Mar. 11, 2021
Good evening, Thank you for giving me the opportunity to comment on the proposed amendments to rule 144. I will limit my comments to the parts of the proposed rule that affect pricing of securities and capital formation. I will also attempt to explain the difficulty of companies that are not Form S-3 shelf eligible to raise capital and thus must rely almost solely on transactions under regulation D 506(b) and 506(c) and investors who rely on rule 144 as a means to sell stock issued pursuant to regulation D. On page 23 it asks in number “16. Is the proposed six-month transition period appropriate? Would a shorter or longer transition period be more appropriate (e.g., three months, nine months)?” On page 35 of the proposed rule, you discuss “We are proposing to amend Rule 144(d)(3)(ii) to provide that the holding period for certain securities acquired upon conversion or exchange of market-adjustable securities issued by unlisted issuers would not begin until the conversion or exchange occurs. The proposed amendment would expose the holder of the market-adjustable security to the economic risk of the underlying securities during the proposed corresponding holding period following the conversion or exchange”. The easier the access to trading liquidity for a sophisticated investor, and the less risk put on the sophisticated investor, the greater the access to non-covenant heavy capital for the issuer, thus the smaller the discounts that investors are willing to pay to invest in the issuer. Therefore discounts on ATM equity offerings are zero (no discount), because the shares are free trading registered shares the day they are issued. Equity line discounts are closer to zero for a NASDAQ or NYSE stock than say a 6 month hold variable priced convertible notes for a pink sheet stock, because the holding period is so long, there is much more risk to sophisticated investors the longer the holding period. In fact, NASDAQ and NYSE issuers in an ATM Equity Offering does not even deal with any sophisticated investors asking for restrictive covenants. No two securities or issuers are the same. Pink Sheet, OTCQB companies, OTCQX companies have difficulty raising money to advance their businesses and terrible access to capital, are not Form S-3 shelf eligible and cannot issue even one share from an ATM Equity Offering to unsophisticated investors. As an investment banker, we often shy away from raising non shelf eligible issuers for many reasons. First off, most institutional investors no longer invest in a regulation D financing and cannot sell under rule 144 any longer. Also many funds have monthly or daily redemptions and cannot buy restricted securities at all. Most non-nationally listed issuers stocks cannot be deposited into a brokerage account due to the issuers not being on an exchange, and difficulty removing 144 legends on securities. The attorneys charge fees to lift legends off of stock certificates, and the transfer agent charges fee to remove legends and deposit the shares, then the clearing firms charge due diligence fees and the introducing broker dealer charges fees, and so on. As a result, the few hedge funds that are willing to invest in this high-risk segment of the market want to be compensated with extreme discounts for taking on the deposit risk. Very few broker dealers accept 144 stock for an OTC stock. The few clearing firms that do accept 144 stock, charge millions of dollars in fees to deposit the 144 stock. Thus more risk and real economic cost to the investor. In addition, these companies have higher risk of bankruptcy. In addition, the more restrictions that are put on issuers to raise capital, and for investors to sell stock and deposit the stock, the deeper the discounts and stronger covenants that the investors will demand. The more difficult it is for Issuers to raise capital and for investors to deposit stock, the more expensive each financing will become. In Germany, Australia, France and many other countries, companies that issue stock may do so with no filings required like our rule 144, and thus they have lower costs in accessing capital. And doing rights offerings in these countries is much more common. Allow companies to do rights offerings with no registration statement on a simple offering circular (as they do on the TSX in Canada) for up to 100% of the market cap. Giving issuers’ investors greater access to financings, would alleviate the need to utilize regulation D and therefore rule 144 as a means to sell stock, as issuers would be more inclined to offer rights to shareholders to buy securities. Allow 144 securities issued pursuant to a rights offering to be exempt from registration immediately, and purchasable and sellable under rule 144 with no restrictions as rights offerings are non-dilutive. I would advise pegging rule 144 holding period directly to the discount to market for Issuers from the market price. The greater the price, the lower the holding period. For example, common stock offerings at a premium to market should have zero holding period under rule 144. The bigger the discount, the longer the holding period. Make it, as an example 1 week for each 1% discount to market (for common stock offerings or market-adjustable securities). So a 5% discount would be a 5 week holding period, a 10% discount would be a 10 week 144 holding period, 17% discount would be 17 weeks, but do not allow discounts greater than 17% at all in allowing people to sell under rule 144 due to potential excessive toxicity. And 17 weeks is in line with Canada’s 4-month hold (17 weeks) hold for restricted securities. Many securities trade both on the TSX or TSX Venture and on the OTC Markets, Nasdaq and NYSE. This would also likely increase capital formation and minimize the risk of death spirals. High discount variable priced market-adjusted convertible are a problem, that can only be fairly attacked and cured by tying the discount to the holding period. High discount variable priced securities fleece retail investors daily. In addition, lower discount and shorter 144 holding periods would incentive investors to invest again and again in companies creating capital formation, without the death spiral of absurdly discounted variable priced convertibles. Changing rule 144 in its current form as a strategy to increase risk to investors is a very bad idea on its head. The result of strategizing to add risk for sophisticated investors (by essentially requiring that each sophisticated investor agree to a post conversion lock-up period is frankly insane) will result in even less access to capital for issuers, more expensive terms for issuers, stronger covenants for the sophisticated investors and higher risk of bankruptcy (thus fleecing retail shareholders). Instead, think of being innovative and permanently changing rule 144 as we know it for the good of both retail investors and issuers. The less risk for the sophisticated investors, the greater access for the issuer to lower cost capital. The easier it is to deposit 144 stock and all stock for that matter through DWAC or electronic deposit; the more likely investors invest in the company. The more retail and sophisticated investors that want to invest in the issuer, the better the terms for the Issuer and thus for the Issuers retail shareholders. And lastly, allowing the company to offer securities to their existing loyal shareholders more easily would be a real game changer. Right now we have a regulation D and rule 144 system that hurts issuers and punishes retail investors. Retail investors should have the right to buy stock directly in the companies that they can invest in through brokerage accounts through rights offerings and ATMs. Regards, Richard H. Kreger RHK Noble Capital Markets