Shareholders in Current or Former Shell Companies

Rule 144 Opinion Letters Cannot Be Drafted for a Current Shell

Few things are more frustrating than “shell status” to OTC shareholders with restricted stock in microcap companies.   Why?   Because Rule 144 cannot be used to clear restricted stock in public companies that are shells when the legal opinion is written.  Another way to say this is that a Rule 144 legal opinion cannot be drafted for a “current shell.”

Exceptions to the Rule 144 Shell Status Requirement

The only exception to the “shell status” requirement under Rule 144 is known as the “Evergreen Rule” which means that a former shell company must meet these requirements in order for a securities lawyer to issue a Rule 144 opinion letter:

  1. The public company must be up-to-date or “current” in its SEC filings under the Securities Exchange Act of 1934 (“Exchange Act”).   This means that the company cannot be “delinquent” and must have filed its 10K, 10Q, 8K, filings up to the date of the Rule 144 legal opinion.   This is the origin of the term “evergreen” which implies that the requirement to remain current is forever.
  2. The public company must have filed “Form 10 Information” (which includes audited financials.  This doesn’t have to be in a Form 10, and could instead be shown in several filings, including a Super 8-K, and subsequent quarterly and annual filings.
  3. The public company must show that it ceased to be a shell greater than One (1) Year before the date of the Rule 144 opinion letter.

Section 4(a)(1) Legal Opinion Letters Can Be Issued for Current Shells

So, to recap, Rule 144 is never available if the public company is a shell on the date the Rule 144 opinion letter is drafted.  This is called a “current shell.”   Rule 144 cannot be used for current shells.   In those cases where a Shareholder has restricted stock in an OTC Markets or Bulletin Board (“OTCBB”) company that is a current shell company, an experienced securities lawyer may be able to issue a legal opinion under Section 4(a)(1).

Section 4(a)(1) is also known as Section 4(1) and these are sometimes just referred to as a 4-1 opinion.

Section 4(a)(1) Opinions Can Be Issued for Former Shell Companies

Simply put, shell status is not an element of using Section 4(a)(1).   It does not matter if a public company is a former shell or a current shell.  However, it is important to note that there are two special requirements of Section 4(a)(1) opinions that a shareholder must meet before a 4-1 opinion letter can be drafted.

Section 4(a)(1) Shareholders Cannot Be Control Persons

Whereas Rule 144 opinions can be used for Affiliates or Control Persons of a public company, subject to certain trading volume limitations, Section 4(a)(1) opinions will not be issued for insiders of public companies because that control person may be deemed an “issuer, underwriter or dealer.”  For this reason, only Non Affiliate shareholders are likely to receive a Section 4(a)(1) legal opinion from an experienced securities attorney.

Section 4(a)(1) Has a Minimum Two Year Holding Period

Whereas Rule 144 has holding periods of either six months or a year, depending on the Issuer’s SEC reporting status, Section 4(a)(1) or 4-1 opinion letters require a holding period of at least Two (2) Years.

Tacking is allowed under Section 4(a)(1), so that a Shareholder may “tack onto” the holding period of a prior holder.

Rule 144 and Section 4(a)(1) Lawyer Matt Stout

Shareholders seeking Rule 144 or Section 4(a)(1) legal opinion letters can contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com for a no cost review of their documents and certs.

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What is the Rule 144 Holding Period for SEC Filers Shown as Pink Sheets on OTCMarkets.com?

New Requirements for OTC Markets OTCQB Market Tier

In 2014, OTCMarkets.com tightened the requirements for Issuers seeking to become quoted on its OTCQB marketplace.  This has resulted in many fully reporting SEC filers appearing as Pink Sheets on OTCMarkets until they complete the new certification and meet the new $0.01 bid test.  In the meantime, how can you tell what the proper Rule 144 holding period is for these Issuers?

Rule 144 Holding Period Remains the Same Despite the OTCMarkets.com Change

The Rule 144 holding period for non reporting Pink Sheets is twelve (12) months, but for current SEC filers is only six (6) months, even if those SEC filers are shown as Pink Sheets on OTCMarkets.com.  This applies to all non-shell, current, fully reporting OTCQB issuers.

How To Tell if an Issuer is an SEC Filer on OTCMarkets.com

For this reason, when looking up ticker symbols on OTCMarkets.com it is necessary to determine whether or not a Pink Sheet is really an SEC filer.  This information is shown just under the Company name.   If the Issuer is a “true” Pink Sheet, it will say “Alternative Reporting” underneath the name, rather than “SEC Filer.”  To double-check, a shareholder can also do a search on the SEC.gov Company Filings page.

