Rule 404 suggestion and the use of Form S-3 for secondary offerings for OTCBB companies were recommendations of the SEC's Advisory Committee on Smaller Public Companies.

Deadlines are hitting starting today for comment letters (September 4 is the deadline on the Rule 144 proposal), so get yours in!

Interesting New Comment to SEC Proposals: Reduce the Regulation S Holding Period

I noticed that a lawyer has posted a comment to the SEC proposal to change the holding periods for Rule 144 suggesting that Regulation S also be amended to reduce the holding periods there to six months from one year.

As many of you know, Regulation S was passed originally to ease the process of capital formation when the money is being raised outside the US and in other circumstances. It became controversial when a poorly drafted section was interpreted to allow public resale in the US just 41 days after issuing stock. In fact, some say the modern PIPE market was born in Reg S deals at this time. The SEC dealt with the problem (after awhile) by changing the period to one year; at the time suggesting it should be parallel with the holding periods under Rule 144.

Thus, says the commenter, Regulation S should continue to be parallel, so if you are changing Rule 144, Reg S also should have a reduced holding period. Makes sense to me. Anything that eases the regulatory burden without encouraging bad guys is probably a good thing. We'll see if the SEC Staff responds on this point.

Marty Dunn Departing the SEC

It does seem I'm covering a lot of action at the SEC these days, hopefully we'll get back to talking about the reverse merger business once the new proposals are passed.

In any event, the SEC announced on August 6 that Deputy Director of Corporation Finance Martin Dunn is stepping down to join a law firm. Generally well regarded and perceived as extraordinarily talented and dedicated, Marty is also known for his wry wit, especially breaking up otherwise drone PLI lectures to securities lawyers. John White was technically his boss, but Marty's many years working the bureaucracy at the SEC led most to believe he essentially ran Corporation Finance.

I had talked with Marty a number of times, in particular concerning the Rule 415 issue. He is a patient man who listened to all who were interested in expressing their opinions (even if he didn't always agree). With the assistance of Carol McGee and Dave Lynn at the SEC, Marty essentially designed the 30% of public float standard which can be registered for resale without a 415 analysis being triggered. Many in the PIPE and RM world thought this would cause the end of many deals and changes to many others. In fact that result has occurred, as has been written many times in this space.

Since the announcement, Marty has also been instrumental in putting together the six new proposals that will indeed help smaller public companies and make the 415 issue less of a concern in many situations. I believe Marty felt strongly that those in the extreme cases seeking to register 2-3 times a company's float were indirectly conducting a direct public offering. How that translated into no more than 30% of the float is still a bit of a mystery to me. Initially the SEC internally guided its staff to issue a 415 comment when more than 50% of a company's outstanding stock was seeking to be registered. That seems like a more logical standard, if there has to be one.

As we noted in our comment letter to the SEC proposals, we hope the Commission will take another look at this issue. Congress has asked Chairman Cox about it and his response to their concerns that the 415 issue will stifle capital formation is not to worry, these new proposals will take care of everything. I respectfully disagree, and am hopeful that Marty's replacement will have more of the spirit of the proposals in mind and recommend an adjustment to the 415 thresholds.

In any event, I respect Marty Dunn and wish him all the best in his new position back with us in the private sector.

No Summer Vacation at the SEC

Dear blogees: Unlike the Supreme Court, Congress and the Iraqi Assembly, the Securities and Exchange Commission is in full mode this summer. On August 3, the SEC at last released the final installment of its six proposal response to the recommendations of their Advisory Committee on Smaller Public Companies. Release 33-8828, entitled "Revisions of Limited Offering Exemptions in Regulation D," is now available on the SEC website. We are reviewing it, but the primary purpose is to create a new type of "super-accredited" investor, and allow companies to engage in limited tombstone-like advertising and solicitation solely to these individuals or entities with greater income or investment assets.

Separately, more comments are arriving to the Rule 144 proposal. Former top SEC lawyer Dave Lynn's new boss Jesse Brill at The Corporate Counsel has weighed in, along with another law firm (or as Johnny Carson used to say, "on another network"). I assume as the dog days of August drag on, there will be many more thoughts posted.

Based on a completely unscientific poll (i.e. judging by activity in our law office), many in the deal community have moved forward assuming the proposals will likely be adopted essentially as written, which in my opinion is probably a safe assumption. Reverse merger and APO deals are picking up and moving forward, this despite the stock market woes of recent days, reinforcing my long-held belief that RM deals are not generally market-sensitive. We'll see more reliable data when The Reverse Merger Report provides its third quarter numbers in a few months.

Where is the Regulation D Proposal?

The last of the SEC's six major proposals to ease the burden on smaller public companies has still not been released more than two months after it was announced back on May 23.

