The Reverse Merger & SPAC Blog

Make Sure to Vote!!!

2008-11-02T14:07:00.004-05:00

If you are a US citizen, you must be living under a rock if you don't know that this Tuesday we are electing a new President. Either way a historic event - either the first African American President or the first female Vice President. Both pretty exciting if one considers where we were even 30-40 years ago.

Sen. Obama thinks everyone should have the day off to vote. Luckily in NY we vote from 7 am until 9 pm. So in my office everyone will have lots of opportunity to vote without our needing to be unavailable to our clients.

But vote we must. The voting process in our country is flawed, subject to fraud and skewed by the Electoral College, which gives 100% of a state's "vote" based on which candidate gets even one more vote than the other. The system will never change because smaller states get more power, and would never vote to amend our Constitution to change it. Within one close state individual votes can matter, as we found in the 2000 election in Florida. But this is very rare indeed.

But vote we must. A democracy only works if the people for whom it exists exercise the rights they have. What does this have to do with the smallcap markets and reverse mergers? Quite a bit actually. The US Securities and Exchange Commission regulates these markets and with a few pen strokes can significantly improve or impede these markets. The Commission is led typically by a representative of the current President. And of course the economic and fiscal policies of each Administration impact on small businesses both public and not. So make sure when you vote, if you are playing in this world, that you consider the possible effects on your dealmaking and regulatory environment.

But vote you must.

Deals Closing, But...

2008-10-30T05:49:00.005-04:00

As mentioned a few weeks ago, things are picking up. Deals that were languishing or almost dying have come back to life and are actually getting closed. We are completing several reverse mergers in my office this week, complete with contemporaneous financings.

What next? That's the big question. Some are suggesting (including some lawyer colleagues I was with last night) that PIPE funds have little or no money allocated for new transactions between now and the end of the year. Some feel we need to get past the US elections. Others believe we need to wait for the stock markets to stabilize more, despite some recent positive days. One client simply said to me, after this deal I just don't know what is next.

Consensus seems to be we will see a deal slowdown until early next year. I do think that reverse merger deals that need to close by year end pretty much would have started already. But we often start deals this time of year that are not slated to close until early in the next year, so we'll see what happens! I think we will finish the year close to last year in terms of number of reverse mergers completed, but I expect there will be meaningfully fewer deals with contemporaneous financings, and where a financing is present, the average size will be down.

Feel free to comment here on what you are seeing...

Book Ready for Update

2008-10-29T06:51:00.003-04:00

I'm very happy to let you know (but not yet officially announce) that Bloomberg Press has informed me that my book, Reverse Mergers: Taking a Company Public Without an IPO, has been greenlighted for me to write an updated second edition. I am still working out the fine print with Bloomberg, but I am confident we will be able to do so. Back to spending some Saturdays at the computer...

In the current environment there was some initial trepidation to come out with a new or even updated finance book. But everyone realized that this was the perfect time to do so (although the new edition probably won't be ready for about a year). Reverse mergers, as I have written many times, are generally not cyclical. We are busy doing deals right now. And they are an especially attractive option when the market is down and IPOs are non-existent, such as is currently the case.

So in the meantime, feel free to make Reverse Mergers your stocking stuffer, client holiday gift or sturdy doorstop. It is still vastly current, and the basics of transactions have not changed. Still have to sell out the third printing of the first edition! But my thanks go to you, my loyal blogees/readers, many of whom have helped the book be such a success.

Start the Week Right

2008-10-27T06:53:00.003-04:00

We all work hard. We have goals to reach, mountains to climb, ambition to feed, laser focus, fire in the belly and unabashed determination, especially when the economy, the market, and prospects are heading downward. But a friend once said to me, "No one on their death bed ever said, 'I wish I spent more time at the office.'"

Working hard is not the same as working smart. If you focus on the efficiency of your efforts, strategic delegation to talented co-workers, and careful prioritization, you can find a little more flexibility in that schedule without having to sacrifice any potential for future and/or continued success. In fact you may find renewed energy and perspective that may have been lacking.

Take a pledge this week to find a little extra time in your life for those who mean the most to you. Try to switch one business dinner to a lunch. Ask a colleague to handle an assignment that you will review instead of do yourself. Make sure that trip is really important and worth it.

Just a thought from a fellow fast lane traveler..

What is the Value of Legal Opinions in Reverse Mergers?

2008-10-23T08:51:00.005-04:00

In some reverse merger transactions attorneys resist giving traditional legal opinions. Or in other cases, in particular in Chinese reverse mergers, getting opinions that have any value requires multiple attorneys in multiple jurisdictions to opine (in one recent transaction our client sought an opinion from a British Virgin Islands attorney, another in Hong Kong and another in the PRC). Sometimes the shell's lawyer feels he or she has not represented the company long enough to opine. In most deals, however, both the private company's counsel and the shell's counsel give legal opinions to each other and, if a placement agent and/or investor is also involved, to them as well. Why are legal opinions important? Are they?

Simple answer: they are important. But they are not necessarily essential to get a deal done. Sometimes, for example, attorneys agree that neither side will give an opinion. There are several reasons opinions matter. First, an attorney providing a legal opinion that something is the case is more likely to be truly sure as to that matter. A company may provide a representation in an agreement that, for example, it has XX shares outstanding, but when the lawyer gives an opinion to that effect, he or she will carefully check the stock records or information from a transfer agent to be absolutely sure. Would he do that if he wasn't giving an opinion? Many will but not all. At a minimum, smart lawyers impress on their client the importance of ensuring that each representation they make is in fact true.

The second, probably more obvious reason that opinions matter is that the recipient of the opinion holds an insurance policy. If it turns out the opinion is wrong, the attorney can be sued. Without the opinion generally only the company could face an action, not the attorney absent alleged fraud or other wrongdoing.

Each transaction is different and there may be valid reasons (cost is sometimes one of them) to complete a deal without opinions. Just make sure you work with your counsel to understand the risks if you go without one.

Come Hobnob With Top SEC Staffers and Commissioners

2008-10-17T16:00:00.004-04:00

Got the following email from a friend in the American Bar Association's Section of Business Law about an important upcoming conference (I added a little):

The SEC has posted its on-line registration form to participate in the 27th Annual SEC Government-Business Forum on Small Business Capital Formation to be held this year on Thursday, November 20, 2008, at the SEC Headquarters, 100 F Street, N.E., Washington, D.C. In past years the SEC Chairman has welcomed the participants, and speakers usually include top staffers who can provide useful insight into the SEC's views on various topics. At times they will telegraph upcoming rulemakings and other actions.

If you are interested in attending the SEC Forum you must complete and submit the registration information below by November 17, 2008. You can register on-line at: https://tts.sec.gov/cgi-bin/registration-form .

The full agenda, including main topic of the program's morning session, has not yet been announced but participants are asked to choose one from among the following afternoon breakout sessions (which appear to be concurrent):

* Private Placement and M&A Brokers
* Private Securities Offerings
* Smaller Publicly Traded Companies
* Tax

More information about the annual forum can be found on the SEC's web page for the Government-Business Forum on Small Business Capital Formation at: http://www.sec.gov/info/smallbus/sbforum.shtml

Back to business? Whither Rule 144(i) Relief?

2008-10-17T06:27:00.005-04:00

I got a number of calls yesterday that reminded me of the Monday following the terrorist attacks on Tuesday, September 11, 2001. That was the day that clients called and said to us, basically, "Get back to work and finish that deal."

At least three different projects that were on hold for the last few weeks are now moving forward again. Several transactions that were not technically on hold but which were seeming to drag more than normal suddenly scheduled closing dates or were restructured to get completed. I even got started on a completely new transaction.

