1. Rule 144 – Is She an Affiliate?
Unfortunately, the 1933 Act does not define the terms "control person" or "control
relationship". However, the SEC in Rule 405, by its own authoritative style, refers
control as follows:
"The term "control" including the terms "controlling," "controlled by," and "under
common control with," means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise
[intermediaries, agents,…].”
When it comes to control, ownership or ownership interest means a legal or
beneficial interest in an institution or its corporate parent or a right to share in the
profits derived from the operation of an institution or its corporate parent.
When a big shareholder acquires ownership and control of the corporation, the
corporation is required to file a Form 8-K with the SEC notifying that agency of
the change in control. A change in ownership that results in a change in control
increases or decreases an investor the right to vote and/or ownership percent of the
corporation therefore the ability to control the corporation. Ownership or
ownership interest does not include an ownership interest held by:
• A mutual fund that is regularly and publicly traded
• A U.S institutional investor
• A profit sharing plan of the institution or its corporate parent
• An employee stock ownership plan
ASC 860-10-20 describes beneficial interests as ‘rights to receive all or portions of
specified cash inflows received by a trust or other entity, including but not limited
to senior and subordinated shares of interests, principal, or other cash inflows to be
‘passed-through’ or paid-through, premiums due to guarantors, commercial paper
obligations, and residual interests whether in the form of debt or equity’
That said, all corporate directors as well as senior officers of a corporation are
control persons of that corporation based on the 1933 Act purposes. Some
executive officers at one level below corporate officers as well as officers and
directors of subsidiaries are somehow control persons because they are delegated
temporary a least with these positions. But, the identity of control persons depends
on the corporate organizational and delegation policy and the top management
discretion.
It is clear that only corporate officers or directors who sign misleading statements
(10-Q, 10-K, 8-K, S-3, S-8 and others) may be found liable but more people will
be forced to trade under Rule 144. Large share ownership is also indicative of
control status.
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2. It also depends upon ongoing relationship with the company, past relationship
with the company, relationship with other control persons, or continued ownership
of a large block of the company's shares.
In addition, affiliate status could be attributed through other indicia of control, such
as board representation.
Some cases with no substantial body of law defining control, have found that
possession of power to control is enough, no actual use of that control. These
cases are documented under Sections 15 and 20a of the Securities and Exchange
Act.
The SEC advises that actual control or the ability to control is enough. Inaction in
exercising this right and absenteeism of the control person may or may not
disqualify her from this exemption.
The SEC staff and courts publicly advise about the utilization of limited tests to
determine who is a control person, I provide you with a long version of this test
below
Characteristics in determining whether or not one can be considered a control
person in the eyes of the court
1. Corporate officers of company
2. Corporate directors (including outside and independent directors)
3. Some subsidiaries board directors
4. Some executive officers at one level below corporate officers rank
5. Board representation
6. Large share ownership with more than 10% of an issuer outstanding
equity security (controlling shareholder with legal and/or beneficial
interests)
7. Past relationship with the company (newly retired officers,…)
8. Ongoing relationship with listed or others control persons (close
family members, confidential friends and confidential advisors)
9. Ongoing relationship with the company (with negative control rights-
no veto or voting rights, acting in disguised capacity, nominal, figure-
head and/or de-facto officers)
10.Continued ownership of a large block of the company share (with
inactive rights)
After a close examination of these characteristics, you will realize that these
presumptive characteristics are rebuttable; a person who claims that she is not an
affiliate in order to use the exemption from registration has the burden of proving
the availability of the exemption. The process dictates that counsels of the
company or this person must file a non- action letter to the SEC. Although the
counsel can file either an interpretative letter or an exemptive letter, it is good for
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3. him to file an interpretative and/or exemptive no action letter. It is addressed to the
office of the Chief Counsel, Division of Corporation Finance, SEC with these
paragraphs:
• Heading:
o ‘I am writing on behalf of …)
• Background and Transaction request
• Request
o Consistency of relief is based on prior staff decisions (it take time to
review all of them but this review is necessary)
• Legal Discussion
o General
o Resale of Control shares by affiliates in private placement market
(PPM): the Staff has taken position in numerous no action letters that
securities issued without registration (PPM) in reliance upon Section
3(a)(10) are not all deemed to be restricted securities within the
meaning of Rule 144(a)(3) under the Securities Act. See Aura
Systems, Inc (July 8, 1994), Medical Imaging Centers of America,
Inc, LA gear, Inc and Newbridge Networks Corporation.
Accordingly, persons to whom shares are issued who are not deemed
to be ‘affiliates’ of the Company within the meaning of Rule 144(a)
(1) may publicly resell such shares without registration (PPM) in
reliance upon Section 4(1) of the Securities Act. Also, any persons to
whom shares are issued who deemed to be an ‘affiliate’ of the
company within the meaning of Rule 144(a)(1) may publicly resell
such shares so long as they comply with all of the provisions under
Rule 144 including rule’s holding period requirement of 6 months and
others requirements. In view of the fact that, Plaintiff’s director is a
shadow director of the company with a little control of the corporation
within the meaning of Rule 405 (defined above)… In addition,
Section 2(a)(9) provides a presumption of non-control to “Anyone
who does not own more than 25% centum of the voting securities of
any company”. Section 2(a)(9) provides that either presumption may
be rebutted by evidence but will continue ‘until a determination to the
contrary made by the Commission by order either on its own motion
or on application by an interested person. Nevertheless no person
may rely on the presumption that all board directors are equal and
hold the same control rights based on all the facts and circumstances.
It is why we expect to be of the opinion that Plaintiffs’ director Ms.
Mary Shapiro will not be deemed to be an ‘affiliate’ of the company.
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4. We understand that, as set forth in Release No. 33-6253, the Staff
does not provide advice with regard to the determination of ‘affiliate’
status or availability of the exemption from registration under Section
4(1) of the Securities Act; accordingly, we do not request the Staff to
express a position with respect to any such determination. Because
the determination of non- control status should be made under the
consideration of all relevant facts and circumstances including the
passivity implied commitment that would not have the ability to
exercise controlling influence.
• Conclusion:
o For the forgoing reasons, we respectfully request that the Staff
confirms that the Commission will not recommend any enforcement
action if the company’s independent director, Ms Mary Shapiro trade
her shares as a non-affiliate. In addition to electronic submission of
this letter, I am sending an original and 7 copy of this letter. In event
that the staff is not inclined to respond favorably to this request, we
would appreciate the opportunity to discuss your concerns before
receiving your written response. If you have any question regarding
an aspect of this request, or if you require additional information,
please feel free to call me at… Thank you in advance for your
attention to this matter
• Signature
o It is signed by the Company’ securities counsel
Good luck to Mary Shapiro
4 Research conducted by Arthur Mboue