Tag Archives: Affiliate Holding Period Under Rule 144

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.

Rule 144(c) Current Public Information Requirement

Shareholders familiar with Rule 144 know that for the Rule 144 Six (6) Month holding period to be used, the public company’s mandatory SEC filings under the Securities Exchange Act of 1934 must be current.  When an SEC filer’s Exchange Act reports become delinquent, the One (1) Year holding period under Rule 144 applies (if the company was never a “shell”).

Affiliate Sales of Restricted Stock Using Rule 144

Is this true for Affiliates, who have filed a Form 144 with the intention of selling up to 1% of the public company’s issued and outstanding shares of common stock during a 90 day period?

Yes, the Rule 144 “current public information” requirement must be met in order for the Affiliate to sell shares under the Rule 144 safe harbor.  The public company’s filings must remain current in order to meet his requirement at the time each sale is made.

Rule 144 Attorney Drafts Affiliate Legal Opinions

Affiliates of OTC Bulletin Board and OTC Markets companies can contact Rule 144 lawyer Matt Stout for assistance with completing Form 144 and selling restricted stock at (410) 429-7076 or mstout@otclawyers.com.

 

 

 

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.

Supporting Documentation for Rule 144 Legal Opinions

One of the most common questions a securities lawyer receives is “What do I need to provide in order to have the restricted legend removed from my certificate?”   The best answer is always for the Shareholder to provide all of the documentation in his or her possession showing the origin and history of the shares.

Shareholders seeking Rule 144 legal opinions should first create PDF files of the stock certificates, and any other supporting documents which can show that the elements of Rule 144 are met.  Then email all of this to the securities lawyer.  The securities lawyer’s process cannot really begin until this information is reviewed and very few questions can be answered until then since most answers depend on the specific facts of the Rule 144 transaction.

SEC and OTC Markets Filings That Mention the Rule 144 Transaction

If the Shareholder is aware of a past SEC filing (10-Q, 10-K, 8-K) or OTC Markets filing (Quarterly Report, Annual Report, or Information and Disclosure Statement) that mentions their transaction, they should note this.   A reference in a public filing to their shares, or the transaction which originated their shares is perhaps the most helpful, and the most rare piece of documentation that can be provided.

Aside from documentation in the Issuer’s public filings, depending on the transaction which originated the shares, this documentation could include:

Documents in Support of a Debt Conversion Under Rule 144

Not all of these documents may be available to the Shareholder in every Rule 144 transaction, but in a best case scenario, all of these would be provided:

  1. Promissory Note; and
  2. Debt Purchase Agreement, if applicable; and
  3. Conversion Agreement signed by the Issuer, if possible; and
  4. Conversion Notice; and
  5. Board Resolutions in which the Issuer acknowledges the debt and the conversion; and
  6. Proof of payment via check or wire transfer; and
  7. Non Affiliate letters signed by the Shareholder and the Prior Debt Holder.

Documents in Support of a Private Stock Purchase Under Rule 144

Many of these documents may not be available, but they are helpful to establish the chain of ownership under Rule 144.  Since the Issuer is not usually involved, there are less Board Resolutions and documents provided:

  1. Stock Purchase Agreement (“SPA”); and
  2. Proof of payment via check or wire transfer; and
  3. Non Affiliate letters signed by Shareholder and the Prior Holder (unless the SPA clearly states this); and
  4. Documents showing how the Seller acquired the Shares in the first place.

Documents in Support of Shares Earned Under a Consulting Agreement Under Rule 144

Not all of these may be in a Shareholder’s packet, but more is better:

  1. Consulting Agreement between Shareholder and Issuer, which hopefully sets forth exactly when the Shares are considered fully “paid for” or earned under Rule 144; and
  2. Board Resolution acknowledging Consulting Agreement and confirming how and when the Shares were earned.  This essentially takes the place of “proof of payment” in the other examples; and
  3. Non Affiliate letter signed by Consultant unless non affiliate status is addressed in the Consulting Agreement.

