Great Summary of the Rescue Bill

I am pleased to have received permission from Seyfarth Shaw LLP to reprint this newsletter sent to their clients. There's no commentary here, just the facts. You can also find it at: http://www.seyfarth.com/index.cfm/fuseaction/publications.publications_html/object_id/a5b661d8-7e3a-4de6-b8a5-785a635f6abf or click on the download notation at the bottom.

Executive Summary of the Emergency Economic Stabilization Act of 2008

10/08/2008

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “Act”). The Act provides the Secretary of the Treasury (the “Secretary”) with unprecedented “authority and facilities” designed to restore liquidity and stability to the financial system of the United States. For your convenience, set forth below is a thematic executive summary of the Act’s provisions.

Troubled Asset Relief Program

Under the Act, the Secretary is authorized to establish the Troubled Asset Relief Program (the “TARP”). The TARP will be implemented through a new Office of Financial Stability within the Department of Treasury. The Office of Financial Stability will be headed by an Assistant Secretary of Treasury who will be appointed by the President and confirmed by the Senate.
The Act provides the Secretary with the power to purchase troubled assets from any financial institution. Troubled assets are defined to include residential or commercial mortgages and any securities, obligations or other instruments related thereto, so long as they were originated or issued on or before March 14, 2008. Troubled assets also include any other financial instrument, originated or issued at any time, the purchase of which the Secretary determines, after consulting with the Chairman of the Board of Governors of the Federal Reserve (the “Chairman”), are necessary to promote financial market stability. Financial institutions are defined to include institutions such as banks, savings associations, credit unions, security brokers or dealers or insurance companies. Further, to qualify as a “financial institution” under the Act, an institution must be established and regulated under the laws of the United States or any State, territory or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa or the United States Virgin Islands, and must have “significant operations” in the United States. Central banks or institutions owned by foreign governments do not qualify as “financial institutions” under the Act.

Under the Act, the Secretary has the right to manage troubled assets, to sell troubled assets and to enter into “securities loans, repurchase transactions or other financial transactions.” Financial institutions are prohibited from selling assets to the Secretary at a profit, except with respect to troubled assets acquired in a merger or acquisition or acquired from a financial institution in conservatorship or receivership or that has initiated bankruptcy. The Secretary has been given the power to waive specific provisions of regulations applicable to purchases by the Federal Government if “urgent and compelling circumstances make compliance with such provisions contrary to public interest.”

The Secretary has been granted immediate authority to purchase up to a total of $250 billion of troubled assets (the “Purchase Authority Limit”1). Upon certification to the Congress by the President that additional funds are needed, the Secretary’s Purchase Authority Limit shall increase to $350 billion. And, following another certification to the Congress by the President and the failure by Congress to pass a joint resolution of disapproval, the Purchase Authority Limit shall increase to $700 billion.

Under the Act, the Secretary also has the power to establish an insurance program to guarantee troubled assets. Upon the request of a financial institution participating in such program, the Secretary may guarantee the timely payment of up to 100 percent of principal of, and interest on, a troubled asset. The Secretary shall collect premiums from financial institutions participating in the guarantee program. Such premiums shall be in an amount determined by the Secretary and may vary based upon the credit risk associated with the particular troubled asset. The premiums received by the Secretary pursuant to the guarantee program shall be placed into a Troubled Assets Insurance Financing Fund and shall be used to fulfill the obligations of the guarantees provided by the Secretary. The Purchase Authority Limit shall be reduced by an amount equal to the difference between the total of the outstanding guaranteed obligations under the insurance program and the balance in the Troubled Assets Insurance Financing Fund.
Subject to certain exceptions to be established by the Secretary, the Secretary may not purchase or make any commitment to purchase any troubled asset without first receiving (i) from a publicly traded financial institution, a warrant giving the Secretary the right to receive nonvoting common stock or preferred stock or voting stock with respect to which the Secretary agrees not to exercise voting power, as determined by the Secretary, or (ii) from a financial institution that is not publicly traded, a warrant for common or preferred stock or a senior debt instrument. In order to maximize the value for taxpayers and to maximize the return on investment for the Federal Government, the Secretary may sell, exercise or surrender the warrants or senior debt instruments, as the Secretary deems fit.