These are all good signs that Wall Street is ready to get back to business. We seem to be past the "deer in the headlights" attitude that pervaded the last few weeks. This is good.

One victim of this crisis, at least in terms of timing, may well be our effort to push for the elimination of the "evergreen" requirement in new Rule 144(i) (see prior posts) sometime before the election. Our request for rulemaking, submitted on October 2, probably has very little chance of seeing action by the Securities and Exchange Commission this month. And one assumes that it is likely that Chairman Christopher Cox will not be here after the election, since he is a Republican not likely to be kept if Obama wins, and his fellow Republican John McCain has called for his resignation. I remain very hopeful, however, that we can effect this change, and will continue to push, even if it takes a little while.

Wow!

2008-10-13T18:40:00.004-04:00

Maybe I should start giving investment advice! Anyone who listened to me after my post yesterday below could have easily made 10-11% in one day on blue chip stocks today!

The volatility in the market, however, is still problematic. Of course up is way better than down, and erasing a large percentage of the losses is a good thing. But until things settle down into a more predictable pattern, normal business will not resume. Let's hope this is where that begins to happen.

Had lunch with a middle market M&A player who said "we're doing a lot of restructurings."

Time to Buy

2008-10-12T08:39:00.005-04:00

As mentioned in previous posts, I'm no economist or prognosticator. And many who are way smarter than I am make a living advising people about how to invest to make the most over time. But there is one thing I have observed in nearly 50 years of existing on this planet. The stock market goes up. Then it goes down. Repeat. Over and over. And, as I have said before, long term investing in equities always outperforms almost any other method of investing.

I can't provide data, charts and true objective analysis like Wharton's Prof. Jeremy Siegel, whom I had the challenge of following as speaker at Wharton's MBA Convocation a few years back. Jim Cramer did scare a few by advising folks to take their money out of the market if they need the money in the next five years. But in truth that's been the advice of the advisors forever - if you might need the money pretty soon, it really shouldn't be at risk.

But for those of us who have a bit more of a time horizon (for the moment anyway!), I can only look at current market prices and see tons and tons of incredible bargains. The sell-off is probably not over, it may indeed have a bit more to go. But my smart brother-in-law, who's been in the market for over 40 years, says very simply, "You can't buy at the bottom or sell at the top, so don't try."

But when you look at what are considered "normal" ratios of stock price to earnings, you see lots of opportunities. So I think it's time to buy. The other reason it's time: the stock market, our economy and our financial institutions are not entering a depression or collapse. A number of sectors of the economy are getting stronger (look at the dramatic fall in energy prices for example). We are not seeing massive unemployment, runs on banks, people trying to jump out of their air conditioned windows on Wall Street. Yes times are tough, but thanks to the steps that have been taken and more that are coming, I expect that we will move to a more traditional bear market and recessionary economy for awhile.

This we know how to deal with. We tighten our belts, if necessary draw a little on that rainy day fund, and wait for the next upturn. Oh, and something else Prof. Siegel talks about. Expectations. If everyone gets a little sunnier outlook like I am projecting here, it will become infectious, and that alone with fuel the positive energy in the market and in our economy. So at a time when most of us are not high in expectations about the Presidential election, let's up our expectations a bit on capitalism and our very way of life here in America.

Oh and take a close look at the smallcap market as you invest. When things come back chances are the smaller stocks will outperform largecaps. And of course that helps those of us who make our livings not prognosticating, but helping smaller companies find ways to fuel their growth and build wealth for their stockholders.

[I'm not a financial advisor, this is not legal or financial advice, blah blah, so don't sue me!]

Great Summary of the Rescue Bill

2008-10-09T09:58:00.003-04:00

I am pleased to have received permission from Seyfarth Shaw LLP to reprint this newsletter sent to their clients. There's no commentary here, just the facts. You can also find it at: http://www.seyfarth.com/index.cfm/fuseaction/publications.publications_html/object_id/a5b661d8-7e3a-4de6-b8a5-785a635f6abf or click on the download notation at the bottom.

Executive Summary of the Emergency Economic Stabilization Act of 2008

10/08/2008

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “Act”). The Act provides the Secretary of the Treasury (the “Secretary”) with unprecedented “authority and facilities” designed to restore liquidity and stability to the financial system of the United States. For your convenience, set forth below is a thematic executive summary of the Act’s provisions.

Troubled Asset Relief Program

Under the Act, the Secretary is authorized to establish the Troubled Asset Relief Program (the “TARP”). The TARP will be implemented through a new Office of Financial Stability within the Department of Treasury. The Office of Financial Stability will be headed by an Assistant Secretary of Treasury who will be appointed by the President and confirmed by the Senate.
The Act provides the Secretary with the power to purchase troubled assets from any financial institution. Troubled assets are defined to include residential or commercial mortgages and any securities, obligations or other instruments related thereto, so long as they were originated or issued on or before March 14, 2008. Troubled assets also include any other financial instrument, originated or issued at any time, the purchase of which the Secretary determines, after consulting with the Chairman of the Board of Governors of the Federal Reserve (the “Chairman”), are necessary to promote financial market stability. Financial institutions are defined to include institutions such as banks, savings associations, credit unions, security brokers or dealers or insurance companies. Further, to qualify as a “financial institution” under the Act, an institution must be established and regulated under the laws of the United States or any State, territory or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa or the United States Virgin Islands, and must have “significant operations” in the United States. Central banks or institutions owned by foreign governments do not qualify as “financial institutions” under the Act.

Under the Act, the Secretary has the right to manage troubled assets, to sell troubled assets and to enter into “securities loans, repurchase transactions or other financial transactions.” Financial institutions are prohibited from selling assets to the Secretary at a profit, except with respect to troubled assets acquired in a merger or acquisition or acquired from a financial institution in conservatorship or receivership or that has initiated bankruptcy. The Secretary has been given the power to waive specific provisions of regulations applicable to purchases by the Federal Government if “urgent and compelling circumstances make compliance with such provisions contrary to public interest.”

The Secretary has been granted immediate authority to purchase up to a total of $250 billion of troubled assets (the “Purchase Authority Limit”1). Upon certification to the Congress by the President that additional funds are needed, the Secretary’s Purchase Authority Limit shall increase to $350 billion. And, following another certification to the Congress by the President and the failure by Congress to pass a joint resolution of disapproval, the Purchase Authority Limit shall increase to $700 billion.

Under the Act, the Secretary also has the power to establish an insurance program to guarantee troubled assets. Upon the request of a financial institution participating in such program, the Secretary may guarantee the timely payment of up to 100 percent of principal of, and interest on, a troubled asset. The Secretary shall collect premiums from financial institutions participating in the guarantee program. Such premiums shall be in an amount determined by the Secretary and may vary based upon the credit risk associated with the particular troubled asset. The premiums received by the Secretary pursuant to the guarantee program shall be placed into a Troubled Assets Insurance Financing Fund and shall be used to fulfill the obligations of the guarantees provided by the Secretary. The Purchase Authority Limit shall be reduced by an amount equal to the difference between the total of the outstanding guaranteed obligations under the insurance program and the balance in the Troubled Assets Insurance Financing Fund.
Subject to certain exceptions to be established by the Secretary, the Secretary may not purchase or make any commitment to purchase any troubled asset without first receiving (i) from a publicly traded financial institution, a warrant giving the Secretary the right to receive nonvoting common stock or preferred stock or voting stock with respect to which the Secretary agrees not to exercise voting power, as determined by the Secretary, or (ii) from a financial institution that is not publicly traded, a warrant for common or preferred stock or a senior debt instrument. In order to maximize the value for taxpayers and to maximize the return on investment for the Federal Government, the Secretary may sell, exercise or surrender the warrants or senior debt instruments, as the Secretary deems fit.

