November 13, 2009
David Feldman will be a panelist at the Financial Executive Institute seminar entitled, "Where’s the Money? Finding Public vs. Private Capital Today."
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.
David Feldman is a contributor to PIPES: Revised and Updated Edition - A Guide to Private Investments in Public Equity (Bloomberg Press, 2005) available on
http://www.amazon.com.
Dov Scherzer is the U.S. contributor to the British
treatise, Internet Law and Regulation (Sweet & Maxwell, 2d Ed. 1997;
3d Ed. 2002; 4th ed. 2007),
Available Here.
Dov Scherzer is the U.S. contributor to the British
treatise, Electronic Signatures Law and Regulation (Sweet & Maxwell,
1st Ed. 2004),
Available Here.
In the News
David
Feldman quoted extensively in a PIPEs
Report article on July 3, 2007 concerning
SEC's proposed amendments to Rule 144.
SEC
Releases Text of Rule 144 and S-3 Amendments:
Comment Sought on First Proposal Affecting
PIPEs
by
Joe Gose
A month
after the Securities and Exchange Commission
offered sweeping amendments to key regulations
governing the PIPE industry, the agency
began soliciting comments on two of
the six proposals: reducing the Rule
144 affiliate and non-affiliate holding
periods for restricted securities in
reporting companies to six months from
two years and one year, respectively,
allowing companies of any size, subject
to conditions, to register shares for
primary offerings using Form S-3, or
in the case of foreign-issuers, Form
F-3.
The commission, which is still working
on four additional proposals related
to rescinding SB Forms for smaller companies,
reengineering Regulation D and other
regulations, is providing roughly 60
days for comment on each amendment.
PIPE experts are anticipating that the
Rule 144 and Form S-3 amendments could
dramatically change the private placement
market's complexion. Current regulations
prevent companies with less than a $75
million public float from using Form
S-3, for example, which is considered
more issuer-friendly than other registration
statements such as Form SB-2.
Ultimately, small companies would be
able to register shelf offerings using
Form S-3 under Rule 415 of the Securities
Act, which would likely lead to more
registered direct financings. Thus,
the proposals would give small companies
more flexibility and opportunities to
raise capital, and they would also provide
investors with a greater degree of exit
certainty, PIPE experts say.
"The sense is that this is going to
be very constructive," says John Borer,
CEO of Rodman & Renshaw, a placement
agent that has facilitated 30 PIPEs
to raise $581.5 million this year. "I
think it will expand the list of investors
who will be able to do PIPEs just because
the liquidity window will be shorter.
But experts also insist that the proposals
could be improved. Ambiguity still surrounds
how the Rule 144 changes would affect
shareholders in reverse mergers, which
frequently coincide with private placements,
for example.
The biggest gripe in the Form S-3 amendment,
meanwhile, centers on the proposal to
restrict companies with less than a
$75 million public float from selling
more than 20% of that float in a public
offering over any period of 12 calendar
months. Additionally, shell companies
would be restricted from using Form
S-3 for some 12 months after they merge
with an operating company.
Still, the SEC's potential regulatory
overhaul follows months of uncertainty
surrounding private offerings of very
small issuers -- typically Form SB-2
filers -- who rely on Rule 415 to register
their shares for resale.
About a year ago, the commission began
rejecting the attempts of such issuers
to register large amounts of PIPE securities
using Rule 415, arguing that the offerings
were primary rather than secondary and
that investors who sought to res=sell
the securities were underwriters.
Later, the agency notified PIPE players
using Form SB-2 that companies relying
on Rule 415 would only be able to register
up to 33% of their float in most private
deals. To a large degree, both the Rule
144 and Form S-3 amendments would alleviate
those concerns by giving micro cap PIPE
issuers and investors greater flexibility
when it comes to issuing, registering
and reselling shares.
Stuart Bressman, an attorney with the
law firm Thelen Reid Brown Raysman &
Steiner, who primarily represents placement
agents, likens the SEC's efforts to
craft new regulations to shoving "round
pegs in square holds," particularly
as the commission tries to fit the proposals
into a framework created in 1933.
"When you go back to the 1933 Act, people
weren't thinking about PIPEs, registered
directs and all night trading around
the world," Bressman says. "It's not
perfect, but it's a step in the right
direction. It's the first time in a
long time that the SC has come out with
something that doesn't make [my clients']
life harder."
Taming Worm/Wulff
One of the biggest and most welcome
elements in the proposed Rule 144 changes
would eliminate the most troublesome
restrictions under the SEC's Worm/Wulff
Letters interpretation. Since 2000,
Worm/Wulff has prevented certain restricted
security holders in shell companies
from ever availing themselves of Rule
144 -- the securities had to be registered
before they could be sold.
Under the proposal, the commission would
allow security holders in shells to
sell their securities under Rule 144
when the companies have ceased to be
shells, when they're subject to the
reporting requirements of Section 13
or 15(d) of the Exchange Act, and when
they've filed all required reports during
the preceding 12 months or other appropriate
period. But the key condition would
require that issuers wait at least 90
days after they've filed a current "Form
10 information" (the "super" Form 8-K)
acknowledging that they've ceased to
be shells.