In addition to having the power to purchase troubled assets, the Secretary is also authorized to take such action as the Secretary deems necessary to carry out the purposes of the Act including, without limitation, hiring employees, entering into contracts, designating financial institutions as fiscal agents of the Federal Government, and establishing vehicles to purchase, hold and sell troubled assets and issue obligations.

The Secretary is required to use his or her authority under the Act to minimize the potential long-term negative impact on the taxpayers by holding assets to maturity or by holding assets for resale until such time as the Secretary determines that the market is optimal for selling such assets. The Secretary shall sell such assets at a price determined by the Secretary so as to maximize return on investment for the Federal Government.

When purchasing or guaranteeing troubled assets, the Secretary shall consider a number of factors including, among others, the most efficient way to (i) protect taxpayers by maximizing overall returns and minimizing the impact on the national debt, (ii) provide stability and prevent disruptions to financial markets, (iii) help families keep their homes, and (iv) ensure stability for public instrumentalities such as counties and cities.

The Secretary’s powers under the Act expire on December 31, 2009. Upon the submission of a written certification to Congress, the Secretary may extend his or her authority under the Act until October 3, 2010. The certification must include a justification for the extension and details regarding the anticipated cost for such extension.

Oversight, Reporting, and Disclosure Requirements

The Act establishes an Office of the Special Inspector General for the TARP. The head of such office, the Special Inspector General, shall be appointed by the President and confirmed by the Senate and shall conduct, supervise and coordinate audits and investigations of the purchase, management and sale of troubled assets. The Special Inspector General shall have the power to hire employees, sign contracts and request assistance from other governmental agencies. The Special Inspector General is to report to the appropriate committees of Congress on a quarterly basis. $50 million of the funds available to the Secretary under the Act shall be available to Special Inspector General to fulfill his or her obligations under the Act.

The Act also establishes a new Financial Stability Oversight Board (the “Oversight Board”) comprised of the Chairman, the Secretary, the Director of the Federal Housing Finance Agency, the Chairman of Securities and Exchange Commission, and the Secretary of Housing and Urban Development. The Oversight Board shall review the policies implemented by the Secretary pursuant to the Act and analyze the effect of such actions in preserving homeownership, stabilizing financial markets and protecting taxpayers. The Oversight Board also shall make recommendations to the Secretary to improve the TARP and shall report any fraud, misrepresentation, or malfeasance to the Special Inspector General or the United States Attorney General. The Oversight Board is required to meet two weeks after the first purchase of a troubled asset by the Secretary and shall meet monthly thereafter. Further, the Oversight Board is required to report to the appropriate committees of Congress and the Congressional Oversight Panel described below on a quarterly basis, at a minimum.

The Act also establishes a Congressional Oversight Panel. The 5-member panel2 shall submit regular reports to Congress detailing, among other things, the exercise by the Secretary of his or her powers under the Act as well as the impact of the TARP on financial markets, financial institutions, market transparency and foreclosure mitigation efforts. Furthermore, the panel is required to submit a special report on regulatory reform by January 20, 2009. The special report shall contain an analysis of the current state of the regulatory system and its effectiveness in terms of overseeing the financial system and protecting consumers. The report shall contain recommendations for improvements to the regulatory system, including recommendations regarding gaps in consumer protection and whether certain participants that are outside the regulatory system should become subject to the regulatory system.

The Secretary is required to report to the appropriate committees of Congress every thirty days. The Secretary’s reports to Congress shall include an overview of actions taken by the Secretary pursuant to the Act, a summary of obligations and expenditures incurred for administrative expenses and a detailed financial statement regarding the TARP. Further, not later than seven days after the date on which the commitment to purchase troubled assets reaches $50 billion, and at each $50 billion interval thereafter, the Secretary is to provide a written report to Congress containing, among other things, a description of the transactions made during the reporting period. The written reports also must include the pricing mechanisms utilized by the Secretary to purchase troubled assets, together with a justification for the price paid. Additionally, each report shall include a description of the impact on the financial system of the actions taken by the Secretary, together with an estimate of additional actions needed to address any challenges that remain in the financial system.

