Debt holders of Promissory Notes and other claims in OTC Markets microcap public companies often ask what is necessary to draft a legal opinion under Rule 144 or Section 4(1) for shares issued in a debt conversion.
The following is an outline of documents which are helpful in determining the validity of the debt. As is usually the case in life, more documentation is better.
If the debt arose from services performed, these documents will be important:
- Invoices and/or correspondence showing communication between the debt holder and the Issuer;
- Consulting Agreement or other written evidence like an email chain, showing services were performed for an agreed upon amount of money, giving rise to the debt obligation. (The date the services were performed is likely the date the holding period starts under Rule 144, unless the language states otherwise.)
If the debt is due to a loan of money to the public company, these documents are helpful:
- Proof of payment either in the form of bank statements, wire transfer confirmations, or cancelled checks. (The date of this payment is likely the start of the Rule 144 holding period, which could be after an agreement was signed.);
- Promissory Note and any Amendments which should show the principal amount, interest rate and default or conversion mechanisms;
Regardless of the source of the debt obligation, if invoices or a Note is going to be converted into shares, at some point there will likely be a
- Conversion Agreement, under which the Issuer and debt holder might agree to a conversion strike price or formula which was not present in the prior documents. This is often a compromise.
- Notice of Conversion, under which the debt holder gives the Issuer and the Transfer Agent notice of the amount of debt being converted, the conversion price, the total shares due, and the amount of debt remaining after such conversion.
Perhaps most helpful of all will be evidence that the Issuer acknowledged the debt and voted to allow the conversion. If so, there may be a
- Board Resolutions or Written Consents which demonstrate the Company’s Board of Directors voted on the services, debt and/or conversion;
- Transfer Agent Instructions which specify the number of shares to be issued.
In every case, the Shareholder seeking the legal opinion under Rule 144 or Section 4(1) will benefit by having his or her
- Broker’s Shareholder Representation Forms filled out, which will specify the Shareholder’s non-affiliate status, the total number of shares beneficially owned by the Shareholder and the holding period.
Finally, the holy grail of Rule 144 would be a specific and detailed mention of the debt obligation and the debt holder in the company’s OTC Markets or SEC filings.
If this is the case, the Shareholder would benefit by making a copy of the filing(s) and including those in the PDF package he or she emails to the securities lawyer drafting the Rule 144 or Section 4(1) legal opinion.
Matt Stout is a microcap securities lawyer representing OTC Markets public companies and their shareholders in a wide range of securities regulation, SEC compliance, FINRA corporate actions and DTC eligibility matters.