[Federal Register Volume 69, Number 77 (Wednesday, April 21, 2004)]
[Proposed Rules]
[Pages 21650-21662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8963]



[[Page 21649]]

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Part III





Securities and Exchange Commission





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17 CFR Part 230, et al.



Use of Form S-8 and Form 8-K by Shell Companies; Proposed Rule

  Federal Register / Vol. 69, No. 77 / Wednesday, April 21, 2004 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 240 and 249

[Release Nos. 33-8407; 34-49566; File No. S7-19-04]
RIN 3235-AH88


Use of Form S-8 and Form 8-K by Shell Companies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing rule 
amendments relating to filings by reporting shell companies. We propose 
to define a ``shell company'' as a company with no or nominal 
operations, and with no or nominal assets or assets consisting solely 
of cash and cash equivalents. We also propose to prohibit the use of 
Form S-8 under the Securities Act of 1933 by a shell company. In 
addition, we propose to amend Form 8-K under the Securities Exchange 
Act of 1934 to require a shell company, when reporting an event that 
causes it to cease being a shell company, to file with the Commission 
the same type of information that it would be required to file to 
register a class of securities under the Exchange Act. These proposals 
are intended to protect investors by deterring fraud and abuse in our 
securities markets through the use of reporting shell companies.

DATES: Comments should be received on or before June 7, 2004.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic comments:
     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please 
include File Number S7-19-04 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper comments:
     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number S7-19-04. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Gerald J. Laporte, Chief, or Kevin M. 
O'Neill, Special Counsel, Office of Small Business Policy, Division of 
Corporation Finance, Securities and Exchange Commission, 450 5th 
Street, NW., Washington, DC 20549-0310, (202) 942-2950.

SUPPLEMENTARY INFORMATION: We are requesting public comment on 
proposals designed to protect investors by deterring fraud and abuse in 
our securities markets through the use of shell companies. We propose 
to amend Form S-8 \1\ under the Securities Act of 1933\2\ to prohibit 
use of the form by reporting shell companies.\3\ We also propose to 
amend the requirements of Form 8-K \4\ under the Securities Exchange 
Act of 1934 \5\ as they apply to shell companies. The Form 8-K 
amendments would require a shell company, when reporting an event that 
causes it to cease being a shell company, to file with the Commission 
the same type of information that it would be required to file to 
register a class of securities on Form 10 \6\ or Form 10-SB \7\ under 
the Exchange Act. In addition, we propose to amend Rule 405 \8\ under 
the Securities Act and Rule 12b-2 \9\ under the Exchange Act to define 
``shell company'' and amend Rule 12b-2 to revise the definition of 
``succession.''
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    \1\ 17 CFR 239.16b.
    \2\ 15 U.S.C. 77a et seq.
    \3\ Only certain reporting companies are eligible to use Form S-
8. In this release, we use the term ``reporting companies'' to refer 
to companies that have an obligation to file reports under section 
13 (15 U.S.C. 78m) or 15(d) (15 U.S.C. 78o(d)) of the Securities 
Exchange Act of 1934.
    \4\ 17 CFR 249.308.
    \5\ 15 U.S.C. 78a et seq.
    \6\ 17 CFR 249.210.
    \7\ 17 CFR 249.210b.
    \8\ 17 CFR 230.405.
    \9\ 17 CFR 240.12b-2.
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    In proposing these rules, we are not addressing the relative merits 
of shell companies. We recognize that companies and their professional 
advisors use shell companies, often called ``corporate shells'' in this 
context, for many legitimate corporate structuring purposes. Our 
proposed definition of the term ``shell company'' is not intended to 
imply that all shell companies are fraudulent. Rather, the proposals in 
this release target regulatory problems that we have identified where 
shell companies have been used as vehicles to commit fraud and abuse 
our regulatory processes.

I. Background and Summary

    Today's proposals represent the Commission's latest effort in its 
ongoing campaign against fraud and abuse in the market for highly 
speculative securities, especially securities that trade at low share 
prices. This campaign dates to our earliest days, when the Commission 
moved to help clean up the ``bucket shops'' of New York City remaining 
from the 1920s.\10\ It continued through our efforts to quell 
speculation in uranium mining stocks in the Cold War years of the 1950s 
and our attacks on ``boiler rooms'' of the 1960s and 1970s. In the 
1980s and 1990s, we focused on what we called the ``penny stock 
market'' and ``microcap company fraud.'' \11\ In 1990, Congress passed 
the Securities Enforcement Remedies and Penny Stock Reform Act,\12\ 
which gave us new authority and tools to protect investors and deter 
fraud and abuse in this market. We have used this authority to carry 
out the intent of Congress.\13\
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    \10\ For a discussion of the history of our efforts in this 
area, see William H. Lash, III, Loose Change: The Campaign for Penny 
Stock Reform, 60 UMKC L. Rev. 1, 1-2 (1991), and the House Committee 
Report on the Securities Enforcement Remedies and Penny Stock Reform 
Act of 1990, H.R. Rep. No. 101-617, at 9 (1990), reprinted in 1990 
U.S.C.C.A.N. 1408, 1411.
    \11\ ``Penny stock'' commonly refers to low-priced, publicly 
traded securities, generally selling for less than $5 per share. In 
1990, a definition of the term ``penny stock'' was added to section 
3 of the Exchange Act, 15 U.S.C. 78c(a)(51). Pub. L. 101-429 Sec.  
503, 104 Stat. 931, 952. In 1995, a definition of the term ``penny 
stock'' was added to section 27A of the Securities Act, 15 U.S.C. 
77z-2(i)(3). Pub. L. 104-67 Sec.  102(a), 109 Stat. 737, 749.
    Examples of microcap company securities fraud schemes can be 
found on our Web site at http://www.sec.gov/hot/microcap.htm and are 
described in our press releases entitled ``SEC Charges 82 
Individuals and Companies in Second Nationwide Microcap Fraud 
Sweep,'' Press Release 1999-90 (Aug. 3, 1999), and ``SEC, U.S. 
Attorney, and FBI Announce Major Attack Against Microcap Fraud,'' 
Press Release 2000-81 (June 14, 2000). SEC press releases are 
available on our Web site at www.sec.gov.
    \12\ Pub. L. 101-429, 104 Stat. 931 (1990).
    \13\ For example, we adopted Rule 419 under the Securities Act, 
17 CFR 230.419, which is discussed later in this release. We also 
adopted Rule 15g-8 under the Exchange Act, 17 CFR 240.15g-8, which 
prevents trading of any securities held in a Rule 419 escrow 
account. In 1993, we adopted the penny stock disclosure rules, 17 
CFR 240.15g-1 through 240.15g-9, which require brokers who buy and 
sell penny stocks for their customers to provide specific 
information to the customers. Release No. 33-6932 (Apr. 13, 1992) 
(57 FR 18037). We recently proposed amendments to the penny stock 
disclosure rules designed to address market changes, evolving 
communications technology and recent legislative developments. 
Release No. 34-49037 (Jan. 8, 2004) (69 FR 2531).