The Secretary also must submit a written report to the appropriate committees of Congress by no later than April 30, 2009. Such written report shall contain an analysis of the current state of the regulatory system and its effectiveness in overseeing the participants in the financial markets. The written report shall provide recommendations as to whether participants in the financial markets that are outside the regulatory system should become subject to the regulatory system. Moreover, the written report also shall contain recommendations for enhancing the clearing and settlement of over-the-counter swaps.

The Act also requires the Secretary to make available to the public, in electronic format, a “description, amounts and pricing” of assets acquired under the Act. Such disclosure shall be made within two business days of purchase, trade or other disposition.

The Comptroller General of the United States shall have ongoing oversight of the TARP, including the activities, performance, financial condition, and efficiency of the TARP. The Secretary is to provide the Comptroller General with space and facilities in the Department of Treasury, and the Comptroller has been provided with broad rights regarding access to data relating to the TARP. The Department of Treasury is required to reimburse the Government Accountability Office for the full cost of all such oversight activities. The Comptroller General shall report to the appropriate committees of Congress and to Special Inspector General no less frequently than once every sixty days. The Comptroller shall also conduct annual audits of the TARP and recommend corrective actions to be taken by the TARP.

Additionally, the Comptroller General is required to undertake a study to determine the extent to which leverage and sudden delevereaging of financial institutions was a factor behind the current financial crisis. The Comptroller General’s findings are to be delivered in a report, which must be submitted to the Senate’s Committee on Banking, Housing and Urban Affairs, by June 1, 2009.

Executive Compensation

Financial institutions that sell troubled assets to the Secretary are required to meet “appropriate standards for executive compensation and corporate governance” established by the Secretary. In establishing such standards, the Secretary must (i) set limits on compensation for senior executive officers3 that exclude incentives to take unnecessary and excessive risks that threaten the value of the financial institution while the Secretary holds a debt or equity position therein, (ii) allow for the recovery, by a financial institution, of a bonus or incentive compensation based on earnings, gains or other criteria which is later proven to be materially inaccurate, and (iii) impose a prohibition against making any golden parachute payments. If the Secretary purchases troubled assets at auction from a single financial institution and such purchases, in the aggregate, exceed $300,000,000 (including direct purchases), such financial institution shall be prohibited, while the Act is in effect, from entering into any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency or receivership.

The Act also provides that Section 162(m) of the Internal Revenue Code (IRC) is amended to limit the deductible compensation, for any year in which the Act is in effect, to $500,000 for a covered executive4 of a financial institution that has sold more than $300,000,000 of troubled assets to the Secretary. The Act also amends Section 280G of the IRC to impose restrictions on severance payments made to covered executives of the financial institutions participating in a program under the Act.

Recoupment

On October 3, 2013, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to Congress on the net amount within the TARP. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall so as to ensure that the TARP does not add to the deficit or national debt.

Mark-to-Market Accounting Provisions

The Act contains a provision that allows the Securities and Exchange Commission (SEC) to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is “necessary or appropriate in the public interest and is consistent with the protection of investors.” The Act also requires the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Secretary, to conduct a study on market-to-market accounting standards as provided in Statement Number 157 of the Financial Accounting Standards Board, as such standards are applicable to financial institutions. The study shall consider, at a minimum, the effects of such accounting standards on a financial institution’s balance sheet, the impact of such accounting on bank failures in 2008, and the impact of such standards on the quality of financial information available to investors. The study shall also consider the process used by the Financial Accounting Board in developing accounting standards, the advisability and feasibility of modifications to such standards and alternative accounting methods to those provided in Statement Number 157. The SEC shall submit to Congress a report of such study before January 3, 2009.

Miscellaneous Provisions

The Act contains a number of provisions aimed at preventing foreclosures and assisting homeowners. For example, in connection with the Secretary’s acquisition of mortgages, mortgage backed securities and other assets secured by residential real estate, the Secretary is required to implement a plan that seeks to maximize assistance for homeowners and seeks to encourage servicers of such mortgages to take advantage of the HOPE for Homeowners Program. Further, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent “avoidable foreclosures.”