Shareholders with questions regarding Rule 144 opinion letters Issuers seeking to upgrade to OTCQB contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com.

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When are Rule 144 Opinions Not Issued?

We do not issue Rule 144 legal opinion letters for every Shareholder who contacts us.  Why?   Sometimes this is due to the Issuer’s current shell status, or the fact that the Shares are simply not old enough.  These are easily spotted by a securities lawyer familiar with Rule 144, and the Shareholder can be advised of the requirements and whether or not there is a contingency on which the legal opinion would depend.

But most of the time the reason why a 144 letter is not issued is due to lack of documentation.   Without documents which clearly show the origin and history of the Shares, there is no basis on which to issue a legal opinion under SEC Rule 144.

Sometimes several years have elapsed since the Shareholder acquired the Shares.  When this happens it is rare for a Shareholder to have every document surrounding a Rule 144 restricted stock transaction.

A securities lawyer with experience researching Issuers and drafting Rule 144 legal opinion letters knows what to request in order to supplement the file.  This supplemental information may take the form of Non Affiliate Letters or Affidavits in which Shareholders will affirm the circumstances under which the Shares were issued under oath.   Other times the Shareholder or securities lawyer will obtain confirmation from the Issuer or the Transfer Agent as to certain details which may remain unclear from the documents or the SEC or OTC Markets filings.

Shareholders can email their stock certificates and supporting documentation to securities lawyer Matt Stout for a Rule 144 review and a flat fee quote at mstout@otclawyers.com.

Those with additional questions about SEC Rule 144 opinion letters or selling restricted stock in OTC Bulletin Board or OTC Markets companies can also call (410) 429-7076 to speak with Matt Stout.

 

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What is the Holding Period for Stock Acquired Under a Subscription Agreement?

Shareholders who own restricted stock in OTC Markets or OTC Bulletin Board Issuers know that compliance with Rule 144 is a fact of life, and that virtually no broker will accept OTC stock for deposit without a Rule 144 legal opinion letter from a securities attorney.

Among the many documents that can be used to support a Rule 144 legal opinion letter, the Subscription Agreement from a Private Placement can be useful in establishing the origin and history of restricted stock.  Sometimes the Subscription Agreement has one date when the Investor signed, and another date when it was signed by the Issuer.  Added to this, often the wire transfer date or date of the cancelled check can be different, as well.

Shareholder’s Holding Period Under Rule 144 Depends on the Issuer’s SEC Reporting Status

The main element of Rule 144 that concerns the Shareholder is the holding period required after the Shareholder has acquired the Shares from the Issuer.   In general, the holding period depends on whether or not the Issuer is an SEC reporting company or an OTC Markets Pink Sheet.  In either case, the Shareholder is allowed to “tack onto” the ownership of a prior Shareholder if the Shares were acquired in a private transaction.

Rule 144 Holding Period for SEC Reporting Companies

The Rule 144 holding period is six (6) months for those securities of OTC Bulletin Board, OTC Markets OTCQB and OTCQX (and for all securities listed on a national stock exchange like the NASDAQ or NYSE MKT).

Rule 144 Holding Period for Pink Sheets

The Rule 144 holding period for Non SEC reporting companies such as OTC Markets Pink Sheets is twelve (12) months.

When does the holding period start if the Shares are acquired by subscription agreement?

The holding period for restricted stock in over-the-counter companies like OTCBB, OTCQB, OTCQX and OTC Markets Pink Sheets that is acquired by the Shareholder by Subscription Agreement starts at the time the Subscription Agreement is accepted by the Issuer, not on the date the Subscription Agreement is signed by the Shareholder, since the Shareholder signs first, and then submits it along with an Investor Questionnaire in order to induce the Issuer to accept the subscription for the Shares.

The Holding Period Begins When the Issuer Signs the Subscription Agreement or Payment Is Made, Whichever Is Later

However this is only true if the purchase price for the Shares has already been paid by the Shareholder.   For that reason, the securities lawyer drafting Rule 144 legal opinions will pay close attention to the date of the wire transfer confirmation or cancelled check, since the holding period for all securities purchased or earned through services under Rule 144 does not begin until full consideration for the Shares has been paid.

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Current Public Information Requirement Under Rule 144 for Multiple Sales

Sometimes Shareholders, such as Affiliates, will sell stock over time and the question arises whether or not one Rule 144 legal opinion will suffice.   This depends upon how long ago the 144 opinion letter was drafted.  The reason updated legal opinions are requested by brokers and clearing firms is that one of the elements of SEC Rule 144 requires “current pubic information” be made available to investors by the Issuer.

