Category Archives: Reverse Merger

Rule 144 Holding Period for Stock-for-Stock Acquisitions

Reverse Mergers of OTC Markets microcap companies are typically achieved using a stock-for-stock exchange under which the public company issues restricted stock in exchange for the private stock of the company being “vended in.”

Holding Period of Private Company Stock Does Not Tack under Rule 144

Shareholders in the private company may have already held their private stock for many years prior to the reverse merger.  Thus these private shareholders are often under the mistaken but intuitive impression that they can tack their ownership of the stock in the private company prior to the reverse merger in order to meet the holding period requirement under Under Rule 144.   However, this is not true.

Rule 144 Holding Period Starts Upon the Closing of the Share for Share Exchange

In a stock-for-stock acquisition or reverse merger achieved via a share exchange, the date of closing determines when the Rule 144 holding period starts.  Why?  Because the shareholders receiving OTC Bulletin Board or OTC Markets Pink Sheet public company shares are not at risk until the transaction actually closes and the public company’s shares are actually issued in exchange for the private company’s shares.

The Date of the Merger Agreement Does Start the Rule 144 Holding Period

For example, if the closing of the reverse merger will be delayed until the private company’s financials are audited, then the date of the Merger Agreement or the 8-K announcing the proposed Merger will not determine the start of the Rule 144 holding period.

When the closing is delayed for any reason, the Rule 144 holding period for those receiving the public company’s stock will not start until the reverse merger closes because the recipients will not be at economic risk until that time.

Rule 144 Securities Attorney Opinions by Matheau J. W. Stout, Esq.

Rule 144 has many nuances and experienced securities attorneys issue legal opinions only after a thorough review of all shareholder documents and Issuer filings.   Shareholders seeking Rule 144 or Section 4(a)(1) legal opinions can email documents to OTC securities lawyer Matt Stout at mstout@otclawyers.com or call (410) 429-7076 for a no cost review.

What is Rule 144?

Rule 144 Safe Harbor for Clearing Restricted Stock

SEC Rule 144 is the most common safe harbor that Shareholders of restricted stock in OTC Markets companies use to sell their shares.

Rule 144 has three major questions that must be answered before it can be used to remove a restricted legend from a stock certificate.  These questions determine Affiliate Status, 144 Holding Period and Shell Status.

Is the Shareholder an Affiliate of the Issuer under Rule 144?

Under Rule 144, an Affiliate is a “control person” which is most often an officer, director, or owner of greater than 9.99% of the total issued and outstanding shares of any class of stock in the Issuer.

If a Shareholder is an Affiliate, or was an Affiliate within the past 90 days, then he or she is subject to trading volume limitations under Rule 144.

What are the Affiliate Trading Volume Limitations Under Rule 144?

Affiliate Shareholders of OTC Bulletin Board and OTC Markets OTCQB, OTCQX and Pink Sheets, can only sell up to 1% of the Issuer’s total issued and outstanding shares during any 3 month period, and such sales must be reported to the SEC on Form 144.

What is the Shareholder’s Holding Period under Rule 144?

Whether or not the Shareholder is an Affiliate, the restricted stock must be held for a certain period of time, known as the Rule 144 “holding period” after the Shareholder acquires the shares and before the Shareholder sells the stock.

What is the 144 Holding Period for SEC Reporting Companies?

For SEC reporting public companies, like those quoted on the OTC Bulletin Board (OTCBB) and the OTC Markets OTCQB and OTCQX, and for those listed on the NASDAQ or NYSE MKT, the Rule 144 holding period is a minimum of six (6) months.

In order to qualify, the public company must be “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.  This is also known as a mandatory SEC filer.

Rule 144 Holding Period for Non Reporting Companies

For Non SEC Reporting Issuers, like those quoted on the OTC Markets Pink Sheets and filing OTC Markets Disclosure Statements, the Rule 144 holding period is twelve (12) months.

Voluntary SEC filers are also considered non reporting companies and have a Rule 144 holding period of twelve (12) months.

Voluntary filers are those which go public via S-1, but which have not yet filed an 8A-12g or 8A-12b or Form 10 under the 34 Act, so they are not yet technically “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.

Was the Issuer Ever A “Shell Company” under Rule 144?

Current Shells Cannot Use Rule 144 to Clear Stock

Rule 144 does not allow Shareholders of public companies that are currently classified as a “shell company” to use its safe harbor to clear and sell restricted stock.

This is true even if the Shareholder is not an Affiliate, and if the Shareholder has held stock for longer than the required holding period under Rule 144.

Can Former Shells Use Rule 144?

Former shell companies that now have assets and an operating business must wait one (1) year after the Issuer ceases to be a shell before their shares may be sold using Rule 144, and then only if the public company is an SEC filer and subject to the filing requirements of the Exchange Act of 1934.

