Category Archives: Rule 144 Attorney

Who is a Control Person Under Rule 144?

Affiliates According to Rule 144

An affiliate under SEC Rule 144 is, in general terms a person, such as an officer, director or large shareholder, in a relationship of control with the public company.

Rule 144 Affiliates Include Officers, Directors and Others by Beneficial Ownership

The standard group of easily identifiable affiliates includes a company’s officers, directors, or owners of greater than 9.99% of the securities of any class. But then, under the concept of beneficial ownership, we must add to that list, the spouse of an affiliate, or anyone living in the same household as an affiliate.  They too, are considered affiliates under Rule 144 because they are deemed in theory to exercise the same type of control.

How Does the SEC Define Control Person?

According to the SEC, “control” means the power to direct the management and policies of the public company.  That control could be exercised by an affiliate through ownership of voting securities or by agreement.

Does the Securities Act or Rule 405 Define Control Person?

However, the Securities Act of 1933 doesn’t define the terms “control person” or “control relationship”. That being said, in Rule 405, the SEC defines “control” as follows:

“The term “control” (including the terms “controlling,” “controlled by,” and “under common control with,” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”

Affiliate shareholders of microcap public companies quoted on the OTC Markets, or listed on NASDAQ or NYSE can contact an experienced securities attorney for a no cost review of their Form 144, stock certificates and supporting documentation at (410) 429-7076.  If an opinion can be issued, affiliates will receive a prompt turnaround and a reasonable flat fee.

 

Sales of Affiliate Stock Under Rule 144

What Are the Conditions for Selling Stock Under Rule 144?

One possible way to sell restricted stock to the public, is to meet the criteria of Rule 144.  While Rule 144 is not the only exemption used by non-affiliate shareholders of restricted stock to sell their securities, Rule 144 offers a “safe harbor” exemption to Affiliates when the requirements are met.

Five Criteria For Using Rule 144 To Clear Restricted Stock

  1. Holding Period Under Rule 144

    If the public company that issued the Affiliate’s restricted stock is a “fully reporting company” that is technically “subject to” the reporting requirements of the Securities Exchange Act of 1934 (a/k/a Exchange Act or 34 Act), then the minimum holding period is six months. If the public company that issued your restricted stock is not subject to the reporting requirements of the 34 Act, then you must hold the stock for at least one year. Please note that the calculation for the holding period does not begin until the stock is “fully paid for.”

  2. Current Public Information Requirement of Rule 144

    The public company’s filings must show “adequate current information” about the company, that is publicly available, before the sale can be made. For SEC filers subject to the Exchange Act this generally means that the the company has filed all of its 10-Q, 10-K, 8-K reports and links to such reports are available on its website. For non-reporting companies, whether they are voluntary filers under the 33 Act or just Pink Sheets filing disclosures on OTCMarkets.com, the SEC states that “certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements” must be publicly available.

  3. Trading Volume Formula for Affiliates Under Rule 144

    For Affiliates of the public company only, there is a trading volume limitation placed on their ability to sell stock.  The SEC allows such an Affiliate (an owner of greater than 9.99% of the outstanding securities of any class, an officer, director, control person, or their spouses…or those living in the same household as the foregoing…)  to sell during any three-month period a maximum of 1% of the outstanding shares of the same class being sold (if an OTC Markets stock), or if the class is listed on a stock exchange, such as NASDAQ or NYSE, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.  OTC stocks, including those previously quoted on the old OTC Bulletin Board and those now quoted on the OTC Markets Pink Sheets, must be sold by Affiliates using the 1% maximum.

  4. Ordinary Brokerage Transactions Under Rule 144

    For Affiliates of publicly traded companies, their restricted stock sales must be handled in all respects as “routine trading transactions, and brokers may not receive more than a normal commission” according to the SEC.  That means neither the seller nor the broker “can solicit orders to buy the securities.”

  5. Filing a Notice of Proposed Sale With the SEC

    Affiliates must also file Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.  Most brokerages will require an Affiliate of the public company to fill out Form 144 for every sale, which will list the current issued and outstanding shares of common stock, and state the proposed maximum (1%) that the Affiliate intends to sell.  Affiliates must update their Form 144 periodically and brokers often require updated Rule 144 legal opinions to be issued in order for the Affiliate to continue selling.

