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ORRICK,
HERRINGTON & SUTCLIFFE LLP
1000
Marsh Road
Menlo
Park, CA 94025
tel 650-614-7400
fax 650-614-7401
www.orrick.com
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| November 6, 2009 |
Lowell
D. Ness
(650)
614-7455
lness@orrick.com
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Barbara
C. Jacobs
Assistant
Director
Securities
and Exchange Commission (Mail Stop 4561)
100 F
Street, N.E.
Washington,
D.C. 20549
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Re:
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VirnetX
Holding Corporation (the “Company”)
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Registration
Statement on Form S-3 (the “Registration
Statement”)
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Filed
September 25, 2009
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| File No. 333-162145 |
Dear Ms.
Jacobs,
Please
find, as set forth below, the Company’s responses to the comment letter of the
staff of the Securities and Exchange Commission (the “Staff”) dated October
23, 2009 (the “Staff
Letter”). Concurrent with delivering this letter, the Company
has filed Amendment No. 1 to the Registration Statement (the “Amendment No. 1”) on
EDGAR. For the Staff’s convenience, the Staff’s comments from the
Staff Letter are set forth in italics before each response. We will also
provide you, under separate cover, with a marked copy of Amendment No.
1 showing all changes from made the previously filed version.
General
1. We
refer to our comment letter dated October 13, 2009 relating to your
application requesting confidential treatment of certain portions of
Exhibit 10.1 to your Form 10-Q for fiscal quarter ended June 30,
2009, and note that we have received your written response dated
October 22, 2009. Please be advised that your registration
statement will not be declared effective until all issues relating to your
confidential treatment request have been resolved.
The
Company has separately responded to the Staff’s initial comment letter with
respect to such application and will respond to any additional comments on the
Company’s application promptly.
2. We
note that you identify yourself as a smaller reporting company on the cover page
of your Form 10 K for the fiscal year ended on December 31, 2008, which you
filed on March 31, 2009. We note further that the aggregate market
value of the voting and non voting common equity held by your non affiliates as
of the last date of your second fiscal quarter in 2008 exceeded $123
million. Please provide us with your analysis as to whether your
company qualified as an accelerated filer at the end of your last fiscal
year. Further, please address in your analysis whether your Form 10 K
was filed timely. Refer to Rule 12b 2 under the Exchange Act.,
Section III.E.1.d of SEC Release No. 33 8876 and Question 130.04 under our
Exchange Act Rules Compliance and Disclosure Interpretations, available on our
web site.
November
6, 2009
VirnetX
Holding Corporation
Page
2
The
Company respectfully submits that it continues to believe that it was not an
accelerated filer with respect to its Form 10-K for the fiscal year ended
December 31, 2008 (the “2008 10-K”) and, as a
result, the Company believes that its 2008 10-K was timely filed.
As set
forth in Rule 12b-2 of the Exchange Act of 1934, as amended (the “Rule”):
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1.
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The
term "accelerated filer" means an issuer after it first meets the
following conditions as of the end of its fiscal
year:
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i.
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The
issuer had an aggregate worldwide market value of the voting and
non-voting common equity held by its non-affiliates of $75 million or
more, but less than $700 million, as of the last business day of the
issuer's most recently completed second fiscal
quarter;
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ii.
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The
issuer has been subject to the requirements of section 13(a) or 15(d) of
the Act for a period of at least twelve calendar
months;
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iii.
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The
issuer has filed at least one annual report pursuant to section 13(a) or
15(d) of the Act; and
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iv.
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The issuer is not eligible to use the requirements
for smaller reporting companies in Part 229 of this chapter for its annual
and quarterly reports. [emphasis
added]
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Although
the Company had a public float in excess of $75 million on June 30, 2008, it
continued to be eligible to use the requirements for smaller reporting companies
in its 2008 10-K. On its face, the Rule unambiguously makes it
impossible for an issuer to be an accelerated filer if at the end of its fiscal
year it is eligible to use the requirements for smaller reporting
companies. Moreover, Form 10-K itself requires the issuer to check
only one box, further clarifying the mutually exclusive nature of an issuer’s
status as either an accelerated filer or a smaller reporting
company. In addition, the Company respectfully notes that it would be
confusing to investors if an issuer were to check the box “accelerated filer”
while providing only the reduced disclosure of a smaller reporting company, or
alternatively, attempted to check more than one box in contravention of the
instructions to the form.
