SEC Rules Affecting Rule 144 Legal Opinions and Shell Companies

Shell Company Laws

The Securities and Exchange Commission (“SEC”) has published releases relating to Shell Companies that affect the use of Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), by shareholders of Shell Companies. In addition, the rules limit registration of securities on Form S-8 of the Securities Act and affect disclosures required in Form 8-K under the Securities Exchange Act of 1934, (the “Exchange Act”).

What is a Shell Company?

Securities Act Rule 405 and Exchange Act Rule 12b-2 define a Shell Company as a company, other than an asset-backed issuer, with no or nominal operations; and either:

  • no or nominal assets;
  • assets consisting of cash and cash equivalents; or
  • assets consisting of any amount of cash and cash equivalents and nominal other assets.

What is a Business Combination Related Shell Company?

A business combination related shell company is:

  • a shell company formed by an entity that is not a shell company solely for the purpose of changing that entity’s domicile solely within the United States; or
  • a shell company formed by an entity that is not a shell company solely that among one or more entities other than the shell company, none of which is a shell company.

What Specific Rules Apply to Shell Companies?

Reliance on Rule 144 By Shell Company Shareholders

Shareholders who hold shares which are not subject to a registration statement, under the Securities Act, often rely upon Rule 144 for their resale. Rule 144 is not available for the resale of securities initially issued by either reporting or non-reporting shell companies (other than a business combination related shell company) or an issuer that has been, at any time previously, a reporting or non-reporting shell company, unless the issuer meets specified conditions. A security holder may resell securities pursuant to Rule 144’s safe harbor if the following conditions are met:

  • The issuer of securities that was formerly a reporting or non-reporting shell company has ceased to be a shell;
  • The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
  • The issuer of the securities has filed all reports and material required to be filed under 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 filed such reports and materials), other than Form 8-K reports; and
  • At least one year has elapsed from the time the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.

Form 8-K Requirements

Form 8-K is a Securities and Exchange Commission (SEC) periodic report that issuers file to disclose material events. Unlike periodic reports on Form 10-K and 10-Q, which are required to be filed by specific dates. Form 8-K is one of the most commonly filed SEC reports.

Form 8-K requires disclosure of transactions involving an SEC reporting Shell Company that ceases to be a shell company, typically involving a reverse merger or acquisition. The issuer is required to file a report on Form 8-K to report the following:

  • A material definitive agreement under Item 1.01 of Form 8-K;
  • Completion of acquisition or disposition of assets under Item 2.01 of Form 8-K;
  • Changes in control under Item 5.01 of Form 8-K ; and
  • Information that would be required in a registration statement on Form 10 to register a class of securities under Section 12 of the Exchange Act.

Form S-8

Form S-8 is a short-form Securities Act registration statement used by SEC reporting companies to register shares to be offered under employee and consultant benefit plans for services. Form S-8 under the Securities Act prohibits companies who are Shell Companies from using Form S-8. If a company ceases to be a Shell Company, it may use Form S-8 sixty calendar days after the company files “Form 10 Information,” which is information that a company would be required to file in a registration statement on Form 10 if it were registering a class of securities under Section 12 of the Exchange Act. This information would normally be reported on a current report on Form 8-K reporting the completion of a transaction that caused the company to cease being a shell company.

For further information please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, FL, (561) 416-8956, or [email protected].  This information is provided as a general or informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855