It is important to note that Rule 144 cannot be used by Shareholders of non reporting Pink Sheets to clear restricted stock if the public company is a current shell or a former shell.    Shareholders of SEC filers which are subject to the reporting requirements of the Exchange Act may use Rule 144 only if the requirements of the Evergreen Rule are met.  (In these cases, if Rule 144 is unavailable as an exemption, it may be possible for non-affiliate stockholders to use Section 4(a)(1) instead.)

Shareholders of OTC Markets public companies, or those trading on the NASDAQ or NYSE needing Rule 144 legal opinions to deposit restricted stock can reach an experienced securities attorney by calling (410) 429-7076 any time.  There is never a cost to review certificates and supporting documents, and if a legal opinion can be issued, a reasonable flat fee will be quoted.

Selling Stock in Former Shell Companies Under Rule 144

Rule 144 is the most common exemption from registration of microcap stock, and is often cited by securities attorneys in legal opinions used to deposit restricted shares in OTCMarkets companies.

However, Rule 144 can never be used if the Issuer is currently a shell company.  If the Issuer is a former shell, Rule 144 can only be used by a shareholder if certain conditions apply.  These requirements for former shells are known informally as “The Evergreen Rule.”

What are the Requirements of the Evergreen Rule under Rule 144?

  1. The Issuer of the securities must have ceased to be a shell company;
  2. The Issuer must be “subject to” the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”).  This means the Issuer must be a “mandatory SEC filer” or “fully reporting.”;
  3. The Issuer must have filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, during the last 12 months, other than Form 8-K reports; and
  4. The Issuer must have filed current ‘‘Form 10 information.”  This includes audited financials and could be done in a Form 10, but is more likely achieved in a combination of other SEC filings, including a “Super 8-K.”

If the foregoing requirements of the Evergreen Rule are met, then Rule 144 might be available, subject to all other applicable Rule 144 conditions, such as Affiliate status, and holding period.

Section 4(a)(1) Alternative to Rule 144 for Current and Former Shells

In many cases, the requirements of the Evergreen Rule cannot be met.  For instance, if an Issuer is currently marked a shell company, or if a former shell is delinquent in its SEC filings, then Rule 144 cannot be used.   If the securities are greater than Two (2) Years old, Section 4(a)(1) may offer a solution.

Requirements of Section 4(a)(1) Legal Opinions

Matheau J. W. Stout, Esq. drafts Section 4(a)(1) legal opinions for shareholders who are not “issuers, underwriters or dealers.”   Because shell status is not an element of Section 4(a)(1), these legal opinions can issued for Non Affiliate shareholders in current shells or former shell companies.

Current information is also not an element of Section 4(a)(1), such that these opinions can also be drafted even when the Issuer is delinquent in its filings, and marked as a Yield Sign or Stop Sign at OTCMarkets.com.

Section 4(a)(1) is concerned with the shareholder, rather than the Issuer.   Section 4(a)(1) opinions cite case law extensively and are typically much longer than the average Rule 144 opinion, as they go into great detail when examining whether or not a shareholder can be classified as an issuer, underwriter, or dealer in securities.

Securities Attorney Drafting Section 4(a)(1) Opinion Letters for Shareholders

Shareholders with stock in current or former shell companies quoted on the OTC Bulletin Board or OTC Markets can contact OTC securities lawyer Matt Stout for a no cost review of their certificate and supporting documents at (410) 429-7076 or mstout@otclawyers.com.

 

 

Can a Start Up Go Public via S-1 as a Shell Company?

Filing an IPO via S-1 Registration Statement gives any private US corporation the opportunity to go public on the OTC Bulletin Board or OTC Markets.   Contrary to popular belief, the SEC does not require companies going public to exceed any minimum asset or revenue criteria.  Any US domiciled corporation can go public using Form S-1 even if it is a brand-new start up with very few assets and zero revenue.

The Decision to Declare Shell Company Status in an S-1

If a start up company’s S-1 Registration Statement shows few assets and operations, the SEC staff member reviewing the S-1 may request that the start up either declare itself to be a shell company as defined in Securities Act Rule 405, or provide a legal analysis in support of its belief that it should not be considered a shell.

Under Rule 405, in order to meet the definition of a “shell company” the Issuer must have

  1. No or nominal assets; or
  2. Assets consisting solely of cash or cash equivalents; and
  3. No or nominal operations.

What Happens if an Issuer Declares Shell Status in an S-1?

