In February of this year the SEC inadvertently added verbiage to Rule 144 that now affects any company who was ever in its history a shell company by subjecting them to additional restrictions when investors sell unregistered stock under Rule 144. This change has been dubbed the “evergreen requirement”.
Brian Breheny, deputy director of the Securities and Exchange Commission’s corporate finance division, referred to the so-called evergreen requirement in Rule 144(i) of the Securities Act, as an “unfortunate result” and said it was “probably not something that the commission intended.”
The remarks came at the SEC Government-Business Forum on Small Business that was held last week. David Feldman, a Manhattan SEC attorney who is well versed on this subject, recently wrote to the Commission asking for clarity on the subject and suggestions to revise this new rule. Jack Hogoboom, an attorney with the law firm of Lowenstein Sandler, also broached the issue to the deputy director .
Hogoboom said the rule “has the impact of punishing a company that was ever a shell in perpetuity and more importantly, its investors.”
Breheny was responsive and indicated the SEC is likely to take action to address concerns raised about the rule.
“We’ve already started to move on that,” he said. “I think you could see something sooner rather than later.”
Under the so called “evergreen requirement”, a company that ever reported as a shell must be current in its filings with the SEC for 12 months before investors can sell unregistered shares. Here is the hitch. As a result, the restrictive legend can never be removed in advance of a sale. The rule affects all companies going public through a reverse merger or SPAC. So basically, you have to register the shares to get the legend removed.
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