LEGAL & COMPLIANCE, LLC

Dodd-Frank Act Changes Definition Of Accredited Investor Effective Immediately

legalandc — Fri, 13 Aug 2010 12:34:24 +0000

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). After many revisions, the final Dodd-Frank Act has only minor effects on securities Issuers and their investors. The primary change, which takes effect immediately, is a modification to the definition of “accredited investor” contained in the Securities Act of 1933. In particular: (i) as it relates to natural persons, the $1,000,000 net worth standard must now be calculated excluding the value of the primary residence of such natural person; and (2) the Securities and Exchange Commission (SEC) has been mandated to review the entire accredited investor definition within four (4) years and make appropriate changes within that time, without additional act of Congress.

Increased Net Worth Requirements

This change effectively increases the net worth requirements for investors, whose largest asset is often their primary residence. Although the SEC has not yet issued any guidance or other information on the change, it is anticipated that investors will also be allowed to exclude the value of any mortgages or other debt secured by the primary residence in calculating their net worth.

Regulation D

Under Regulation D of the Securities Act of 1933, the disclosure requirements for offerings made strictly to accredited investors are less comprehensive, and accordingly less expensive, than offerings which include non-accredited investors. Moreover, the increased disclosure requirements are applicable if even one non-accredited investor is offered the investment, regardless of whether they subsequent accept the offer and become an investor. In addition to detailed disclosure requirements related to the business, its financial history and the control persons background, offerings made to non-accredited investors must include financial statements, which in most cases must be audited.

Dodd-Frank Act

In addition, the Dodd-Frank Act has eliminated many exemptions from the requirement to be registered as a financial advisor. In particular, the previous “private advisor” exemption has been eliminated. The private advisor exemption allowed advisors to avoid SEC registration if they did not advise a business development company, had fewer than fifteen (15) clients and did not hold themselves out to the public as an investment advisor. The elimination of the private advisor exemption becomes effective July 21, 2011.

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Special Purpose Acquisition Companies (SPACs)

legalandc — Thu, 05 Aug 2010 21:04:21 +0000

A SPAC is a company organized to purchase one or more operating businesses and which generally intends to raise capital through an initial public offering (IPO), direct public offering (DPO) or private offering.

IPO’s, DPO’s and Rule 419

SPAC’s that engage in either an IPO or DPO are subject to Rule 419 of the Securities Act of 1933, as amended. The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, by a blank check company. Rule 419 requires that the blank check company filing such registration statement deposit the securities being offered and proceeds of the offering, less reasonable offering expenses, into an escrow or trust account pending the execution of an agreement for an acquisition or merger. In addition, the registrant is required to file a post effective amendment to the registration statement containing the same information as found in a Form 10 registration statement, upon the execution of an agreement for such acquisition or merger. The rule provides procedures for the release of the offering funds in conjunction with the post effective acquisition or merger.

Dissenting Shareholders

However, if an acquisition or other business combination is not completed within 18-24 months, the investor funds must be returned. Moreover, the SEC generally takes the position that the fair market value of the acquisition must be at least 60%-80% of the escrowed funds from the raise. Proposed business combinations must be approved by the shareholders as well and dissenting shareholders can convert their shares into a pro-rata portion of the escrow balance.

If the post IPO SPAC shares are listed on an exchange, they are “federally covered” and the Issuer is not subject to state blue sky laws. However, if the SPAC shares are listed on the over the counter bulletin board, they are not federally covered and the Issuer must comply with individual state blue sky laws, which can be cumbersome.

Subsidiary Spin-Offs

legalandc — Wed, 04 Aug 2010 17:49:42 +0000

A subsidiary spin-off is a transaction where a parent corporation’s stock ownership of a subsidiary is distributed to the parent corporation’s shareholders giving the shareholders direct ownership of the former subsidiary. Typically, the subsidiary shares are distributed to the shareholders pro rata as a dividend. In fact, two of the requirements for an unregistered spin-off, as set forth in Staff Legal Bulletin No. 4 issued by the Securities and Exchange Commission, are that the distribution be pro rata and that no consideration be paid by the shareholders (i.e. a dividend).

A more complex form of a spin-off is commonly referred to as a Reorganized (“D”/355) which is where the parent corporation forms a shell subsidiary, transfers the stock to the shell subsidiary, which in turn distributes the stock to the parent shareholders.