It is rare when Shareholders have all of these documents handy when they go to sell restricted stock, since this is often years after the Shares were originally acquired.   On those occasions, a securities lawyer with expertise in drafting legal opinions under Rule 144 looks at the total picture and can request additional letters, affidavits and information when necessary.

Shareholders can contact securities lawyer Matt Stout with questions regarding Rule 144 legal opinions, Section 4(1) opinion letters and clearing restricted stock in general at (410) 429-7076 or mstout@otclawyers.com.

 

 

Must Affiliates File a Notice on Form 144 When Selling Stock?

Affiliates Filing a Notice of Proposed Sale With the SEC

Affiliates are generally officers, directors, or beneficial owners of more than 10% of an Issuer’s stock, and like all shareholders in Over-the-Counter microcap companies, Affiliates sooner or later want to sell some of their securities.  When an Affiliate wishes to sell stock, the U.S. Securities and Exchange Commission requires filing SEC Form 144, which puts the public on notice of the Affiliate’s proposed sale.  

Greater than 5,000 Shares or $50,000 in 3 Month Period

Affiliates of an OTC Bulletin Board or OTC Markets Pink Sheet Issuer must file a notice with the SEC on Form 144 if

  1. the sale of securities involves more than 5,000 shares; or
  2. the aggregate dollar amount is greater than $50,000 in any 3 month period.  

The sale of the Affiliate’s securities must take place within 3 months of filing Form 144.  If the securities have not been sold within those 3 months, the Affiliate must file an amended notice.

Affiliates of OTC Bulletin Board or OTC Markets OTCQB, OTCQX and Pink Sheets Issuers with questions on the process of selling restricted stock under Rule 144 can contact Matt Stout, securities lawyer for information.

What Is the Holding Period Under Rule 144 for Affiliates?

An Affiliate under Rule 144 is typically an officer, director, or large shareholder of an OTC public company who is in a “relationship of control” with the issuer.  Before an Affiliate may sell restricted securities under SEC Rule 144, he or she must hold them for a certain period of time, depending on whether the issuer is an OTC Bulletin Board, or an OTC Markets Pink Sheet.

Holding Period for SEC Reporting Companies and Pink Sheets

If the Issuer is an “SEC reporting company” under the Securities Exchange Act of 1934, such as an OTCBB, OTCQB, or OTCQX, then the Affiliate must hold the securities for a minimum of six (6) months before resale.

If the Issuer of the securities is a Pink Sheet, and thus not subject to SEC reporting requirements, then the Affiliate must hold the securities for at least one (1) year before resale.

Holding Period Begins When Shares Are Paid For

Either holding period begins when the securities are purchased and fully paid for or earned (if acquired for services). It is important to remember that the holding period (and Rule 144 in general) only applies to restricted securities.

If Affiliates purchase securities in the public markets, these shares are free trading, and not restricted, so there would technically be no holding period under Rule 144.

However, this is often difficult to document, especially if the shares are intermingled or held at the same broker.  Affiliates wishing to purchase securities of the Issuer in the public markets would do well to keep good records, since it may become necessary to trace these non-restricted shares back to their source to prevent them from unduly being classified by the Transfer Agent or clearing firm as restricted.

Affiliates Should Wait Greater Than Ninety Days After Resigning

If an Affiliate purchases additional stock from the Issuer, this will not affect the holding period of earlier purchased stock of the same class.  However, Affiliates who sell stock to Non-Affiliate Shareholders can inadvertently cause those shares to be considered Affiliate Shares unless greater than 90 days has past since the Seller has ceased to be an Affiliate.

In practice, it is best for Affiliates of OTC Bulletin Board and OTC Markets Pink Sheet companies to fully document their holding period, and especially to document when they cease to be an officer, director, control person or 10% holder of the Issuer’s stock.

Likewise, it is important for investors purchasing stock privately from “former” Affiliates to review the Issuer’s Board Resolutions and filings to determine when the Seller officially ceased to be an Affiliate, since the Transfer Agent, broker and clearing firm will want to know these details.   An OTC Securities Lawyer like Matheau J. W. Stout can provide legal advice to the purchasers of Affiliate stock and draft 144 legal opinion letters that detail the origin, history and affiliate status of the shares.