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Volume 1, Issue 1

February 1, 2007

LATEST FROM THE SEC ON RULE 415


On January 26, 2007, David
Lynn, Chief Counsel of the Division of
Corporation Finance of the Securities and
Exchange Commission, participated in a
panel discussion hosted by our Firm that
was moderated by Richard Friedman,
where a discussion was had regarding the
Commissions position regarding the registration of securities for resale on a delayed or continuous basis pursuant to Rule
415.

closure, including an acknowledgment of


the seller's prospectus delivery requirements. In an offering involving Rule 415
or Form S-3, if the offering is deemed to
be on behalf of the issuer, the Rule and
Form in some cases will be unavailable
(e.g., because of the Form S-3 public
float test for a primary offering, or because Rule 415 (a)(l)(i) is available for
secondary offerings, but primary offerings must meet the requirements of one
of the other subsections of Rule 415).

During such discussion, Mr.


Lynn provided the following guidance
The question of whether an ofregarding the SECs position.
fering styled a secondary one is really on
behalf of the issuer is a difficult factual
1. He stated that he had come to one, not merely a question of who rethe panel discussion to inform as many ceives the proceeds. Consideration
people as possible about the SECs cur- should be given to how long the selling
rent position, and that the guidance that he shareholders have held the shares, the
was providing related only to transactions circumstances under which they reinvolving convertible securities, whether ceived them, their relationship to the
fixed or floating.
issuer, the amount of shares involved,
whether the sellers are in the business
2. At the outset, Mr. Lynn ex- of underwriting securities, and finally,
plained that the SECs position has been whether under all the circumstances it
around for over a decade, and that it had appears that the seller is acting as a
been set forth not only in Rule 415 itself, conduit for the issuer. [emphasis
but also in the SECs Manual of Publicly added]
Available Telephone Interpretations. Specifically, he referred to Interp. # 29 of the
3. He further indicated that, as a
1997 Manual, which provides as follows guideline, registrations of securities on a
(and which sets forth the specific factors secondary basis pursuant to Rule 415
upon which the SEC bases its analysis):
would generally only be permitted up to
an amount not exceeding 1/3 (33%) of
29. Rule 415; Form S-3
the given companys outstanding shares
excluding shares that are held by afIt is important to identify filiates (persons other than the directors,
whether a purported secondary offering officers and 10% or greater shareholders of
is really a primary offering, i.e., the sell- the company) and the selling stockholding shareholders are actually underwrit- ers, and that the Staff would count securiers selling on behalf of an issuer. Under- ties underlying warrants against this cap
writer status may involve additional dis- even if they where out of the money.

4. Notwithstanding the foregoing, he indicated that the Staff would be


willing, in a given set of circumstances,
to look favorably at any extraordinary
factors that may need to be considered
in order to permit the registration of
additional securities. These factors include the following:

A broad number of investors in a


given offering;
The fact that the investors had no
relation to one another or to the
company prior to the investment;
The fact that no one investor acquired too many shares vis--vis the
company or the other investors
(perhaps a 5% or 10% test);
Whether there had been any recent
transaction prior to the completion
of the offering by which the number
of shares held by non-affiliates had
been increased significantly; and
A recent reverse merger.
as a guideline, registrations of securities on a
secondary basis pursuant to Rule 415 would
generally only be permitted up to an amount not
exceeding 1/3rd (33%) of the given companys
outstanding shares excluding shares that are
held by affiliates and the selling stockholders.

In this regard, we have recently


had some success in getting the SEC to
look favorably at the registration of additional securities based upon some or all of
the above-mentioned factors. We do note,
however, that the Staff has clearly taken
the position that no one deal may be used
as a guideline for future deals and that the
particular facts and circumstances involved
in any given transaction are what need to
be looked at and upon which such a determination will be made. Accordingly, we

LATEST FROM THE SEC ON RULE 415


believe that it is of utmost importance for
companies to consult with us early in the
process when contemplating and structuring proposed transactions so that we can
assist in the evaluation of how the transaction and subsequent registration will ultimately be looked upon by the Commission. In this regard, we believe that it is of
utmost importance for companies to consult with us early in the process when contemplating and structuring proposed transactions so that we can assist in the evaluation of how the transaction and subsequent
registration will ultimately be looked upon
by the Commission.

7. In that regard, we have already


received and responded to comments that
have been recently issued by the Staff in
response to a registration statement that
deal with these matters and that most filers
will be seeing in response to filings of this
type.

was one of the issues that (in addition to


Sarbanes-Oxley) may be giving rise to the
notion that foreign markets are gaining an
advantage over US markets (a position that
was recently outlined in a press conference
that was held and a study that was commissioned by Mayor Bloomberg, Senator
Schumer and Governor Spitzer). In addition, the discussion also covered the issues
related to the SECs need to follow its
Mission Statement while balancing the
competing interests of protecting public
investors versus the need to promote capital formation.

8. One other point of importance


that he stated was that additional (or subsequent) registrations by the same issuer
would only generally be permitted following the later of (i) 60 days after the
sale of substantially all of the securities
registered, or (ii) 6 months after the ef10. Finally, some discussion was
fective date of the registration state5. Mr. Lynn stated that the SECs ment.
had regarding other possible proposals or
position on this matter had grown out of
solutions that may be considered to ease
9. Following this discussion, a the restrictions that are being imposed on
concern regarding these type of
[convertible] transactions, based upon the number of questions were raised relating to micro-cap companies. These possibilities
fact that these transactions have resulted in offerings of common stock, and Mr. Lynn include reducing the Rue 144 holding pean extreme amount of securities being is- acknowledged that the position that he had riod to 6 months or permitting Small Busisued (as well as the extreme conversion set forth related only to transactions in- ness Issuers to afford themselves of the
ratios involved), and that this gave rise to volving convertible securities, and that the opportunity to utilize Form S-3, on some
the question regarding just how much a Staff would look at transactions involving limited basis, to register securities on a
given companys market can bear in the common stock differently, but that it primary basis for a shelf offering.
face of an at the market offering (in ac- would still remain concerned and vigilant
cordance with the at the market offering about proposed registrations of an excessive amount of securities under Rule 415.
provision of Rule 415(a)(4)).
Mr. Lynn also indicated that similar stan6. Further, he indicated that the dards would apply to equity lines. Further,
SEC would not be taking any other formal we discussed the effects that this position
actions or issuing any other formal guid- is having, and will continue to have, on
ance other than through the comment proc- micro-cap companies in particular and
ess involved in filings of registration state- public companies and the PIPEs market in
general. That is, that it has had a chilling
ments for these types of offerings.
effect on deals, and that we felt that this
Please let me know if we can provide you with any additional information on this topic.
Richard A. Friedman
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018

Tel: 212-930-9700
Fax: 212-930-9725
rfriedman@srff.com
www.srff.com

Sichenzia Ross Friedman Ference LLP provides experienced, professional representation in all matters involving the securities industry, as well as in all general
corporate and litigation matters. Our clients range from start-ups to established, listed companies. They include private and public corporations, partnerships, broker-dealers, bank-affiliated broker-dealers, investment advisors, registered personnel, public and corporate customers and investors, and other entities. We also
advise institutional investors on transactions involving complex securities law considerations. Our practice includes the representation of clients located in the United
States and throughout the World, including Argentina, Austria, Australia, Canada, China, Germany, Hungary, Israel, Korea, Malaysia, Mexico, Switzerland and the
United Kingdom.

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