Reasons for Spin-Offs

There are many reasons a company may choose to complete a spin-off, however, the most common reasons include: (i) to separate profit centers to increase shareholder value; (ii) shedding in-house providers to free up regulatory or other conflicts; and (iii) separating regulated and unregulated businesses.

Using a dividend to distribute the subsidiary stock usually means no shareholder vote or approval is required. However, a vote may be required if the subsidiary constitutes all or substantially all of the parent’s assets. Practitioners must review state corporate law to be sure to abide by voting requirements.

Parent Company Compliance

Under federal securities laws, if a vote is required, the parent must comply with the proxy requirements of Section 14 of the Exchange Act of 1934 and the rules promulgated thereunder. If no shareholder vote is required, the parent corporation must comply with Staff Legal Bulletin No. 4. In particular, the subsidiary shares (the shares distributed to the parent company shareholders) do not need to be registered if the following five conditions are met: (i) the parent shareholders do not provide consideration for the spun-off shares; (ii) the spin-off is pro-rata to the parent shareholders; (iii) the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets; (iv) the parent has a valid business purpose for the spin-off; and (v) if the parent spins-off restricted securities, it has held those securities for at least one year. Below is a discussion of each of the five conditions.

The mechanics of actually distribution the subsidiary shares involve: (i) setting the exchange ratio; (ii) fixing the record date; and (iii) having the transfer agent issue and mail the shares.

The risks of a spin-off are generally minimal and include losing valuable revenue of the subsidiary and shareholder complaints or lawsuits.

PIPE Transactions, Terms and Requirements

legalandc — Fri, 18 Jun 2010 23:04:55 +0000

A PIPE (Private Investment in Public Equity) transaction is typically a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the SEC. Generally the securities are sold at a discount to market price. A traditional PIPE generally involves a fixed number of securities at a fixed price, with the closing conditioned only on the effectiveness of a resale registration statement. Any transaction that does not fall within this parameter is considered non-traditional and the structure can vary widely, including for example price variables (such as a death spiral), warrants and options, convertible securities and equity line transactions.

Traditional PIPE Transactions

In particular, a traditional PIPE is generally a set number of securities at a set price (which may be a discount to market at the time of close) and is conditioned only upon the effectiveness of a re-sale registration statement. A traditional PIPE where the price is a discount to market would differentiate from a non-traditional death spiral in that there would only be one closing in the traditional PIPE and there would be multiple closings with continued downward pressure on the stock price and a continued dilutive effect with a non-traditional death spiral. The transaction documents associated with a traditional PIPE are generally very straight forward and do not contain ongoing negative covenants relating to information rights, future financing or corporate governance.

The terms of a non-traditional PIPE can vary widely but the basic requirements that the investment decision be completed in a private transaction prior to the filing of a registration statement and that the investor bear the risk of an investment are consistent.

Re-Sale Registration Statements

The SEC allows the filing of a re-sale registration statement for a PIPE if 1) the initial sale or placement of securities is conducted in a manner consistent with a private placement (no general solicitation or advertising and offerings made to accredited investors) and 2) the investors enter into definitive commitments which are only subject to the satisfaction of closing conditions outside the control of the investor, such as the effectiveness of a re-sale registration statement (that is, investor has made the investment decision and assumed the risk prior to the filing of the registration statement).

Section 9 of the Securities and Exchange Act of 1934, as amended, prevent the Investor from entering into hedging transactions (short sales and the like) from the time of entering into the PIPE transaction agreement through the effectiveness of the registration statement. In addition, Investors must be aware of insider trading rules (Section 10 of the Exchange Act and rules promulgated thereunder), throughout the period of the PIPE transaction. Moreover, the SEC has taken the position that an Investor that engages in short-selling prior to the final closing of PIPE and effectiveness of a registration statement, is engaging the unregistered sale of securities in violation of Section 5 of the Securities Act of 1933, as amended.

Direct Public Offerings And The Internet

legalandc — Wed, 16 Jun 2010 21:59:43 +0000

In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.

To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:

• An electronic prospectus must provide the same information as a paper written prospectus;
• The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
• The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
• The Investor must be immediately notified of any amendments or changes in the offering documents; and
• The Issuer must have a system for evidencing delivery of materials and maintaining copies of any correspondence and communications by and between the Issuer and Investor through electronic means;

State and Federal Securities Laws

The National Securities Markets Improvement Act of 1996 preempts state registration requirements of certain federally covered securities including most registered offerings and offerings exempt under Rule 506 of Regulation D of the Securities Act of 1933. However, for offerings that are not preempted by the 1996 Act, state securities laws must be reviewed and abided by.