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    Although the fraudulent methods used to manipulate the market for 
highly speculative securities, especially low-priced securities, have 
changed over time, many of the basic schemes employed have remained 
fairly constant. One common practice involves the use of reporting 
shell companies in ``pump-and-dump'' schemes. This type of scheme 
generally involves misleading investors. These schemes typically have 
many of the following characteristics:
     The shell company has no or nominal assets and 
operations and a small trading market;
     The shell company promoters issue large amounts 
of securities to themselves or designated nominees, sometimes using 
Form S-8;
     The shell company acquires or is merged with a 
private business that the promoters claim has high growth potential;
     Inadequate information is available to investors 
regarding the post-transaction company;
     The promoters ``pump'' up the price of the stock 
to investors through unduly positive press releases on the company and 
its prospects, exaggerated tout sheets, or fraudulent messages on the 
Internet;\14\
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    \14\ Examples of schemes involving promotion of shell companies 
over the Internet can be found in our press release entitled ``SEC 
Charges 33 Companies and Individuals with Fraud for Manipulating 
Microcap Stocks,'' Press Release 2000-124 (Sept. 6, 2000).
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     The promoters use high-pressure tactics to get 
people to invest, and also engage in market manipulation to create 
artificial demand and artificially high prices for the stock of the 
company; and
     The promoters ``dump'' their stock in the 
company by selling it at the artificially high prices their promotional 
activities have created, halt those activities and move on, allowing 
the price of the stock to sink in value in the hands of the investors 
who have been misled into purchasing it.\15\
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    \15\ Joseph Goldstein, Chairman of the Commission's internal 
Penny Stock Staff Task Force, testified before the House 
Subcommittee on Telecommunications and Finance on August 21, 1989 
that ``a common method or [sic] perpetrating penny stock fraud is 
through the marketing of `shell' corporations * * * with no 
operating history, few employees, few or no discernible assets, and 
no legitimate likelihood of success in the future.'' H.R. Rep. No. 
101-617, at 9 (1990), reprinted in 1990 U.S.C.C.A.N. 1408, 1412-13.
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    Many investors have been victimized in variants of the basic shell 
company scheme over the years.\16\
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    \16\ For examples of recent enforcement cases involving alleged 
shell companies, see Melanie A. Chieu, ``SEC Charges Four Men with 
Illegal Stock Sales,'' e-Securities 10 (Aug. 2002), and ``Stock 
Manipulation Scheme Involving False Anthrax Claims Subject of SEC 
Enforcement Action,'' Press Release 2003-127 (Sept. 30, 2003).
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    The Securities Enforcement Remedies and Penny Stock Reform Act 
directed us to address one type of scheme using shell companies to 
defraud investors--the registered ``blank check'' offering. In this 
scheme, the promoters seek to engage in a primary offering \17\ of 
securities of a shell company. They ask investors to authorize them to 
invest the proceeds of the offering in whatever way that the promoters 
decide, in other words, to give the promoters a ``blank check.'' \18\ 
In response to the guidance Congress gave us in the Act as to blank 
check offerings, we adopted Securities Act Rule 419 \19\ in 1992. Rule 
419 sought to combat fraud and abuse in public blank check offerings by 
requiring the promoters to deposit the proceeds of the offering in 
escrow until the blank check company identifies a company to 
acquire.\20\ Once a company is located and proposed to the investors, 
the promoters must give the investors an opportunity to reaffirm their 
decision to invest in the blank check company before the offering 
proceeds can be used to acquire the business. We believe that Rule 419 
has been successful in deterring fraud and abuse in public blank check 
offerings.\21\
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    \17\ In this context, the term ``primary offering'' refers to an 
offering of securities by the issuer of the securities.
    \18\ If the sponsors intend to invest the proceeds of the 
offering in a particular industry or sector, the offering often is 
called a ``blind pool'' offering. Neither blind pool offerings nor 
blank check offerings are inherently fraudulent. Many responsible 
businesspersons sponsor legitimate blind pool and blank check 
offerings.
    \19\ 17 CFR 230.419.
    \20\ The Securities Enforcement Remedies and Penny Stock Reform 
Act and Rule 419 refer to the companies subject to the rule as 
``blank check companies'' and define that term. In general, a 
``blank check company'' is defined as a development stage company 
that has no specific business plan or purpose or has indicated that 
its business plan is to engage in a merger or acquisition with an 
unidentified company. Some market participants, however, have 
applied the term ``blank check company'' to a wider group of 
companies than those making traditional ``blank check'' offerings. 
Some have seemingly applied it to all shell companies. We believe 
that under today's proposals all blank check companies as defined in 
Rule 419 would be considered shell companies until they acquire an 
operating business or more than nominal assets. Not all shell 
companies, however, would be classified as blank check companies 
under Rule 419. See Part II.C below for a discussion of the proposed 
definition of ``shell company.''
    \21\ One commentator has described the rule's practical effect 
as ``mak[ing] blank check offerings much less popular, as promoters 
will not have immediate access to proceeds and will not know the 
eventual amount of proceeds available until after the second stage 
refund period has passed.'' Stuart Cohn, Securities Counseling for 
New and Developing Companies, Sec.  18:17, at 73-76 (2003).
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    The rule and form amendments we propose today address two 
variations of abusive shell company transactions not covered by Rule 
419. The first type of transaction involves the use of Form S-8 
registration statements by reporting shell companies to circumvent the 
registration and prospectus delivery requirements of the Securities 
Act. Form S-8 may be used only to register securities for offer and 
sale in connection with employee benefit plans.\22\ The use of Form S-8 
by registrants to raise capital is prohibited. Some shell companies--
which rarely have employees--have used Form S-8 registration statements 
improperly to register sales of securities that, while fashioned as 
sales under employee benefit plans, in fact are capital-raising 
transactions. In form, these transactions are sales of securities by 
the shell company to employees in a transaction that is registered on 
Form S-8, and then a resale by the purchasers to the public. In 
substance, the sale by the company is to purported employees who act as 
underwriters to distribute the securities to the public without the 
required registration and prospectus delivery.\23\
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    \22\ When we use the term ``employee'' in this release to refer 
to persons to whom securities may be issued legally using Form S-8, 
we intend to refer both to employees and to consultants and advisors 
to whom securities legally may be issued using Form S-8.
    \23\ Examples of shell companies and alleged shell companies 
improperly raising capital using Form S-8 can be found in SEC v. 
Cavanaugh, 1 F. Supp. 2d 377, 344-60 (S.D.N.Y.), aff'd, 155 F.3d 129 
(2d Cir. 1998) (shell company with no operations, in which only 
$24,000 had been invested to set up and initially manage company, 
filed Form S-8 to issue 100% of its stock to four investors who 
invested $6,000 each); Sky Scientific, Inc., 69 SEC Docket 945 (Mar. 
5, 1999) (admin. proceeding), aff'd, 77 SEC Docket 1926 (May 17, 
2002) (company with minimal revenues from operations and nominal 
assets used Form S-8 to distribute shares to public, eventually 
filing 107 registration statements on Form S-8 covering 
approximately 30 million shares); Investment Technology, Inc., 
Litigation Release No. 18249 (July 24, 2003) (associates of company 
that, according to its annual report on Form 10-KSB for the fiscal 
year ended Dec. 31, 2001, had not commenced principal operations and 
had only $18,000 in assets, allegedly dumped millions of shares 
using two Form S-8 registration statements and collectively realized 
more than $200,000 in unlawful profits); Hollywood Trenz, Inc., 
Litigation Release No. 17204 and Accounting and Auditing Enforcement 
Release No. 1472 (Oct. 25, 2001) (distribution through 16 Form S-8 
registration statements of 25 million shares of common stock in a 
company seeking financing to reverse history of operating losses, 
including a Form S-8 filed three days after its annual report on 
Form 10-KSB for the fiscal year ended December 31, 1995 indicating 
that company had no operations and primary asset consisted of 
capitalized costs of project that could ultimately be charged to 
operations).
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    Because shell companies do not operate businesses and hence rarely 
have employees, we see no legitimate basis for shell companies to use 
Form

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S-8. For this reason, and because of the history of abuse of this form 
by reporting shell companies, we propose to prohibit shell companies 
from using Form S-8.
    The second type of reporting shell company transaction we address 
in the proposed rules involves the use of Form 8-K to report ``reverse 
merger'' and other transactions in which a reporting shell company 
combines with a formerly private operating business, with the surviving 
entity becoming a reporting company in the business formerly conducted 
by the private business. The operating business has, in effect, become 
a reporting company. The conversion generally takes one of two forms:
     In the most common type of transaction, a 
``reverse merger,'' the private business merges into the shell company, 
with the shell company surviving and the former shareholders of the 
private business controlling the surviving company.
     In another type of shell company conversion, a 
``back-door registration,'' the shell company merges into the formerly 
private company, with the formerly private company surviving and the 
shareholders of the shell company becoming shareholders of the 
surviving entity.\24\
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    \24\ This was the type of transaction involved in Lisa Roberts, 
Director of NASDAQ Listing Qualifications, Interpretive Letter (Apr. 
7, 2000), which is discussed in footnotes , 54 and 57 below.
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    The surviving entity in these transactions generally has an 
obligation to file current reports on Form 8-K to report both the entry 
into a material non-ordinary course agreement providing for the 
transaction and the completion of the transaction.\25\ In both types of 
transaction, the entry into the agreement would require a report under 
Item 1.01 of Form 8-K.\26\ In addition, the completion of the 
transaction also is reportable under either or both of Item 2.01 of 
Form 8-K--as the acquisition of a business--and Item 5.01 of Form 8-K--
as a change-in-control transaction.\27\ Audited financial statements 
would be required to be filed under Item 9.01 of Form 8-K for 
transactions reportable under Item 2.01.\28\
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    \25\ Our proposals are not intended to impose any new event 
filing requirements under Form 8-K. If an event was not reportable 
under Form 8-K previously, it would not become reportable as a 
result of adoption of these proposals. For example, if the 
conversion of a shell company into an operating business is not 
reportable because the company has previously reported substantially 
the same information, the company need not file an additional report 
on Form 8-K. See General Instruction B.3 to Form 8-K and footnote 50 
below.
    \26\ Item 1.01 is a new provision of Form 8-K requiring the 
filing of a current report upon entry into a material definitive 
agreement. The provision becomes effective on August 23, 2004. See 
Release No. 33-8400 (Mar. 16, 2004) (69 FR 15594).
    \27\ We recently adopted amendments that transferred the 
substance of former Item 2 and Item 1 of Form 8-K to Item 2.01 and 
Item 5.01 of Form 8-K, respectively. We are using the new item 
numbers in this release. The amendments are effective on August 23, 
2004. Id.
    \28\ Item 9.01 requires the filing of financial statements only 
for ``significant'' acquisitions. The significance test states that 
an acquisition or disposition is deemed significant if (1) the 
company's and its other subsidiaries' equity in the net book value 
of the assets or the amount paid or received for the assets exceeded 
10% of the total assets of the company and its consolidated 
subsidiaries, or (2) the transaction involved a business that is 
significant under Regulation S-X. The acquisition of any business by 
a shell company would undoubtedly be significant under this test. 
The substance of Item 9.01 of Form 8-K formerly was contained in 
Item 7 of Form 8-K. Id.
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    The existing Form 8-K disclosure requirements, however, are not 
tailored for shell company conversion transactions. The Item 2.01 
requirements focus on describing a newly acquired business and 
providing financial information for the new business. The Item 5.01 
disclosure requirements focus on identifying the persons who acquired 
control, the consideration used to acquire control, the transaction 
that resulted in the change in control, and the beneficial ownership of 
the company after the change in control. These reporting requirements 
do not address the reality that a shell company conversion transaction 
introduces a reporting company with a new operating business to 
investors and the marketplace for the first time.
    The existing Form 8-K disclosure requirements have resulted in an 
uneven level of disclosure in the reporting of such transactions, and a 
lack of information available to investors. Some companies attempting 
to ``go public'' in a shell company conversion transaction file reports 
on Form 8-K containing information similar to the information that they 
would file to ``go public'' under the Securities Act by means of a 
registration statement on Form S-1 or Form SB-2 \29\ or to register a 
class of securities under the Exchange Act on Form 10 or Form 10-SB. 
Many companies completing shell company conversion transactions, 
however, make the sparsest of filings on Form 8-K. These filings often 
do not contain much of the information useful to investors in making 
informed decisions about investing in the company, such as the 
information contained in Management's Discussion and Analysis of the 
Financial Condition and Results of Operations required by Item 303 of 
Regulation S-K and Regulation S-B.\30\
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    \29\ 17 CFR 239.11 or 17 CFR 239.10, respectively.
    \30\ 17 CFR 229.303 and 17 CFR 228.303. Currently, investors in 
some cases may not receive information about the nature of a new 
business until the company files an annual report on Form 10-K or 
Form 10-KSB, which may be as late as a year or more after completion 
of the acquisition. For instance, if a reverse merger occurs in the 
first month of its fiscal year, the company would not be required to 
file its annual report on Form 10-K or Form 10-KSB until up to 90 
days after the end of the current fiscal year, more than 14 months 
later.
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    Further, some of the information required by Form 8-K may be filed 
on a delayed basis. Existing rules permit companies acquiring new 
businesses to wait up to 71 days after the initial filing on Form 8-K 
reporting completion of the acquisition to file audited financial 
statements and pro forma financial information reflecting the new 
financial profile of the company. Both shell and non-shell companies 
are entitled to this ``71-day window'' delayed filing deadline.\31\
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    \31\ The ``window'' provision is contained in Item 9.01 of Form 
8-K. The window period recently was modified slightly, effective on 
August 23, 2004. See Release No. 33-8400 (Mar. 16, 2004). The 71 
days are calendar days. When added to the four business days that a 
reporting company has to file its initial report on Form 8-K 
reporting the completion of the transaction under the newly amended 
Form 8-K requirements, the amount of time available approximates 75 
calendar days, the amount of time available before the recent 
amendment. Previously, Form 8-K required the initial report of the 
completion of the transaction to be filed within 15 calendar days. 
If the company's required audited financial statements and pro forma 
information was not available, the company was allowed to file them 
within another 60 calendar days.
    In the ``back-door registration'' type of transaction, which is 
reported as a change in control rather than as an acquisition, the 
staff has indicated that the entire Form 8-K report, including 
audited financial statements, is due at the time of filing of the 
report on completion of the transaction. No delayed filing or 
``window period'' is permitted. See Lisa Roberts, Director of NASDAQ 
Listing Qualifications, Interpretive Letter (Apr. 7, 2000).
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    We developed the ``window'' provision in 1976 to alleviate the 
difficulties operating companies could encounter if audited financial 
statements of businesses acquired were required to be filed in a report 
on Form 8-K within a few days after the acquisition.\32\ We recognized 
that some

