Tag Archives: 144 opinion

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.

 

 

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.

When Does the Rule 144 Holding Period Begin When Payment is Escrowed?

As many OTC investors know, Bulletin Board and Pink Sheet Issuers raising capital using a Private Placement Memorandum (“PPM”) sometimes choose to escrow all subscription payments until a minimum amount is raised.

When an OTC private placement offering is made on this type of “minimum/maximum basis”, shares are not issued to investors and proceeds are not delivered to the Issuer from an escrow account unless and until the target minimum amount is sold.

Rule 144(d) Applied to PPM Investors with Escrowed Funds

Under Rule 144(d), the holding period for shares acquired in an OTC Markets company using a “minimum/maximum” offering begins when the shareholder pays for the shares and payment is deposited in the escrow account.

When is the Shareholder Committed to Purchase PPM Shares?

The reason that the Rule 144 holding period begins before the release of the escrowed funds is because the shareholder is committed to participate in the offering if the minimum amount is sold, and that factor is not in the shareholder’s control once the payment is sent and accepted for deposit by the escrow agent.

When are the Shareholder’s Funds At Risk under Rule 144?

This is the moment when the shareholder’s funds are “at risk.”  In contrast, if the language of the subscription or escrow agreement somehow gave the shareholder the right to withdraw the funds upon request, then the funds would not be considered “at risk” and the Rule 144 holding period would not begin to run.

Rule 144 Opinion Attorney Offers No Cost Review of Documents

OTC securities lawyer Matt Stout reviews shareholder documents at no cost in preparation for issuing Rule 144 and Section 4(a)(1) legal opinions to clear restricted stock.

Questions about the Rule 144 holding period, Affiliate Status, and Shell Status are reviewed and if a legal opinion cannot be issued there is no cost to the shareholder.  Contact Matt Stout with Rule 144 questions at (410) 429-7076 or mstout@otclawyers.com.

Rule 144 Holding Period for Shares Issued Per Anti-Dilution Rights

When does the Rule 144 holding period begin for shares received due to anti-dilution rights?

For purposes of Rule 144(d), additional shares of stock acquired from an Issuer pursuant to anti-dilution rights have the same holding period as the original shares governed by the anti-dilution provision.   Another way of saying this is that the new shares can tack onto the holding period of the old shares.

Shareholder Opinion Letters for OTC Markets and Bulletin Board Stocks

OTC securities attorney Matt Stout drafts Rule 144 and Section 4(a)(1) opinion letters for Shareholders of Pink Sheet and Bulletin Board companies trying to clear and sell restricted stock.

Questions regarding Rule 144 holding periods, shell status or Section 4-1 alternatives to Rule 144 can be emailed at mstout@otclawyers.com or (410) 429-7076.

Debt Conversions Under Rule 144(d) and Section 3(a)(9)

Securities exchanged for other securities of the same Issuer under Section 3(a)(9) will be attributed the “character” of the exchanged securities.  This concept is clear under Rule 144(d), which allows for tacking of the old security’s holding period when an Issuer’s convertible debt is exchanged for equity.

Debt Conversions into OTC Stock Under Rule 144(d)

This concept is seen whenever a Debt Holder in an OTC Markets or OTC Bulletin Board company converts a Promissory note into Common Stock.  In that instance, the old security (Promissory Note) is exchanged for the new security (Stock).

Tacking of Rule 144 Holding Period in Debt Conversions

A debt conversion is usually done by a Debt Holder when the Rule 144 holding period has already been met by the Note, so that the Debt Holder may then deposit and sell the newly converted Stock without any additional waiting.

Securities Attorney for Debt Holders in OTC Companies

Debt Holders in OTC Markets and Bulletin Board companies can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers for Rule 144 legal opinions or Section 4(a)(1) opinions based on debt conversions.

 

What is the Rule 144 Holding Period for a Warrant Exercise?

Rule 144 Holding Period for Cashless Warrant Exercise

If the exercise of a warrant is “cashless” then a Shareholder is allowed to tack the holding period of the warrant onto the common stock under Rule 144(d)(3)(x).  This means that as long as there is no consideration whatsoever paid in order to exercise the warrant, the holding period of the common stock will tack back to the date of the warrant itself.

Rule 144 Holding Period for Warrant Exercises Upon Payment of Cash

In contrast, if the warrant exercise is not “cashless”, then the holding period will begin on the date of the warrant exercise.

De Minimus Payments to Exercise Warrants Under Rule 144

This is true even if the payment to exercise the warrant is “de minimis.”  That is, even if the amount paid to exercise the warrant is a very tiny amount of cash, the Shareholder will be prevented from tacking the holding period of the warrant to that of the common stock under Rule 144(d)(3)(x).