Practically all states have adopted statutes, rules, orders or policies exempting Internet offerings and governing their mechanics. Compliance with the various state securities law requirements may be daunting, however, an Issuer can utilize disclaimers to mitigate the risks of violations. The disclaimers can be general, focusing on the state(s) where the securities are being offered and indicating that the offering is not made to persons elsewhere, or more specific disclaiming an offering in a particular state. Again, an Issuer must maintain control over the potential investors that review its offering documents through access procedures and other internal controls.

Silence is Golden

As with all offerings, Issuers should be careful not to condition the market or discuss the offering on their website with access to offering information being given only to prequalified potential investors.

Regulation A – An Exemption By Any Other Name Is A Short Form Registration

legalandc — Wed, 12 May 2010 22:05:17 +0000

Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than any other exemption. In particular, Regulation A provides for the filing of an offering prospectus which closely resembles a registration statement, with the Securities and Exchange Commission (“SEC”). The SEC then can, and often does, comment on the filing. Practitioners often refer to Regulation A as a short form registration.

Moreover, although the Regulation A offering prospectus does not go “effective” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement. For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus much the same as Section 8(a) for registration statements. Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified” much the same way as a registration statement’s automatic effectiveness can be delayed until the SEC declares it “effective”.

Regulation A and 134 Registration Statements

Regulation A mirrors registration in many other ways. For example, oral offers may be made after the offering prospectus is filed, just as with registration statements. Written offers must be accompanied by a preliminary offering prospectus, just as for registration statements, and advertising may be made on a limited basis in rules that match Rule 134 for registration statements.

Although Regulation A offerings have many things in common with registered offerings, they differ in many respects as well. One of the most important differences is that, in Regulation A offerings, an issuer may formally “test the waters” before the filing of an offering prospectus, by oral and written communications to potential buyers, designed to gauge interest in the offering. The written documents that may be used to “test the waters” are limited in content and must be filed with the SEC. Though a failure to file the document will not destroy the exemption if the document otherwise meets the Regulation A requirements.

Regulation A and Rule 504 Similarities

The limitations on the availability to use Regulation A are similar to Rule 504. In particular Regulation A is only available to US or Canadian companies. In addition, the issuer cannot be an Exchange Act reporting company or an investment company, and neither the Company nor is officers and directors can have had previous regulatory problems (the so called “bad boy” exclusion). The maximum dollar amount of securities that may be sold under Regulation A is $5 million in a twelve month period, of which $1.5 million can be sold by security holders.

Regulation A offerings generally require the same effort and cost as registered offerings.

Form 10 Registration Statements

legalandc — Fri, 19 Mar 2010 18:51:35 +0000

A Form 10 Registration Statement is a registration statement used to register a class of securities pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). To explain a Form 10 registration statement, let’s start with what it isn’t. It is not used to register specific securities for sale or re-sale and does not change the transferability of any securities. That is, a Form 10 registration statement does not register a security for the purposes of Section 5[1] of the Securities Act of 1933 (“Securities Act”) . Following the effectiveness of a Form 10 registration statement, restricted securities remain restricted and free trading securities remain free trading.

The Purpose of Form 10 Registration Statements

Now onto what a Form 10 registration is. As indicated above a Form 10 registration statement is used to register a class of securities. Any Company with in excess of $10,000,000 in total assets and 750 or more record shareholders is required to file a Form 10 registration statement with the Securities and Exchange Commission (“SEC”). In addition, any company, whether publicly held or not and with or without assets, may voluntarily file a Form 10 registration statement at any time. A Form 10 registration statement automatically becomes effective sixty (60) days following filing.

Upon effectiveness the Company which filed the Form 10 registration statement is subject to the reporting requirements of the Exchange Act. That is, they must file annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K. In addition, such Company is then subject to the proxy rules in Section 14 of the Exchange Act, and ownership rules and reporting requirements in Sections 13 and 16 of the Exchange Act.

What Makes a Company Public?