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business combinations involving companies with operations are complex, 
so that it may not be possible to prepare audited financial statements 
within a few days. This is especially true in a typical business 
combination involving the acquisition of an operating business, where 
the reporting company is not in control of the business to be acquired 
until the acquisition occurs, and often cannot dictate the timing of 
audits of the financial statements.
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    \32\ Release No. 34-12619 (July 12, 1976) [41 FR 29784]. At 
first, the extension period was 60 days, was not automatic, and had 
to be approved by staff of the Division of Corporation Finance after 
an informal request expressing a need for an extension. The 
Commission at the time believed that the need for an extension would 
be infrequent and would only occur in the most complex types of 
transactions. By the early 1980s, however, the volume was larger 
than expected and could no longer be administered on a case-by-case 
basis. In 1985, the Commission amended Form 8-K in Release No. 34-
6578 (Apr. 23, 1985) to allow for an automatic 60-day extension if 
the registrant stated, in the initial Form 8-K filing, that filing 
of the financial statements with the initial Form 8-K report would 
be impracticable and that it would file them as soon as possible 
within the 60-day period.
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    While legitimate reasons exist for providing additional time for 
the filing of certain financial information involving operating 
businesses, these reasons do not apply with regard to transactions 
involving shell companies. The shareholders of the operating business 
about which investors need more extensive information usually control 
the surviving entity.
    Moreover, the promoters of shell company schemes can take advantage 
of the lack of adequate financial and other information in the Form 8-K 
filing during the window period to promote the company and sell their 
shares at artificially high prices. During this time, the market may 
have difficulty pricing the securities because of the lack of adequate 
information.\33\ Investors who purchased the securities at artificially 
high prices while adequate information is unavailable typically lose 
money when specific and reliable information becomes available, the 
promotional activities stop, and prices drop. In some cases the 
financial statements never are filed.\34\ The abuses we have witnessed 
in this area confirm the advisability of requiring the Form 8-K to 
contain information equivalent to that required in a Form 10 or Form 
10-SB under the Exchange Act reflecting the new assets and operations 
of the company, including audited financial statements of the operating 
business for the periods specified by Regulation S-X \35\ or Item 310 
of Regulation S-B,\36\ as applicable.
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    \33\ An example of allegedly fraudulent promotional activities 
between the time of filing the report on completion of the 
transaction and filing of financial statements can be found in the 
case that was the subject of the press release entitled ``Stock 
Manipulation Scheme Involving False Anthrax Claims Subject of SEC 
Enforcement Action,'' Press Release No. 2003-127 (Sept. 30, 2003). 
There, a company filed its initial Form 8-K report on July 2, 2001, 
the promoters conducted an allegedly fraudulent promotional campaign 
and realized approximately $1.6 million between July 17 and August 
16, 2001, and the company filed an amendment to its initial filing 
on Form 8-K containing audited financial statements on September 4, 
2001.
    \34\ The required financial statements sometimes are not filed 
because proper disclosure of the true nature of the transaction 
presumably would end the fraudulent scheme.
    \35\ 17 CFR 210.1-01 through 210.12-29.
    \36\ 17 CFR 228.310.
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    Our proposed amendments to Form 8-K would require a shell company, 
when reporting an event that causes it to cease being a shell 
company,\37\ to include the same type of information that it would be 
required to file to register a class of securities under section 12 of 
the Exchange Act.\38\ We would require the report on Form 8-K to be 
filed within the same filing period as generally is required for other 
Form 8-K reports, which is within four business days after completion 
of the transaction, effective August 23, 2004.\39\ The window provision 
for the filing of financial statements and pro forma financial 
information would be eliminated for shell companies.
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    \37\ In most cases, this occurs when the shell company acquires 
or is acquired by an operating business. Under the proposed 
definition of ``shell company,'' it also could occur when the shell 
company acquires more than nominal assets (except for cash and cash 
equivalents).
    \38\ 15 U.S.C. 78l. See Part II.D below for a discussion of the 
treatment of foreign private issuers that are shell companies.
    \39\ As discussed in footnote 31 above, we recently shortened 
the time for reporting such transactions on Form 8-K to four 
business days. Release 33-8400 (Mar. 16, 2004).
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    We propose to define ``shell company'' as a company with no or 
nominal operations, and with no or nominal assets or assets consisting 
solely of cash and cash equivalents.\40\ We believe that this 
definition generally reflects the ordinary understanding of the term 
``shell company'' in the area of corporate finance and defines those 
companies where the likelihood of abuse is greatest. Finally, as 
discussed below, we propose to revise the definition of ``succession'' 
to capture certain transactions involving shell companies.
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    \40\ Proposed amendments to 17 CFR 230.405 and 17 CFR 240.12b-2. 
See Part II.C below.
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II. Discussion of Proposals

A. Securities Act Form S-8 Proposal

    The proposed amendments to Form S-8 would prohibit the use of that 
form by a shell company. A company that ceases to be a shell company 
would become eligible to use Form S-8 to register securities 60 
calendar days after it has filed information equivalent to what it 
would be required to file if it were registering a class of securities 
on Form 10 or Form 10-SB under the Exchange Act. Ordinarily, that 
information would be filed in a current report on Form 8-K reporting 
completion of the transaction that causes it to cease being a shell 
company. In other cases, the information may be filed in a Form 10 or 
Form 10-SB, or in a registration statement on Form S-4 \41\ covering 
the transaction. Form 10 provides investors with important and valuable 
information. The 60-day delay would give employees and the market time 
to absorb the information provided by the company in its Form 8-K or 
other filing.\42\ In this regard, the 60-day period is consistent with 
the 60-day period that passes before a company's registration of a 
class of securities on Form 10 or Form 10-SB becomes effective under 
section 12(g) of the Exchange Act.\43\
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    \41\ 17 CFR 239.25.
    \42\ By ``investors,'' we mean both the employees and other 
permitted persons to whom the company may sell employee benefit plan 
securities in transactions registered on Form S-8 and persons who 
may purchase those securities when resold. Securities sold in 
transactions registered on Form S-8 are not restricted securities 
within the meaning of Securities Act rules. See 17 CFR 
230.144(a)(3). As discussed above, Form S-8 abuses often involve 
almost immediate distribution of securities that are allegedly not 
restricted into the open market by purported employees and 
consultants who are in fact underwriters engaging in a distribution 
to the public without the required registration.
    \43\ 15 U.S.C. 78l(g).
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    The appropriateness of this proposal is supported by the nature of 
shell companies and the purpose of Form S-8. It is unlikely that use of 
Form S-8 by a shell company is appropriate or necessary. Shell 
companies do not have substantial operations with employees to 
compensate. Further, Form S-8 may not be used to raise capital or to 
compensate consultants or advisors for providing services in connection 
with the offer or sale of securities in a capital-raising transaction 
or services that promote or maintain a market in the issuing company's 
securities.\44\ To the extent a shell company would have any employees, 
their activities usually involve capital-raising and similar 
activities. We do not believe a shell company's employees should be 
able to be compensated for these activities with securities registered 
on Form S-8 any more than its consultants and advisors.
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    \44\ General Instruction A.1(a)(1) to Form S-8 specifically 
states that the form may be used to issue securities to consultants 
only for bona fide services that ``are not in connection with the 
offer or sale of securities in a capital-raising transaction, and do 
not directly or indirectly promote or maintain a market for the 
registrant's securities.''
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    The amendments proposed today would not prevent a shell company 
from registering offers and sales of securities pursuant to employee 
compensation plans under the Securities Act. Rather, the proposals 
would require the shell company to register that transaction on a form 
other than Form S-8.\45\ Alternatively, the shell company may be able 
to offer and sell those securities without Securities Act registration 
pursuant to an available

