The SEC posted their 114 page proposal on Rule 144 changes to their site Friday June 22, 2007.
The SEC is proposing making Rule 144 available for the resale without registration of restricted securities issued by a reporting shell company, at least 90 days after a reverse merger is completed and the “Form 10 information” or the often called super 8-K is filed revealing that the previous shell has now been replaced by a real operating business and therefore is no longer considered a “shell”.

This change in policy by the SEC will have a huge impact on all of us who participate in reverse mergers.  The new SEC position is extremely positive and can be viewed as a sort of “acceptance” in regard to shell companies.

One of the big question marks for Buyers who acquire and Sellers who are structuring shells is ensuring that shares can be registered.  Since the recent Worm/Wulff interpretations of 144 by SEC staff most Buyers became confused and bewildered.   With the SEC’s new policy private companies merging with shells can now have a clearer picture about how to handle registration rights.  In addition, if a shell founder chooses to increase his shareholder base those shareholders now will have tradable shares under Rule 144 without registration post-merger.

At this time it is still unclear as to how much time must elapse post-merger before the resale under 144 is permitted.   There is a conflict on the interpretation of the language:  the language suggests that 144 will start to be available for former shell owners 90 days after the Form 10 information is filed, however, this does not coincide with the language of the newly proposed 144 holding period (which in most cases will be six months) which starts on the later of the date the shareholder received the shares or the date the Form 10 information is filed. Hopefully the SEC will clarify this issue shortly, as it appears they want the 90-day period to have some meaning.

More importantly, this is a giant step for all or us who have been involved in the reverse mergers.  This segment of the financial services industry is now beginning to gain traction and is slowly gaining recognition as a viable alternative to the traditional IPO for emerging growth companies.  Looks like we are finally coming out of the dark and will no longer be treated as the red headed step child of the SEC.

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