Interestingly, even though a Company that files a Form 10 registration statement becomes subject to the reporting requirements of the Exchange Act, a Form 10 registration statement does not make a company public, and there is no pre-requisite that a company be public prior to filing a Form 10. A public company, by definition, has public shareholders. A Form 10 registration statement can be filed by an entity with a single shareholder. Moreover, regardless of the filing of a Form 10, a Company must satisfy other regulatory obligations to trade on either the over the counter market (PinkSheets or Bulletin Board) or on an exchange (AMEX; NASDAQ; etc.). A prerequisite to trading on either the over the counter market or an exchange, would be to have public shareholders holding freely tradeable shares. As explained in this article, a Form 10 does not impact upon this requirement.

Following the changes in Securities Act Rule 144 in February 2009, a Form 10 registration statement has become an important avenue for many previously non-reporting entities. Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the
Securities Act of 1933, as amended, to sell their restricted securities.

Rule 144 and Form Registration Statements

In layman terms, Rule 144, allows shareholders to sell their unregistered shares. However, Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.

In order to use Rule 144, a Company must have ceased to be a shell company, be subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; 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; and have filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer a shell company, then those securities may be sold subject to the requirements of Rule 144 after one year has elapsed from the date that the issuer filed “Form 10 information” with the SEC.

Evergreen Requirements

In other words, if a non-reporting entity ever was a shell company, even ten years ago, one of the only ways its shareholders can avail themselves of Rule 144 is for that company to file a Form 10 registration statement and thereafter remain current in their Exchange Act reporting requirements. Note, that a company could comply with Rule 144(i) by the filing of an S-1 registration statement, which also contains “Form 10
information.”

[1] Section 5 of the Securities Act provides that it is unlawful to sell, offer to sell or offer to buy a security unless there is a registration statement in effect for such security, or a valid exemption exists.

Section 4(6) Registration Exemption for Accredited Investors

legalandc — Thu, 28 Jan 2010 15:25:27 +0000

Section 4(6) provides a registration exemption for offerings to accredited investors, if the aggregate offering amounts up to the dollar limit of Section 3(b) (currently $5,000,000), if there is no advertising or public solicitation in connection with the transaction by the Issuer or anyone acting on the Issuer’s behalf.

The term accredited investor is defined in section 2(a)(15) and generally includes:

Banks, insurance companies and pension plans;
Corporations, partnerships and business entities with over $5 million in assets;
Directors, executive officers and general partners of the issuer;
Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
Entities, all of whose equity owners are accredited.

In addition, the SEC has the power to define as an accredited investor any person, who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor.

Section 4(6) and Regulation D

Section 4(6) is rarely used as a free standing exemption; rather it is thought that Section 4(6) falls under the mandate of Regulation D although none of the three enumerated exemptions under Regulation D (Rules 504, 505 and 506) are strictly limited to accredited investors.

Practitioners seeking to rely on Section 4(6) should be aware that such securities are not considered federally covered under Section 18 of the Securities Act of 1933 and accordingly, in addition to abiding by the federal securities regulations, individual state securities laws must be considered.

An In-Depth Review of Private Placements Under Section 4(2)

legalandc — Mon, 25 Jan 2010 14:55:05 +0000

Section 4(2) of the Securities Act of 1933 provides that the registration requirements of Section 5 do not apply to “transactions by an issuer not involving any public offering.” The definition of an “issuer” is pretty straightforward as found in Section 2(a)(4) and includes, “the person who issues or proposes to issue” a security and is understood to mean the entity that originally sells the securities. However, not so straightforward is what constitutes a “public offering,” which term is not defined in the Securities Act. In reliance on Section 4(2) the SEC enacted Rule 506 as part of Regulation D.

Rule 506 as a Safe Harbor Provision

Rule 506 is a Safe Harbor. In other words, if all the conditions of Rule 506 are met, you can rest assured that the conditions of Section 4(2) have been satisfied. However, Section 4(2) can be satisfied as a standalone exemption separate from Rule 506. The importance of the distinction between Section 4(2) and Rule 506 cannot be underestimated. Often, when the technical requirements of Rule 506 have not been met, usually inadvertently, the Section 4(2) exemption will still stand and save the day. Moreover, many Issuers satisfy the Section 4(2) exemption “by chance” when other exemptions fail. Section 4(2) does not have filing requirements and at times may be the only exemption available to save an Issuer from civil or even criminal liability.

SEC vs. Ralston Purina Company

The leading case defining a public vs. a private offering is SEC vs. Ralston Purina Co., wherein the U.S. Supreme Court laid down its guidelines. The U.S. Supreme Court focuses on the sophistication of the investor coupled with their access and receipt of disclosure information from the Issuer. Disclosure information should be the “kind of information which registration would disclose.” Importantly, the U.S. Supreme Court refused to establish a quantity standard based on the number of investors. Although, ultimately quantity may be considered, the important factors remain investor qualification and access to disclosure information.