[[Page 21654]]

exemption from registration. We are aware that a different registration 
form may not provide the same ease of registration as Form S-8 and that 
the securities sold in an exempt transaction likely would be treated 
differently under Securities Act Rule 144 than securities sold to 
employees in a registered transaction.\46\ These potential 
disadvantages for shell companies would be more than offset, however, 
by the likelihood that use of Form S-8 by a shell company would be 
inappropriate and would pose significant risks to the market for the 
securities sold in the transactions purported to be registered on that 
form.
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    \45\ Form S-1, and perhaps Form SB-2, would be available to 
register such transactions. See 17 CFR 239.11 and 17 CFR 239.10, 
respectively.
    \46\ Securities Act Rule 144 (17 CFR 230.144) addresses the 
issue of when a person is deemed to be an underwriter. Rule 144 
``permits the public sale in ordinary trading transactions of 
limited amounts of securities owned by persons controlling, 
controlled by or under common control with the issuer and by persons 
who have acquired restricted securities of the issuer.'' See 
Preliminary Note to Rule 144.
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    We have seen numerous examples of shell companies using Securities 
Act Form S-8 to distribute their securities and raise capital in an 
improper manner. Companies seeking to use these types of schemes prefer 
Form S-8 because it becomes effective upon filing with the Commission 
and does not require a prospectus to be filed in the registration 
statement.\47\ Many of the abusive schemes we have seen involve 
multiple filings of registration statements on Form S-8.\48\ Some 
registration statements involving these schemes cover a very large 
percentage, even a majority, of the company's outstanding securities. 
Some involve multiple employee compensation plans for companies that 
typically have no apparent need for numerous employee plans. Some 
involve using Form S-8 improperly to register the sale of shares to 
purported employees or other nominees, who are designated as 
``consultants'' and ``advisors'' but who often do not provide any 
services for which the company may pay compensation with securities 
registered on Form S-8. The later, unregistered sales of these 
securities into the market by purported employees deny the protections 
of the Securities Act to investors in the company's securities.
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    \47\ See 17 CFR 230.462(a).
    \48\ See footnote for examples of shell companies filing 
multiple Form S-8 registration statements to distribute shares into 
the public marketplace.
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    Our current proposal to prohibit use of Form S-8 by shell companies 
is similar to another proposal we issued in 1999 but did not adopt. 
That proposal would have prohibited shell companies from using Form S-8 
until they filed an annual report on Exchange Act Form 10-K or 10-KSB 
containing audited financial statements reflecting a transaction that 
provided the company with more than ``nominal'' assets.\49\ Today's 
proposal differs from the 1999 proposal in two respects. Under the 1999 
proposal, a shell company would have had to wait possibly up to a year 
before being able to use Securities Act Form S-8. Under our current 
proposal, a former shell company that promptly files a required report 
on Form 8-K could be eligible to use Form S-8 in 60 days. In addition, 
in 1999 we did not propose to define the term ``shell company'' or any 
similar term, as we do today, but applied the proposal to companies 
``with nominal assets.''
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    \49\ Release No. 33-7647 (Feb. 25, 1999) (64 FR 1118). Only two 
commenters addressed the proposal to prohibit shell companies from 
using Form S-8. One stated that it did not have a strong reaction to 
the proposal, while the second supported the proposal but wanted a 
definition of the term ``nominal assets.''
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    We request specific comment on the following questions:
     Would adoption of the Form S-8 proposal 
effectively deter fraudulent and abusive use of Form S-8?
     Would prohibiting shell companies from using 
Form S-8 unduly hinder legitimate shell companies from offering 
securities to employees?
     Should any shell companies, or companies that 
have been shell companies within 60 days, be permitted to use Form S-8? 
If so, under what specific circumstances?
     Is the proposed 60-day waiting period too long? 
Should it be shorter, such as 30 days?
     Is the proposed 60-day waiting period too short? 
Should it be longer, such as 90 days?
     Is the waiting period proposed in 1999 
preferable?
     Should the waiting period be tied to some event 
other than filing of Form 10-equivalent information? For instance, 
should we provide that a shell company may use Form S-8 once a specific 
period of time has elapsed since completion of the transaction in which 
it ceases being a shell company, or a specified number of days after it 
files a periodic report on Form 10-K, Form 10-Q, Form 10-KSB or Form 
10-QSB?
     Can you suggest a different waiting period or 
other alternative condition to Form S-8 availability that would 
adequately protect the markets and investors without adversely 
affecting the new business of the company?
     Instead of prohibiting use of Form S-8 by shell 
companies, could we more effectively deter fraudulent and abusive 
conduct by shell companies by restricting the use of Form S-8 in other 
ways?

B. Exchange Act Form 8-K Proposal

    The amendments to Form 8-K that we propose today would require a 
shell company to make a more specific and detailed filing on Form 8-K 
upon completion of a transaction that causes it to cease being a shell 
company.\50\ Following completion of the transaction, the shell company 
would need to file a current report on Form 8-K containing the 
information that would be required in a registration statement on Form 
10 or Form 10-SB to register a class of securities under section 12 of 
the Exchange Act. The company would be required to file its report on 
Form 8-K within four business days after completion of the transaction. 
As a result of these amendments, shell companies would no longer have a 
window for filing financial information about the company. Requiring 
prompt and detailed disclosure in Form 8-K filings would provide 
investors in operating businesses newly merged with shell companies 
with a level of information that is equivalent to the information 
provided to investors in reporting companies that did not originate as 
shell companies. The filing of this Form 8-K report would decrease 
significantly the opportunity to engage in fraudulent and manipulative 
activity.
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    \50\ Under General Instruction B.3 to Form 8-K, a reporting 
company is not required to file a report on the form if the 
information required by the form previously has been filed. A shell 
company that became an operating business as a result of a merger 
registered on Form S-4 under the Securities Act, for instance, would 
have no obligation to file a Form 8-K report containing information 
on completion of the merger if all the information required by Form 
8-K to report completion of the merger has previously been included 
in an effective registration statement on Form S-4. Because of this, 
our Form 8-K proposal would not require the filing of additional 
Form 8-K reports or the reporting of any additional events, although 
the proposal would require provision of additional information in 
Form 8-K reports already required to be filed.
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1. Acquisitions
    Currently, reporting shell companies that cease being shell 
companies because they complete a significant acquisition of a new 
business are required to report the event under Item 2.01 of Form 8-K 
as a significant acquisition of assets.\51\ Item 2.01

[[Page 21655]]

requires the company to furnish information about the date and manner 
of the acquisition and a ``brief description'' of the assets. Form 8-K 
does not require specifically that the company disclose the information 
that would be required to register a class of securities under section 
12 of the Exchange Act. Item 9.01 of Form 8-K, however, requires that 
the filing contain audited financial statements of the business 
acquired.\52\ Currently, reporting companies may file the financial 
statements with the initial Exchange Act Form 8-K filing; however, they 
also have the option to file the financial statements not later than 71 
days after the due date of the initial filing.\53\
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    \51\ Reporting shell companies are not subject to different 
treatment in this regard. All reporting companies that complete 
significant acquisitions of assets not in the ordinary course of 
business are required to file a current report on Form 8-K covering 
the transaction. In addition, reporting companies also may be 
required to disclose material information in a Form 8-K filed at the 
time of entering into the transaction under Item 1.01 of Form 8-K. 
See also Regulation FD, 17 CFR 243.100 through 243.103.
    \52\ Item 9.01 until recently was numbered Item 7 of Form 8-K. 
See Release No. 33-8400 (Mar. 16, 2004). It requires inclusion in 
the filing of financial statements of a significant business 
acquired for the periods specified in 17 CFR 210.3.05(b), prepared 
in accordance with the requirements of Regulation S-X, 17 CFR 210.1-
01 through 210.12-29. It also requires pro forma financial 
information in accordance with Article 11 of Regulation S-X with 
respect to a business acquired.
    \53\ Most offerings of securities must be delayed until the 
financial statements are filed, although ordinary trading and market 
transactions by persons who are not underwriters, issuers or dealers 
in securities may occur. See Instruction to Item 9.01 of Form 8-K.
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    We propose to close the 71-day window for shell companies to file 
financial information reflecting significant acquisitions for several 
reasons. First, the operating business that constitutes all or 
substantially all of the company's operations and assets has no 
publicly disclosed financial information. Consequently, prompt access 
to the operating business's Form 10-equivalent information should be 
useful to investors. Under our current rules, if the former shell 
company or its successor chooses to file the audited financial 
statements later than the due date for the Form 8-K filing reporting 
completion of the transaction, the securities trade in the markets 
without vital information about the significant acquisition being 
available.
    Second, obtaining audited financial statements for the operating 
business does not present the difficulties that caused us to provide 
the 71-day window for business combinations involving reporting 
companies with operations. In a shell company conversion transaction, 
management of the continuing operating business is in control of the 
transaction and has the power to control the timing and preparation of 
the required financial and other information. The 71-day extension 
should not be necessary to produce audited financial statements in the 
shell company situation.
2. Changes in Control
    Currently, reporting shell companies that cease being shell 
companies because they are acquired by an operating business in a 
``back-door registration'' transaction are required to report the 
completion of the event under Item 5.01 of Form 8-K as a ``change in 
control'' of the company. The line-item disclosures currently required 
by Item 5.01 focus on identifying the persons who acquired control, the 
amount and source of consideration used to acquire control, the 
transaction that resulted in the change in control, and the beneficial 
ownership of the company after the change in control. In addition, the 
Commission's staff has expressed its view that a Form 8-K report filed 
by a shell company that ceases being a shell company in this type of 
transaction should include as additional information the information 
required in a Form 10 or Form 10-SB for a company registering a class 
of securities under section 12 of the Exchange Act or, at a minimum, 
``complete audited and pro forma financial statements required by these 
forms.'' \54\ This information is to be filed with the report on Form 
8-K reporting completion of the acquisition.\55\
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    \54\ See Lisa Roberts, Director of NASDAQ Listing 
Qualifications, Interpretive Letter (Apr. 7, 2000). As explained in 
this interpretive letter, the procedure sometimes called ``back-door 
registration'' under the Exchange Act did not, in the Commission 
staff's view at the time, constitute a ``succession'' of the 
surviving entity to the rights and obligations of the reporting 
shell company because the definition of ``succession'' in Exchange 
Act Rule 12b-2 requires that the acquiring company acquire a ``going 
business'' and a shell company was not considered a ``going 
business.'' Nevertheless, the staff permitted nonreporting acquiring 
companies to file Form 8-K reports and enter our reporting system, 
so long as specified information was included, rather than requiring 
these companies to file registration statements under section 12 of 
the Act to become reporting companies.
    \55\ Id.
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    We propose to revise the definition of ``succession'' in Exchange 
Act Rule 12b-2 to include a change in control of a shell company.\56\ 
This would codify the ``back-door registration'' procedure permitted by 
the Commission staff.\57\ As a result of the revision, the nonpublic 
acquiror would succeed to the reporting obligations of the shell 
company and become a reporting company. For public shell companies with 
securities registered under section 12 of the Exchange Act,\58\ this 
would occur because Exchange Act Rule 12g-3 \59\ would impose section 
12 regulation on the acquiror without the necessity of filing an 
Exchange Act registration statement. Similarly, public shell companies 
with reporting obligations under section 15(d) of the Exchange Act \60\ 
would be deemed to have assumed the reporting obligations of the shell 
company by operation of Exchange Act Rule 15d-5.\61\ Due to the 
interaction of this proposed definition of ``succession'' and Rules 
12g-3 and 15d-5, a private entity that acquires a public shell company 
would be required to report the transaction on Form 8-K rather than 
filing an Exchange Act registration statement.\62\
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    \56\ Proposed revision of Rule 12b-2.
    \57\ If this rule is adopted, it will supersede the Lisa 
Roberts, Director of NASDAQ Listing Qualifications interpretive 
letter discussed in footnote 54 above.
    \58\ 15 U.S.C. 78l.
    \59\ 17 CFR 240.12g-3.
    \60\ 15 U.S.C. 78o.
    \61\ 17 CFR 240.15d-5.
    \62\ If a company is filing a registration statement under 
section 12(g) of the Exchange Act to register a class of securities 
because it has total assets of more than $10 million and a class of 
equity securities held by more than 500 record holders, it has 120 
days after the last day of the fiscal year on which it first met 
those thresholds to file the registration statement with the 
Commission. The registration statement becomes effective 
automatically 60 days after filing, unless the staff accelerates 
effectiveness pursuant to delegated authority upon request of the 
company.
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3. Request for Comment
    We request specific comment on the following questions:
     Will requiring former shell companies to make 
more complete and detailed filings on Form 8-K when they cease being 
shell companies help investors in making informed investment decisions 
and deter fraud and abuse by shell companies?
     Will closing the 71-day window for filing the 
financial statements of businesses acquired by shell companies in 
significant acquisitions deter fraud and abuse by shell companies?
     Is the non-financial information that is 
proposed to be required in the Form 8-K necessary? Alternatively, 
should we require the historical audited annual and unaudited interim 
financial statements only, or some intermediate level of information, 
such as historical audited annual and unaudited interim financial 
statements, required pro forma financial information and the 
information containing Management's Discussion and Analysis of the 
Financial Condition and Results of Operations of the new business 
pursuant to Item 303 of Regulation S-K or Regulation S-B? \63\
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    \63\ 17 CFR 228.303 or 17 CFR 229.303.
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     Because of the manner in which we propose to 
define ``shell company,'' a company could cease to be a shell company 
by acquiring substantial assets, even if it has neither acquired nor 
been acquired by an operating business. Should the proposed Form 8-