Subsequent language in the proposal,
however, creates uncertainty around
the 90-day guideline, starting that
the holding period begins on either
the day the company filed the Form 10
or when the securities were acquired,
whichever is later. David Feldman,
a partner were the law firm Feldman
Weinstein & Smith, who specializes
in reverse merger transactions, says
the confusion centers on a technicality
concerning "control" securities, which
commonly refer to securities held by
affiliates that are no longer restricted.
But unrestricted control securities
don't exist in shells because shells
cannot register the securities except
under complex circumstances, he says.
The bottom line: Feldman, who has followed
up with SEC staff on the ambiguity,
predicts that the commission will apply
the six-month holding period to shell
security holders, and that the clock
will begin ticking when the super Form
8-K is filed. If that indeed occurs,
it would mark a major improvement over
the current rules, he says. "There is
no way to overstate how huge and awesome
these changes to Rule 144 and Worm/Wulff
are going to be in the reverse merger
and PIPEs industries," Feldman adds.
Rule 144 Overview
In addition to shortening the holding
period to six months for non-affiliates
of reporting companies, the amendment
would eliminate the manner of sales
and volume restrictions, which are currently
present until after a two-year hold.
While the holding period would drop
to six months from two years for affiliates
under the proposed changes, affiliates
would still face manner of sale and
volume restrictions at all times going
forward, though manner of sale restrictions
would be lifted for debt securities.
Additionally, non-affiliate and affiliate
holders of restricted securities in
non-reporting companies would have to
hold the securities for one year, but
again all manner of sale and volume
restrictions would codify several staff
interpretations related to Rule 144,
among other amendments.
Restricted security owners who short
sell issuers, meanwhile, would face
a tolling period of up to six months,
depending on how long their short position
remained open, before the securities
would become freely tradable. (Shareholders
of non-reporting companies, whether
affiliated or non-affiliated, would
not be subject to tolling provisions.)
Rule 144 at one time included a tolling
provision before it was eliminated in
1990, but the SEC is now proposing to
expand the scope of the pre-1990 provision,
which covered only short sales and options.
Given the new hedging products today,
the commission says, any "put equivalent
option" under Exchange Act Rule 16a-1(h)
should be subject to the tolling rules.
A put equivalent position is defined
as "a derivate security position that
increases in value as the value in the
underlying equity decreases, including,
but not limited to, a long put option
and a short call option position."
But Sam Krieger, a partner with the
law firm Krieger & Prager, wonders
whether the put equivalent option is
too broad. "The put equivalent option
is a very large universe of transactions,"
he says, "and it's a definition that's
not easily discernible."
Lastly, the commission is proposing
to change Rule 145 of the Securities
Act, which establishes resale limitations
on certain persons who acquire securities
in business combinations. In particular,
the agency would eliminate the presumptive
underwriter position in Rule 145(c)
except in deals involving shell companies.
Brewing Battle
Under the Form S-3 amendment, SEC staffers
are proposing a new General Instruction
I.B.6 to Form S-3 that would allow companies
with less than $75 million in public
float to register shares using the form,
provided they meet other conditions
for eligibility (General Instruction
I.A. of Form S-3), they are not shell
companies and have not been shell companies
for at least 12 months, and they do
not sell more than 20% of their public
float in primary offerings on Form S-3
over any period of 12 calendar months.
No doubt the 20% restriction will generate
the most heat among commenters, and
the SC is asking for no fewer than nine
comments on issues that relate directly
or indirectly to the restriction.
At the same time, the commission indicates
that it is resolved to keep the 20%
ceiling in place to balance corporate
needs and investor protection: "We have
placed the cap of 20% in order to allow
an offering that is large enough to
help an issuer meet its financing needs
when market opportunities arise but
small enough to take into account the
effect new issuance may have on the
market for thinly traded securities,"
the proposal states.
The commission also is trying to provide
issuers with at least some flexibility
within the 20% offering restriction.
Essentially, the SEC is proposing to
link the restriction to a calculation
of the float immediately prior to each
contemplated sale rather than to the
initial filing of the registration statement.
It's a double-edged sword, however:
As the float increases in a 12-month
period, a company would be able to issue
a growing amount of shares incrementally
throughout the year. But as the float
shrinks, companies would be in danger
of surpassing 20%. Similarly, if the
float exceeds $75 million subsequent
to Form S-3 effectiveness, the 20% restriction
would be lifted. But if they float then
dips under $75 million later, the cap
would return.
The commission's proposal to prevent
shell companies and former shell companies
from using Form S-3 for 12 months also
promises to elicit comment. According
to the SEC, such a delay would provide
investors in the former shell 12 full
months of disclosures on the new operating
company prior to Form S-3 eligibility.
Yet blank check company experts are
aiming for at least a reduction in the
waiting period. "My impression was
that [the 12-month period] was not a
unanimous view of the staff," Feldman
says. "So we're going to push on that."
