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 for a no cost review of their documents and certs.

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