The Act also contains provisions temporarily increasing, from $100,000.00 to $250,000.00, the standard maximum deposit insurance amounts available under the Federal Deposit Insurance Act and the Federal Credit Union Act. Such increases are not to be taken into account by the Board of Directors of the Federal Deposit Insurance Corporation or by the National Credit Union Administration Board when setting assessments or insurance premium charges. The temporary increases shall be effective until December 31, 2009.

1 The Act does not contain provisions limiting the amount of troubled assets that the Secretary can buy from a single financial institution.
2 The five members shall consist of one member appointed by the Speaker of the House, one member appointed by the minority leader of the House, one member appointed by the majority leader of the Senate, one member by the minority leader of the Senate and one member appointed by the Speaker of the House and the majority leader of the Senate, after consultation with the minority leader of the Senate and the minority leader of the House.
3 Defined as the top five highest paid executives at a publicly traded company whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934 and any regulations issued thereunder, and non-public company counterparts.
4 Defined as any employee who (i) at any time during the portion of the taxable year during which the authorities granted to the Secretary under the Act are in effect, is the chief executive officer or the chief financial officer of the applicable employer, or an individual acting in either such capacity or (ii) is one of the three highest compensated officers of the applicable employer for the taxable year (other than the chief executive officer or the chief financial officer of the applicable employer, or an individual acting in either such capacity) determined (a) on the basis of shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (without regard to whether those rules apply to the employer) and (b) by only taking into account employees employed during the portion of the taxable year during which the authorities granted to the Secretary under the Act are in effect.

Download Executive Summary of the Emergency Economic Stabilization Act of 2008
This information is from a newsletter which is a periodical publication of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) Copyright © 2008 Seyfarth Shaw LLP All rights reserved.

Update on SPACs from M&A Journal

I got permission from Jonathan Marino of M&A Journal to reprint the below article he wrote. You can also find it at: http://www.mergersunleashed.com/news/186252-1.html

SPACs Brace for Hedge Fund Industry Shrinkage

Unwinding positions could hamper SPAC backlog; mid-market companies

eyeing blank-check exits may find opportunities dwindling in near-term.

By JONATHAN MARINO

October 3, 2008

Citigroup's Old Lane hedge fund, which took several positions in special purpose acquisition companies (SPACs), has cashed in on many of those investments as it liquidates, according to its federal filings. The fund, which was bought from now-chief executive Vikram Pandit in 2007, announced this summer plans to liquidate after its change in management prompted a mandatory allowance of investors to remove their capital, if wanted. They did, en masse.
Old Lane likely isn’t the only hedge fund that invests in SPACs to see its investors seek back what money they have left. In fact, the entire asset class faces an uncertain future as funds may go to untold lengths to recoup money and combinations are voted down. If funds aren’t rejecting combinations solely out of the desire to repay anxious investors clamoring for cash, the prospect of a company being brought public and then seeing its valuation hurt is also cause for hesitation. One hedge fund investor stated that his fund sold SPAC shares after it brought a company public; that company in turn shed nearly 40% of its value in trading thereafter.

What happens next for hedge funds—market speculation and handwringing indicates 2008 could see the most hedge fund liquidations ever—will directly impact SPACs’ fundraising ability. Cliff Teller, executive managing director at Maxim Group, which both underwrites and advises blank check companies, said it is his hope for the asset class that around half of SPACs that identify a target succeed in making a combination. Anything short of that is a poor harbinger for blank check companies.

“The current environment is similar to 1998,” said Ken Heinz, president of Hedge Fund Research Inc., a database that tracks thousands of funds. “There’s a lot of speculation."
This year could outpace 2005, which saw the most hedge fund liquidations ever, when about 850 or them—11 percent—became no more, Heinz said. Between 800 and 1,000 liquidations this year “is plausible,” he said, and that only takes into account 350 funds that ceased to exist in the first half of this year. The tail end of 2008 has potentially to nearly double that.

The results may be widespread: backlogged blank check companies may be stifled interminably until market conditions improve. Teller indicated that those capable of enduring the uncertainty are best poised.