In addition to having the power to purchase troubled assets, the Secretary is also authorized to take such action as the Secretary deems necessary to carry out the purposes of the Act including, without limitation, hiring employees, entering into contracts, designating financial institutions as fiscal agents of the Federal Government, and establishing vehicles to purchase, hold and sell troubled assets and issue obligations.

The Secretary is required to use his or her authority under the Act to minimize the potential long-term negative impact on the taxpayers by holding assets to maturity or by holding assets for resale until such time as the Secretary determines that the market is optimal for selling such assets. The Secretary shall sell such assets at a price determined by the Secretary so as to maximize return on investment for the Federal Government.

When purchasing or guaranteeing troubled assets, the Secretary shall consider a number of factors including, among others, the most efficient way to (i) protect taxpayers by maximizing overall returns and minimizing the impact on the national debt, (ii) provide stability and prevent disruptions to financial markets, (iii) help families keep their homes, and (iv) ensure stability for public instrumentalities such as counties and cities.

The Secretary’s powers under the Act expire on December 31, 2009. Upon the submission of a written certification to Congress, the Secretary may extend his or her authority under the Act until October 3, 2010. The certification must include a justification for the extension and details regarding the anticipated cost for such extension.

Oversight, Reporting, and Disclosure Requirements

The Act establishes an Office of the Special Inspector General for the TARP. The head of such office, the Special Inspector General, shall be appointed by the President and confirmed by the Senate and shall conduct, supervise and coordinate audits and investigations of the purchase, management and sale of troubled assets. The Special Inspector General shall have the power to hire employees, sign contracts and request assistance from other governmental agencies. The Special Inspector General is to report to the appropriate committees of Congress on a quarterly basis. $50 million of the funds available to the Secretary under the Act shall be available to Special Inspector General to fulfill his or her obligations under the Act.

The Act also establishes a new Financial Stability Oversight Board (the “Oversight Board”) comprised of the Chairman, the Secretary, the Director of the Federal Housing Finance Agency, the Chairman of Securities and Exchange Commission, and the Secretary of Housing and Urban Development. The Oversight Board shall review the policies implemented by the Secretary pursuant to the Act and analyze the effect of such actions in preserving homeownership, stabilizing financial markets and protecting taxpayers. The Oversight Board also shall make recommendations to the Secretary to improve the TARP and shall report any fraud, misrepresentation, or malfeasance to the Special Inspector General or the United States Attorney General. The Oversight Board is required to meet two weeks after the first purchase of a troubled asset by the Secretary and shall meet monthly thereafter. Further, the Oversight Board is required to report to the appropriate committees of Congress and the Congressional Oversight Panel described below on a quarterly basis, at a minimum.

The Act also establishes a Congressional Oversight Panel. The 5-member panel2 shall submit regular reports to Congress detailing, among other things, the exercise by the Secretary of his or her powers under the Act as well as the impact of the TARP on financial markets, financial institutions, market transparency and foreclosure mitigation efforts. Furthermore, the panel is required to submit a special report on regulatory reform by January 20, 2009. The special report shall contain an analysis of the current state of the regulatory system and its effectiveness in terms of overseeing the financial system and protecting consumers. The report shall contain recommendations for improvements to the regulatory system, including recommendations regarding gaps in consumer protection and whether certain participants that are outside the regulatory system should become subject to the regulatory system.

The Secretary is required to report to the appropriate committees of Congress every thirty days. The Secretary’s reports to Congress shall include an overview of actions taken by the Secretary pursuant to the Act, a summary of obligations and expenditures incurred for administrative expenses and a detailed financial statement regarding the TARP. Further, not later than seven days after the date on which the commitment to purchase troubled assets reaches $50 billion, and at each $50 billion interval thereafter, the Secretary is to provide a written report to Congress containing, among other things, a description of the transactions made during the reporting period. The written reports also must include the pricing mechanisms utilized by the Secretary to purchase troubled assets, together with a justification for the price paid. Additionally, each report shall include a description of the impact on the financial system of the actions taken by the Secretary, together with an estimate of additional actions needed to address any challenges that remain in the financial system.

The Secretary also must submit a written report to the appropriate committees of Congress by no later than April 30, 2009. Such written report shall contain an analysis of the current state of the regulatory system and its effectiveness in overseeing the participants in the financial markets. The written report shall provide recommendations as to whether participants in the financial markets that are outside the regulatory system should become subject to the regulatory system. Moreover, the written report also shall contain recommendations for enhancing the clearing and settlement of over-the-counter swaps.

The Act also requires the Secretary to make available to the public, in electronic format, a “description, amounts and pricing” of assets acquired under the Act. Such disclosure shall be made within two business days of purchase, trade or other disposition.

The Comptroller General of the United States shall have ongoing oversight of the TARP, including the activities, performance, financial condition, and efficiency of the TARP. The Secretary is to provide the Comptroller General with space and facilities in the Department of Treasury, and the Comptroller has been provided with broad rights regarding access to data relating to the TARP. The Department of Treasury is required to reimburse the Government Accountability Office for the full cost of all such oversight activities. The Comptroller General shall report to the appropriate committees of Congress and to Special Inspector General no less frequently than once every sixty days. The Comptroller shall also conduct annual audits of the TARP and recommend corrective actions to be taken by the TARP.

Additionally, the Comptroller General is required to undertake a study to determine the extent to which leverage and sudden delevereaging of financial institutions was a factor behind the current financial crisis. The Comptroller General’s findings are to be delivered in a report, which must be submitted to the Senate’s Committee on Banking, Housing and Urban Affairs, by June 1, 2009.

Executive Compensation

Financial institutions that sell troubled assets to the Secretary are required to meet “appropriate standards for executive compensation and corporate governance” established by the Secretary. In establishing such standards, the Secretary must (i) set limits on compensation for senior executive officers3 that exclude incentives to take unnecessary and excessive risks that threaten the value of the financial institution while the Secretary holds a debt or equity position therein, (ii) allow for the recovery, by a financial institution, of a bonus or incentive compensation based on earnings, gains or other criteria which is later proven to be materially inaccurate, and (iii) impose a prohibition against making any golden parachute payments. If the Secretary purchases troubled assets at auction from a single financial institution and such purchases, in the aggregate, exceed $300,000,000 (including direct purchases), such financial institution shall be prohibited, while the Act is in effect, from entering into any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency or receivership.

The Act also provides that Section 162(m) of the Internal Revenue Code (IRC) is amended to limit the deductible compensation, for any year in which the Act is in effect, to $500,000 for a covered executive4 of a financial institution that has sold more than $300,000,000 of troubled assets to the Secretary. The Act also amends Section 280G of the IRC to impose restrictions on severance payments made to covered executives of the financial institutions participating in a program under the Act.

Recoupment

On October 3, 2013, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to Congress on the net amount within the TARP. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall so as to ensure that the TARP does not add to the deficit or national debt.

Mark-to-Market Accounting Provisions

The Act contains a provision that allows the Securities and Exchange Commission (SEC) to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is “necessary or appropriate in the public interest and is consistent with the protection of investors.” The Act also requires the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Secretary, to conduct a study on market-to-market accounting standards as provided in Statement Number 157 of the Financial Accounting Standards Board, as such standards are applicable to financial institutions. The study shall consider, at a minimum, the effects of such accounting standards on a financial institution’s balance sheet, the impact of such accounting on bank failures in 2008, and the impact of such standards on the quality of financial information available to investors. The study shall also consider the process used by the Financial Accounting Board in developing accounting standards, the advisability and feasibility of modifications to such standards and alternative accounting methods to those provided in Statement Number 157. The SEC shall submit to Congress a report of such study before January 3, 2009.

