SEC's Proposal on Rule 144 Changes with Respect to the Treatment of Securities Issued by "Reporting and Non-Reporting Shell Companies."

(Excerpt taken verbatim from the SEC's website found at http://www.sec.gov/rules/proposed/2007/33-8813.pdf)

A blank check company is a company that:

• Is 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; and
• Issues penny stock.120

Such companies historically have provided opportunity for abuse of the federal securities laws, particularly by serving as vehicles to avoid the registration requirements of the securities laws.121 Rule 419 under the Securities Act122 was adopted in 1992 to control the extent to which such companies are able to access funds from a public offering. In 2005, we amended Securities Act Rule 405 to define a "shell company" to mean a registrant, other than an asset-backed issuer, that has:

1. no or nominal operations; and
2. 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.123

On January 21, 2000, the Division of Corporation Finance concluded in a letter to NASD Regulation, Inc. that Rule 144 is not available for the resale of securities issued by companies that are, or previously were, blank check companies.124 In an effort to curtail misuse of Rule 144 by security holders through transactions in the securities of blank

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121 See Release No. 33-6932 (Apr. 28, 1992) [57 FR 18037].
122 17 CFR 230.419.
123 See 17 CFR 230.405 and Release No. 33-8587 (Jul. 15, 2005) [70 FR 42234].
124 Ken Worm, NASD Regulation, Inc. (Jan. 21, 2000). In that letter, the Division stated that "transactions in blank check company securities by their promoters or affiliates . . . are not the kind of ordinary trading transactions between individual investors of securities already issued that Section 4(1) [of the Securities Act] was designed to exempt." The Division stated its view that "both before and after the business combination or transaction with an operating entity or other person, the promoters or affiliates of blank check companies, as well as their transferees, are 'underwriters' of the securities issued. . . . Rule 144 would not be available for resale transactions in this situation, regardless of technical compliance with that rule, because these resale transactions appear to be designed to distribute or redistribute securities to the public without compliance with the registration requirements of the Securities Act."

check companies, we are proposing to codify this position with some modifications.125 First, we propose to modify the staff interpretation to address securities of all companies, other than asset-backed issuers, that meet the definition of "shell company." 126 These companies would include any company, including a blank check company, that meets the definition. The category of companies to whom the staff interpretation is proposed to apply would be broader than the definition of "shell company" in Rule 405, however, as it would apply to any "issuer" meeting that standard, whereas the Rule 405 definition refers only to "registrants." We believe that this provision better describes the companies that are the subject of the abuse that the staff interpretation is designed to address. For the purposes of the discussion in this release only, we call these companies, "reporting and non-reporting shell companies." Under the proposed rule, a person who wishes to resell securities issued by a company that is, or was, a reporting or a non-reporting shell company, other than a business combination related shell company, 127 would not be able to rely on Rule 144 to sell the securities.

Second, because the reasons for prohibiting reliance on Rule 144 do not appear to be present after a reporting company has ceased to be a shell company and there is adequate disclosure in the market that would serve to protect against further abuse, 128 we propose to permit the availability of Rule 144 for resales under provisions that are similar

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125 See proposed Rule 144(i).
126 See proposed paragraph (i)(1) of Rule 144.
127 "Business combination related shell company" is defined in Securities Act Rule 405.
128 We are not proposing a comparable provision for security holders of non-reporting companies that have ceased to be shell companies because they have business operations or more than nominal non-cash assets. We have not proposed a comparable provision for these companies, because we preliminarily believe that the information that a non-reporting company would provide to the market does not adequately protect against potential abuse in those situations.

to our provisions that permit the use of a Securities Act Form S-8129 registration statement by reporting companies that were formally shell companies. 130 We propose to permit reliance on Rule 144 for resales by a security holder when: the issuer of the securities that was formally a reporting or non-reporting shell company has ceased to be a shell company; the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all reports and material required to be filed during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and materials); and at least 90 days have elapsed from the time the issuer files current "Form 10 information" with the Commission reflecting its status as an entity that is not a shell company.

Form 10 information is equivalent to information that a company would be required to file if it were registering a class of securities on Form 10, Form 10-SB, or Form 20-F under the Exchange Act,131 and such information is ordinarily filed on Form 8-K. 132 Under the proposed amendments, an affiliate security holder selling control securities would have to wait at least 90 days before being permitted to resell the

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129 17 CFR 239.16b.
130 See Release No. 33-8587. These provisions are consistent with the Form S-8 provisions for shell companies, except that Form S-8 requires a former shell company to wait 60 days, rather than 90 days, before it is able to use the form to register securities.
131 17 CFR 249.210; 17 CFR 249.210b; and 17 CFR 249.220f.
132 17 CFR 249.308. Items 2.01(f) and 5.01(a)(8) of Form 8-K require a company in a transaction where the company ceases being a shell company to file a current report on Form 8-K containing the information (or identifying the previous filing in which the information is included) that would be required in a registration statement on Form 10 or Form 10-SB to register a class of securities under Section 12 of the Exchange Act.

securities, and a security holder selling restricted securities would be required to wait the duration of the holding period before being permitted to resell the securities. 133 The 90- day delay or the duration of the holding period would provide the market with time to absorb the Form 10 information filed with the Commission regarding the company, and the 90-day delay here is consistent with the 90-day waiting period in Rule 144(c) and proposed Rule 144(d).