This proposal, which is supposed to include the right to have limited advertising if offerees include only a new type of "super accredited investor," appears to be in tweak central at the SEC. The proposal also is going to state that the standards to become an accredited investor will be increased and indexed for inflation starting in 2012 (it will be here before you know it, just ask my office landlord!).

We are hopeful that John White's promise to have everything for our "summer reading" will include this important proposal.

On a personal note, I wish to thank everyone who expressed concern about us following the steampipe explosion one block from our office on Lexington Avenue in Manhattan last week. All of us at FW&S are fine, thankfully, though certainly a bit shaken up! The office was only closed for a day, and now, but for continuing street closures, we are back to normal. Thank goodness technology allowed all of us to continue to work remotely even while the building was shut down.

I am off to a little R&R with the family and look forward to talking with you all again soon.

The New SEC Regulation D Proposal - Why We Care

I have had a chance to review the SEC’s proposed overhaul of Form D and proposal to require electronic filing of the form going forward. While you might think this stuff is highly technical and seemingly not that important other than for the form-philes among us (not me friends), in many ways it is. [Note: the more substantive proposal regarding a new proposed "super accredited investor" standard with limited advertising and solicitation permitted has not yet been published.]

The goal of the proposal seems to be to make preparing and filing Form D so easy even a CEO can do it, theoretically even without an attorney (heaven forbid). But given that you have to go obtain Edgar codes, make decisions about what Rule you are filing under, determine who is a promoter of the company and so on, I think lawyers will still need to provide critical advice on the form. However, one look at the proposed new form and you will see it is indeed much simpler and shorter and should not take one long to complete in the proposed new online filing system.

Also, it appears they are proposing allowing the electronic filing with the SEC to count for purposes of filing with the states as well, subject of course to the states accepting this, which the SEC states in the proposal they hope will happen (they suggest “one-stop” filing with them). The question is, will this eliminate state filings if you file a Form D? Eliminate state filing fees (not likely)? Eliminate the need for state blue sky review at all in Regulation D offerings (very not likely)? The poor blue sky lawyers took enough of a hit when Congress preempted state securities regulation of offerings on larger exchanges back in 1996.

This is also a lost opportunity for Edgar filing companies (sorry Shai!). They would have had quite a boon formatting and filing these as they do for all our other SEC filings, but it looks like the Commission is determined to make it easy enough to file yourself after you obtain Edgar codes.

The other goal of the proposal is to organize, gather and make available data and search capabilities of all filed Forms D, which currently is virtually impossible to obtain. If this goes through, anyone will now be able to view and download anyone’s Form D rather than waiting and ordering it on paper. Thus you can see what your competitors are doing more easily, see what investment banks are acting as placement agents for offerings, etc. There are some other changes that could be rather significant, and here they are:

1. They propose that the form no longer require disclosure of owners of 10% or more of the company’s stock, only officers, directors and promoters. The feeling is this information is either contained in offering materials for investors or is available to them. This allows private companies to keep this information confidential from the public.

2. The proposal suggests that the form be revised to ask you to provide a revenue range and industry classification, mostly for data collection purposes. However you will be able to decline to provide the revenue information.

3. The form will still be filed within 15 days after the first sale. The only required amendments will be to correct mistakes of fact or changes in the situation (but not just more closings or minor changes in offering size or changes in revenue).

4. If your offering lasts more than a year, a once a year update filing will be required.

5. They propose requiring the inclusion of the identifying “CRD” number of any broker who receives compensation in the transaction. This may not bode well for unregistered brokers trying to earn fees, and is likely to be the subject of comment.

6. Here’s one to rejoice about: they propose eliminating the information about use of proceeds and offering expenses. That was always the most annoying and seemingly unnecessary part of the form.

7. The electronic filing would be signed like other Edgar filings, with a conformed (ie typed) signature on the filing and a requirement for the company to obtain and retain for five years a manual signature.

8. They propose making clear that the electronic filing of Form D does not in and of itself constitute general solicitation in violation of Regulation D. In the past the form had room for footnotes and other things that might have been deemed to constitute solicitation. The new form will be drop-down menus and have no real room for “free writing,” so filing will not be deemed solicitation.

9. Here’s a tip- don’t plan to go to lunch while online preparing this, as the new proposed filing system would time you out if you are inactive for one hour and no previous work would be saved.

10. One request for comment is whether public companies should be exempt from Form D filing as long as the same information is in a Form 8-K filing or periodic filing such as Form 10-Q or 10-K. I say yes!

Anyway, life for securities lawyers will certainly be a little bit simpler if this new proposal is adopted. And it will be interesting so see, as happened in the reverse merger business with the passage of new rules in 2005 that required identifying shells and shell mergers, what data can be collected and become available as to the extent of the private placement market and information about issuers, agents and the like.

I hope you're enjoying the summer!