Miscellaneous Provisions

The Act contains a number of provisions aimed at preventing foreclosures and assisting homeowners. For example, in connection with the Secretary’s acquisition of mortgages, mortgage backed securities and other assets secured by residential real estate, the Secretary is required to implement a plan that seeks to maximize assistance for homeowners and seeks to encourage servicers of such mortgages to take advantage of the HOPE for Homeowners Program. Further, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent “avoidable foreclosures.”

The Act also contains provisions temporarily increasing, from $100,000.00 to $250,000.00, the standard maximum deposit insurance amounts available under the Federal Deposit Insurance Act and the Federal Credit Union Act. Such increases are not to be taken into account by the Board of Directors of the Federal Deposit Insurance Corporation or by the National Credit Union Administration Board when setting assessments or insurance premium charges. The temporary increases shall be effective until December 31, 2009.

1 The Act does not contain provisions limiting the amount of troubled assets that the Secretary can buy from a single financial institution.
2 The five members shall consist of one member appointed by the Speaker of the House, one member appointed by the minority leader of the House, one member appointed by the majority leader of the Senate, one member by the minority leader of the Senate and one member appointed by the Speaker of the House and the majority leader of the Senate, after consultation with the minority leader of the Senate and the minority leader of the House.
3 Defined as the top five highest paid executives at a publicly traded company whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934 and any regulations issued thereunder, and non-public company counterparts.
4 Defined as any employee who (i) at any time during the portion of the taxable year during which the authorities granted to the Secretary under the Act are in effect, is the chief executive officer or the chief financial officer of the applicable employer, or an individual acting in either such capacity or (ii) is one of the three highest compensated officers of the applicable employer for the taxable year (other than the chief executive officer or the chief financial officer of the applicable employer, or an individual acting in either such capacity) determined (a) on the basis of shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (without regard to whether those rules apply to the employer) and (b) by only taking into account employees employed during the portion of the taxable year during which the authorities granted to the Secretary under the Act are in effect.

Download Executive Summary of the Emergency Economic Stabilization Act of 2008
This information is from a newsletter which is a periodical publication of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) Copyright © 2008 Seyfarth Shaw LLP All rights reserved.

Update on SPACs from M&A Journal

2008-10-06T15:00:00.004-04:00

I got permission from Jonathan Marino of M&A Journal to reprint the below article he wrote. You can also find it at: http://www.mergersunleashed.com/news/186252-1.html

SPACs Brace for Hedge Fund Industry Shrinkage

Unwinding positions could hamper SPAC backlog; mid-market companies

eyeing blank-check exits may find opportunities dwindling in near-term.

By JONATHAN MARINO

October 3, 2008

Citigroup's Old Lane hedge fund, which took several positions in special purpose acquisition companies (SPACs), has cashed in on many of those investments as it liquidates, according to its federal filings. The fund, which was bought from now-chief executive Vikram Pandit in 2007, announced this summer plans to liquidate after its change in management prompted a mandatory allowance of investors to remove their capital, if wanted. They did, en masse.
Old Lane likely isn’t the only hedge fund that invests in SPACs to see its investors seek back what money they have left. In fact, the entire asset class faces an uncertain future as funds may go to untold lengths to recoup money and combinations are voted down. If funds aren’t rejecting combinations solely out of the desire to repay anxious investors clamoring for cash, the prospect of a company being brought public and then seeing its valuation hurt is also cause for hesitation. One hedge fund investor stated that his fund sold SPAC shares after it brought a company public; that company in turn shed nearly 40% of its value in trading thereafter.

What happens next for hedge funds—market speculation and handwringing indicates 2008 could see the most hedge fund liquidations ever—will directly impact SPACs’ fundraising ability. Cliff Teller, executive managing director at Maxim Group, which both underwrites and advises blank check companies, said it is his hope for the asset class that around half of SPACs that identify a target succeed in making a combination. Anything short of that is a poor harbinger for blank check companies.

“The current environment is similar to 1998,” said Ken Heinz, president of Hedge Fund Research Inc., a database that tracks thousands of funds. “There’s a lot of speculation."
This year could outpace 2005, which saw the most hedge fund liquidations ever, when about 850 or them—11 percent—became no more, Heinz said. Between 800 and 1,000 liquidations this year “is plausible,” he said, and that only takes into account 350 funds that ceased to exist in the first half of this year. The tail end of 2008 has potentially to nearly double that.

The results may be widespread: backlogged blank check companies may be stifled interminably until market conditions improve. Teller indicated that those capable of enduring the uncertainty are best poised.

SPACs have “infinite life if the management team is committed to the process,” he said.
Further, those that have already listed might begin to enjoy an advantage, as the scarcity of capital available to companies looking to grow could eventually push more mid-market firms toward SPACs for exits. Future SPACs, Teller said, will likely be smaller, perhaps generating still more chances for mid-market firms looking at a sale.

Another hedge fund investor whose fund has often taken SPAC positions said that, while existing blank check companies can feel more secure thanks to having cash, those trapped in the sizeable SPAC backlog are not likely to succeed. However, thanks to the extremely high price of debt, those SPACs that have already come to market might enjoy an advantage going into the M&A process, since their targets will have few, if any, options to finance growth.

The options, the first hedge fund investor said, are for SPACs to either “stay backlogged” or “pack it in.” A third option, the investor said, would be after abandoning expectations of making it to the US market in the near term, would be to pursue a listing on the Toronto Stock Exchange. The TSX’s Julie Shin, who leads the exchange’s listed issuer services, said ideally it will see its first blank check listing by the end of 2008.

Another, third, investor is less optimistic for the worldwide SPAC market at this juncture.
“Current SPAC returns in the secondary market and lack of leverage available globally make me skeptical,” that investor said.

See You at the PIPEs Conference

2008-10-04T15:01:00.002-04:00

My law partner Joe Smith and I are both speaking at DealFlow Media's PIPEs Conference this November 12-13 at the New York Hilton. This is by far the biggest PIPE conference of the year. Joe will be on the traditional panel discussing legal issues concerning PIPEs. My panel will be on reverse mergers. I urge all interested in this space to attend- my firm is also sponsoring the luncheon. Here is the description of my panel.

Investing in Reverse Merger Companies: Navigating Rule 144

3:45 - 4:35 PM This year the SEC adopted significant changes to securities law designed to improve the regulatory environment for smaller public companies. Now that these rules have been in place for some time, new strategies have emerged for investors. This panel explores the various approaches to investing in newly-reverse merged companies, positioning private companies for the public market, and covers what investors need to know in the post-Rule 144 environment.

Nine Law Firms Submit Request for Rulemaking on Rule 144(i) to SEC; Text Below

2008-10-02T09:36:00.005-04:00

Below is the request for rulemaking to eliminate the "evergreen" requirement in amended Rule 144(i). The SEC received the request today. My immense thanks to my co-signers Spencer Feldman of Greenberg Traurig, David Miller of Graubard Miller, Sam Krieger of Krieger & Prager, Nanette Heide of Seyfarth Shaw LLP, Richard Anslow of Anslow & Jaclin, Mitchell Littman of Littman Krooks, Nimish Patel of Richardson & Patel and Michael Williams of Williams Law Group. I am hopeful that the addition of your stature and reputation and that of your firms will improve the chances of this request getting the attention and response that it deserves. Here's the request.

