ABOUT RULE 419

Securities act Rule 419 became law in 1992, and sought to answer the perceived abuses in  blank check offerings. The main problem was that a “promoter” or group of promoters would raise money in a blank check offering, without specifying the company which they were going to merge into the public company. After the reverse merger was completed, or even when it was rumored to be completed, the promoters would cause an active trading market to be established for the public company. Since the private company which is gone public through reverse merger into the blank check company never went through the registration process, information regarding its business and financial condition were not disseminated or even are publicly available to the public. This led to persons being sold something, often through boiler room tactics, which wasn’t what they were promised.

Rule 419 requires all the free trading shares issued in the blank check offering to be escrowed until information about the private company which engage in the reverse merger is reviewed by the Securities and Exchange Commission and published, and the purchasers voted to approve the transaction. Rule 419 effectively ended blank check offering in the United States and made the reverse merger business inevitable.