For those Issuers which truly are “shells” (such as those with no business model other than to find an operating company to merge into or acquire), declaring shell company status will require the Issuer to revise its prospectus, including the cover page and prospectus summary, to disclose that the Issuer is a shell company.

A shell company Issuer will also need to disclose in the Risk Factors section, the consequences of “shell status” including restrictions on the Issuer’s ability to use registration statements on Form S-8, the limitations on the ability of its shareholders to use Rule 144 and potential illiquidity of its securities.

Declaring shell status in an S-1 when the company is actually a shell does not prevent the S-1 from being declared Effective.  However, according to the “Evergreen Rule” it does have lasting implications (forever) for shareholders looking to deposit and clear restricted stock in the future under Rule 144.

Is a Startup Company Considered a Shell Company Under Rule 144?

No, a start-up company was specifically not intended to be classified as a shell company under Rule 144, and if the S-1 is documented properly, a startup will not need to declare itself a “shell company.”

According to Footnote 172 to SEC Release No. 33-8869 (which was the release that accompanied the final amendments to Rule 144), the amendments to Rule 144 were not intended to capture a “start-up” company or a company with limited operating history that was in the early stages of development.

This footnote was intended to address the concerns of several comments to Release No. 3-8869 that defined a shell company, and the primary concern was that the definition of a shell company was too broad as it would capture and include almost every business in its early stages of development, and specifically those in the start-up phase of operations.

Footnote 172 addressed these concerns in providing that a “start-up company” is excluded from the definition of a shell company since “such a company doesn’t not meet the condition of having no or nominal operations”.

Securities Lawyer for Start Up Companies Going Public via S-1 Registration Statement

Startup entrepreneurs seeking an IPO on the OTC Bulletin Board (“OTCBB”) or the OTC Markets OTCQB can contact securities attorney Matt Stout for a free consultation at (410) 429-7076 or mstout@otclawyers.com.

 

What are the Regulation S Safe Harbor Categories?

There are Three Issuer Safe Harbor Categories under Regulation S

The Regulation S issuer safe harbor contains three categories of offerings, depending on the nationality and reporting status of the Issuer, and whether or not there is substantial US market interest in the securities.

The three categories represent increasing protections to make sure that the securities offered in a Regulation S offering are not part of an unregistered distribution of securities in the United States.

Regulation S Safe Harbor Category 1

The first Issuer Safe Harbor under Regulation S contains the least restrictive conditions and is for offerings of securities of Foreign Companies:

  1. with no substantial US market interest in these foreign securities,
  2. securities offered and sold in “overseas directed offerings,”
  3. securities backed by the full faith and credit of a foreign government, and
  4. securities offered and sold pursuant to certain employee benefit plans.

For offerings in Category 1, there are no requirements other than the Regulation S General Conditions.  Category 1 Regulation S securities are not the subject of legal opinions by US securities attorneys.

Regulation S Safe Harbor Category 2

The second Issuer Safe Harbor under Regulation S applies to offerings that are not eligible for Category 1.  These would include the following:

  1. equity securities of a reporting foreign company; or
  2. debt securities of a reporting foreign or US Issuer or a non-reporting foreign company.

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for a period of 40 days.

Category 2 Regulation S securities are rarely the subject of legal opinions by US securities attorneys.  Today it would be very difficult to find a brokerage firm which would accept for deposit any restricted securities using the 40 day holding period.  Most, if not all, of such brokers were based offshore and have since been shut down.  Nevertheless, when some think if Reg S, they assume the holding period is only 40 days.   Even in the heyday of offshore brokerages, this was only true for stock of “reporting” foreign companies, since debt securities would need to be converted into stock anyway in order for deposit and trading.

Regulation S Safe Harbor Category 3

The third Regulation S Issuer Safe Harbor contains the most restrictive conditions and applies to all securities not eligible for Categories 1 and 2. This includes the following:

  1. equity securities of a reporting US Issuer;
  2. any securities of a non-reporting US Issuer; and
  3. equity securities of a non-reporting foreign company that has a substantial US market interest in its equity securities.

Category 3 encompasses nearly all Regulation S securities which are the subject of legal opinions drafted by US securities attorneys.  In practice, the holding period requirements of Reg S Category 3 are similar to Rule 144 for OTCMarkets or OTC Bulletin Board public companies.

Other Offering Restrictions Under Regulation S for Sales to US Persons under Category 3

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for the following periods:

Equity securities of Non-Reporting Issuers: One Year.  This is the same as a Non-Reporting OTC Markets Pink Sheet or Voluntary SEC Filer under Rule 144.