[[Page 21656]]

K disclosure requirements be modified for this type of transaction?
     Would the proposed amendments to Form 8-K unduly 
increase costs for smaller public companies?
     Would adoption of the Form 8-K proposal have any 
unwarranted or unforeseen adverse consequences, including adverse 
consequences for the preparation and auditing of financial statements 
reflecting significant acquisitions of businesses by shell companies? 
Would it create unnecessary obstacles to legitimate transactions?
     Should certain shell companies be exempted from 
the Form 8-K proposal? If so, what specific circumstances would warrant 
exemption?
     Is the proposed revision of the definition of 
``succession'' appropriate? Does it have any consequences other than 
requiring the filing of a report on Form 8-K when a private entity 
acquires a public shell company? Should we instead make these companies 
file an Exchange Act registration statement, perhaps within an 
accelerated time frame?
     Should we amend the definition of the term 
``succession'' in Rule 12b-2 to delete the reference to ``a going 
business,'' so that it would mean the act or right of taking over a 
predecessor entity's rights, obligations and property despite changes 
in ownership or management?
     Should we amend Rule 12g-3 and Rule 15d-5 under 
the Exchange Act to provide that a change in control of a shell company 
constitutes a ``succession'' for purposes of those rules rather than, 
or in addition to, amending the definition of the term ``succession'' 
in Rule 12b-2 to achieve the same result? Is there a different and 
better way to achieve the desired result?
     Should we try to make reports on Form 8-K 
reporting the shell company transactions discussed in this release 
easier to identify in the Commission's Electronic Data Gathering, 
Analysis and Retrieval (EDGAR) system,\64\ such as by creating a 
special Form 8-K item for them or a special EDGAR tag? \65\
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    \64\ EDGAR is the computer system maintained by the Commission 
for the receipt, acceptance, review and dissemination of disclosure 
documents submitted to the Commission in electronic format.
    \65\ An EDGAR tag is an identifier that highlights specific 
information in a document filed through EDGAR.
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C. Definition of ``Shell Company''

    We propose to add a definition of the term ``shell company'' to 
Rule 405 under the Securities Act and Rule 12b-2 under the Exchange 
Act. The definition would state that the term ``shell company'' means a 
registrant with no or nominal operations, and with no or nominal assets 
or assets consisting solely of cash and cash equivalents.
    We believe this definition generally reflects the ordinary 
understanding of the term ``shell company'' in the area of corporate 
finance.\66\ It has been used in this area for many years.\67\ It 
predates the definition of the term ``blank check company'' in Section 
7(b)(3) of the Securities Act and Rule 419. It does not include many of 
the concepts used in those definitions, such as ``development stage 
company,'' company with ``no specific business plan or purpose,'' and 
company that ``has indicated that its business plan or purpose is to 
merge with an unidentified company.'' \68\ We believe the proposed 
definition of ``shell company'' is more appropriate for the purposes of 
today's proposals, as it better describes the type of company involved 
in the schemes we are attempting to address, uses more objective 
criteria, and would be easier to apply.\69\
    The proposed definition of ``shell company'' would include 
reporting companies whose assets consist solely of cash and cash 
equivalents. We have included cash-only shell companies because these 
types of shell companies could also engage in the types of schemes 
addressed in the Form S-8 and Form 8-K proposals. We seek comments, 
however, on the appropriateness of including cash-only shell companies 
in the definition of the term ``shell company.''
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    \66\ Barron's Finance & Investment Handbook 593 (5th ed. 1998), 
a commonly used reference work on corporate finance terminology, 
defines the term ``shell corporation'' as follows:
    SHELL CORPORATION company that is incorporated but has no 
significant assets or operations. Such corporations may be formed to 
obtain financing prior to starting operations, in which case an 
investment in them is highly risky. The term is also used of 
corporations set up by fraudulent operators as fronts to conceal tax 
evasion schemes.
    \67\ A popular handbook of investment terms published in 1983 
defined the term ``shell company'' as follows:
    SHELL COMPANY Jargon for a corporation, usually without assets 
or a valid business operation, whose shares are offered for sale. 
Although such sales are not necessarily fraudulent, the value of the 
shares is questionable and are always high risk.
    Allan H. Pessin & Joseph A. Ross, Words of Wall Street, 2,000 
Investment Terms Defined 229 (1983).
    \68\ 15 U.S.C. 77g(b)(3). These concepts also are present in 
Rules 251, 419 and 504 under the Securities Act. See 17 CFR 
230.251(a)(3), 230.419(a)(2)(i) and 230.504(a)(3). Our staff also 
has used the term ``blank check company'' in interpretive letters to 
describe what appear to be shell companies. See Ken Worm, NASD 
Regulation, Inc., Interpretive Letter (Jan. 21, 2000) and Lisa 
Roberts, Director of NASDAQ Listing Qualifications, Interpretive 
Letter (Apr. 7, 2000).
    \69\ Because the definition of ``blank check company'' requires 
that the company have ``no specific business plan,'' many companies 
seek to circumvent Rule 419 promulgated under Section 7(b) by 
arguing that they have a specific business plan when they do not 
have a business plan that would attract investment by a reasonable 
investor seeking a reasonable balance of risk and return.
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    The proposed definition of ``shell company'' does not exclude two 
types of shell companies commonly used for corporate structuring 
purposes--shell companies used to change corporate domicile and shell 
companies formed to effect merger and acquisition transactions (the 
latter of which are commonly referred to as ``merger subs''). As to 
shell companies used to change corporate domicile, we have excluded 
them from application of the portion of the Form S-8 proposal that 
suspends the ability of a former shell company to use Form S-8 for 60 
days after it files Form 10 information reflecting its conversion from 
a shell company into an operating business. We see no reason to suspend 
the ability of such shell companies to use Form S-8 after completion of 
the change-in-domicile transaction. We also see no reason to exclude 
shell companies used to change corporate domicile from the 
applicability of the Form 8-K proposal. A change in corporate domicile 
ordinarily would not be reportable as either an acquisition of assets 
or a change in control, the only types of transactions to which the 
Form 8-K proposal is applicable.
    As to merger subs, we see no reason to exclude them from the 
definition of ``shell company'' or from application of either the Form 
S-8 proposal or the Form 8-K proposal. We do not envision any 
unreasonable burdens or problems in applying the proposals to merger 
subs. In most instances, merger subs do not survive business 
combinations as reporting companies. In those situations where that may 
happen, the merger sub should have previously filed its Form 10 
information with the Commission and have no difficulty complying with 
the Form 8-K proposal. We are seeking comment, however, on these 
preliminary determinations regarding shell companies used merely to 
change corporate domicile and shell companies used as merger subs.
    We request specific comment on the following questions:
     Is our proposed definition of the term ``shell 
company'' too broad or too narrow? If so, how should the definition be 
tailored to achieve our objectives?
     Should the first ``and'' in the proposed 
definition be an ``or,'' so that the definition would encompass a 
company that has (1) no or nominal operations, (2) no or nominal 
assets, or (3) assets consisting solely of cash and cash equivalents?

[[Page 21657]]

     Should our definition of the term ``shell 
company'' have quantitative thresholds defining the term ``nominal''? 
For example, if a shell company has a specific level of non-cash assets 
or operations, should we exclude it from the definition? \70\
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    \70\ Examples of such thresholds can be found in Rule 3a51-1 
under the Exchange Act, 17 CFR 240.3a51-1, which exclude from being 
classified as penny stock companies certain issuers with net 
tangible assets of $2 million (if in continuous operation for at 
least 3 years) or $5 million (if in continuous operation for less 
than three years) or average revenue of $6 million for three years.
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     If the definition had quantitative thresholds, 
how could we prevent companies from circumventing them to defeat the 
intent of the Form 8-K proposal?
     Should we define the term ``shell company'' in a 
different way? For example should the definition reflect concepts from 
the definition of ``blank check company,'' such as ``development stage 
company,'' company with ``no specific business plan or purpose,'' or 
company that ``has indicated that its business plan or purpose is to 
merge with an unidentified company'?
     Should the definition of the term ``shell 
company'' include companies whose assets consist solely of cash, as 
proposed, and thereby subject such companies to the Form S-8 and Form 
8-K proposals? If not, under what circumstance should such companies be 
excluded?
     Should the definition of ``shell company'' 
include companies with substantial assets, so long as they have no or 
nominal operations? If shell companies were defined only in terms of 
operations, would this be overly inclusive? On the other hand, can 
companies with substantial assets but no operations be used to combine 
with operating businesses in a manner that implicates the policy 
concerns discussed in this release?
     Should the definition of ``shell company'' 
exclude shell companies formed solely to change corporate domicile or 
shell companies formed solely to effect merger and acquisition 
transactions?

