THE 2008 AMENDMENTS TO RULE 144-THE “SHELL COMPANY”

A critical changes was made in 2008 to Rule 144. Basically, Rule 144 permits persons holding restricted securities (generally those acquired directly from the company in a private placement) to remove the restriction on those shares and resell them to the public. Prior to the 2008 amendments, a company, particularly a company that was reporting to the SEC on a quarterly and annual basis, could use  Rule 144 to free up unrestricted shares and its shareholders could then resell those shares in the public market, even though the public company had very little assets or operations.

Rule 144(i) provides that companies which have (a) no or nominal non-cash assets AND (b) no or nominal operations are ”shell companies” and are unable to use Rule 144 until that company has filed  ”Form 10 information” with the SEC and one year has transpired. Basically, ”Form 10 information” is substantially similar to that which would be contained, including financial statements of the company, if it filed an S-1 registration statement or Regulation A offering with audited financial statements.

Therefore, if it is determined that your private company has gone public through a merger into a ”shell company,” it will not be able to utilize Rule 144 with respect to its investors until one year has passed since the Form 10 information has been filed with the SEC. This is a significant factor that has to be borne in mind.