THE SEA CHANGE OF THE WORM/WULLF LETTER
The small capitalization trading market was forever changed into the year 2000 by the publication of the Worm/Wullf letter. Worm was a director of the NASD’s Market Regulation Division. He wrote a letter to Richard Wulff, who was in charge of the Division of Small Business Policy in the SEC’s Corporation Finance Department.
The letter presented a scenario wherein a public company with no assets or business, such as a Form 10 shell, merged into a private company and then utilized Rule 144 in order to lift the restrictions on trading from restricted shares.
Director Wulff stated that such a company would not be able to use Rule 144. The Worm/Wullf letter, obviously coordinated by both persons, decimated the public shell company industry. It was based on the authority of the federal securities case of SEC v. Cavanaugh, 1 F.Supp. 2d 337, in the Southern District of New York. The Cavanaugh case involved a private company named WTS Transnational into a public shell company named Curbstone. As part of the reverse merger and WST becoming public, a large number of previously restricted shares were freed up to be resold in the public market, utilizing allegedly false and misleading press releases and other publicly disseminating information.
The defendants in Cavanaugh claimed that their activities fell under the exemption of Securities Act Section 4(1), which permits resales by persons who are not “issuers, underwriters or dealers.” Rule 144 is a safe harbor under Section 4(1), but, is not the exclusive means of taking advantage of the rule. The court found that the exemption of Section 4(1) was not available under the rubric of a Supreme Court case, SEC v Ralston Purina, 346 US 119: “the applicability of Section 4(1) should turn on whether a particular class of persons affected need the protection of the Act”). The court found that since the information which would be in a registration statement was not provided to the public while these newly unrestricted shares began trading, that the exemption of Section 4(1) would not be available.
The SEC has continued evolution of the Worm/Wullf doctrine, and the incorporation of this doctrine into the shell company rules appears to be fully congruent with these cases.