D. Effect on Shell Companies That Are Foreign Private Issuers

    Some foreign private issuers \71\ that are registered with the 
Commission would come within the proposed definition of ``shell 
company.'' Shell companies that are foreign private issuers would be 
subject to the proposed rules regarding use of Form S-8. Accordingly, 
as with a domestic shell company, a foreign private issuer shell 
company would not be eligible to file a registration statement on Form 
S-8 until 60 days after it files the information that it would be 
required to file if it were registering a class of securities under the 
Exchange Act. For foreign private issuers, the requisite information 
would be the equivalent of information required in a registration 
statement on Form 20-F,\72\ rather than on Form 10 or Form 10-SB.\73\
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    \71\ The term ``foreign private issuer'' is defined in Exchange 
Act Rule 3b-4(c), 17 CFR 240.3b-4(c). A foreign private issuer is a 
non-government foreign issuer, except for a company that (1) has 
more than 50% of its outstanding voting securities owned by U.S. 
investors and (2) has either a majority of its officers and 
directors residing in or being citizens of the United States, a 
majority of its assets located in the United States, or its business 
principally administered in the United States.
    \72\ 17 CFR 249.220f
    \73\ Generally, foreign private issuers may elect to register 
under the Exchange Act on Form 10 or Form 10-SB, as eligible, rather 
than on Form 20-F. Foreign private issuers that have chosen to 
report on domestic forms should comply with the same Form 8-K 
requirements as domestic companies, providing information equivalent 
to that required in a Form 10 or 10-SB.
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    If a foreign private issuer shell company engaged in a transaction 
with a domestic operating business that resulted in the shell company's 
loss of foreign private issuer status upon completion of the 
transaction, the surviving entity would have to file a Form 8-K upon 
completion of the transaction. That Form 8-K report would contain the 
same information that would be required in the appropriate initial 
registration statement used to register securities under the Exchange 
Act, as would be the case for a similar transaction involving a U.S. 
shell company under the proposed rules. As in transactions involving 
U.S. shell companies, the filing on Form 8-K would need to be filed 
within four business days after the completion of the transaction.
    Foreign private issuers that are subject to the periodic reporting 
requirements under the Exchange Act generally are not required to file 
current reports on Form 8-K.\74\ Rather, many of the disclosures 
required of foreign private issuers are made on Form 20-F, which is an 
integrated form used both as a registration statement for purposes of 
registering securities of qualified foreign private issuers under 
section 12 of the Exchange Act \75\ or as an annual report under 
section 13(a) \76\ or 15(d) \77\ of the Exchange Act.
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    \74\ See Exchange Act Rules 13a-11(b) and 15d-11(b), 17 CFR 
240.13a-11(b) and 240.15d-11(b).
    \75\ 15 U.S.C. 781.
    \76\ 15 U.S.C. 78m(a).
    \77\ 15 U.S.C. 78o(d).
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    Because the proposed rules relating to shell companies would apply 
to foreign private issuers, we believe that foreign private issuer 
shell companies should have the same disclosure requirements as those 
proposed for domestic shell companies. To avoid the use of foreign 
private issuer shell companies to circumvent the proposed new 
disclosure and timing requirements, we are considering the appropriate 
form on which foreign companies should file information equivalent to 
that contained in an Exchange Act registration statement even if they 
do not lose their foreign private issuer status following completion of 
the transaction with the operating business. We believe that whichever 
form is used, it would be appropriate to require foreign private issuer 
shell companies to follow the same timing as would apply to a U.S. 
shell company under the proposed rule, i.e., four business days after 
completion of the transaction.
    We request specific comment on the following questions relating to 
alternative approaches that we are considering with respect to 
disclosure requirements applicable to foreign private issuer shell 
companies:
     What factors would be most significant to a 
foreign shell company when structuring a transaction with an operating 
business? In what circumstances would an operating business seek to 
enter into a transaction with a foreign shell company rather than a 
domestic shell company?
     Should foreign private issuer shell companies 
file registration statement-equivalent information as an amendment to 
their annual report on Form 20-F? Should it be a separate report on 
Form 20-F, as would be the case with a transition report? We note that 
under current rules, any annual report, transition report or amendment 
on Form 20-F would include the certifications required by Exchange Act 
Rule 13a-14 \78\ and section 906 of the Sarbanes-Oxley Act of 2002.\79\
---------------------------------------------------------------------------

    \78\ 17 CFR 240.13a-14.
    \79\ Pub. L. 107-204, 116 Stat. 745 (2002).
---------------------------------------------------------------------------

     Would there be additional consequences to 
requiring that the disclosure be made on Form 20-F? Would this type of 
disclosure place undue burdens on foreign companies?
     Would it be more appropriate to require foreign 
private issuer shell companies to file a report on Form 8-K or Form 6-K 
containing the level of information required in a Form 20-F 
registration statement when it ceases to be a shell company? Should the 
Commission create a separate disclosure form (similar to Form 8-K) for 
those reports by foreign private issuers? What are the advantages or 
disadvantages of these approaches compared to filing the

[[Page 21658]]

information in an amendment to an annual report on Form 20-F?
     Should the timing requirements for filings made 
by foreign private issuers differ from the timing requirement for 
filing Form 8-K that applies to domestic issuers? If so, what timing 
would be appropriate?

III. Request for Comments

    We request and encourage any interested person to submit comments 
regarding:
     The proposals that are the subject of this 
release;
     Additional or different changes relating to 
shell companies; and
     Other matters that may have an effect on the 
proposals contained in this release.
    Comment is solicited from the point of view of both issuers and 
investors, as well as facilitators of capital formation, such as 
underwriters and placement agents, and other regulatory bodies, such as 
state securities regulators. We also solicit comments from accounting 
firms that regularly audit the types of transactions covered by the 
proposals.

IV. Paperwork Reduction Act

    The proposed amendments affect Securities Act Form S-8, Exchange 
Act Form 8-K, Form SB-2, and Form S-1, which contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\80\ We are submitting a request for approval of 
the proposed amendments to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The titles of the affected collections of information are Form 
S-8 (OMB Control No. 3235-0066), Form 8-K (OMB Control No. 3235-0060), 
Form SB-2 (OMB Control No. 3235-0418), and Form S-1 (OMB Control No. 
3235-0065). An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \80\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    These amendments are intended to protect investors by deterring 
fraud and abuse in our public securities markets through the use of 
shell companies. Compliance with the proposed disclosure requirements 
would be mandatory. There would be no mandatory retention period for 
the information disclosed and responses to the disclosure requirements 
would not be kept confidential. It is difficult to quantify whether the 
collection of information will increase for foreign private 
issuers.\81\
---------------------------------------------------------------------------

    \81\ We believe that a foreign private issuer shell company 
merging with a domestic operating business would rarely be able to 
keep its foreign private issuer status. We would not expect the 
number of these transactions to have any effect on the estimates 
used in this section.
---------------------------------------------------------------------------

Form S-8

    The new proposal to prohibit shell companies from using Securities 
Act Form S-8 may require some companies to use a less streamlined form, 
such as Form SB-2 or Form S-1, to register offerings that otherwise 
would have been registered on Form S-8. A company that ceases to be a 
shell company would be eligible to file a Form S-8 registration 
statement 60 days after it has filed information equivalent to what it 
would be required to file if it were registering a class of securities 
under the Exchange Act. We estimate that this may reduce the number of 
registration statements filed on Form S-8 by approximately 5%, and may 
increase the number of registration statements filed on Form SB-2 and 
Form S-1 by a corresponding amount. We estimate that approximately 
4,050 Form S-8 registration statements were filed in the Commission's 
last fiscal year, resulting in a total annual compliance burden of 
97,200 hours (12 hours per response x 4,050 filings) and an annual cost 
of $14,580,000 (12 hours x 4,050 filings x $300). We also estimate that 
approximately 650 Form SB-2 registration statements were filed in the 
last fiscal year, resulting in a total annual compliance burden of 
385,450 hours and an annual cost of $86,726,000. We further estimate 
that approximately 433 Form S-1 registration statements were filed in 
the last fiscal year, resulting in a total annual compliance burden of 
189,329 hours and an annual cost of $170,396,000.
    With respect to Form S-8, we estimate that 50% of the burden of 
preparing the form is borne by the company's internal staff and that 
50% represents work performed by outside securities counsel retained by 
the company at an average the rate of $300 per hour. With respect to 
Form SB-2 and Form S-1, we estimate that 25% of the burden of preparing 
the form is borne by the company's internal staff and that 75% of the 
burden represents work performed by outside securities counsel at the 
rate of $300 per hour.
    We do not expect that shell companies that are prohibited from 
using Form S-8 will file other registration statements, but if they did 
they could use Form SB-2 or Form S-1. At the maximum, we estimate the 
number of Form S-8 registration statements filed on other forms would 
be 5% of the Form S-8 registration statements filed in fiscal year 2003 
would no longer be filed (4,050 x .05 = 203). We also expect that the 
overwhelming majority of companies (95%) that chose to file another 
registration statement in lieu of Form S-8 would file them on Form SB-
2, thereby increasing the number of Form SB-2 filings by 193 (203 
filings x .95) and the number of Form S-1 registration statements by 10 
(203 filings x .05). As a result, the Form S-8 reporting burden would 
decrease by 2,436 hours (203 filings x 12 hours) and the annual cost 
would decrease by $730,800 (203 filings x 12 hours x $300). The Form 
SB-2 reporting burden would increase by 28,612 hours (385,450 hours / 
by 650 filings = 593 hours per filing x 193 filings x .25) with an 
annual cost increase of $25,751,025 (593 hours x 193 filings x $300 per 
hour x .75). Finally, the Form S-1 reporting burden would increase by 
4,373 hours (757,317 hours / by 433 filings = 1,749 hours per response 
x 10 filings x .25) with an annual cost increase of $393,525 (1,749 
hours x $300 per hour x .75).

