On September 6, 2013, in response to an application made by Dorsey & Whitney LLP, the United States Securities and Exchange Commission (the “SEC”) granted an Interpretive Letter that will permit many Canadian former capital pool companies (a “CPC”) and similar entities to rely upon Rule 144 under the Securities Act of 1933 in connection with the resale and removal of legends from their securities. A copy of the application to the SEC and its response may be accessed here.

Rule 144(i)

Rule 144 under the Securities Act of 1933 (“Securities Act”) sets forth certain conditions for securityholders to publicly resell restricted securities held in the issuer. Under Rule 144(b), restricted securities of an issuer that does not file reports with the SEC generally become freely tradable in the hands of a non-affiliate of the issuer one year after (i) they are acquired from the issuer or an affiliate of the issuer and (ii) the full purchase price has been paid for the securities.

However, in an effort to combat fraud, in 2007 the SEC amended Rule 144 by adding Rule 144(i). Rule 144(i) generally provides that Rule 144 is not available for securities of an issuer that is, or that has at any time previously been, an issuer with (i) no or nominal operations and (ii) either (1) no or nominal assets, (2) assets consisting solely of cash and cash equivalents, or (3) assets consisting of any amount of cash and cash equivalents and nominal other assets (a “Shell Company”), unless the issuer:

  1. has ceased to be a Shell Company;
  2. files reports with the SEC;
  3. has filed all required SEC reports and other materials during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and
  4. has filed current “Form 10 information” with the SEC reflecting the issuer’s status as an entity that is no longer a Shell Company, and at least one year has elapsed since such Form 10 information was filed.

As defined in Rule 144(i), “Form 10 information” means information that is required by Form 10 or Form 20-F to register under the Exchange Act each class of securities being sold under Rule 144. The issuer may provide the Form 10 information in any filing of the issuer with the SEC. The Form 10 information is deemed filed when the initial filing is made with the SEC.

Therefore, pursuant to Rule 144(i), regardless of whether an issuer has ceased to be a Shell Company, the securities of any issuer that has previously been a Shell Company may not be resold under Rule 144 unless the issuer has been subject to SEC reporting for at least one year and has met all of its filing obligations thereunder.

By its terms, Rule 144(i) automatically applies to Canadian issuers that began as Shell Companies, such as CPCs and similar entities, notwithstanding the fact that they might no longer be Shell Companies. Since many Canadian issuers do not file SEC reports and since the definition of “Form 10 Information” is limited to reports filed with the SEC, on its terms there would be no way for securityholders of those issuers to ever rely on Rule 144 – which has implications for the liquidity of an issuer’s securities.

SEC Interpretive Letter

Largely on the basis that publicly reporting companies in Canada are required to meet a robust set of disclosure requirements that are similar to the disclosure requirements applicable to foreign private issuers required to make filings under the Securities Exchange Act of 1934, Dorsey was successful in getting the SEC to agree that notwithstanding the foregoing, Rule 144 is available to any issuer that:

  1. is organized under the laws of Canada;
  2. was, at the time it became a public company, a (i) “capital pool company” (“CPC”), which is a Shell Company that is regulated by the TSX Venture Exchange or (ii) a “special purpose acquisition corporation” (“SPAC”), which is a Shell Company that is regulated by the Toronto Stock Exchange (issuers that existed under the predecessor programs to the current CPC program, including those that were administered by the Canadian Venture Exchange, the Vancouver Stock Exchange or the Alberta Stock Exchange, are also included);
  3. has ceased to be a Shell Company and, since the date that it initially ceased being a Shell Company by virtue of completing a “qualifying transaction” under the CPC or SPAC programs, has never again been a Shell Company;
  4. is a “reporting issuer” under the laws of at least one Canadian province and is required to filed reports on SEDAR;
  5. has filed on SEDAR all reports and other materials required to be filed by it during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials);
  6. has filed an Annual Information Form, prepared in accordance with Canadian securities laws, on SEDAR during the preceding 16 months; and
  7. has filed on SEDAR at least one year prior to the action to be taken under Rule 144:
          • an Annual Information Form prepared in accordance with Canadian securities laws;
          • audited annual financial statements, prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Boards, as currently required to be prepared by the issuer under Canadian securities laws; provided that, if permitted by Canadian securities laws, such audited annual financial statements may be prepared in accordance with (i) Canadian generally accepted accounting principles in effect from time to time (provided that such financial statements are accompanied by a reconciliation to United States generally accepted accounting principles), or (ii) United States generally accepted accounting principles;
          • Management’s Discussion and Analysis relating to its audited annual financial statements required to be prepared by the issuer under Canadian securities laws; and
          • a Management Information Circular/Proxy Statement prepared by the issuer in connection with an annual or special meeting of shareholders of the issuer;

all of which information shall reflect the issuer’s status as an entity that is no longer a Shell Company.

For certainty, the SEC’s Interpretive Letter does not extend to any issuer that was not a CPC or SPAC, or has been a Shell Company at any time subsequent to the completion of the initial transaction pursuant to which it ceased to be a Shell Company, such as by virtue of, for example, undertaking a reorganization, sale of assets, bankruptcy or other corporate event.

In addition, it is important to note that the Interpretive Letter requires that the applicable issuer file Annual Information Forms in Canada. We are aware that issuers listed on the TSX Venture Exchange are not required to file Annual Information Forms, so in order for those issuers to benefit from the SEC’s Interpretive Letter they will be required to begin voluntarily filing Annual Information Forms.

Benefits for Issuers

The relief obtained by Dorsey in the SEC’s Interpretive Letter will allow Canadian former Shell Companies that satisfy the above requirements to remove the Securities Act legend from restricted securities held by non-affiliates of the issuer after a one year hold period. Previously, holders were unable to remove such legends, which limited their ability to deposit such securities into brokerage accounts, recognize the full value of such securities and borrow against that value. This relief is a welcome change, and one which we believe will enhance the ability of affected Canadian issuers to raise capital in the United States.