TheCorporateCounsel.net

In a morning panel at “The SEC Speaks in 2024” featuring senior members of Corp Fin, Chief Counsel Michael P. Seaman discussed the Staff’s interpretation of the definition of “shell company” particularly in the context of reverse mergers and particularly where the public company allocates potential future profits of its legacy business (including any proceeds from the sale of that business) through the issuance of contingent value rights (CVRs) to existing pre-transaction shareholders. Where what is being sold is the opportunity for the private company to go public through a company with some cash but little else remaining because the business has been signed away with a CVR, the SEC Staff considers this a merger with a shell company with all the attendant consequences.

This Goodwin alert from January has more on this based on comment letters Corp Fin Staff has issued in the life sciences reverse merger context. It identifies these considerations from those comment letters:

– Does the combined company intend to continue any operations of the public company? Does the combined company intend to retain any of the public company’s employees for a meaningful period of time following the closing? Did the pre-closing public company stockholders receive a CVR entitling them to the value of legacy assets of the public company to be sold following the closing of the RM?
– The Staff did not provide specific guidance as to what would constitute more than “nominal other assets” to avoid being characterized as a shell company under its broadened interpretation of the Rule 12b-2 definition.
– The Staff indicated that accounting for a RM as a reverse recapitalization (as opposed to a reverse asset acquisition) is a strong indication that the public company should be viewed as a “shell company.”

The alert continues with some high-level implications of that status for both the combined company and the investors. At closing, the company will have to consider whether shell-company-related 8-K disclosure is required, and going forward, deal with the following, many of which Michael raised during the panel and recommended that folks reach out to the Office of Chief Counsel with questions.

– Delayed Form S-3 Eligibility: the post-merger combined company will not be Form S-3 eligible until 12 full calendar months after closing of the RM (e.g., similar to an IPO, the combined company needs “seasoning” through 12 calendar months of SEC reporting).
– Delayed Filing of Form S-8: the post-merger combined company will need to wait at least 60 calendar days post-closing of the RM to file a Form S-8 for any equity plans or awards.
– “Ineligible Issuer” Status: the post-merger combined company will be an ineligible issuer for three years following the closing of the RM (e.g., no free writing prospectus, no WKSI status despite public float, etc.).
– No Incorporation by Reference: although Form S-1 is available for offerings (including for a resale shelf registration statement), the post-merger combined company will be ineligible to use incorporation by reference until Form S-3 becomes available (e.g., manual updates will be required to keep a resale shelf prospectus current).
– No Rule 145(c) Securities on the Form S-1 Resale Shelf: investors who were affiliates of the private company and receive securities of the public company in the RM (i.e., Rule 145(c) securities) will be statutory underwriters with respect to resales of those securities and, as such, the Staff has indicated that such securities may not be included in the Form S-1 resale shelf and instead may be sold only in a fixed price offering in which such investors are named as underwriters in the prospectus.
– Rule 144(i)(2) Compliance: applies to all public resales of Rule 145(c) securities per Rule 145(d), as well as “restricted” or “control” securities of the issuer per Rule 144 (e.g., holders of restricted securities and any affiliates of the public company are also affected).

– Meredith Ervine