Form 8-K

    Form 8-K (OMB Control No. 3235-0060) prescribes information about 
important corporate events that a company must disclose on a current 
basis. Form 8-K also may be used, at a company's option, to report any 
events that the company deems to be of importance to its shareholders. 
In addition, companies may use the form to report the nonpublic 
information required to be disclosed by Regulation FD.
    We currently estimate that Form 8-K results in a total annual 
compliance burden of 513,007 hours and an annual cost of $41,040,000. 
We estimate the number of Form 8-K filers to be 13,200, based on the 
actual number of Form 10-K and Form 10-KSB filers during the 
Commission's 2003 fiscal year. For purposes of this analysis, we 
estimate that the number of reports on Form 8-K filed annually is 
154,007. We estimate that each entity currently spends, on average, 
approximately five hours completing the form. We estimate that 75% of 
the burden is borne by the company and that 25% of the burden is borne 
by outside securities counsel retained by the company at an average 
cost of $300 per hour. Our estimates of the average number of hours 
each entity spends completing the form, and the average hourly rate for 
outside securities counsel, were obtained by contacting a

[[Page 21659]]

number of law firms and other persons regularly involved in completing 
the forms.
    Under the proposal, a shell company would be required to make a 
more specific and detailed filing on Form 8-K when it reports a 
transaction that causes it to cease being a shell company. The shell 
company would need to file a Form 8-K that contains the information 
that would be required in an initial registration statement on Form 10 
or Form 10-SB to register a class of securities under section 12 of the 
Exchange Act. The company would be required to file the Form 8-K within 
four business days after the closing of the transaction. This amendment 
would eliminate the 71-day window during which the financial 
information currently can be filed.
    This proposal would not increase the number of Form 8-K filings but 
would increase the amount of information that a former shell company 
must include in the form. In 2003, companies that categorized 
themselves as ``blank check companies'' under the SEC Standard 
Industrial Classification (SIC) Code for that category disclosed 63 
transactions under Item 2 of Form 8-K. We believe that the additional 
information we are requiring is analogous to the information required 
to complete a Form 10-SB. Currently, we estimate that it takes 133 
hours to complete a Form 10-SB. We estimate that it would take a shell 
company 133 hours to prepare the information that we are proposing to 
require the company to provide in a Form 8-K report. We estimate that 
the company bears 75% of the burden and that 25% of the burden is borne 
by outside securities counsel retained by the company at an average 
rate of $300 per hour. We estimate that it will take a former shell 
company 133 hours to complete the Form 8-K when it reports a 
transaction that causes it to cease being a shell company. The burden 
in this type of Form 8-K filing would increase to 8,379 hours (133 
hours x 63 shell companies). Therefore, the Form 8-K reporting burden 
would increase by 6,284 hours (8,379 hours x .75). The cost burden 
would increase by approximately $628,425 (.25 x 8,379 hours x $300).
    In accordance with 44 U.S.C. 3506(c)(2)(B), we solicit comment on 
the following:
     The appropriateness of the proposed changes in 
the collection of information for the proper performance of the 
functions of the agency, including whether the information will have 
practical utility;
     The accuracy of our estimate of the burden of 
the proposed collection of information;
     Ways to enhance the quality, utility and clarity 
of the information to be collected;
     Ways to minimize the burden of the collection of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology; and
     Any effects of the proposals on any other 
collections of information not previously identified.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy of Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609, with reference to File No. S7-19-04. Requests for 
materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
19-04, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release. Consequently, 
a comment to OMB is assured of having its full effect if OMB receives 
it within 30 days of publication.

V. Cost-Benefit Analysis

    Shell companies have been used for fraudulent and manipulative 
purposes. These proposals will disqualify shell companies from using 
Form S-8. These proposals will also require a shell company making a 
filing on Form 8-K to report completion of a transaction that causes it 
to become an operating business and cease being a shell company to 
include information of the kind it would be required to include in a 
long-form filing to register a class of its securities under the 
Exchange Act. These new proposals would make it more difficult for 
shell companies to be used for fraudulent purposes.
    These proposals are consistent with the notion that the federal 
securities regulations should promote full disclosure. We solicit 
comment specifically on the costs to shell companies of losing 
eligibility to use Form S-8. A shell company will continue to be 
eligible to use Form S-1 or Form SB-2 to offer securities in connection 
with its employee benefit plan. A shell company may also be entitled to 
rely on certain exemptions from the registration and prospectus 
delivery requirements of the Securities Act. Shell companies would thus 
still be able to issue securities to employees and consultants; but 
they could not use a streamlined form with automatic effectiveness, and 
the securities may be subject to restrictions on resale. This may 
impose costs on companies that issue securities as compensation. This 
cost is difficult to quantify. The benefit of this proposal is the 
increased protection of investors.
    The proposals also would require the filing of a report on Form 8-K 
containing information of the type that is required in an initial 
registration statement on Form 10 or Form 10-SB when registering a 
class of securities under section 12 of the Exchange Act. For purposes 
of the Paperwork Reduction Act, we estimate the cost of preparing this 
report is 133 hours. Most of this time would be spent by internal 
company personnel, but we estimate that 25% would involve outside 
professionals. Assuming an hourly rate of $300, this would result in an 
estimated average out-of-pocket cost of $9,975 (133 hours x .25 x 300). 
Further, we estimate that approximately 105 shell companies a year 
would be required to prepare and file this information. In calendar 
year 2003, there were 63 reverse merger transactions involving blank 
check companies and 41 ``back door'' registration transactions.
    The proposal to amend Form 8-K will require additional disclosure 
to be filed with the Form 8-K reporting completion of the transaction 
within four business days instead of within 71 calendar days after the 
initial filing due date. The additional disclosure will increase costs 
for shell companies that file a Form 8-K following the completion of 
the transaction that causes them to cease being shell companies. The 
benefit of this amendment to Form 8-K would be the protection of 
investors and increased integrity of the markets for the securities of 
smaller companies. To assist in a full evaluation of the costs and 
benefits of the proposals, we seek the views of and other data from the 
public.

[[Page 21660]]

VI. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \82\ requires us to consider 
the anti-competitive effects of any rules that we adopt under the 
Exchange Act. Section 23(a)(2) prohibits us from adopting any rule that 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. Furthermore, section 
2(b) of the Securities Act \83\ and section 3(f) of the Exchange Act 
\84\ require us, when engaging in rulemaking that requires us to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider whether the action will promote 
efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78w(a)(2).
    \83\ 15 U.S.C 77b(b).
    \84\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The purpose of these proposed amendments is to deter fraud and 
reduce abuse of Form S-8 in unlawful capital-raising transactions 
through the use of shell companies and to enhance our reporting 
requirements with respect to transactions involving shell companies. We 
anticipate that these proposals would improve the proper functioning of 
the capital markets. We believe the proposals will enhance investor 
confidence in the securities markets and promote efficiency and capital 
formation. We do not expect that the proposals will have any anti-
competitive effects.
    We solicit comment on these matters with respect to the proposed 
rules. Would adoption of the proposals have an adverse effect on 
competition that is neither necessary nor appropriate in furtherance of 
the purposes of the Securities Act or the Exchange Act? Would the 
proposed amendments, if adopted, promote efficiency, competition and 
capital formation? Commenters are requested to provide empirical data 
and other factual support for their views, if possible.

VII. Initial Regulatory Flexibility Analysis

    We have prepared an Initial Regulatory Flexibility Analysis, in 
accordance with 5 U.S.C. 603 concerning the rules proposed today.

A. Reasons for and Objectives of the Proposed Amendments

    The purpose of these proposed amendments is to protect investors in 
shell companies and to deter fraud and abuse in our public securities 
markets through the use of shell companies.

B. Legal Basis

    The amendment proposed for Securities Act Form S-8 and adding the 
definition of shell company to Rule 405 under the Securities Act would 
be adopted pursuant to sections 6, 7, 8, 10, 19, and 28 of the 
Securities Act. The amendment to Exchange Act Form 8-K and adding the 
definition of shell company to Rule 12b-2 under the Exchange Act would 
be adopted pursuant to sections 3, 12, 13, 15, and 23(a) of the 
Exchange Act.

C. Small Entities Subject to the Proposed Amendment

    The proposed amendments would affect companies that are small 
entities. Exchange Act Rule 0-10(a) \85\ defines an issuer, other than 
an investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. We estimate that there were 
approximately 2,500 issuers, other than investment companies, that may 
be considered small entities. The proposed amendments would prohibit 
the use of Securities Act Form S-8 by shell companies and require them 
to have specific and detailed information on file before being 
permitted to use Form S-8 when they become an operating business and 
cease being a shell company. We believe only a small percentage of the 
2,500 issuers that are small entities are shell companies. The proposed 
amendments would affect only shell companies but they all would be 
``small entities.''
---------------------------------------------------------------------------

    \85\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

D. Reporting, Record Keeping, and Other Compliance Requirements

    The proposed amendments would impose additional disclosure 
requirements on shell companies by requiring them to provide certain 
business disclosure in addition to currently required audited financial 
statements. No other new reporting, record keeping or compliance 
requirements would be imposed. The proposed amendments would prohibit 
shell companies from using Form S-8 and require a shell company to 
include additional information in any report on Form 8-K that it files 
to report completion of a transaction in which it ceases being a shell 
company and becomes an operating business. Other than the additional 
disclosure requirements, the primary impact of these proposals relates 
to the timing of the filing.

