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DEFINITION AND EXPLANATION OF “SHELL COMPANY”

Rule 144(i)(1) prohibits reliance on the rule for sales of restricted stock and any stock held by affiliates of the issuing company into the public market if the issuing company is now or at any time previously has been a “shell company”, unless the requirements of Rule 144(i)(2) are satisfied.

Rule 144(i)(1) defines a shell company as a company that has:

(A) No or nominal operations; and

(B) Either:

  1.   No or nominal assets;
  2.   Assets consisting solely of cash and cash equivalents; or
  3.   Assets consisting of any amount of cash and cash equivalents and nominal other assets; or

Shell companies do not include development stage companies pursuing an identified actual business plan (not including acquisitions of other, unidentified businesses), a business combination related shell company, as defined in Rule 405, or an asset-backed issuer, as defined in Item 1101(b) of Regulation AB.  Even though an issuing company categorizes itself as “development stage”, an extended period of failure to make progress toward its stated business plan may disqualify its stockholders from using this exception from classification as a shell company.  Also, an issuing company that engages in what would be described as a “classic shell company transaction”, a reverse merger, will be subject to additional scrutiny regarding uninterrupted continuity of business activities.

Rule 144(i)(2) does permit the use of Rule 144 by stockholders of an issuing company that has previously been but is not now a shell company if the issuing company is required to file reports with the SEC, has been filing reports with the SEC for at least one year that contain information about its current operating (or development stage) business activities (not including shell company activities) and is current in its reporting obligations at the time of the proposed sale in reliance on Rule 144.

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