SEC Release No. 4552

The leading SEC pronouncement on Section 4(2) is SEC Release No. 4552 in which it set forth what it considers to the requirements for a private placement. According to the release, all the surrounding circumstances must be considered, “including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering.” Unfortunately, the release does not offer much guidance on each of the factors. Release No. 4552 does however discuss two important concepts in analyzing an offering. The first is “coming to rest” and the second is “integration.”

Coming to Rest

“Coming to rest” is a concept that deals with the issue of when a particular offering is over. The SEC considers an offering to be continuing until the offered securities have “come to rest” in the hands of the persons who are not “merely conduits for a wider distribution.” Integration deals with the issuer of when purportedly singe offerings are integrated to form one larger offering and whether when viewed as a whole, this larger offering, qualifies for an exemption. The list of factors relevant in analyzing integration include, whether:

The different offerings are part of a single plan of financing;
The offerings involve the issuance of the same class of security;
The offerings are made at or about the same time;
The same type of consideration is to be received; and
The offerings are made for the same general purpose.

Courts of Appeals have offered guidance on their interpretations of SEC vs. Ralston Purina Co. and Release No. 4552. In particular, in determining whether an offering is private or public (for purposes of the Section 4(2) exemption), courts consider such factors as:

The number of offerees and their relationship to each other and to the Issuer;
The number of units offered;
The size of the offering;
The manner of the offering;
Whether the offerees are sophisticated and/or accredited;
Access and availability of information that would otherwise be found in a registration; and
Absence of redistribution.

Investor Qualifications

The American Bar Association offers excellent guidance in determining the qualification of the investor, which is a key point regardless of whose guidance is followed. In particular, the following factors should be considered:

Risk-bearing ability (it is assumed an accredited investor can bear the risk of an investment);
Degree of sophistication (whether the offeree can understand and evaluate the offering);
The offerees representative (including investment advisors, accountants and attorneys);
The manner of disclosure (the clearer and more thorough the disclosure, the less concentration on sophistication);
Nonqualified offerees (and the impact they have on the entire offering); and
Economic bargaining power.

In conclusion, the best way to analyze whether a particular offering meets the requirements of the Section 4(2) exemption is to examine the offering through the eyes of the state and federal securities regulators and/or plaintiff’s attorneys. If they could reasonably find problems with the offering, either changes those problem areas before embarking on the offering or come up with a new strategy.

Rule 144 and the Evergreen Requirement Examined

legalandc — Fri, 22 Jan 2010 16:23:49 +0000

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In addition, Rule 144 is used to remove the restrictive legend from securities in advance of a sale. In layman terms, Rule 144, allows shareholders to either remove the restrictive legend or sell their unregistered shares.

Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.

Form 10 Information

The Evergreen Requirement

Rule 144 now affects any company who was ever in its history a shell company by subjecting them to additional restrictions when investors sell unregistered stock under Rule 144. The new language in Rule 144(i) has been dubbed the “evergreen requirement”. The new Rule has the impact of punishing a company that was ever a shell in perpetuity and more importantly, its investors. Brian Breheny, deputy director of the Securities and Exchange Commission’s corporate finance division, referred to the so-called evergreen requirement in Rule 144(i) of the Securities Act, as an “unfortunate result” and said it was “probably not something that the commission intended.”

Going Public and Reverse Mergers

Under the so called “Evergreen Requirement”, a company that ever reported as a shell must be current in its filings with the SEC for 12 months before investors can sell unregistered shares. Here is the hitch. As a result, the restrictive legend can never be removed in advance of a sale. The rule affects all companies going public through a reverse merger or SPAC. Moreover, the Rule effects all companies that have ever been a shell, even if a reverse merger was completed decades ago. It paints a “scarlet letter” on all former shell companies, as this requirement continues literally forever – famous former shells like Blockbuster Entertainment, Texas Instruments and Berkshire Hathaway are now burdened by this restriction decades after their reverse mergers.

So basically, you have to register the shares to get the legend removed. Practitioners have requested that the SEC either amend the Rule or issue additional guidance removing this requirement from Companies that were no longer shells at the time the Rule was enacted. So far no such changes have been made.