Equity securities of Reporting Issuers: Six Months.  This is the same as a Mandatory SEC Filer like an OTCQB or OTCBB stock under Rule 144.

Debt Securities: 40 Days.  In practice, this is of no consequence, because in order for the US Shareholder to deposit and sell stock under Reg S Category 3, “Debt Securities” are converted into “Equity Securities” so the respective Six Months or One Year holding periods will still apply.

Securities Attorneys for Selling Regulation S Stock

As a practical matter, all securities sold pursuant to the registration exemption under Regulation S will undergo scrutiny from brokerage compliance officers when the shareholder attempts to clear stock for resale.

Unless the typical Six Months or One Year holding periods are met, it is highly unlikely that US Shareholders will be able to deposit any Reg S stock, regardless of the public’s impression that the holding period is “only 40 days.”  Once those holding periods are met, it may also be possible to obtain a Rule 144 legal opinion even though the original private offering was done under Regulation S.  If the stock is greater than two years old, it may also be possible for a Section 4(a)(1) opinion to be drafted.

It is important to provide an experienced securities attorney like Matt Stout with all documentation showing the origin and history of the Reg S shares when seeking a legal opinion to clear Regulation S stock.

Regulation S Shareholders can contact securities lawyer Matt Stout at mstout@otclawyers.com or (410) 429-7076 to discuss the Regulation S General Conditions and Safe Harbors at no cost.

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 Tacking Under Rule 144?

Tacking under Rule 144 allows a holder of restricted securities to aggregate the separate holding periods of prior holders in order to meet the Rule 144 holding period requirement.

Rule 144 Holding Periods:  Either Six Months or One Year

The holding period for mandatory SEC filers is 6 months.  These are fully reporting Issuers filing 10-K, 10-Q and 8-Ks and “subject to” the requirements of the Securities Exchange Act of 1934.

In contrast, the Rule 144 holding period for voluntary SEC filers and non-reporting Pink Sheets is 12 months.

Rule 144 Tacking is Allowed for Restricted Stock and Convertible Debt

Tacking is used for both restricted stock, and for convertible promissory notes, as well.

For example, if a Note is documented at over a year old, the Rule 144 holding period is likely met even if the Note holder converts into common stock immediately prior to seeking a Rule 144 legal opinion.  This is because the Note holder is allowed to tack the age of the Note onto the age of the newly issued stock to meet the 12 month holding period.

Tacking Under Rule 144 is Only Permitted to Non Affiliates

By permitting tacking, the SEC allows a selling security holder to include the holding period of a prior non-affiliate holder.   However, if the securities were purchased from an affiliate, tacking is not permitted and the holding period starts over.

For example, if a non affiliate shareholder who owned stock in an SEC mandatory filer for seven months sells stock in a private Stock Purchase Agreement to a new non affiliate shareholder today, the new shareholder has already exceeded the 6 month holding period.

Removing the restricted legend on the stock will require the new shareholder to provide documentation which shows the origin and history of the shares, including the prior holder’s purchase date and non affiliate status.

OTC Securities Lawyer Answers Rule 144 Questions on Tacking

Shareholders with questions regarding tacking under SEC Rule 144 or Section 4(a)(1) can contact OTC Bulletin Board and OTCMarkets securities attorney Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

Tacking of Rule 144 Holding Periods for Distributions of Stock

Do pro rata distributions of restricted stock from a corporate entity shareholder to its individual shareholders affect the Rule 144 holding period?

No.  Under Rule 144(d), the holding period of the corporate entity shareholder may be tacked onto the holding period of an individual shareholder who receives the distribution of restricted stock.

Documenting the Origin and History of Rule 144 Restricted Stock

In order for a Rule 144 opinion letter to be issued by an experienced OTC Markets Pink Sheet and Bulletin Board securities attorney like Matt Stout, the shareholder must provide documentation showing the origin and history of the shares.  The main task of an OTC securities lawyer issuing Rule 144 legal opinions is to confirm when and how the securities were first issued, and then to track every transaction from that point forward.

Rule 144 Securities Attorney Matt Stout Drafts Legal Opinions for Shareholders

OTC securities lawyer Matheau J. W. Stout, Esq. reviews documents at no cost in preparation for drafting legal opinions under Rule 144 and Section 4(a)(1) for Pink Sheets and OTCMarkets OTCQB stocks.   Shareholders can email certificates and Rule 144 documentation to mstout@otclawyers.com or call Matt Stout at (410) 429-7076 to discuss Rule 144 and clearing restricted stock.