SPACs have “infinite life if the management team is committed to the process,” he said.
Further, those that have already listed might begin to enjoy an advantage, as the scarcity of capital available to companies looking to grow could eventually push more mid-market firms toward SPACs for exits. Future SPACs, Teller said, will likely be smaller, perhaps generating still more chances for mid-market firms looking at a sale.

Another hedge fund investor whose fund has often taken SPAC positions said that, while existing blank check companies can feel more secure thanks to having cash, those trapped in the sizeable SPAC backlog are not likely to succeed. However, thanks to the extremely high price of debt, those SPACs that have already come to market might enjoy an advantage going into the M&A process, since their targets will have few, if any, options to finance growth.

The options, the first hedge fund investor said, are for SPACs to either “stay backlogged” or “pack it in.” A third option, the investor said, would be after abandoning expectations of making it to the US market in the near term, would be to pursue a listing on the Toronto Stock Exchange. The TSX’s Julie Shin, who leads the exchange’s listed issuer services, said ideally it will see its first blank check listing by the end of 2008.

Another, third, investor is less optimistic for the worldwide SPAC market at this juncture.
“Current SPAC returns in the secondary market and lack of leverage available globally make me skeptical,” that investor said.

See You at the PIPEs Conference

My law partner Joe Smith and I are both speaking at DealFlow Media's PIPEs Conference this November 12-13 at the New York Hilton. This is by far the biggest PIPE conference of the year. Joe will be on the traditional panel discussing legal issues concerning PIPEs. My panel will be on reverse mergers. I urge all interested in this space to attend- my firm is also sponsoring the luncheon. Here is the description of my panel.

Investing in Reverse Merger Companies: Navigating Rule 144

3:45 - 4:35 PM This year the SEC adopted significant changes to securities law designed to improve the regulatory environment for smaller public companies. Now that these rules have been in place for some time, new strategies have emerged for investors. This panel explores the various approaches to investing in newly-reverse merged companies, positioning private companies for the public market, and covers what investors need to know in the post-Rule 144 environment.

Nine Law Firms Submit Request for Rulemaking on Rule 144(i) to SEC; Text Below

Below is the request for rulemaking to eliminate the "evergreen" requirement in amended Rule 144(i). The SEC received the request today. My immense thanks to my co-signers Spencer Feldman of Greenberg Traurig, David Miller of Graubard Miller, Sam Krieger of Krieger & Prager, Nanette Heide of Seyfarth Shaw LLP, Richard Anslow of Anslow & Jaclin, Mitchell Littman of Littman Krooks, Nimish Patel of Richardson & Patel and Michael Williams of Williams Law Group. I am hopeful that the addition of your stature and reputation and that of your firms will improve the chances of this request getting the attention and response that it deserves. Here's the request.

DNF

FELDMAN WEINSTEIN & SMITH LLP

420 LEXINGTON AVENUE

NEW YORK, NEW YORK 10170

T: (212) 869-7000

F: (212) 997-4242

www.feldmanweinstein.com

October 1, 2008

Via Overnight Mail
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F. Street NE
Washington, DC 20549-1090

Dear Ms. Morris:

We are writing on behalf of a number of our law firms’ respective clients. We hereby jointly petition the Securities and Exchange Commission (the “Commission”), pursuant to Commission Rule of Practice 192(a), to adopt an amendment to Rule 144 under the Securities Act of 1933, as amended (17 CFR 230.144) (“Rule 144”). The proposed amendment would remove the prohibition in Rule 144(i) on shareholders who acquired shares when an issuer was a “shell company” or former “shell company” from being able to utilize Rule 144 for a sale of unregistered securities if the issuer has not filed its Securities Exchange Act of 1934 (“Exchange Act”) reports for the one year prior to the proposed sale, other than in the first year following each date the issuer ceases to be a shell company and releases “Form 10 information.”

This proposed amendment, we believe, will improve the public markets by providing greater transparency for investors and instilling greater confidence and liquidity in the capital markets, and treating former shells, starting one year after each time they cease to be a shell and release full Form 10 information, who have filed their Exchange Act reports during that one year period, like any other public company.