The moment a public company ceases to be a shell is sometimes clear because it is found in an SEC filing, like a “Super 8-K” for instance.  This could be the date upon which the company acquired an operating business or assets, in a reverse merger.

The Evergreen Rule:  Rule 144 Applied to Former Shell Companies

Former shells that are fully reporting OTCQB, OTCQX and OTC Bulletin Board companies must have filed current SEC reports like the 10-Q, 10-K and 8-K for a minimum of one (1) year from the date they ceased to be a shell, and they must be current in their filings now, before its Shareholders can avail themselves of the exemption from registration offered by Rule 144.

The term “Evergreen Rule” refers to the requirement that former shell companies must remain current in their filings (forever) in order for Rule 144 to be used.  If a former shell becomes delinquent in SEC filings, Rule 144 cannot be used until the Issuer is current.

Non Reporting Pink Sheet Former Shells Cannot Use Rule 144

Former shell companies that are OTC Markets Pink Sheets cannot used Rule 144 even if they are “Pink Current” now meaning that they are up to date on their OTC Markets Quarterly Reports, Annual Reports and their Information & Disclosure Statements.

Section 4(a)(1) Can Be Used to Clear Stock of Pink Sheet Former Shells

If the shares are greater than Two (2) Year old, OTC shareholders in Pink Sheets or delinquent SEC filers may be able to use Section 4(a)(1) (also known as Section 4(1) or simply 4-1) to clear and deposit their restricted stock.

Section 4(a)(1) can only be used if the shareholder is not an Issuer, Underwriter or Dealer, and if the shareholder can document the origin and history of the Shares as dating back greater than Two (2) Years.

OTC Bulletin Board (OTCBB) and OTC Markets Issuers seeking a securities attorney with expertise in Rule 144 and Section 4(a)(1) can contact Matt Stout at (410) 429-7076 or mstout@otclawyers.com for further information.

Pros and Cons of Going Public

Advantages of Going Public

Entrepreneurs seek to take companies public for many reasons, including:

  1. To raise funds through increased access to capital; and
  2. To create or increase liquidity in the company’s securities, which can provide shareholders with a hope of selling their stock in the open market.
  3. To fund a roll up strategy, in which they acquire other businesses using the public company’s stock as currency.
  4. To attract and compensate consultants and employees by using the public company’s stock, such as in an S-8 Plan.
  5. To create investor awareness of the public company’s brand and technology.

Perceived Disadvantages to Going Public

Entrepreneurs perceive some disadvantages to taking a company public, such as

  1. Going Public via S-1 Registration Statement requires time and some money to complete.
  2. Administrative compliance for SEC filers includes audited financials, and filing SEC reports like 10-K, 10-Q and 8-K.
  3. The public company’s shareholders must be aware of and in most cases approve your corporate actions.
  4. Transparency is required, since financials and disclosures are all available to the general public.

In the end, the decision to go public is made by entrepreneurs who believe that transparency is a good thing, and that securities compliance is a small price to pay for the potential upside and liquidity that is possible for shareholders in public companies.

OTC Markets Securities Lawyer Taking Companies Public

Entrepreneurs can discuss going public under a flat fee via S-1 Registration Statement on the OTC Markets or OTC Bulletin Board with securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

 

 

What is a Blank Check Company?

A Blank Check Company is defined by the SEC under the Securities Act of 1933, Rule 419, as a company that has

  1. no specific business plan or purpose, or
  2. has indicated that its business plan is to engage in a merger or acquisition with an unidentified operating business, and
  3. is issuing “penny stock.”

These blank check companies are sometimes referred to as 419 shells.  Blank check companies are similar to a special purpose acquisition company (SPAC) in that both are created to consummate a business combination with an unidentified target company.

S-1 Registration Statements and Blank Check Companies

When filing an S-1 Registration Statement for a development stage start up company, is it not uncommon for initial SEC comments to question whether or not the registrant is a blank check company.  If the company is not a blank check under Rule 419, then the response to the SEC would include information supporting the company’s specific business purpose and a bona fide plan of operations.

Companies that are concerned about being incorrectly labeled a blank check company or 419 shell should take care to draft the business plan portion of the S-1 with sufficient detail so that the question answers itself.

Entrepreneurs considering taking their companies public via S-1 Registration Statement can contact securities attorney Matt Stout with questions at (410) 429-7076 or via mstout@otclawyers.com.

What is the Rule 144 Holding Period for Shares Exchanged with the Private Company in a Reverse Merger?

In the context of a reverse merger, what would be the holding period under Rule 144 for shares awarded to shareholders of the private company in the share exchange?

Many people familiar with SEC Rule 144 would presume that the holding period would begin on the date of the Share Exchange or Merger Agreement.  Others might hope that there is tacking involved, and that the holding period began when the shares were originally awarded to the private company’s shareholders.