So the question arises, how long will a Rule 144 legal opinion last?   That depends on the broker’s compliance department.

When restricted stock is sold pursuant to Rule 144 in over a 3 month period does the Issuer have to meet the the “current public information” requirement at the time of each sale of stock?

Yes.  This is because the “current public information” requirement under Rule 144 must be met by the Issuer on the date the 144 opinion letter is drafted in order for the Shareholder to sell stock under the Rule 144 safe harbor.  For this reason, the public company must be found to meet this this requirement at the time of each sale.

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How To Document the Rule 144 Holding Period in a Private Placement

One of the most common ways a Shareholder acquires restricted stock of an OTC Bulletin Board or OTC Markets Pink Sheet Issuer is through a private placement.  A Private Placement usually includes several items that can help a securities lawyer drafting a Rule 144 legal opinion letter to confirm the date on which the Shareholder’s holding period began under Rule 144.

Private Placement Memorandum or Stock Purchase Agreement

Sometimes these private placements are formal, and a Private Placement Memorandum (“PPM”) under Regulation D 504, 505, or 506 is used and the Issuer actually files a Form D with the SEC.  Other times, the Issuer is less formal, and uses instead a Stock Purchase Agreement (“SPA”).  Both a PPM and an SPA can be used to document when the transaction actually occurred for the purposes of determining the Rule 144 holding period.

Subscription Agreement and Investor Questionnaire

More likely with the PPM, the OTC Issuer may have also  provided the Shareholder with a Subscription Agreement that lists the per share price of the restricted stock, the amount of money the Shareholder is investing, and the number of shares awarded to the Shareholder.   For this reason, Subscription Agreements are very helpful as supporting documentation on which a Rule 144 opinion can be based.

An Investor Questionnaire will often accompany the PPM or SPA, to provide the Issuer with the assurance that the Shareholder is an Accredited Investor.  This provides yet another document that “dates” the transaction, and adds to the paper trail supporting the 144 opinion letter.

Wire Transfer Confirmation or Cancelled Check

Shareholders who still have a copy of their wire transfer confirmation or cancelled check can easily document the purchase of Shares under Rule 144.  Most Shareholders do not have this proof of payment available, but those who do make it easier on a securities attorney drafting a Rule 144 opinion letter, since the date of the payment establishes the beginning of the Shareholder’s holding period under Rule 144.

S-1 Registration Statement

Even more rare than a wire transfer confirmation is finding that the Issuer actually filed an S-1 “resale” registration statement.  This is often promised within the language of a PPM in order to induce investors to join the private placement in the hope that their Shares will later “be registered with the SEC.”

Even if the S-1 has long-since gone “stale” the fact that the Shareholder’s name and the amount of Shares are listed in an SEC filing provides great documentation for a securities lawyer drafting the 144 opinion letter.   This is likely the only reason that a private, Non Affiliate, Shareholder would find his or her name and number of Shares in a public filing.  By referencing the S-1, the securities lawyer researching the elements of Rule 144 can confirm that the Rule 144 holding period is no longer in question, regardless of when the actual certificate was issued.

Even if all of these documents cannot be located, Shareholders with restricted stock acquired in a private placement can contact securities lawyer Matt Stout to discuss how to document the transaction, and the Rule 144 holding period at (410) 429-7076.

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Is a Pink Current Issuer “Fully Reporting” Under Rule 144?

Current Public Information Under SEC Rule 144

Yes, even though Pink Sheets are not “SEC reporting” a Pink Current Issuer on OTCMarkets.com can be considered “fully reporting” under Rule 144.

One of the important elements of SEC Rule 144 is the “current public information” requirement.  Sometimes investors believe incorrectly that an Issuer needs to be an SEC Reporting company that is current in its 10-Q, 10-K and 8-K filings to be considered “fully reporting” under Rule 144.

OTC Markets Has Three Tiers of Pink Sheets

OTC Markets divides its Pink Sheet Issuers amongst several market tiers, depending on how current the Issuer is in its OTC Markets filings.

Pink Current Issuers Under the Alternative Reporting Standard

Pink Sheet Issuers that timely file all of their Quarterly Reports, Annual Reports, and Information and Disclosure Statements are listed as Pink Current.

The Pink Current market tier designation means that this Issuer satisfies the reporting requirements under the OTC Markets Alternative Reporting Standard.

Shareholders with restricted stock in OTC Markets Pink Sheet companies, including those in Pink Current, Pink Limited Information (Pink Yield Sign) and Pink No Information (Pink Stop Sign) can contact securities lawyer Matt Stout with questions about the process of depositing and selling restricted stock under SEC Rule 144.

