New SEC Rules Relating to Shell Companies
|To:||Our Clients and Friends|
|From:||Olshan Grundman Frome Rosenzweig & Wolosky LLP|
|Date:||September 28, 2005|
|Re:||New SEC Rules Relating to Shell Companies|
This memorandum summarizes the rule changes adopted by the Securities and Exchange Commission (the "SEC") on June 29, 2005 relating to filings by reporting shell companies as reported in Release 33-8587. These new rules and amendments are intended to assure that investors in shell companies that acquire operations or assets have access on a timely basis to the same kind of information as is available to investors in public companies with continuing operations. It is the intention of the SEC in adopting these rules to protect investors by deterring fraud and abuse in the securities markets through the use of shell companies. The rules:
- define certain terms, including "shell company";
- generally prohibit shell companies from utilizing Form S-8 and prohibit companies that cease being shell companies from utilizing Form S-8 until 60 days after the surviving entity files information equivalent to that which would be required in a Form 10 or Form 10-SB;
- require companies that cease being shell companies to file a Form 8-K within four business days after the transaction that results in the termination of shell company status, which Form 8-K must include audited and other financial information concerning the operating entity that has entered into the transaction with the shell company upon the filing of the Form 8-K (as opposed to 71 days after the filing of the Form 8-K); and
- add a check box to Form 10-Q, Form 10-QSB, Form 10-K, Form 10-KSB, and Form 20-F to allow market participants and regulators to identify shell companies more easily.
The new rules and amendments generally took effect on August 22, 2005. Should you wish to review the SEC's final rule release in more detail, we would be happy to provide you with a copy. You can also obtain the release from the SEC's web site, www.sec.gov.
The rules amend Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), and Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to define the terms "shell company," and amend Rule 12b-2 under the Exchange Act to revise the definition of the term "succession."
The rules define a "shell company" to mean a registrant, other than an asset-backed issuer, that has (i) no or nominal operations; and (ii) either (a) no or nominal assets; (b) assets consisting solely of cash and cash equivalents; or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets. For purposes of this definition, the determination of the amount of a company's assets (including cash and cash equivalents) must be based on the amounts that would be reflected on the company's balance sheet prepared in accordance with U.S. generally accepted accounting principles on the date of that determination. The rule intentionally avoids defining the term "nominal" in order to discourage companies from attempting to circumvent the new rules and from fraudulently misusing shell companies.
In addition, the rules amend the definition of "succession" to include a change in control of a shell company that is required to be reported on Form 8-K pursuant to Item 5.01 or on Form 20-F pursuant to the new rules that pertain to Form 20-F described below. In most cases, this amendment will require a non-public company that acquires a shell company to succeed to the reporting obligations of the shell company. As a result of this amended definition of "succession," a private entity that acquires a reporting shell company will generally report the transaction on Form 8-K rather than filing a registration statement under the Exchange Act.
Form S-8 is used by public companies to register securities for sale under the Securities Act in connection with employee benefit plans. Under the new rules, shell companies are prohibited from using Form S-8. Former shell companies will be permitted to use Form S-8 once they become operating companies and 60 days pass after they have filed with the SEC the information about the operating company that they would be required to provide if they were filing a Form 10 or Form 10-SB registration statement under the Exchange Act*. (The information required in a Form 10 and Form 10-SB is similar to the information required in a Form 10-K or Form 10-KSB.) The 60-day period is consistent with the 60-day period between the filing and effectiveness of a company's registration of a class of securities on Form 10 and Form 10-SB under Section 12(g) of the Exchange Act. If a shell company that does not become an operating company has employees to whom it wants to offer securities under an employee benefit plan, it will be required to file a Form SB-2 or Form S-1, as applicable, or it may offer and sell such securities without registration pursuant to an available exemption under the Securities Act.
The rule includes a limited exception to permit business combination related shell companies to use Form S-8 immediately after they cease being shell companies and have filed the information that is required by Form 10 or Form 10-SB, as applicable to the registrant.* The rules define a "business combination related shell company" as a shell company formed by an entity that is not a shell company solely for the purpose of (i) changing that entity's domicile solely within the United States; or (ii) completing a business combination transaction among one or more entities other than the shell company, none of which is a shell company.
Form 8-K is used by public companies to disclose under the Exchange Act certain corporate events on a current basis. The rules provide for a new Form 8-K section, Item 5.06, to require disclosure of the material terms of a transaction in which a company ceases to be a shell company. The Form 8-K must be filed within four business days after the transaction in which the company ceases to be a shell company. The changes to Form 8-K also affect existing Item 2.01 (which relates to the completion of a significant acquisition or disposition), 9.01 (which relates to filing financial statements as exhibits) and 5.01 (which relates to a change in control of an entity) of Form 8-K to require companies reporting under Item 5.06 to disclose information comparable to the information that they would be required to provide if they were filing a registration statement on Form 10 or Form 10-SB to register a class of securities under Section 12 of the Exchange Act. This information includes the audited and pro forma financial information filed pursuant to Item 9.01 of Form 8-K, thereby eliminating the additional 71-day period typically allowed for filing such information when a publicly-traded operating company completes a significant acquisition or disposition. Unlike the other provisions in Release 33-8587, this new Item 5.06 is effective November 7, 2005.
Business combination related shell companies will not be subject to the requirements of Item 5.06.
Form 20-F is a multi-function form under the Exchange Act for foreign private issuers. Unlike domestic issuers, foreign private issuers that are subject to the periodic reporting requirements under the Exchange Act generally are not required to file current reports on Form 8-K. Instead, pursuant to new Exchange Act Rules 13a-19 and 15d-19, foreign private issuer shell companies will be required to report on Form 20-F transactions in which they cease being shell companies within four business days after consummation. Such companies will need to provide disclosure on Form 20-F comparable to that which domestic companies will report on Form 8-K. The extension provided by Rule 12b-25 for the due date of filing annual or transitional reports on Form 20-F does not apply to reports required pursuant to new Exchange Act Rules 13a-19 and 15d-19. Additional language has also been added to Exchange Act Rules 13a-14(a) and 15d-14(a) so that a report filed on Form 20-F pursuant to new Exchange Act Rules 13a-19 and 15d-19 will not require certifications of the foreign private issuer's principal executive and principal financial officers. The requirements of Exchange Act Rules 13a-19 and 15d-19 do not extend to foreign private issuers that are business combination related shell companies.
Shell Company Check Box on Exchange Act Reports
The rules amend Form 10-Q, Form 10-QSB, Form 10-K, Form 10-KSB and Form 20-F to add a box on the cover page of each of those forms that all registrants must mark to indicate whether or not they are a shell company. Such identification of shell company or non-shell company status on the cover page of these forms will constitute required disclosure that is subject to all applicable federal securities laws.
* Similar requirements will also pertain to foreign private issuers that are shell companies.