Specifically, we propose changing the phrase in Rule 144(i)(2) that currently reads, “…has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, 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…” to read instead, “has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the 12 months following each date upon which the issuer ceases to be a shell company and has filed current ‘Form 10 information’ with the Commission, other than Form 8-K reports…”

Background of the Issue

In adopting the changes to Rule 144, the Commission appeared to express some concern about reverse mergers with shell companies. Under the new Rule 144(i), if a company ever was a shell company, the company must have completed all its Commission filings for the last 12 months or Rule 144 is simply not available. This means that any company that was ever a shell remains subject to this, even if it has not been a shell for many decades.

Problems Presented

The “evergreen” requirement that a former shell company stay current creates several problems.

Structuring registration rights if a former shell company is conducting a private offering of securities.

Prior to the adoption of the Rule 144 amendments, it was customary in private investments in public equity (“PIPEs”) and other private placements for issuers to register the applicable securities in a resale registration statement and maintain that resale registration statement effective until the earlier of (i) the sale of all shares that were registered; and (ii) such time as the holder could sell without any restrictions under Rule 144. Prior to the rule change, for non-affiliates in most cases this period was two years.

Post-rule change, this period (other than with respect to sales of securities by shell companies) for non-affiliates is now one year. This is true because even though a holder of the placed securities can start to sell in six months, the company must remain current for the next six months, thus creating a potential restriction. However, in a situation involving a company that was ever a shell, this period now never ends. Thus even five, ten or more years after a company ceases to be a shell, under the new rule a holder cannot utilize Rule 144 if the company is not current in its filings at the time of sale.

It has been our experience that both issuers and investors have experienced significant difficulties in dealing with these registration rights issues, and we are not aware of any PIPE offering subsequent to the adoption of the Rule in which this issue has been properly addressed to the investors’ satisfaction, which has inhibited capital formation for smaller public companies in these troubling economic times.

Removal of restrictive legends.

Stock certificates issued to private placement or PIPE investors, as well as any holder who acquires shares from a company that are unregistered or "restricted" contain a legend on the certificate stating that the shares cannot be sold unless registered or an exemption from registration applies. Freely tradable shares have no such legend and delivering the unlegended stock certificate to a brokerage firm generally provides free tradability of the shares.

It is common practice to have the restrictive legend removed at the time of a sale where a holder seeks to sell utilizing the exemption under Rule 144. This process is somewhat cumbersome and occasionally time-consuming, involving the company, the transfer agent and company counsel giving an opinion, among other things. Convention has developed allowing the legend to be removed when the holder has sufficiently held the shares so that they can be sold without any restrictions under Rule 144, rather than in connection with a sale. Removing the legend in advance is advantageous both to the investor and the issuer because it saves time at the time of sale by avoiding the difficult process described above, thereby avoiding unnecessary “fails-to-deliver” and costly buy-ins for innocent investors. Occasionally, a company also may refuse to remove a legend at the time of sale or counsel may have issue with delivering an opinion. Removing the legend in advance takes away this very real concern for investors.

Unfortunately, a holder of shares in a company that was ever a shell now can never have his or her legend removed in advance of a sale. Thus, even if a year has passed and no volume restrictions apply, there now forever remains another restriction: that at the time of sale the company must have been current for the prior year. Since an issuer cannot know this in advance, it will be unable to remove the legend until the time of sale. If the legend was removed any earlier, and a holder sought to sell at a later time, and the company was not current in its Exchange Act reports, the holder would be in violation of Rule 144.

The Scarlet Letter Effect

This limitation paints every former shell with a “scarlet letter,” and applies to every share issued by that company not only when it was a shell company but also after it ceased to be a shell company, perhaps suggesting that the Commission believes these companies forever require greater regulatory oversight. If the Commission chooses not to effect our proposed amendment, the current rule will apply to Berkshire Hathaway, Occidental Petroleum, Texas Instruments, Blockbuster Entertainment, Tandy Corp. (Radio Shack), Waste Management, Jamba Juice, Muriel Siebert and every former special purpose acquisition company (SPAC), even if it raised $1 billion. All these companies went public through business combinations with shell companies.

