David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman quoted in regards to the SEC's
update on the Worm/Wulff letters in
The Reverse Merger Report, January 10,
2008
SEC
Pulls About-Face on Worm/Wulff
By:
Joshua Sisco and Max Frumes
On
Dec. 6, shell sponsors and securities
lawyers around the country let out a
heavy sigh of collective relief as the
Securities and Exchange Commission formally
reversed its position taken eight years
ago in relation to the infamous "Worm/Wulff
letters."
Now, affiliates and non-affiliates of
both reporting and non-reporting shells
are able to resell restricted securities
under the exemptions provided under
the recently amended Rule 144. In addition,
affiliates and non-affiliates of fully
reporting shells may now use the resale
exemptions provided by the newly amended
Rule 145.
Rule 144 governs the trading of restricted
securities without the necessity of
a registration process. Following the
changes, it allows holders of restricted
shares issued by a shell company unrestricted
public sale after one year. Holders
of restricted shares not issued by shells
now have unrestricted public resale
privileges after six months.
Prior to the change in Rule 144, holders
of restricted securities issued by shell
companies were never able to resell
their shares, according to the "Worm/Wulff
letters." The maximum wait time
will now be one year under the new rule.
A year after the Form 10 information
has been filed, a reverse merger company
will be able to take full advantage
of the reduced holding period, if it
has: · ceased to be a shell company,
which the SEC defines as a registrant,
other than an asset-backed issuer, that
has no or nominal operations; and either
no or nominal assets; assets consisting
solely of cash and cash equivalents;
or assets consisting of any amount of
cash and cash equivalents and nominal
other assets. This applies even when
the issuer was a reporting or non-reporting
shell company at the time of sale. "Shell"
encompasses what the SEC defines as
a blank check company, which is any
company in the development stage; has
no specific business plan or purpose,
or has indicated that its business plan
is to merge with or acquire an unidentified
third party; or issues penny stock.
· is fully reporting under the
Exchange Act (which will exclude companies
listed on the Pink Sheets); ·
is current with its filings; ·
and at least one year has passed after
Form 10 information was filed with the
commission.
Rule 145 governs both registered and
unregistered shares issued in any M&A
transaction. In reference to shell companies,
the amendments to the rule are only
applicable to fully reporting shells.
Under the 145 amendments affiliates
of the acquiring and target company
must meet all 144 shell company conditions
to resell the securities acquired in
the transaction. Additionally, 90 days
post-acquisition, affiliates can resell
securities according to 144's volume
and current reporting limitations, and
manner-of-sale requirements. Six months
from the deal's close, issuers need
only be current in their reporting for
non-affiliate shareholders to sell the
shares. After one year, there are no
longer restrictions.
The most important result of the SEC's
new position, according to Tim Keating
of Keating Investments, is that it clears
up all doubt. "Worm/Wulff was never
law, it was only an interpretation,"
he said. "A grey area is now black
and white and there is a safe harbor
to operate in."
Tim Halter of Halter Financial, another
major reverse merger firm, however,
says the changes will not affect his
deals as all restricted shares in connection
with reverse mergers sponsored by Halter
are registered before resale to the
public.
Keating, a principal sponsor in the
shell market, said his firm still backed
deals where restricted shares were sold
under Rule 144. He said he worked with
at least one lawyer who wrote an opinion
stating that it was still possible to
use Rule 144 in connection with shell
companies strictly because the position
outlined in the letters was never formally
codified.
After boiling down the securities law
minutiae, the correspondence, between
the NASD's Assistant Director of Regulation
Ken Worm and Richard Wulff, head of
the Small Business Office in the Corporate
Finance Division at the SEC, essentially
concluded that at no time will investors
in a shell company, prior to, or at
the time of a merger, be able to resell
the restricted securities under the
exemptions provided for in Rule 144.
David Feldman, with the law
firm Feldman Weinstein & Smith,
specializing in shell mergers, agreed
with Keating on the importance of removing
all doubt. He believes that shell mergers
will continue to increase, in part because
of the rule changes. "It provides
an improved environment for capital
formation in connection with reverse
mergers in a meaningful way."