Tacking onto the Holding Period of Convertible Notes under Rule 144

Does Accrued Interest Affect the Holding Period Under Rule 144(d)?

When Convertible Promissory Notes with accrued but unpaid interest are exchanged for stock in a public company, the Rule 144 holding period for the Notes can be tacked to the holding period for the stock under Rule 144(d)(3)(ii) only if the exchange consists only “of other securities of the same Issuer.”

That means no additional consideration can be paid in the exchange other than the securities themselves and is consistent with Section 3(a)(9) of the Securities Act of 1933,

Accrued Interest is Not Considered Additional Consideration Under Rule 144

This brings up the question of whether or not accrued but unpaid interest on the Note is construed by the SEC as additional consideration inconsistent with Rule 144(d)(3)(ii).

The SEC’s position is that the right to receive payment for the accrued interest is not additional consideration, and the holding period for the Convertible Promissory Notes can be tacked to the holding period for all shares of stock received in the exchange.

Rule 144 Securities Lawyer Opinion Letters for Debt Conversions

Matheau J. W. Stout, Esq. reviews Notes at no cost in preparation for issuing Rule 144 legal opinions for debt holders in OTC Markets and OTC Bulletin Board companies.  Debt holders can email documents to mstout@otclawyers.com or call Matt Stout at (410) 429-7076 for a free consultation on Rule 144, or on the Section 4(a)(1) alternative to Rule 144 if the securities are at least 2 years old.

When is an Amendment to Form 144 Needed?

Affiliate Shareholders of OTC Markets and Bulletin Board public companies are those serving as Officers, Directors, control persons or owners of more than 9.99% of the Issuers voting securities of any class (“Affiliates”).

Affiliates Submit SEC Form 144 When Selling Restricted Stock

Affiliates of OTC companies know that in order to clear and sell restricted stock, they need to fill out a Form 144 and submit that to their broker, which will allow them to sell up to 1% of the total issued and outstanding common stock of the Issuer within a 90 day period.

Increasing the Number of Shares Sold Requires an Amendment to Form 144

Under Rule 144(h), an amendment to SEC Form 144 needs to be filed if the Affiliate wishes to sell more securities during the 90 day period than was originally declared for sale on the original Form 144.

For example, if an Affiliate files a notice on SEC Form 144 for the proposed sale of less than the full amount of shares that could be sold under the volume limitations set forth in Rule 144(e), but then decides to sell up to 1% of the issued and outstanding, an amendment is needed.  For this reason, it may be wise for Affiliates to consider simply using the 1% number in the original Form 144 filing.

No Form 144 Amendment is Needed if the Affiliate Shares are Unsold

Under Rule 144(h), if the Affiliate filed a Form 144, but does not sell all of the securities referred to during the 90 day period, no amendment needs to be filed with the SEC.

No Form 144 Amendment is Needed Due to a Stock Split

If after an Affiliate’s filing of Form 144, the OTC Issuer declares a stock split,  no new Form 144 filing is needed within the 90 day period to sell the correct number of post-split shares which equate to the number of pre-split shares the Affiliate had already declared on Form 144.  The broker will simply make the adjustment and inform the Affiliate of the new maximum to be sold under the Rule 144 volume trading limitations.

No Form 144 Amendment is Needed to Change Brokers

Individual brokerages may have their own policies on this, but the SEC does not require a new Form 144 or amendment to be filed when an Affiliate uses more than one broker, since it is the share number and trading volume limitation which governs trading, and not the brokerage used to execute the trades.

Likewise, under Rule 144(h), an Affiliate filing Form 144 who indicates that the Affiliate may sell shares through more than one broker is not required to allocate a specific number of shares to each broker on Form 144.

OTC Securities Lawyer Helps Affiliates Sell Restricted Stock

Management and control persons of OTC Markets and Bulletin Board public companies can contact Matt Stout for referrals to OTC brokers and assistance filling out SEC Form 144.   Securities lawyer Matt Stout reviews certificates, filings and documents at no cost to determine if a Rule 144 legal opinion can be issued.   Shareholders can email Matheau J. W. Stout, Esq. at mstout@otclawyers.com or call (410) 429-7076.