Example: If you purchased your shares while the company was private and held them for six months and the company become fully reporting on the seventh month can your shares become free trading or do you have to wait six months from the date the company becomes fully reporting? This becomes further confusing when you take into consideration the one year hold period for shareholders when a company purchases a shell that was previously reporting as a ”shell company”. Most of these issues will be worked out as attorneys seek additional clarification of the new rule changes from the SEC.

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There are some new twists to the rule. Previously, non-affiliates had a hold period one year. After the rule change, the hold period was reduced to six months but that only works if you purchased your restricted shares after the company becomes fully reporting and the company did not purchase a shell that was reporting as a “shell company”.

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Previously, many shareholders in reverse mergers did not have Rule 144 available to them as they do now. The SEC has also eliminated certain volume restrictions that were mandated prior to the rule changes.

Also included in new Rule 144(i) is the following: if a company ever was a shell company, past or present, then the company must be current on its periodic SEC filings for 12 months before 144 is available. The new rule is also retroactive. This rule applies to all companies even larger ones like the NYSE or Berkshire Hathaway, who became public company via a reverse merger eons ago. Interesting to note is companies who are late with their filings and get caught up and become current can still attempt to use 144.

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I have spoken to several attorneys about the new Rule 144 changes that took place in February of this year and there appears to be mixed opinions as to how the rule applies when you are backing a company into an OTCBB shell that is dormant, has no assets and is reporting to the SEC as a “shell company”.

Most aspects of the new Rule 144 have improved the conditions for principals of shells and industry professionals who facilitate reverse mergers. In the final version of the new rule the SEC changed the way shareholders of former shells that check the “shell company” on their SEC filings were treated. Shareholders must now wait one year, not six months, to have the exemption from registration available from Rule 144.

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In contrast the differences in investing in a US based company versus a foreign company are significant. US based companies get higher valuations and in some ways have less risk. Companies have a greater awareness of SEC and SOX compliance and understand the importance of keeping their investors informed.

Foreign companies have greater risk associated with them but US based investors can usually find companies that are well established, exhibit steady increases in revenues and profits, and provide investment opportunities at substantial discounts to market. The biggest advantage is foreign companies have greater immediate growth potential. The downside, as we have described in length in this series, is if something goes wrong there is little recourse and the SEC is limited in its ability to protect US investors.

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There are several other areas of concern that US investors must address when investing in foreign companies. This can include but not limited to release of funds from escrow in traunches based upon the company’s use of proceeds. Other conditions usually contain a provision for Officers and Directors shares to be held in escrow until certain milestones have been met and a “make good” clause that is based upon the company hitting their projected pretax profit for the next twelve months. These types of terms and conditions are unique to US investment in a foreign company listed on the OTCBB. However, when implemented properly, these safeguards tend to limit the downside risk and protect US investors.

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Other terms and conditions for investment in a foreign company can include prepayment of the first year’s attorney, accountant and consultants fees along with $500,000 for investment awareness programs with a “use it or lose it” clause. Terms and conditions can also include a clause that prevents a change in the CFO position within the first twelve months of being public without written permission by the investors. Case in point - in 2007, sixty nine (69) Chinese companies went public with nine (9) of them changing their CFO’s in the first year. Now, that could mean the company’s wanted to bring in more qualified individuals for the CFO position or they felt they could drop the position altogether because they were now public. Either way, these types of issues are of great concern to US investors. For example; Chinese companies main goal is going public and they consider that achievement the end of the race when, in fact, it is actually the start of the race.

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Because of the cultural differences and risk factors associated with foreign deals it is not uncommon for US based investors to dictate certain terms and conditions that are unique to these types of investment. One of the biggest areas of concern is investor awareness. For some reason certain countries, like China, do not understand why they should spend money to make retail and institutional investors aware of their company. I describe this observable fact as follows; It is like having a beautiful bride (the company) that you bring to the alter and marry (going public) and then you lock the bride in a closet where no one can see her (no investor awareness).

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Foreign deals are valued differently than US deals. The goal for the foreign company is not to get listed on the OTCBB but to gain listing on an exchange like AMEX or NASDAQ. To do this they have to demonstrate earnings of $.30 to $.40 a share so they can eventually get their stock to trade at $3.00 to $4.00 per share. This is great for the investors because they end up investing in a company at a three or four price earnings (“PE”) ratio on a pre-money basis.

Now here is the cultural twist. Even though the foreign company understands the criteria for qualifying for an exchange listing they are completely against spending money for investor awareness programs which, if implemented correctly, improve the stock price. Foreign company management does not believe in spending money on things that are not tangible.

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Investment in a foreign company is treated in a much different manner. This is due the inherent risk factors. Investors are keenly aware they have little recourse if a foreign company does not perform. Most of these emerging growth companies are located in BRIC (Brazil, Russia, India, China) countries. Those countries do not have an SEC to protect investors so the investors have to mitigate the risk by including very strong terms and conditions in their funding agreements. Those terms can include how and when the funds are distributed along with “make good” on certain performance standards.

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