No Cost Review of Documents by Rule 144 Legal Opinion Lawyer Matt Stout

Shareholders in need of Rule 144 or Section 4(a)(1) legal opinions can contact OTC Bulletin Board and OTC Markets securities attorney Matt Stout for a no cost review of documents at (410) 429-7076 or via email at mstout@otclawyers.com.

 

 

Rule 144 Holding Period and Employee Stock Options

When does the Rule 144 holding period begin for restricted stock acquired under an Employee Stock Option plan?

The Option Grant Date Does Not Start the Rule 144 Holding Period

The Rule 144 holding period does not begin on the option grant date.  The grant of an option only gives an employee the right to acquire stock in the future.  The date of the employee’s stock option grant can never be used for Rule 144 holding period purposes, even if the exercise does not require the payment of cash or other consideration to the Issuer.

The Option Exercise Date Starts the Rule 144 Holding Period

The holding period under SEC Rule 144 starts on the date the option is exercised by the employee, and, unless the exercise is “cashless”, the full payment of the exercise price is made to the Issuer.  This is intuitive, since prior to exercising the option, the employee is not at risk, and the stock has not been in any way “earned” or “paid for.”

What is the Rationale Behind the Rule 144 Holding Period for Stock Options?

The SEC Rule 144 holding period does not begin to run until until the option is exercised.   The reason behind this is that because the employee did not pay for the option grant, prior to the issuance of the restricted stock, the employee “optionee” holds no investment risk in the Issuer.

The same rationale used here is consistent with that used when restricted stock is purchased through Subscription Agreement, since the Rule 144 holding period would not begin until the date of the check or wire transfer confirmation–when the subscription was actually paid for by the investor.

Rule 144 Securities Lawyer Matt Stout

OTC securities lawyer Matt Stout drafts Rule 144 and Section 4(a)(1) legal opinions for shareholders in OTC Markets and OTC Bulletin Board companies.   Copies of certificates and supporting documentation can be sent for a no cost review via mstout@otclawyers.com.   Shareholders who wish to clear restricted stock using Rule 144 opinion letters can contact Matt Stout at (410) 429-7076.

What are Convertible Securities?

Convertible securities include bonds and preferred stock.  For OTC Markets and Bulletin Board companies, the term usually means a debt secured by a Promissory Note, which can be converted into common stock.  These are known as Convertible Notes or simply Convertible Debt.

Convertible Debt in OTC Markets Companies

Most convertible promissory notes issued by OTC Markets public companies include provisions that allow the debt holder to decide if and when to convert a Note into common stock.  SEC Rule 144 usually allows a debt holder to trace their holding period to the date of the Note, rather than the date of conversion, which could be months or years after the Note was issued.

Why Do OTC Markets Companies Issue Convertible Debt?

OTC Markets companies issue Promissory Notes primarily to raise capital or to pay for services. It is a fact of life for services providers that OTC public companies often lack the cash to pay their vendors.

Why Do Debt Holders Convert Promissory Notes into Stock?

Statistically, experienced OTC lenders and service providers accepting Convertible Notes in lieu of cash know that microcap companies quoted on the over-the-counter markets will probably default on their obligation to pay.  Given that probability, drafters of Convertible Promissory Notes must take into consideration that the debt holder will later need to convert a defaulted Promissory Note into common stock after the Rule 144 holding period has been satisfied.

9.99% Blocker Clauses in Convertible Promissory Notes

Convertible Promissory Notes issued by OTC Markets  companies usually include “blockers” which are clauses preventing the debt holder from owning greater than 9.99% of the OTC company’s issued and outstanding shares of stock at any one time.  This blocker is intended to prevent the debt holder from being classified as an Affiliate, which would cause Rule 144 Affiliate volume trading limitations to be applicable under Rule 144.

Exceeding 9.99% ownership in an SEC reporting company also brings the obligation of filing SEC Forms 3, 4 and 5.

Institutional financiers that specialize in providing capital to OTC Markets Pink Sheets and Bulletin Board companies using convertible debt typically do not convert a Note again until they are “flat.”  Being “flat” means that the common stock in their brokerage account from the prior conversion has all been sold, such that it is easy to verify with the Company and Transfer Agent that the debt holder has complied with the 9.99% blocker.

4.99% Blocker Provisions in OTC Markets Convertible Debt

For SEC reporting companies filing under the Securities Exchange Act of 1934, sometimes the blocker clause will specify a maximum of 4.99% if the debt holder also wants to avoid the additional obligation of filing a Schedule 13d or Schedule 13g.

When a debt holder converts a Note into 5% of the common stock in company subject to the reporting requirements under Section 12 of the Securities Exchange Act of 1934, the debt holder is required to file a Schedule 13D or 13G.

The rationale behind the 4.99% blocker is that the institutional financiers who provide capital to multiple OTC Markets and Bulletin Board companies tend to do many conversions.  Typically these lenders will only convert after the stock can be cleared using a Rule 144 legal opinion or Section 4(a)(1) opinion, and they will convert the debt in regular increments which are then immediately sold into the market, such that their accounts are flat before each subsequent conversion.

