Trying 4(1) Opinions Where Rule 144 is Unavailable…A Year Later

Just about a year ago, following a great deal of frustration in the reverse merger community over the passing by the SEC of the “evergreen requirement” that prohibits a shareholder of a former shell from selling their shares publicly without registration under Rule 144 unless the issuer has been current in their SEC filings for the past 12 months, I posted an idea that many had talked about (see  http://reversemergerblog.com/2008/08/28/can-a-securities-act-section-41-opinion-remove-a-restrictive-legend-despite-the-rule-144-evergreen-requirement/). This idea involved avoiding the need for Rule 144, which was a safe harbor created in 1972 under Securities Act of 1933 Section 4(1) to ensure that resales would be exempt from registration if they follow Rule 144. But if Rule 144 did not apply, such as when a company has not been current, can you still remove a legend on the back of a stock certificate under old Section 4(1) analysis?

The issue turns essentially on whether the seller is deemed to be an underwriter of the issuer. This tends to turn on a variety of things including how long the person has held the shares, their relationship to the company and what information about the company is generally available to the public. Here’s what we have found trying to do these: it is hard. Also, in hindsight, I am wondering if this is the type of thing our friends at the SEC would want us doing. Why are they hard? Because each case is very fact-specific and one could theoretically be able to argue both sides of whether someone is an underwriter convincingly. This puts the lawyer writing the opinion at risk. Are some cases very very clear, making giving the opinion more comfortable? Probably. But many are not. This is precisely why Rule 144 came about in the first place - because 4(1) was a tough way to figure things out. At least that’s what I hear from my elders who were around then (I was watching the Brady Bunch and thinking bell bottoms were cool when 144 was adopted).

So in hindsight, is this a good idea? A much better idea would be for the SEC to adopt the rule changes contained in the rulemaking petition I submitted to them along with eight other law firms, at http://reversemergerblog.com/2008/10/02/nine-law-firms-submit-request-for-rulemaking-on-rule-144i-to-sec-text-below/. This would all but reverse the evergreen requirement, keeping it in force only for the year following a reverse merger and release of Form 10 information. I remain hopeful that we will see some movement there in the near future.

But while we wait for hoped for SEC action in this, what do we do to get legends removed? My current view is that 4(1) opinions should be very rare. Be careful if it is not the most obvious safe case, such as a nonaffiliate who has held for two years in an issuer that has always been current in its SEC filings. But even there be ready for the possibility that the issuer might disagree and try to prevent the action. Bottom line: let’s not start depending on 4(1) opinions in former shells, instead let’s keep pushing for the reversal of this draconian rule.

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