We respectfully request that the Commission revisit this issue in light of the foregoing. We do not believe that any legitimate investor protection goal is served by this significant restriction which continues to apply many years after a company ceases to be a shell. Indeed, we also believe that the spirit of this burden runs directly counter to the spirit of the various rule changes adopted as part of the Commission’s response to its Advisory Committee on Smaller Public Companies, of which the Rule 144 changes served a part, which were intended to help smaller public companies grow and raise capital.

The Advisory Committee’s charter, as set forth on Page 2 of the Executive Summary of its report, included the direction by the Commission to “identify methods of minimizing costs and maximizing benefits and facilitate capital formation by smaller companies.” Unfortunately, in fact the evergreen requirement in Rule 144(i) will cause, and is already causing, exactly the opposite effect. Indeed, all other aspects of the Rule 144 changes were positive, extremely helpful additions to the regulatory landscape. Only this requirement added a new burden not previously mandated.

Now all former shells, including the well-known companies listed above, will learn that if they conduct any private offering of securities

· it will be impossible to remove a restrictive legend on shares that are not registered, and
· if the shares are registered there is no clear end date for when the registration should remain effective.

We are hopeful the Commission, in revisiting this issue, can confirm that it did not intend for these restrictions to apply to famed investor Warren Buffett, whose reverse merger occurred decades ago.

Urgency of Request

We certainly understand the challenge of the Commissioners in setting the Commission’s agenda, especially given the current financial crisis. However, as a result of the adoption of the evergreen requirement, more and more smaller companies, whose sole realistic method of going public is through a business combination with a shell company, are opting to stay private rather than access the public markets solely because of concerns over this new burden.

They are being forced to accept more onerous financing terms, or not raise financing at all, foregoing growth opportunities and, in some cases, being at risk of surviving at all. There are a growing number of anecdotal incidents, and if addressing this urgent concern takes a year or more, it will certainly continue to create a significant new impediment to companies being able to access the public capital markets.

In 2007 there were over 200 reverse mergers. Through the middle of 2008 there have been 95 reverse mergers, compared with only 25 IPOs (of which only four raised less than $25 million). We are indeed quite concerned that the only realistically available method for smaller companies to go public has suddenly become much more unattractive as a result of this new burden.

Our hope is that if you agree with the proposed amendment, this very narrow item be added to the Commission’s agenda prior to the November 2008 elections. We believe it is a straightforward decision to be made and a small wording change to be accepted.

Conclusion

On November 14, 2007, Chairman Cox hailed the Rule 144 changes as highlighting the Commission’s “focus on removing obstacles of growth” for smaller public companies. On that same day, Division of Corporation Finance Director John White noted the Commission’s desire to “promote the growth and vitality of smaller public companies.” The evergreen requirement runs counter-intuitive to those goals, and we sincerely hope you will determine to improve it in the manner suggested by the proposed amendment.

We thank you for your consideration of this request for rulemaking. Please do not hesitate to contact David Feldman of Feldman Weinstein & Smith LLP at (212) 869-7000 with any questions or requests for further information with respect to the matters set
forth in this letter. All the attorneys and law firms below join in this request. We look forward to your response.

Sincerely yours,

FELDMAN WEINSTEIN & SMITH LLP

By: /s/ David N. Feldman
David N. Feldman, Managing Partner

Additional Signatories:

GRAUBARD MILLER SEYFARTH SHAW LLP

By: /s/ David Alan Miller_____________ By: /s/ Nanette C. Heide__________
David Alan Miller, Managing Partner Nanette C. Heide, Partner

LITTMAN KROOKS LLP GREENBERG TRAURIG, LLP

By: /s/ Mitchell C. Littman____________ By: /s/ Spencer G. Feldman________
Mitchell C. Littman, Founding Partner Spencer G. Feldman, Shareholder

KRIEGER & PRAGER, LLP WILLIAMS LAW GROUP P.A.