DNF

FELDMAN WEINSTEIN & SMITH LLP

420 LEXINGTON AVENUE

NEW YORK, NEW YORK 10170

T: (212) 869-7000

F: (212) 997-4242

www.feldmanweinstein.com

October 1, 2008

Via Overnight Mail
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F. Street NE
Washington, DC 20549-1090

Dear Ms. Morris:

We are writing on behalf of a number of our law firms’ respective clients. We hereby jointly petition the Securities and Exchange Commission (the “Commission”), pursuant to Commission Rule of Practice 192(a), to adopt an amendment to Rule 144 under the Securities Act of 1933, as amended (17 CFR 230.144) (“Rule 144”). The proposed amendment would remove the prohibition in Rule 144(i) on shareholders who acquired shares when an issuer was a “shell company” or former “shell company” from being able to utilize Rule 144 for a sale of unregistered securities if the issuer has not filed its Securities Exchange Act of 1934 (“Exchange Act”) reports for the one year prior to the proposed sale, other than in the first year following each date the issuer ceases to be a shell company and releases “Form 10 information.”

This proposed amendment, we believe, will improve the public markets by providing greater transparency for investors and instilling greater confidence and liquidity in the capital markets, and treating former shells, starting one year after each time they cease to be a shell and release full Form 10 information, who have filed their Exchange Act reports during that one year period, like any other public company.

Specifically, we propose changing the phrase in Rule 144(i)(2) that currently reads, “…has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports…” to read instead, “has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the 12 months following each date upon which the issuer ceases to be a shell company and has filed current ‘Form 10 information’ with the Commission, other than Form 8-K reports…”

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 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

The “evergreen” requirement that a former shell company stay current creates several problems.

Structuring registration rights if a former shell company is conducting a private offering of securities.

Prior to the adoption of the Rule 144 amendments, it was customary in private investments in public equity (“PIPEs”) and other private placements for issuers to register the applicable securities in a resale registration statement and maintain that resale 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. This is true because even though a holder of the placed securities can start to sell in six months, the company must remain current for the next six months, thus creating a potential restriction. However, in a situation involving a company that was ever a shell, this period now never ends. Thus 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.

It has been our experience that both issuers and investors have experienced significant difficulties in dealing with these registration rights issues, and we are not aware of any PIPE offering subsequent to the adoption of the Rule in which this issue has been properly addressed to the investors’ satisfaction, which has inhibited capital formation for smaller public companies in these troubling economic times.

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 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 of the shares.

It is common practice to have the restrictive legend removed at the time of a sale where a holder seeks to sell utilizing the exemption under Rule 144. This process is somewhat cumbersome and occasionally time-consuming, involving the company, the transfer agent and company counsel giving an opinion, among other things. Convention has developed allowing the legend to be removed when the holder has sufficiently held the shares 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 both to the investor and the issuer because it saves time at the time of sale by avoiding the difficult process described above, thereby avoiding unnecessary “fails-to-deliver” and costly buy-ins for innocent investors. 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.

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. Thus, even if a year has passed and no volume restrictions apply, there now forever remains another restriction: that at the time of sale the company must have been current for the prior year. Since an issuer cannot know this in advance, it will be unable 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 in its Exchange Act reports, the holder would be in violation of Rule 144.

The Scarlet Letter Effect

This limitation paints every former shell with a “scarlet letter,” and applies to every share issued by that company not only when it was a shell company but also after it ceased to be a shell company, perhaps suggesting that the Commission believes these companies forever require greater regulatory oversight. If the Commission chooses not to effect our proposed amendment, the current rule 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. All these companies went public through business combinations with shell companies.

We respectfully request that the Commission revisit this issue in light of the foregoing. We do not believe that 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. Indeed, we also believe that the spirit of this burden runs directly counter to the spirit of the various rule changes adopted as part of the Commission’s response to its Advisory Committee on Smaller Public Companies, of which the Rule 144 changes served a part, which were intended to help smaller public companies grow and raise capital.

The Advisory Committee’s charter, as set forth on Page 2 of the Executive Summary of its report, included the direction by the Commission to “identify methods of minimizing costs and maximizing benefits and facilitate capital formation by smaller companies.” Unfortunately, in fact the evergreen requirement in Rule 144(i) will cause, and is already causing, exactly the opposite effect. Indeed, all other aspects of the Rule 144 changes were positive, extremely helpful additions to the regulatory landscape. Only this requirement added a new burden not previously mandated.

Now all former shells, including the well-known companies listed above, will 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, and
· if the shares are registered there is no clear end date for when the registration should remain effective.

We are hopeful the Commission, in revisiting this issue, can confirm that it did not intend for these restrictions to apply to famed investor Warren Buffett, whose reverse merger occurred decades ago.

Urgency of Request

We certainly understand the challenge of the Commissioners in setting the Commission’s agenda, especially given the current financial crisis. However, as a result of the adoption of the evergreen requirement, more and more smaller companies, whose sole realistic method of going public is through a business combination with a shell company, are opting to stay private rather than access the public markets solely because of concerns over this new burden.

They are being forced to accept more onerous financing terms, or not raise financing at all, foregoing growth opportunities and, in some cases, being at risk of surviving at all. There are a growing number of anecdotal incidents, and if addressing this urgent concern takes a year or more, it will certainly continue to create a significant new impediment to companies being able to access the public capital markets.

In 2007 there were over 200 reverse mergers. Through the middle of 2008 there have been 95 reverse mergers, compared with only 25 IPOs (of which only four raised less than $25 million). We are indeed quite concerned that the only realistically available method for smaller companies to go public has suddenly become much more unattractive as a result of this new burden.

Our hope is that if you agree with the proposed amendment, this very narrow item be added to the Commission’s agenda prior to the November 2008 elections. We believe it is a straightforward decision to be made and a small wording change to be accepted.

Conclusion

On November 14, 2007, Chairman Cox hailed the Rule 144 changes as highlighting the Commission’s “focus on removing obstacles of growth” for smaller public companies. On that same day, Division of Corporation Finance Director John White noted the Commission’s desire to “promote the growth and vitality of smaller public companies.” The evergreen requirement runs counter-intuitive to those goals, and we sincerely hope you will determine to improve it in the manner suggested by the proposed amendment.

We thank you for your consideration of this request for rulemaking. Please do not hesitate to contact David Feldman of Feldman Weinstein & Smith LLP at (212) 869-7000 with any questions or requests for further information with respect to the matters set
forth in this letter. All the attorneys and law firms below join in this request. We look forward to your response.

Sincerely yours,

FELDMAN WEINSTEIN & SMITH LLP

By: /s/ David N. Feldman
David N. Feldman, Managing Partner

Additional Signatories:

GRAUBARD MILLER SEYFARTH SHAW LLP

By: /s/ David Alan Miller_____________ By: /s/ Nanette C. Heide__________
David Alan Miller, Managing Partner Nanette C. Heide, Partner

LITTMAN KROOKS LLP GREENBERG TRAURIG, LLP

By: /s/ Mitchell C. Littman____________ By: /s/ Spencer G. Feldman________
Mitchell C. Littman, Founding Partner Spencer G. Feldman, Shareholder

KRIEGER & PRAGER, LLP WILLIAMS LAW GROUP P.A.