In the
Commission’s adopting release No. 33-8876 (January 4, 2008) (the “Release”), the
Commission notes again and again that the final rule was designed to harmonize
the smaller reporting company rules with accelerated filer rules to provide
greater clarity and simplicity for issuers and investors. In fact,
one of the three stated objectives of the Release was “reducing unnecessary
complexity in our regulations by combining the category of “small business
issuers” with the category of “non-accelerated filers” to the extent
feasible.” The Release goes on to say that one of the effects of the
new rule was to: “Combine elements relating to the accelerated filer
definition with qualifying standards for the smaller reporting company
determination and transition provisions to promote uniformity and consistency
with current regulations and, therefore, simplify
regulation.” Footnote 34 to the Release states: “The
entering and exiting rules in the smaller reporting company system are modeled
after the method of determining accelerated filer status set forth in Rule
12b-2.” Elsewhere, the Release notes that: “Many of
the comment letters in favor of our proposed definition of “smaller reporting
company” agreed that combining the categories of non-accelerated filers with
small business issuers for purposes of the definition provided a convenient and
simple approach because it tracks the accelerated filer definition and reduces
regulatory complexity.” Significantly, the Release also
states: “We are adopting transition rules for entering and exiting
smaller reporting company status that track the accelerated
filer
November
6, 2009
VirnetX
Holding Corporation
Page
3
definition.” [emphasis
added] The Release points out: “One comment letter
requested clarification, pointing out that accelerated filers are required to
change to their new status when determining the due date of the annual report
covering the year of the status change, but, as proposed, the smaller reporting
company determination would not take effect until the first fiscal quarter of
the next fiscal year.” In response to such comment letter, the
Release offers the following clarification: “As adopted [the final
release provides that a] smaller reporting company required to transition to the
larger reporting system after its determination date calculation will not be
required to satisfy the larger reporting company disclosure requirements until
the first quarter after the determination date fiscal
year.” Thus, it is precisely in response to the supposed
inconsistency with the accelerated filer rules that the Commission clarified the
timing for transitioning to the smaller reporting company rules. In
light of the number of times the Release mentions harmonization with the
accelerated filer rules, the Company respectfully points out that there is
simply no room to contend that there is a remaining unintended conflict between
the accelerated filer transition rules and the smaller reporting company
transition rules such that an issuer might technically fall within both
definitions with respect to it’s 2008 10-K. In addition, the Company
respectfully points out the well established rule of statutory construction that
a more specific provision adopted later in time should be given precedence over
a more general provision. The accelerated filer rules apply generally
to describe when a company transitions in and out of accelerated filer status,
whereas the later adopted smaller reporting company amendment, as described in
the Release, provides a very specific result for the situation of a company
transitioning from smaller reporting status to accelerated filer
status. Taken together with the unambiguous nature of the Rule
itself, the Release provides abundant clarification that 1) a smaller reporting
company maintains such status until the first 10-Q after the fiscal year of the
status change, and 2) this very specific exception to the general accelerated
filer rules was completely intentional.
In the
Commission’s January 25, 2008 “Changeover to the SEC’s New Smaller Reporting
Company System by Small Business and Non-Accelerated Filer Companies – A Small
Entity Compliance Guide” (the “Guide”), the
Commission repeats its illustration of when a transitioning smaller reporting
company needs to “start filing disclosure based on the non-scaled Regulation S-K
item requirements,” and states that “the issuer needs to begin providing
non-scaled, larger company disclosure in the quarterly report for the first
fiscal quarter following the fiscal year of the public float determination
date.” The Guide provides an example of this transition with no
mention of the “odd” result that would be the case if an issuer could
technically be both an accelerated filer and a smaller reporting company with
respect to a particular report to be filed.