Such repeated and regular conversions in which stock is owned for perhaps only a few days at a time would cause an administrative burden to file multiple SEC forms each time the debt holder’s ownership in a particular OTC Issuer fluctuated above and below 5%.

Conversion Metrics and Formulas in OTC Convertible Debt

Convertible Promissory Notes issued by OTC Markets and Bulletin Board companies to raise capital or pay for services usually contain a conversion ratio based on fluctuating market prices.

Converting OTC Stock at a Discount to Market

That ratio or formula of a market price conversion is typically referred to as a “discount to market” which means that the debt holder will have the right to convert at a share price that is a particular percentage of the share price on the date of conversion or based on some average during a trailing conversion period.

Rule 144 and Section 4(a)(1) Legal Opinions for Debt Conversions

Management and Debt Holders of OTC Markets and OTC Bulletin Board companies can contact OTC Securities Lawyer Matt Stout for Rule 144 legal opinions and Section 4(a)(1) legal opinions at (410) 429-7076 or mstout@otclawyers.com.

 

 

What is a Penny Stock?

Penny Stocks are Quoted on the OTC Markets Pink Sheets

Penny Stocks are securities that are not listed on a national securities exchange like the NYSE or NASDAQ, and are also priced under Five Dollars ($5.00) Per Share.  The SEC’s definition of a Penny Stock is found in SEC Rule 3a51-1.  Penny Stocks are usually quoted on the over-the-counter (OTC) Markets on the Pink Sheets.  As a practical matter, most Penny Stocks trade well under a dollar, and many trade below a penny.

Penny Stocks Can Be Quoted on the OTCQB

OTCMarkets has three market tiers where OTC stocks are quoted.  These include Pink Sheets, OTCQB and OTCQX.  While stock price is a criteria for uplisting on the OTCMarkets.com to OTCQB, the minimum share price is One Penny ($0.01), well below the Five Dollars ($5.00) per share used by the SEC to define a penny stock. Since there is no minimum asset or revenue criteria for uplisting to the OTCQB, many OTCQB stocks are considered Penny Stocks.

OTCQX Companies Are Not Technically Penny Stocks

Stock price is not the only criteria for Penny Stocks. Although OTCQX, the highest market tier on OTCMarkets.com, has an initial minimum bid price criteria for US OTCQX companies of only Twenty-Five Cents ($0.25) and an ongoing minimum price of Ten Cents ($.10), OTCQX companies are not technically Penny Stocks because they meet at least One (1) of the exceptions to the Penny Stock Rule below.

Exceptions to the Penny Stock Rules

OTCQX securities are not Penny Stocks, because the criteria for quotation on the OTCQX requires these securities meet One (1) of these exclusions from the Penny Stock Rules:

  1. Net tangible assets  greater than Two Million Dollars ($2,000,000) if the company has been in operation at least Three (3) Years; or
  2. Net tangible assets of greater than Five Million Dollars ($5,000,000) if the company has been in operation less than Three (3) Years; or
  3. Revenue of at least Six Million Dollars ($6,000,000) for the last Three (3) Years.

Legal Opinion Letters for Shareholders with Restricted Penny Stocks

OTC Markets and Bulletin Board securities lawyer Matt Stout issues Rule 144 legal opinions and Section 4(a)(1) opinions for shareholders who own penny stocks and over-the-counter stocks, as well as OTC Markets Pink Sheets seeking to become current or to uplist on the OTCQB.

Contact OTCLawyers at (410) 429-7076 or mstout@otclawyers.com today.

What does an E Suffix Mean for an OTCBB Trading Symbol?

NASDAQ and OTCBB Companies Delinquent in SEC Filings

Whenever a public company trading on the NASDAQ or the OTC Bulletin Board (“OTCBB”) becomes delinquent in its SEC reporting obligations, the letter “E” is added to company’s ticker symbol.

NYSE Companies Delinquent in SEC Filings

Companies listed on the New York Stock Exchange (“NYSE”) which fall behind in their SEC reports receive the suffix “LF” following their trading symbol.

OTCMarkets Companies Delinquent in Filings

Public companies quoted on OTCMarkets.com which are delinquent in their SEC filings are marked “delinquent” first if they are on the OTCQB Market Tier.  After remaining delinquent for a period of time, they get further marked down to Pink Yield and are removed from the OTCQB.

Bulletin Board and OTC Markets Lawyer Matt Stout

Management and shareholders of SEC filers which are delinquent in their filings under the Securities Exchange Act of 1934 can contact securities attorney Matt Stout to discuss the implications for depositing restricted stock using Rule 144 legal opinion letters and Section 4(a)(1) opinions at (410) 429-7076 or mstout@otclawyers.com.