By: /s/ Samuel M. Krieger____________ By: /s/ Michael T. Williams________
Samuel M. Krieger, Managing Partner Michael T. Williams, Founder

RICHARDSON & PATEL LLP ANSLOW & JACLIN LLP

By: /s/ Nimish Patel ____________ By: /s/ Richard A. Anslow_________
Nimish Patel, Managing Partner Richard A. Anslow, Managing Partner

CC: Chairman Christopher Cox
Commissioner Luis A. Aguilar
Commissioner Kathleen L. Casey
Commissioner Troy A. Paredes
Commissioner Elisse B. Walter
John W. White, Director, Division of Corporation Finance
Erik R. Sirri, Director, Division of Trading & Markets
Thomas Kim, Chief Counsel, Division of Corporation Finance
Gerald Laporte, Director, Office of Small Business Policy

Deep Breath Everyone

2008-09-29T17:33:00.003-04:00

We have been here before. This roughly 7% drop in the Dow Industrials, while representing the largest single day point drop ever, is not even in the top 10 worst days on a percentage basis. We all hope a rescue plan will be passed. Even if not, there are indeed some market forces that might just hang in there (though maybe not in the very short term) to help ultimately turn things around even if the government cannot get past its partisan wrangling.

I can only say one thing to our lawmakers. Stop fiddling, stop fighting, Rome will start burning little by little unless you all stop looking for political advantage and simply get this thing done.

Happy and Healthy

2008-09-28T13:14:00.003-04:00

For those of my brethren celebrating, I want to wish you a happy and healthy New Year, L'shanah tovah. Let us hope that with this New Year, or for others a new season of Autumn here in the Northern Hemisphere, comes 1) resolution of the US government's action in response to the financial crisis, 2) stronger stock markets throughout the world, 3) action by the SEC to remove the new "evergreen" requirement that burdens former shell companies, and 4) lots and lots of companies going public and financing their growth.

OK, that's it. Some have suggested that some of my blog entries are too long! So enjoy the rest of the weekend all.

So Many Mining Companies Changing Hands for Pennies - Why?

2008-09-23T22:51:00.003-04:00

If you read the Reverse Merger Wire, you know that quite a number of public "mining companies," many if not almost all based in Canada, have suddenly had a change in control for very small dollars. These companies, almost all of which are being marketed as shells and most if not all of which have many of the troublesome features described in the infamous footnote 32 of the SEC's 2005 reverse merger rulemaking release, all claim to be start-up or very early stage mining companies.

In the last few years, these shells have been sold for between $500,000 and $800,000 cash, plus equity as well, in connection with reverse mergers. Suddenly, in the last few months many of them have been the subject of a sale of substantial control blocks for anywhere from $3,000 to about $30,000. How can this be if they are able to be sold in transactions for so much more?

I had been scratching my head about this for awhile. I have since, I believe, uncovered the possible culprit, but we are doing more research to be sure. We believe it has to do with new regulations in British Columbia that restrict the transfers of more than 20% of the stock of a company whose operations are based there, if it is public. In those cases, it appears shareholder approval is needed, much like on the larger US exchanges such as the New York Stock Exchange and American Stock Exchange (this is not true on the OTC Bulletin Board or OTC Pink Sheets).

Again, do not take this as for sure, as we have not even finished looking over the regulations and hope to soon. So if this 20% restriction exists, why these sudden cheap changes in control? I think, but again not sure, that the promoters who set these companies up generally do not own any stock initially. They usually appear at the time of a reverse merger, acquire shares from the "founders" of the "mining company" who put some money in and now are bought out by the promoter at a nice profit (but well below the value of the shares at closing of the reverse merger) and therefore always stay below 5% and never have to publicly disclose their ownership. If they were to show themselves while the company was still a shell, and they were seen doing it over and over, the risk of being caught as having set up numerous companies in just the manner described in footnote 32 was too high.

So again, why these changes in control? Well, it is possible that the promoters, seeing the inability to acquire the shares they desire at the time of the reverse merger because of the new 20% transfer limitation, are either directly or indirectly beginning to show themselves now in the shells they have already taken public. So maybe, just maybe, this might help us determine who is behind the creation of these troublesome shells. And maybe, just maybe, they will see less benefit in creating them as in the past if they cannot hide as before. At least not in British Columbia.

Kudos to the BC regulators for helping stamp out something that the SEC has yet, frankly, to do anything about beyond a small footnote and a four year old small fine in an enforcement case. More on this soon.

What Does This All Mean to Me, Al Franken?

2008-09-23T10:55:00.005-04:00

Some of us older folks remember the early days of the NBC comedy show Saturday Night Live. A very clever guy (now running as a Democrat for the US Senate), Al Franken, used to do a sketch talking about problems in the world and then saying, "But what really matters is what this means to me, Al Franken." During the me-decade of the 1980s, this really rang true. Very funny stuff no matter what you think of his politics or the fact that he "secretly" helped SNL recently write a sketch lambasting Republican nominee John McCain.

Let's replace Al Franken with smallcap, microcap and middle market deal worlds. What does all the financial turmoil in these last few weeks mean to us? And why listen to me about this stuff anyway? I am not an economist, finance whiz, politician (my partners might disagree), prognosticator, pundit or strategist. I'm just a guy doing deals in the trenches and out building my business relationships, my Wharton degree in tow.

Well, you're here so I'll give you my thoughts anyway. Here's what I see. First, deals in our world, for now, seem to be getting done. Some are changing deal structures to be smaller deals, at lower valuations, with more investor-protective securities. The middle market and PIPE investment banks seem to be OK. They are finding money for deals. I am still getting calls on a regular basis from companies desiring to be public, and the deals are indeed moving forward. In our RM world, there also appears to still be a strong appetite for Chinese companies to go public here. The current challenges in the SPAC world pre-date these issues, and that is for another day to discuss.

In the end, both PIPEs and reverse mergers (and other IPO alternatives) tend to be fairly non-cyclical. During the worst of the early 2000s, when the IPO market was dead and the stock market in very negative territory, we were actively taking companies public through reverse mergers. That appears to be remaining true in this bear market. The reason is that current market conditions are not that important when pursuing a reverse merger or self-filing. You are thinking more 6, 12 or even 18 months down the road and hoping market conditions will be attractive at that time. Investors with that longer-term perspective are prepared to invest regardless of today's market.

The middle market M&A world, of which I am also a part, is beginning to take its hit as well. The larger M&A deals went away about a year ago, and now the middle market is finding it harder to get deals done, but if they are, multiples and such are noticeably lower. The "strategic" buyers are still active and finding attractive valuations, whereas the "financial" buyers less so for now. Not great for M&A guys, but this also means some companies looking for an exit are more interested in going public through a reverse merger or other IPO alternative. And yes I am also getting those calls.

The New York Times wrote today about who wins in the proposed bailout and sudden increase in regulatory oversight of the financial world. Two key winners, they say: private equity and hedge funds. This is good news for our world, as these still largely unregulated pools of money will continue to be available for PIPE financings that drive many RM deals. Hedge funds now have to report when they short stocks, but most PIPE players are not actively doing that anymore, or if they are they are not concerned about reporting.

Thus, as the largest investment banks move to more conservative play by becoming banks, the middle and lower middle market investment banks may well have the opportunity to be involved in larger, exciting but somewhat risky transactions that the larger banks now must shun.

Despite what some say, this is not entirely unprecedented. Some even older than me say this is very similar to 1970. I do remember the market crash of 1987, when the market dropped 20% in two days (much worse than this rapid decline). I was a young lawyer and my officemate at the time, an active investor, came in calmly after the two-day drop and started buying stocks like crazy. Of course he was right as the market returned to its pre-crash levels within six months.