The
Company also respectfully points out that the Release and the Guide expressly
contradict Question 130.04 under the Staff’s Exchange Act Rules Compliance and
Disclosure Interpretations (the “CD&I”) unless the
term “disclosure requirements” is read to exclude the disclosure requirement
with respect to timing of filing the disclosure. The Release and the
Guide expressly state that the issuer transitions into the smaller reporting
company “disclosure requirements” or “disclosure system” with the first 10-Q
after the fiscal year end, not the 10-K. Neither the Release nor the
Guide specifically addresses whether the term “disclosure requirements” or
“disclosure system” includes or excludes the disclosure timing
requirements. In other publications of the Commission, however, the
Commission has referred to the timing of disclosure as a part of a disclosure
system. For example, in SEC
Release No. 33-6239 (September 4, 1980),
November
6, 2009
VirnetX
Holding Corporation
Page
4
the
release states that “a person who triggers the elements of Rule 14e-3(a)
discussed above may either refrain from trading in the securities specified or
comply with the disclosure requirement of Rule 14e-3(a). The
disclosure requirement has two elements: (1) timing of disclosure and (2) the
information and its source.” In addition, in the Commission’s 2006
release entitled “SEC Votes to Adopt Changes to Disclosure Requirements
Concerning Executive Compensation and Related Matters,” the SEC outlines seven
areas where it had adopted changes to disclosure requirements concerning
executive compensation. The seventh area of discussion was entitled
“Compliance” and included compliance deadlines with respect to the new
provisions. The Company notes that the Release does refer to the
timing of the filing of the 10-Q for the transitioning smaller reporting company
in its discussion of the smaller company reporting “disclosure system,” in an
implicit acknowledgment that disclosure timing is an integral component of the
broader term “disclosure system.” It is natural for a practitioner
and a lay person to assume that when the Commission refers to the term
“disclosure system” and “disclosure requirements,” those terms clearly include
the timing requirements associated with the disclosure. Accordingly,
the Company respectfully points out that when the Commission repeats in several
releases that a transitioning company will transition to scaled disclosure
requirements on a certain schedule, an issuer should be entitled to assume that
it may time its filings in accordance with such a system.
The
CD&I makes several conclusory statements to the effect that the accelerated
filer rules were not changed. The Company respectfully
disagrees. On its face, the only possible interpretation of the
Rule’s definition of “accelerated filer” unambiguously makes it impossible for a
filer to be both an accelerated filer and a smaller reporting
company. The Release and Guide confirm this interpretation, as does
Form 10-K which only permits one box to be checked.
The
timing of the posting of the CD&I is also problematic for issuers with
respect to the 2008 10-K. During the week of June 30, 2008 (the
relevant measurement date for this purpose), the Company conducted its analysis
and concluded that it would need to transition to accelerated filer status since
the aggregate market value of the voting and non-voting common equity held by
the Company’s non-affiliates exceeded $123 million. On that
date, the Staff had not yet posted Question 130.04 in the CD&I, which was in
fact posted several months later on September 30, 2008. The Company
evaluated the transition guidelines provided in Rule 12b-2 and the guidance
given by the Commission in the Release, the Guide, and other Commission guidance
available at that time, and determined that the Company would first file as an
accelerated filer with its Form 10-Q for the quarter ended March 30,
2009. The Company prepared and performed in accordance with a
disclosure schedule for the 2008 10-K and first quarter 2009 10-Q on that
basis.
The
Company acknowledges that Question 130.04 apparently concludes that it is
possible to be both an accelerated filer as well as a smaller reporting company
for a given 10-K, but the Company respectfully submits that the CD&I
attempts to resolve a conflict that does not exist. Moreover, to the
extent the CD&I purports to change the plain meaning of the Rule, the
Release and the Guide, the Company respectfully points out that the CD&I is
not itself sufficient to clarify the matter in that it does not indicate what
box or boxes should be checked on the Form 10-K and how this inconsistency
should be handled to mitigate investor confusion. In light of the
fact that it was posted after the measurement date for the 2008 10-K and
purports to clarify a matter the Company believed to be unambiguous at the time
of its analysis, the Company respectfully suggests that, in any event, it would
be inappropriate to apply the interpretation described in Question 130.04 to the
Company’s 2008 10-K.
