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SEC Proposes Easing Resale Rule

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By: Christopher Faille | November 18, 2007

WASHINGTON (HedgeWorld.com)—The Securities and Exchange Commission voted unanimously on Thursday [Nov. 15] to change the rules that govern public resale of restricted and control securities, a move that may affect the value of private investments in public equities (PIPEs).

Restricted securities are those acquired in unregistered private sales from the issuer, and control securities are those held by an affiliate of the issuing company. A holder of such securities generally wants to establish that the five conditions of the SEC's Rule 144 have been met, in order to qualify for a "safe harbor" exemption in regard to their resale.

Until now, the five conditions have been that the securities have been in the same hands for at least a year; the issuer has complied with periodic reporting requirements; the number of shares to be sold within a three-month period is no greater than 1% of the outstanding shares of the class; the broker doesn't receive more than a normal commission; and the number of shares or their value is above a threshold requiring a timely Form 144 notice be filed with the SEC.

The SEC has now approved changes to this rule—due to go into effect in 60 days—designed to make it easier for small issuers to raise capital. The changes include a reduction in the holding period from one year to six months, an increase in the threshold that triggers Form 144 filing requirements, some simplification and streamlining of the wording of the rule, and codification of certain staff interpretations thereof.

Pluris Valuation Advisors LLC published an article on the impact that these resale rules portend for PIPEs Previous HedgeWorld Story.

All other things being equal, economic theory would suggest that the value of PIPE securities will increase as a result of the halving of the holding period—in other words, that the "illiquidity discount" for such securities will be diminished.

Pluris said that its study confirmed this hypothesis in general. But it cautioned, "We would not expect a straight-line relationship between the days remaining and the discount." The change in the overall valuation of PIPE securities will most likely be slight.

The change will be the largest for the lowest-quality paper. From "issuers that are currently raising equity at effective equity discounts in the 40% range, our models indicate that the change could lead anywhere from a 3% to 14% reduction in the discount and, most likely, in the bottom of the range," said Espen Robak, president of Pluris, in a statement.

The SEC also approved a related change to Rule 145. This is a rule involving business combinations in which some plan results in the submission to securities holders of a choice whether or not to accept a new and different security as a swap for the security they're holding. The rule has long held that any party to such a transaction, other than the issuer of the stock to be swapped, shall be deemed to be an underwriter, a presumption that carries with it a regulatory burden.

The new rule eliminates the "presumptive underwriter" provision except with respect to deals that involve "blank check" or shell companies.

After the meeting that approved these and other changes, SEC Chairman Christopher Cox said in a statement: "Today's rule amendments will enable smaller companies to raise capital more effectively and ease some of the burdens of our reporting and disclosure requirements, and they will ensure that investors in these companies are paying for important investor protections and not red tape."