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 in the Reverse Merger
Report about an affiliate stock purchase
case on August 28, 2008.
Court
Backs SEC in Affiliate Stock Purchase
Case
By:
Joshua Sisco
The Reverse Merger Report (August 28,
2008)
A recent
appeal heard by the Ninth Circuit Appeals
Court in San Francisco overruled part
of an appeal by reverse merger dealmaker
Stanley Medley, requiring him to pay
disgorgement penalties related to three
reverse mergers between 1999 and 2001.
The deals caught the attention of the
Securities and Exchange Commission,
which in September 2001 filed a complaint
in the U.S. District Court for the Northern
District of California alleging that
Medley and colleagues both illegally
sold unregistered securities and acted
as a broker without registering as one.
The case of SEC v. M&A West, Inc.,
et al, confirms a SEC telephone interpretation
from April 2008 that said, “The
cessation of affiliate status is a facts-and-circumstances
determination and counsel should not
assume that it ceases instantly,”
according to attorney Samuel Krieger
with New York-based law firm Krieger
and Prager.
In the three reverse mergers Medley
arranged to purchase stock for relatively
small amounts of money from the affiliates
of the shell. After the deals closed,
affecting a change in control and in
operations, the shell sponsors ceased
to be affiliates, which Medley argues
happened prior to him purchasing the
shares. So, he asserts, he did not purchase
them from affiliates and was not subject
to either registration or holding period
requirements.
All three reverse mergers involved M&A
West, which the district court said
could be fairly described as a sham
incubator for startup companies. The
first involved M&A West subsidiary
M&A West Financial, which was renamed
VirtualLender. The other two deals involved
M&A West itself and another subsidiary
called Digital Bridge. The VirtualLender
deal was done in one step while the
other two were structured in a two-step
arrangement in which the operating company
merged with the shell and Medley purchased
stock from the supposedly former affiliates.
Medley pocketed nearly $2 million from
the illicit stock sales in addition
to $50,000 in cash he was paid for facilitating
each deal. Medley said that his shares
were not restricted because Rule 144(k)
of the Securities Act permits non-affiliates
to sell shares.
Both the district and appeals courts
decided that the two events in question,
losing affiliate status and buying the
shares, were not mutually exclusive,
but contingent upon each other. It was
upheld that Medley did in fact purchase
the securities from affiliates and was
required to either register the shares
or wait two years before selling.
In a dissenting opinion, appeals court
judge Sandra Ikuta agreed that the VitrualLender
transaction violated the Section 5 of
the Securities Act, by illegally selling
unregistered stock.
However, Ikuta disagreed that the other
two mergers were in violation. The majority’s
interpretation of Rule 144(k) sacrifices
the plain language of the regulation
to the general policy goals that the
SEC failed to express in its own regulations,
Ikuta wrote.
Rule 144 has been amended since this
case was litigated, said Krieger. Now
excluded from its safe harbor are shares
of companies with no or nominal operations
and assets consisting solely of cash
or cash equivalents.
“The revised rule may in effect
preclude transactions such as this.
Nevertheless, the ruling is important
for those structuring transactions.
Clearly more attention must be paid
to the substance as well as the structure,”
he said.
One way to eliminate this risk
is to arrange to acquire shares from
a variety of non-affiliates, according
to a blog entry by attorney David Feldman,
a founding partner at the New York law
firm Feldman Weinstein & Smith.
Feldman suggested that as compensation
for “selling (fully tradable)
shares basically for nothing to the
intermediary,” the non-affiliate
receive a much greater amount of restricted
stock in the new company going forward.