Matheau J. W. Stout, Esq. drafts Rule 144 opinions for shareholders of OTC Bulletin Board (OTCBB), OTCQB, OTCQX and OTC Pink Sheet Issuers.   For more information on the process of clearing restricted stock, shareholders seeking 144 opinions or Rule 144 letters can contact Matt Stout at (410) 429-7076 or read more at OTCLawyers.com.

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Affiliates Can Sell Stock After 90 Days under Rule 144

When Can Affiliates Sell 144 Stock Without Volume Restrictions?

Under SEC Rule 144, a former officer, director, or control person of an OTC public company can sell his or her shares without the trading volume restriction if greater than 90 days have past since that person ceased to be an Affiliate.

How To Document Non Affiliate Status Under Rule 144

When former officers, directors and large shareholders of OTC Bulletin Board and OTC Markets companies cease to be affiliates, these documents are helpful to a securities attorney drafting a Rule 144 letter:

  1. Letter of Resignation when the officer or director resigns or steps down;
  2. Board of Director’s Resolution accepting the officer or director’s resignation and appointing someone else;
  3. OTC Markets or SEC filings such as 8-Ks that reference the former Affiliate’s resignation, etc.
  4. And in the case of a large shareholder who no longer owns greater than 10% of an Issuer’s outstanding stock, a shareholder’s list showing when he or she dropped below 10%.

An experienced securities attorney can help the Shareholder gather these documents, all of which can be cited in the restricted stock opinion under Rule 144.

Former Affiliates can contact securities lawyer Matt Stout at OTCLawyers.com for further information on how the 90 days is calculated and how to document non affiliate status under Rule 144.

 

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Beneficial Ownership for Affiliates Under SEC Rule 144

Beneficial Ownership Under Rule 144 Depends on Control

Affiliates in OTC Bulletin Board and OTC Markets public companies are generally the officers, directors, and owners of greater than 10% of an Issuer’s outstanding stock in a given class.   The question of determining how much stock an Affiliate owns comes down to the SEC’s view of beneficial ownership, which looks toward the number of shares an Affiliate can exercise control over, rather than how ownership is actually titled.

Ownership By Family Members of Affiliates Counts

Stock owned by an Affiliate’s spouse, minor children and parents living under the same roof as the Affiliate all count toward the Affiliate’s beneficial ownership under Rule 144. This includes stock in the Issuer that is owned by any corporate entity in which the Affiliate or any of these family members  has control as an officer, director or greater than 10% shareholder, and also includes a Trust under which the Affiliate (or any of these family members) serves as Trustee or Executor.

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When Can I Have the Restricted Legend Removed From My Stock Certificates?

Is the Shareholder an Affiliate of the Issuer?

If you are now, or have been within the previous 90 days, an Affiliate of the Issuer, you cannot have them removed (yet).   All Affiliate stock is subject to volume limitations and notice requirements under Rule 144.  Once you have ceased to be a control person (officer, director, 10% owner, etc.) for greater than 90 days, you may no longer be considered an Affiliate.   Consult with a securities attorney to make sure.

Has it Ever Been Marked a Shell under Rule 144?

If the Issuer is now a “shell” or was a “shell” in the past, its filings must be current for one year after it ceases to be a shell, in order for the restricted legends to be removed under Rule 144.  This is a game changer because even if all of the other elements of Rule 144 are met, the “shell” classification can cause considerable delay in clearing stock of otherwise good companies who have been current in their filings.  This is a substance over form question, and sometimes the Issuer’s filings might not tell the whole story.  On many occasions, an Edgar filer has inadvertently checked the “shell” box on a filing and caused a development stage company to be incorrectly marked as a “shell.”  An experienced securities attorney knows how to review the filings and discover if the Issuer was truly a shell, and if so, when it ceased to be a shell. If the “shell” classification was a mistake, a securities lawyer like Matheau J. W. Stout, may be able to document and correct this filing error.

If You Are Not An Affiliate of the Issuer Your Holding Period Determines When Your Stock Becomes Free Trading

If you are not an Affiliate of the Issuer AND the Issuer was never a shell, you can get the Transfer Agent to remove the restricted legend:

  1. If you have a owned or “held” the Shares for at least 6 months, if the Issuer is an SEC reporting company and current in its SEC filings (such as Forms 10-Q, 10-K and 8-K); or
  2. If you have owned or “held” the Shares for at least 12 months, if the Issuer is not an SEC reporting company.
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