A former Treasury Secretary on the Today show the other day said, "Don't unbuckle your seat belts yet." And he is right. But as tough as things seem, (1) they may not be as bad for us, (2) some of the developments may actually help us, and (3) this too shall pass. There is one thing we know for sure. The stock market goes down, and then up. And investments in equities always outperform other traditional investments over any 10-year period. Your proof: I have not sold a single stock since this all started, except one that actually has been going up.

What I'm not sure about is what this all actually means to now Senate candidate Al Franken. :)

Tip of the Week: Don’t Forget Schedule 14F!

2008-09-19T09:41:00.001-04:00

If you anticipate a change in the shell’s board upon the completion of a reverse merger, this filing is almost always required. It is sometimes forgotten or ignored, but Schedule 14F must be prepared, filed with the SEC and mailed to the shell’s shareholders ten days before closing the deal. The most painstaking part of this process is the weeks it takes to complete the preparation, filing, printing, mailing and closing. Schedule 14F looks similar to a proxy statement for the annual meeting of shareholders in which directors are being elected.

If you were looking to avoid this filing, you would have to remove the board change as a condition to the merger and have no other agreement, arrangement or understanding with regard to changing the board. This is the only legitimate way to avoid the filing. Many argue that Schedule 14F shouldn’t be required because the shareholders do not benefit from receiving this information and have no ability to vote. However, rules are rules. The 14F includes information that would not otherwise be available prior to closing concerning the background of those who will run the newly merged company, including the disclosure of “bad boy” history. Therefore, going through with the filing or removing the board change requirement are my two recommended ways.

Another way to avoid the delay in closing associated with the filing is to file at closing, or less than 10 days before. In this situation, the majority of the board would not be able to change until 10 days pass after filing and mailing, but you could close the merger in the interim. Thus if, for example, the shell has one board member, at closing you might be able to appoint another director on the side of the private company merging in and wait 10 days from filing before the shell director resigns post-closing.

Here one could argue that the majority of the board has not changed. At least this prevents the shell director from passing anything without the private company director, but it also prevents the latter from passing anything. Since this is a short time period, it is for the parties to decide. Some shell clients refuse to do this as they do not wish to be board members, with associated fiduciary duties and liability exposure, post-closing.

Request for Rulemaking Almost Final

2008-09-19T07:36:00.002-04:00

Just wanted to update you that the growing group of attorneys ready to sign the request for rulemaking to eliminate the "evergreen" requirement in Rule 144(i) following the one year anniversary after ceasing to be a shell has just about finalized the document. I've gotten some great input from my colleagues, and we want to make sure that it's right and has the full support of everyone signing it to have the maximum impact.

Given that Chairman Cox's position given the current financial difficulties is not 100% certain, it is even more important that we get the request in very soon, and that is our goal. As soon as I send it in, we will post it here.

Thanks for your patience!

Podcast Link

2008-09-10T18:31:00.003-04:00

Below is a link to the podcast I did with Dave Lynn, former Chief Counsel of Corporation Finance at the SEC, now with TheCorporateCounsel.net, talking about the Rule 144(i) situation. Enjoy!

http://www.thecorporatecounsel.net/nonMember/Files/2008_09_10_Feldman.htm

Request for Rulemaking Coming on Evergreen Requirement

2008-09-05T19:18:00.001-04:00

A group of prominent reverse merger professionals met telephonically last week. We decided to move forward with a "request for rulemaking" with the SEC to ask the Commission to eliminate the requirement for companies to stay current for Rule 144 to be available in a former shell.

Since all holders must wait until one year following a reverse merger and release of the "super" Form 8-K to avail themselves of Rule 144, we believe that is more than sufficient time for the information to be disseminated. After this one year, the company should be treated like any other public company.

I am hopeful we can erase the "scarlet letter" (I have neglected in all this to credit California lawyer Marc A. Indeglia for first using that term in an email to me) that the SEC pinned on all former shells, regardless of how long it was since they were public. As mentioned in prior entries, the SEC staff has told me they "share" and "understand" my concerns about this. This leads me to believe this attempt to seek a rulemaking to reverse this ill-advised requirement is worth the effort.

Thanks to those who are supporting this request, including Richard Anslow, Mitchell Littman, Nimish Patel, Michael Williams, Nanette Heide, Sam Krieger, Spencer Feldman and Tim Keating. We are working on the draft and hope to submit it to the SEC within a matter of weeks.

Timing is everything in life. We hope to make clear to the Staff and the Commission the urgency of this situation, with the hope that maybe we can make it to the Commission's agenda before the election in November. If not, we will continue to push to get it addressed in the very near future.

Wednesday, I did a podcast on www.deallawyers.com on this subject with former SEC Corporation Finance Chief Counsel David Lynn. I will get you all a link when the podcast is posted. In addtion you can look at the coverage of this topic by the Reverse Merger Wire at http://reversemerger.dealflowmedia.com/wires/top_wires.cfm#1.

A Very Good "IDEA"

2008-09-02T09:08:00.001-04:00

The SEC has announced a new system which will eventually replace EDGAR, the electronic data gathering, analysis and retrieval program under which SEC filings are made electronically. IDEA, which stands for Interactive Data Electronic Applications, will allow investors to quickly and easily search financial information. SEC Chairman Christopher Cox recently led a press conference detailing the new system and its advantages.

When it was phased in back in 1996, EDGAR was, frankly, already obsolete. It took years of back and forth before the very complex regulation explaining how it was to work was completed and adopted. The ASCII-based system nevertheless represented a sea change in the availability of information about public companies. Previously one had to send a researcher to the SEC offices who would stand there and copy paper versions of public filings for you. If you wanted to search a particular item, the researcher would do it for a very expensive fee. And it would take quite a bit of time.

Now with the click of a mouse from anywhere in the world you can access information about any public company, or with the help of search engines such as www.tenkwizard.com, search for people, topics and the like. Want to find every shell? Every PIPE? No problem now. But the system is indeed antiquated.

Cox states that unlike EDGAR, this new system will rely on information rather than specific forms and transactions. During the press conference, Cox led an on-screen presentation comparing the new program to its predecessor, emphasizing EDGAR’s lengthy and time consuming steps to access information about financial companies and mutual funds. IDEA will allow better and up-to-date information to be freely available to investors. Instead of examining one form at a time, investors can instantly collect information from thousands of companies and forms. “Data tags,” which are similar to barcodes, allow for investors to view single items in a company’s financial disclosures. IDEA will also include a financial explorer feature and offer clearance to export information to other software (i.e. spreadsheets, databases or comparative and analytical programs.)

IDEA will include a trio of new features which Cox rightfully dubs “21st century SEC.” The first addition, HUB, will allow enforcement resources to be used more effectively, which simply means more bad guys will be caught. RADAR will allow for risk analysis, while the Phoenix feature will track and distribute millions of dollars.

Cox uses a relatable analogy during his presentation as he pulls up a carfax type website, which compares makes and models, prices and vehicle history. Cox believes that in today’s world, financial information should be as easily accessible and helpful as comparison shopping. Not only will this new system prove advantageous to EDGAR users, those utilizing Yahoo Finance, Google and Morning Star are expected to see an information enhancement because of IDEA.

The SEC launched a pilot program of IDEA, which allowed for company feedback. IDEA is dependent on a rulemaking which Cox believes will be passed by the end of this year. The program received about 96 comment letters which are now under review. The current EDGAR system will adopt some of IDEA’s features until its implementation. Cox believes the new program will be up and running in three years.

My two cents: About time!

Can a Securities Act Section 4(1) Opinion Remove a Restrictive Legend Despite the Rule 144 Evergreen Requirement?