November
6, 2009
VirnetX
Holding Corporation
Page
5
The
Company also respectfully notes that the legal status of CD&I is such that
an issuer cannot rely on CD&I particularly in the face of what it believes
to be contrary interpretations set forth in the Rule and Release, both of which
have a legal status that trumps the CD&I. As noted in the lead in
to the CD&I, “the interpretations presented below reflect the views of the
staff of the Division of Corporation Finance. They are not rules,
regulations, or statements of the Commission. Further, the Commission
has neither approved nor disapproved these interpretations. These
positions do not necessarily contain a discussion of all material considerations
necessary to reach the conclusions stated, and they are not binding due to their
highly informal nature. Accordingly, these responses are intended as
general guidance and should not be relied on as definitive.”
Although
the CD&I are a very useful resource for companies and practitioners, the
CD&I cannot be relied on to definitively resolve any inconsistencies in the
rules and regulations of the SEC. In this case, the relevant CD&I
was posted well after the analysis at issue had been completed and purports to
change what the Company believes to be the unambiguously correct interpretation
of the Rule, the Release and the Guide, and it does so in an incomplete
manner. As such, the Company believes the CD&I should not be
applied to its 2008 10-K and, to the contrary, the Company continues to believe
it was a smaller reporting company and not an accelerated filer with respect to
its 2008 10-K, within the clear meaning of the Rule, the Release and the Guide,
and therefore the 2008 10-K was filed in a timely manner.
Use of Proceeds, page
21
3. We
note your statement in this section that you intend to use all the net proceeds
obtained from the private placement transaction to fund working capital
purposes. Please expand your use of proceeds discussion to provide
more specific information as to how you intend to allocate the proceeds of the
transaction amongst your different business endeavors. For example,
please disclose what portions of the proceeds you expect to dedicate to the
Microsoft litigation, the development of GABRIEL technology or to other
purposes. In your discussion, address how this allocation of proceeds
might change if you receive less than the full amount of
proceeds. Also, as the total proceeds that you may acquire through
the private placement transaction substantially exceed your current assets and
accumulated revenue, please address in the prospectus how you intend to manage
this material increase in your assets. Consider including risk factor
disclosure regarding the company’s lack of experience in managing substantial
amounts of cash. Finally, please revise your prospectus to address
the dilutive effects on existing shareholders of the issuance of the common
stock underlying the warrants. Please provide tabular disclosure
showing the number of shares that might be issued upon the exercise of each
series of warrants, the time frame during which each series of warrants can be
exercised, and the effects of the issuance of the shares on existing
shareholders’ economic and percentage ownership. Please include
appropriate risk factor disclosure.
November
6, 2009
VirnetX
Holding Corporation
Page
6
The
Company respectfully acknowledges the Staff’s comments and has revised
Amendment No. 1 accordingly. The
Company also wishes to direct the Staff's attention to the following specific
changes in Amendment No. 1 that the Company has made in direct response to
the Staff's comments:
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the
Company has expanded its discussion in the “Use of Proceeds” section to
address the Staff’s comments;
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the
Company has added tabular disclosure on pages 26-27 that shows the number
of shares that would be issued upon the exercise of each series of
warrants, the time frames during which each series of warrants can be
exercised, and the theoretical effects of the issuance of the shares on
existing stockholders’ economic and percentage ownership;
and
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the
Company has added a risk factor specifically related to the dilutive
impact of the issuance of the shares underlying the
warrants.
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In
response to the Staff’s suggestion that the Company consider adding appropriate
risk factor disclosure regarding the Company’s ability to effectively manage the
proceeds of the offering, the Company has considered such disclosure and
respectfully directs the Staff to the expanded discussion in the “Use of
Proceeds” section and elsewhere in Amendment No. 1 related to the
capital-intensive nature of the Microsoft litigation and its expectation that a
majority of proceeds raised this private placement transaction will be allocated
towards such litigation. The Company respectfully submits to the
Staff that it does not expect that, given the Company’s average monthly burn
rate of approximately $600,000 (as was reported in the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009), that it will have an
amount of money from this private placement transaction that is not otherwise
allocated towards the Microsoft litigation, the commercialization of its
intellectual property portfolio, or towards other general working
capital purposes such that it would be appropriate to include a related risk
factor, pursuant to Item 503(c) of Regulation S-K, in Amendment No.