Rule 144 Holding Period Starts Over in a Reverse Merger

In fact, the Rule 144 holding period for shares received in a private-public share exchange does not begin until the reverse merger transaction is actually closed.  Another way of saying this is that under SEC Rule 144, trading public shares for other shares in a reverse merger causes the Rule 144 holding period clock to start over.

Shares Earned Upon Closing of the Stock-for-Stock Acquisition

A typical share exchange is known as a “stock-for-stock” acquisition and the holding period does not commence until the closing of the acquisition itself.  Naturally, that closing date might be well after the date on the certificates and long after the date of the Share Exchange Agreement.  In many cases, the closing is several months later.  The date itself will appear in an 8-K for an SEC filer and should be in an OTCMarkets disclosure statement for a Pink Sheet.

SEC Considers Securities Issued in a Share Exchange as a New Issuance under Rule 144

Why is this?   The SEC considers securities issued in such a share exchange to be a new issuance such that the holding period commences on the date those shares are fully “earned”.  If those new shares are awarded in the context of a reverse merger, those shares are considered earned when the transaction itself closes.

 

What is the “Evergreen Rule” Under Rule 144?

Rule 144(i), as amended, states that Rule 144 is not available for the resale of securities initially issued by a former shell company unless the following two requirements are met:

1. One (1) year has passed since the Issuer filed current “Form 10 information.” What is Form 10 information? It is the information that would be required if the Issuer were filing a general form for registration of securities on Form 10 under the Securities Exchange Act of 1934, or under an S-1, which reflects its status as an entity which is no longer a “shell”; and

2. The Issuer is current on all reports required to be filed with the SEC during the One (1) Year before the shareholder elects to sell shares.

The Evergreen Rule Requires Current Information Under Rule 144

The latter requirement, that the Issuer be current for the prior twelve months, is known as the “Evergreen Rule” and without that requirement being met, the former shell company’s securities can never be sold under Rule 144. As a practical matter, the Evergreen Rule means that the restrictive legend on the shareholder’s stock certificate cannot be removed in advance of a contemplated sale, since that could mean the actual sale might occur at a time when the Issuer’s filings are no longer current.

The Evergreen Rule as applied to former shell companies lasts forever, even if the Issuer ceased to be a shell long ago, and even if the required Form 10 information was filed many years ago.

For this reason, management of former shell companies should consult with experienced securities counsel when deciding how to respond to requests by shareholders for restrictive legend removal.

Matt Stout is a microcap securities lawyer representing OTCMarkets Issuers in a full range of securities legal matters including reverse mergers, DTC eligibility, securities legal opinions and SEC compliance. Mr. Stout can be reached at mstout@otclawyers.com or (410) 429-7076 with questions about Rule 144.

What is a Reverse Merger?

A Private Company’s Assets or Operations are Vended Into a Public Vehicle

In a reverse merger (or reverse takeover) the controlling shareholders of a public vehicle acquire the business operations or assets of a private company.  Once the reverse takeover (“RTO”) transaction is complete, the private company is either “vended in” as a subsidiary of the Issuer, in which case all of its financials become reported under the umbrella of the public company, or the assets are purchased.

This is usually accomplished via a Share Exchange Agreement in which the shareholders of the private company receive a majority stake or “controlling interest” in the public company.

New Officers and Directors are Appointed from the Private Company in an RTO

With that change in control, new officers and directors are usually appointed from the management of the private company.  The change in control is the reason why reverse mergers are sometimes referred to as a reverse takeover or RTO.

Interestingly, Issuers seeking private company candidates for reverse merger are often called “public shells” even if they have enough assets and operations to avoid classification as a “shell company” under Rule 144.

Super 8-K Type Disclosures Must Be Provided to Investors After a Reverse Merger

Once the reverse merger is complete, the Issuer provides disclosures regarding the private company’s assets and operations using a “Super 8-K” if an SEC reporting company, or an Information and Disclosure Statement if an OTC Markets Pink Sheet using the Alternative Reporting Standard.

The Private Company Now “Trades” on the Public Market

After this disclosure process, the private company’s management is  in control of the public vehicle (which may be a former shell) and its stock is now quoted and trades under the same ticker or trading symbol.  At this point, it often makes sense for the new management to change the name of the company, and its symbol, in order to emphasize the new business operations to investors.

Famous Companies That Went Public Via Reverse Merger or RTO

Some household names which are reported to have gone public via reverse merger or reverse takeover include Berkshire Hathaway, Blockbuster, Waste Management, Jamba Juice, Turner Broadcasting (which later became CNN), Occidental Petroleum,and Texas Instruments.

Entrepreneurs seeking a public shell for a reverse takeover or Issuers looking for private companies to “vend in” can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.