E. Overlapping or Conflicting Federal Rules

    We do not believe any current federal rules duplicate, overlap or 
conflict with the proposed amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives, while 
minimizing any significant adverse impact on small businesses. We 
considered the following types of alternatives:
    (1) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (2) The clarification, consolidation or simplification of 
compliance and reporting requirements under the rule for such small 
entities;
    (3) The use of performance rather than design standards; and
    (4) An exemption from coverage of the rule, or any part thereof, 
for small entities.
    With respect to alternative (1), the proposed amendment to Form S-8 
will prohibit shell companies from using the form. The proposed 
amendments to Form 8-K will shorten the time within which shell 
companies must file their required financial disclosures from 71 
calendar days after the initial Form 8-K filing to four business days 
after completion of the conversion transaction. It would be 
inappropriate to establish a more liberal compliance standard for small 
businesses since the current standard applies to all public companies; 
it is the current delay in the filing of the required financial 
statements that permits abuse by shell companies. The proposed 
amendments will increase costs only to shell companies, not to all to 
small businesses, by requiring former shell companies to file a report 
on Form 8-K containing the information that would be required in an 
initial registration statement on Form 10 or Form 10-SB to register a 
class of its securities under Section 12 of the Exchange Act upon 
making a significant acquisition and 60 days before using Form S-8. 
Form S-8 is a registration statement used for employee compensation 
plans and shell companies typically have few, if any, employees. 
Accordingly, the proposal does not impose any burdens on small 
businesses.
    With regard to Alternative 2, the proposed amendments are clear and 
concise. We however seek comment on the definition of ``shell company'' 
to

[[Page 21661]]

appropriately tailor the rule. Prohibiting the use of Securities Act 
Form S-8 by shell companies does not increase the disclosure required 
unless a shell company wants to compensate employees with securities. 
If the shell company had employees and wanted to compensate them with 
securities it would substantially increase the disclosure required for 
the shell company to file a Form SB-2 or S-1. We believe that most 
shell companies will wait until they cease being a shell company before 
compensating employees with securities. The proposed amendment to Form 
S-8 will require a former shell company to wait 60 days after filing 
the required disclosure before being eligible to use Form S-8. Due to 
the nature of the entity, full and fair disclosure by the operating 
company supports the trading market in the shares of the new entity. 
The proposed amendment to Form 8-K requiring filing additional 
information within four business days does not necessarily increase 
disclosure significantly but rather accelerates it. We propose to 
require that certain information, which is not specifically required in 
the current Form 8-K report, be included for shell companies. We 
solicit comment on these specific issues.
    Alternatives (3) and (4) are not viable because the purpose of the 
amendments is to deter fraud. It would be difficult under Alternative 
(3) to design performance standards that would carry out the 
Commission's statutory mandate to ensure adequate disclosure about 
shell companies and companies formed by merger with a shell company and 
disclose significant acquisitions promptly. Alternative (4) is 
inappropriate since the rule only applies to small entities. An 
exemption for small entities would not achieve the desired result.

G. Solicitation of Comments

    We encourage the submission of written comments with respect to any 
aspect of this initial regulatory flexibility analysis, especially 
empirical data on the impact on small businesses. In particular, we 
request comment on: (1) The number of small entities that would be 
affected by the proposed amendments of Forms S-8 and 8-K; and (2) 
whether these amendments would increase the reporting, record keeping 
and other compliance requirements for small businesses. Such written 
comments will be considered in the preparation of the final regulatory 
flexibility analysis, if the proposed amendments are adopted.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 \86\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \86\ Pub. L. 104-121 tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million 
or more;
     A major increase in costs or prices for 
consumers or individual industries; or
     Significant adverse effects on competition, 
investment or innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data on 
(1) the potential effect on the U.S. economy on an annual basis; (2) 
any potential increase in costs or prices for consumers or individual 
industries; and (3) any potential effect on competition, investment or 
innovation.

IX. Statutory Basis and Text of Proposal

    The amendments to Form S-8 and Rule 405 under the Securities Act 
are proposed pursuant to sections 6, 7, 8, 10, 19 and 28 of the 
Securities Act.
    The amendments to Form 8-K and Rule 12b-2 under the Exchange Act 
are proposed pursuant to sections 3, 12, 13, 15 and 23(a) of the 
Exchange Act.

List of Subjects in 17 CFR Parts 230, 239, 240 and 249

    Reporting and record keeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-
37, unless otherwise noted.
* * * * *
    2. Amend Sec.  230.405 to add the following definition in 
alphabetical order to read as follows:


Sec.  230.405  Definitions of terms.

* * * * *
    Shell company. The term shell company means a registrant with no or 
nominal operations and with:
    (1) No or nominal assets; or
    (2) Assets consisting solely of cash and cash equivalents.
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    3. The authority citation for part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *
    4. Amend Sec.  239.16b to revise the introductory text of paragraph 
(a) to read as follows:


Sec.  239.16b  Form S-8, for registration under the Securities Act of 
1933 of securities to be offered to employees pursuant to employee 
benefit plans.

    (a) Any registrant that, immediately before the time of filing a 
registration statement on this form, is subject to the requirement to 
file reports pursuant to section 13 (15 U.S.C. 78m) or 15(d) (15 U.S.C. 
78o(d)) of the Securities Exchange Act of 1934; has filed all reports 
and other materials required to be filed by such requirements during 
the preceding 12 months (or for such shorter period that the registrant 
was required to file such reports and materials); is not a shell 
company (as defined in Sec.  230.405 of this chapter); and, if it has 
been a shell company at any time during the preceding 12 months, has 
filed current Form 10 information (as defined in Instruction A.1(a)(6) 
to Form S-8) with the Commission at least 60 days previously, may use 
this form for registration under the Securities Act of 1933 (the Act) 
(15 U.S.C. 77a et seq.) of the following securities:
* * * * *
    5. Amend Form S-8 (referenced in Sec.  239.16b) by revising the 
introductory text to General Instruction A.1 and adding paragraphs 
(a)(6) and (a)(7) to General Instruction A. 1, to read as follows:

    Note-- The text of Form S-8 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form S-8--Registration Statement Under the Securities Act of 1933

* * * * *

General Instructions

A. Rule as to Use of Form S-8

    1. Any registrant that, immediately before the time of filing a 
registration statement on this form, is subject to the requirement 
to file reports pursuant to section 13 (15 U.S.C. 78m) or 15(d) (15 
U.S.C. 78o(d) ) of the

[[Page 21662]]

Securities Exchange Act of 1934; has filed all reports and other 
materials required to be filed by such requirements during the 
preceding 12 months (or for such shorter period that the registrant 
was required to file such reports and materials); is not a shell 
company (as defined in Sec.  230.405 of this Chapter); and, if it 
has been a shell company at any time during the preceding 12 months, 
has filed current Form 10 information with the Commission at least 
60 days previously, may use this form for registration under the 
Securities Act of 1933 (the Act) (15 U.S.C. 77a et seq.) of the 
following securities:
    (a) * * *
    (6) The term ``Form 10 information'' means the information that 
is required by Form 10, Form 10-SB or Form 20-F (17 CFR 249.210, 17 
CFR 249.210b or 17 CFR 249.220f), as applicable, under the 
Securities Exchange Act of 1934 to register the class of securities 
being registered using this form. The information may be provided in 
Form 8-K (17 CFR 249.308) or another Commission filing with respect 
to the registrant.
    (7) Notwithstanding the last clause of the first paragraph of 
this Instruction A.1, a shell company in existence solely for 
purposes of changing the corporate domicile of another entity may 
use this form immediately upon ceasing to be a shell company and 
without waiting 60 days after it has filed current Form 10 
information with the Commission.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    6. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    7. Amend Sec.  240.12b-2 to add the following definition of Shell 
company in alphabetical order and revise the definition of Succession 
to read as follows:


Sec.  240.12b-2  Definitions.

* * * * *
    Shell company: The term shell company means a registrant with no or 
nominal operations and with: (1) No or nominal assets; or (2) Assets 
consisting solely of cash and cash equivalents.
* * * * *
    Succession. The term succession means the direct acquisition of the 
assets comprising a going business, whether by merger, consolidation, 
purchase, or other direct transfer; or the acquisition of control of a 
shell company in a transaction required to be reported on Form 8-K (17 
CFR 249.308) in compliance with Item 5.01 of that Form. Except for an 
acquisition of control of a shell company, the term does not include 
the acquisition of control of a business unless followed by the direct 
acquisition of its assets. The terms succeed and successor have 
meanings correlative to the foregoing.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    8. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U. S. C. 78a et seq. and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *
    9. Amend Form 8-K under the caption ``Information to Be Included in 
the Report'' (referenced in Sec.  249.308) by:
    a. Removing the word ``and'' at the end of Item 2.01(d);
    b. Removing the period at the end of Item 2.01(e)(2) and in its 
place adding ``; and';
    c. Adding paragraph (f) to Item 2.01;
    d. Removing the word ``and'' at the end of Item 5.01(a)(6);
    e. Removing the period at the end of Item 5.01(a)(7) and in its 
place adding `` ; and';
    f. Adding paragraph (a)(8) to Item 5.01;
    g. Redesignating paragraph (c) of Item 9.01 as paragraph (d); and
    h. Adding new paragraph (c) to Item 9.01.
    The additions read as follows:

    Note --The text of Form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K--Current Report

* * * * *

Information To Be Included in the Report

* * * * *

Item 2.01. Completion of Acquisition or Disposition of Assets

* * * * *
    (f) if the registrant was a shell company immediately before the 
transaction, the information that would be required if the 
registrant were filing a general form for registration of securities 
on Form 10 or Form 10-SB (17 CFR 249.210 or 17 CFR 249.210b), as 
applicable, under the Exchange Act reflecting all classes of the 
registrant's securities subject to the reporting requirements of 
section 13 (15 U.S.C. 78m) or section 15(d) (15 U.S.C. 78o(d)) of 
such Act upon consummation of the transaction.
* * * * *

Item 5.01. Changes in Control of Registrant

    (a)* * *
    (8) if the registrant was a shell company immediately before the 
change in control, the information that would be required if the 
registrant were filing a general form for registration of securities 
on Form 10 or Form 10-SB (17 CFR 249.210 or 17 CFR 249.210b), as 
applicable, under the Exchange Act reflecting all classes of the 
registrant's securities subject to the reporting requirements of 
sections 13 (15 U.S.C. 78m) or section 15(d) (15 U.S.C. 78o(d)) of 
such Act upon consummation of the change in control.
* * * * *

Item 9.01. Financial Statements and Exhibits

* * * * *
    (a) * * *
    (c) Shell company transactions. A registrant that was a shell 
company immediately before a transaction required to be described in 
Item 2.01 or Item 5.01 of this form must file the financial 
statements required by those items in the initial report.
* * * * *

    Dated: April 15, 2004.
    By the Commission.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8963 Filed 4-20-04; 8:45 am]
BILLING CODE 8010-01-p