1.
Selling Security Holders,
page 21
4. We
note the following selling shareholders, which are non-reporting legal
entities:
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Capital
Ventures International;
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Ramius
Enterprise Master Fund Ltd;
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RCG
PB Ltd.; and
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Vestal
Venture Capital.
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Please confirm, if true, that these
selling shareholders are neither registered broker-dealers nor affiliates of
registered broker-dealers.
November
6, 2009
VirnetX
Holding Corporation
Page
7
The
Company respectfully acknowledges the Staff’s comments and has revised the
disclosure in Amendment No. 1 to confirm that each aforementioned selling
shareholder is not a registered broker-dealer, and that each aforementioned
selling shareholder is an affiliate of a broker-dealer.
5. We
refer to your selling security holders table on page 22 and note your
disclosure that Ramius Advisors has voting control and investment discretion
over the securities held by both Ramius Enterprise Master Fund Ltd. and RCG PB,
Ltd. Given this fact, please advise why Ramius Advisors is not
identified as the selling shareholder in the table.
The
Company respectfully acknowledges the Staff’s comments and has revised Amendment
No. 1 to include Ramius Advisors, an entity that has voting control and
investment discretion over the securities held by both Ramius Enterprise Master
Fund Ltd. and RCG PB, Ltd., in the selling security holders table.
Description of Warrants
Issued in the Private Placement Transaction, page 28
6. Your
use of the term “Effective Date” in this section to refer to something other
than the effective date of the registration statement may be confusing to
investors. Please revise.
The
Company respectfully acknowledges the Staff’s comment and has revised Amendment
No.1 accordingly.
7. Please
add disclosure describing how you accounted for the various series of
warrants.
The
Company respectfully acknowledges the Staff’s comments and has revised Amendment
No. 1 accordingly to include disclosure describing how the Company accounted for
the various series of warrants. Such disclosure is found on page 27
of Amendment No. 1.
Item 17. Undertakings,
page 32
8. We
note that you have included the undertaking related to Securities Act
Rule 430B, although it appears that your document does not omit any of the
information described in Rule 430B(a) or (b). Please confirm
your understanding that this registration statement will rely on Rule 430B
and not Rule 430C. If not, please revise to include the
appropriate undertaking.
The
Company respectfully acknowledges the Staff’s comment and confirms that the
Company is relying on Rule 430C. Amendment No. 1 has been revised
accordingly.
November
6, 2009
VirnetX
Holding Corporation
Page
8
Item 16. Exhibits
Exhibit 5.1 Opinion of
Orrick, Herrington & Sutcliffe LLP
9. We
note the statement on page 1 of the opinion that counsel has not
“independently established or verified any facts relevant to the opinion
expressed herein, but [has] relied upon statements and representations of the
Selling Stockholders and officers and other representatives of the Company and
others.” It is inappropriate for counsel to assume, or to disclaim
any duty to investigate, the material facts underlying its opinion or facts that
are readily ascertainable. Please have counsel revise its opinion to
address the material facts that underlie the opinion or explain why the
disclaimer in the opinion is not inappropriate under state law. We
also note that the final paragraph on page 2 of the opinion limits reliance
upon the opinion to VirnetX Holding Corporation. Please have counsel
revise its opinion to omit any language limiting the ability of investors to
rely upon the opinion.
The
Company respectfully acknowledges the Staff’s comment and Exhibit 5.1 filed with
Amendment No.1 has been revised accordingly to remove the language cited by the
Staff in the Comment Letter.
***
Please
let us know if you have any questions on the foregoing.
Very
truly yours,
/s/ Lowell D.
Ness
Lowell D.
Ness
Orrick,
Herrington & Sutcliffe LLP
cc:
Kendall Larsen (VirnetX Holding Corporation)