By: /s/ Samuel M. Krieger____________ By: /s/ Michael T. Williams________
Samuel M. Krieger, Managing Partner Michael T. Williams, Founder

RICHARDSON & PATEL LLP ANSLOW & JACLIN LLP

By: /s/ Nimish Patel ____________ By: /s/ Richard A. Anslow_________
Nimish Patel, Managing Partner Richard A. Anslow, Managing Partner

CC: Chairman Christopher Cox
Commissioner Luis A. Aguilar
Commissioner Kathleen L. Casey
Commissioner Troy A. Paredes
Commissioner Elisse B. Walter
John W. White, Director, Division of Corporation Finance
Erik R. Sirri, Director, Division of Trading & Markets
Thomas Kim, Chief Counsel, Division of Corporation Finance
Gerald Laporte, Director, Office of Small Business Policy

Deep Breath Everyone

We have been here before. This roughly 7% drop in the Dow Industrials, while representing the largest single day point drop ever, is not even in the top 10 worst days on a percentage basis. We all hope a rescue plan will be passed. Even if not, there are indeed some market forces that might just hang in there (though maybe not in the very short term) to help ultimately turn things around even if the government cannot get past its partisan wrangling.

I can only say one thing to our lawmakers. Stop fiddling, stop fighting, Rome will start burning little by little unless you all stop looking for political advantage and simply get this thing done.

Happy and Healthy

For those of my brethren celebrating, I want to wish you a happy and healthy New Year, L'shanah tovah. Let us hope that with this New Year, or for others a new season of Autumn here in the Northern Hemisphere, comes 1) resolution of the US government's action in response to the financial crisis, 2) stronger stock markets throughout the world, 3) action by the SEC to remove the new "evergreen" requirement that burdens former shell companies, and 4) lots and lots of companies going public and financing their growth.

OK, that's it. Some have suggested that some of my blog entries are too long! So enjoy the rest of the weekend all.

So Many Mining Companies Changing Hands for Pennies - Why?

If you read the Reverse Merger Wire, you know that quite a number of public "mining companies," many if not almost all based in Canada, have suddenly had a change in control for very small dollars. These companies, almost all of which are being marketed as shells and most if not all of which have many of the troublesome features described in the infamous footnote 32 of the SEC's 2005 reverse merger rulemaking release, all claim to be start-up or very early stage mining companies.

In the last few years, these shells have been sold for between $500,000 and $800,000 cash, plus equity as well, in connection with reverse mergers. Suddenly, in the last few months many of them have been the subject of a sale of substantial control blocks for anywhere from $3,000 to about $30,000. How can this be if they are able to be sold in transactions for so much more?

I had been scratching my head about this for awhile. I have since, I believe, uncovered the possible culprit, but we are doing more research to be sure. We believe it has to do with new regulations in British Columbia that restrict the transfers of more than 20% of the stock of a company whose operations are based there, if it is public. In those cases, it appears shareholder approval is needed, much like on the larger US exchanges such as the New York Stock Exchange and American Stock Exchange (this is not true on the OTC Bulletin Board or OTC Pink Sheets).

Again, do not take this as for sure, as we have not even finished looking over the regulations and hope to soon. So if this 20% restriction exists, why these sudden cheap changes in control? I think, but again not sure, that the promoters who set these companies up generally do not own any stock initially. They usually appear at the time of a reverse merger, acquire shares from the "founders" of the "mining company" who put some money in and now are bought out by the promoter at a nice profit (but well below the value of the shares at closing of the reverse merger) and therefore always stay below 5% and never have to publicly disclose their ownership. If they were to show themselves while the company was still a shell, and they were seen doing it over and over, the risk of being caught as having set up numerous companies in just the manner described in footnote 32 was too high.

So again, why these changes in control? Well, it is possible that the promoters, seeing the inability to acquire the shares they desire at the time of the reverse merger because of the new 20% transfer limitation, are either directly or indirectly beginning to show themselves now in the shells they have already taken public. So maybe, just maybe, this might help us determine who is behind the creation of these troublesome shells. And maybe, just maybe, they will see less benefit in creating them as in the past if they cannot hide as before. At least not in British Columbia.

Kudos to the BC regulators for helping stamp out something that the SEC has yet, frankly, to do anything about beyond a small footnote and a four year old small fine in an enforcement case. More on this soon.