2008-08-28T07:17:00.009-04:00

The seminal Securities Act of 1933 provides that in order for shares of stock to become tradable, a registration process with the SEC must be undertaken. There are several exemptions to the requirement to register, including Section 4(1) of the Securities Act, which very simply provides that the requirements of registration do not apply to "transactions by any person other than an issuer, underwriter, or dealer." It has become convention to apply this to resales of shares as well, under what is often called the "Section 4(1-1/2) exemption." Assuming the typical seller of unregistered shares, say a PIPE investor, is neither the issuer or dealer, the issue becomes whether he is an underwriter.

The definition of underwriter is in Section 2(a)(11) of the Securities Act and provides as follows:

"The term 'underwriter' means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking..."

The key phrase is "purchased...with a view to...the distibution of any security." Prior to 1972 when Rule 144 was originally passed, the courts were not clear in interpreting this language. In the end, the question is what was the intention of the purchaser when they bought the stock? If it was "with a view to" public distribution you are an underwriter regardless of any other facts. But how to prove intent? Lawyers back then tried to give opinions stating that shares can be sold without restriction but it was difficult.

Rule 144 came about in 1972 in part because the courts were not providing clear enough guidance. The SEC said, we will provide a safe harbor that makes clear that if you follow Rule 144 you are not an underwriter. Essentially the rule focused on holding periods, and whether or not you are an affiliate. It assumed that holding stock for a certain period of time meant at the end of that period you have proven you are not an underwriter.

Prior to the recent rule changes, after two years you were permitted to sell without any restrictions whatsoever (there were volume limits on sale during the second year prior to that). Now, if the company was never a shell or hasn't been one for at least six months, once you have held securities for six months there are no volume limits, but the company must remain current in its SEC filings until one year after acquiring securities, so it is not until one year that all restrictions go away.

At the end of this one year, lawyers will be able to give opinions to non-affiliates under Rule 144 that no restrictions exist and the restrictive legend on the back of the stock, saying it can't be sold without registration or an exemption, can be removed. At this point whenever the holder wishes to sell, he can simply deliver the certificate to his broker who will effect a public sale. The broker cannot do that if the legend is still on the back.

However, as we have written in previous entries, in shell situations, starting one year after ceasing to be a shell, sales can be made under Rule 144 with no volume limits. But because the SEC now requires the company to be current for the 12 months preceding a sale, the legend can never be removed. That is because one cannot know in advance whether the company will be current at the time of sale in the future. Thus, an opinion cannot be given that all Rule 144 limits have gone away and the legend cannot be removed prior to an actual sale. See prior entries for why this is a legitimate and real concern for investors, particularly PIPE investors.

This is a long explanation to get to the simple question: Do we really need to rely on Rule 144 as the sole way to get a legend removed on stock? Answer: no. A lawyer could go to pre-1972 days, reminisce about the Brady Bunch, Woodstock and really loud ties, and issue an opinion under good old Section 4(1) that the holder is not an underwriter. Remember, Rule 144 is not an exclusive exemption from registration, it is simply one way to ensure you are not required to register, and indeed is an exemption under 4(1).

Since very few of us were in the business world in 1972 (I was in sixth grade and yes, wore bellbottoms), obviously we're not sure exactly how to do this. Let's start with an easy one. Say a PIPE investor in a former shell is not and has never been an affiliate of the company he invested in and is not in the securities business in any respect other than as an investor. He has held shares of common stock for two years. Even under old Rule 144, before the holding periods were shortened, one could sell without any limits whatsoever after two years. With these facts, it would seem not difficult at all for an attorney to conclude that this investor is not an underwriter, and give an opinion, despite the continuing Rule 144 restriction on staying current, to remove the legend. Of course each situation is different and has to be examined. But with these facts it would seem to me to be virtually impossible for the SEC or anyone else to argue that after holding two years this investor still might be deemed to have bought with a view to public distribution.

Now let's go further. The SEC now says, one year after ceasing to be a shell, Rule 144 is available in some form for everyone. A nonaffiliate has the unfettered right to sell without any volume limits at all. Again, the only issue is the need to remain current under the troublesome evergreen requirement, so a legend cannot be removed if one is relying on Rule 144.

But think about this. Is the determination of underwriter status dependent on whether the company is current in its filings? The evergreen requirement, it seems, was not intended to suggest that it affects underwriter status, but I believe was meant to discourage shell players from taking companies public, raising money and then abandoning their SEC filing obligations. But arguably none of this should affect an analysis of an investor's intent to distribute when he acquired his shares. One could posit the argument that after this one year period, regardless of the Rule 144 requirement to stay current, a PIPE investor similar to the one above but who has held for this one year period, also is not an underwriter and a legend could potentially be removed.

This is NOT a long-term solution to the evergreen problem. These 4(1) opinions, if lawyers start giving them, are not going to be easy or simple and will be in some cases fact-specific. Rule 144 opinions are easy as generally all one needs to review is holding period and affiliate status. That is the beauty of 144, and I still believe the SEC should revisit the evergreen requirement and eliminate it.

But while we await this hoped-for change, it may well be that we can counter some who suggest the sky is falling on former shells with the possibility that, at worst, we can ensure that legend removal is available in the same two-year period as it was prior to the rule change and some bold attorneys might be able to get there in the one-year period as well.

Off We Go

2008-08-21T20:12:00.008-04:00

For just a moment, never mind 144(i), evergreen requirements, SPAC doldrums, Worm/Wulff yada yada yada. Sunday is the big day. We are taking my daughter to begin her freshman year at a prestigious university in the Northeast, less than four hours from our home. I think I am ready. I know she is ready though naturally a little nervous. Yet of course there is this sadness. That someone whom we have laughed with, cried with, been amazed, impressed and astounded by and yes someone who has sometimes frustrated and befuddled us for the last 18 years and 5 months (plus the 7.5 months in the womb- yes she was born nearly 6 weeks early), is ready to move on with her life.

As she is our oldest, we are experiencing this for the first time, and it is indeed quite traumatic. A sense of foreboding has engulfed our home for weeks. She is rushing to spend as much time as she can with her 6-year old brother, while also packing, finishing up the incredible charity work she does all summer (check her out at http://www.kidzz4kidzz.org/), and spending time with her friends (and learning this is the time one discovers who one's real friends are). In the meantime, we need to get the little one ready for 1st grade, also a big step, but it is for now taking a back seat to "the big move."

Change is good we are told. I joke with her that I am transforming her room into an "office slash den," she tells me that's fine as long as I switch it back every time she is coming home. As proud as I am and excited for her, this change is gonna take some getting used to.

SEC Response to my Request for Interpretive Guidance

2008-08-21T10:08:00.003-04:00

I received a telephonic response to my request for interpretive guidance on Rule 144(i). See prior blog entries for the request itself.

The bad part of the response: the Staff believes that 144(i) is retroactive to issuers who stopped being shells before the effectiveness of the rule. Thus, every company that was ever a shell, even in the past, is subject to its restrictions. We were hoping they would exempt companies that completed reverse mergers before the new rule was adopted.

The good part of the response: the Staff went out of its way to state that they "share my concerns" raised in the letter.

Here's what I think: I pushed to get them to interpret the rule in a way that was not that easy to do, but could have been done. But in doing so, they could have easily said, "We disagree, it is retroactive, sorry you are out of luck." But by going out of their way to say that they understand and share the concerns raised, one hopes that means continuing advocacy efforts are not yet hopeless on this issue.

I have several thoughts on how to proceed from here, and I will start sharing them with some of the RM "braintrust" that I have come to rely on in recent years. That glass, friend Tim, respectfully, is still 80% full.