As you are aware, the SEC recently approved amendments to Rule 144 to reduce the 144 holding period from one year to six months. The new rules will be effective on February 15, 2008. There are a few areas requiring clarification as set forth below.

Rule 144 for Voluntary Filers

The new six-month holding period under Rule 144 is only available to issuers that are "subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act." Issuers who are voluntary filers of reports under the Exchange Act, however, are considered non-reporting issuers under Rule 144 because they are not "subject" to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Therefore, securities issued by voluntary filers are subject to the old oneyear holding period, not the new sixmonth holding period. Of course, once an issuer files a registration statement that is declared effective and is subject to Section 13 or 15(d) for a period of at least 90 days, holders of restricted securities of such issuer can then rely on the new six-month holding period.

Use of Rule 144 in Connection with Reverse Mergers

Historically, the SEC staff has taken the position that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, shell companies, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. In connection with the amendments to Rule 144, this position has been codified and expanded by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met:

  • the issuer of the securities that was formerly a shell company has ceased to be a shell company;
  • the issuer of the securities is "subject" to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
  • the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and
  • at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. The condition is satisfied at such time as the issuer files its Super 8-K in compliance with disclosure requirements of Form 8-K.

As a result, operating companies merging with shell companies and investors purchasing securities from such issuer in a PIPE transaction or otherwise at the time of the reverse merger or after such date will have to wait for the one year anniversary of the filing of the Form 10 information with the SEC before a holder can rely on sales under Rule 144