March 17, 2014
Dear Sir or Madam:
One of the methods by which smaller companies grow large is by acquiring companies inexpensively which are in bankruptcy or have had significant loss operations. These to –be- acquired companies typically do not have audited or auditable financial statements. The Tier 2 Regulation A companies will typically be unable to acquire these loss companies because of the “change the sign rule” which is discussed in the attached article, which appeared in the September 2011 issue of Insights. The Regulation A companies will not be able to obtain the audited or auditable financial statements needed to satisfy Rule 8-04 of Regulation S-X for the up to two year period required by that rule. This is true even though the acquirers intend to eliminate the losses of the to- be- acquired companies by dropping certain product or service line of business which produced the loss.
If you really want these Tier 2 Regulation A companies to be able to grow, Regulation A companies should be exempted from the “change the sign rule” discussed in the attached article, at least in situations in which they do not intend to continue the product or service line of business which produced the loss. If there is no such exemption, the shareholders of these Regulation A companies will be the losers and many companies which could have qualified for Regulation A will refuse to do so.
Thank you for your attention to this matter.
Copyrighted material redacted. Author cites:
Lipman, Frederick D. "The SEC's 'Change the Sign' Rule." Insights, Volume 25, Number 9, September 2011.