Tag Archives: evergreen rule

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.

 

 

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.

Rule 144 and Selling Stock in Former Shell Companies

As many shareholders in OTC Markets companies know, Rule 144 is the most common exemption for clearing and selling restricted stock.   But how does Rule 144 apply to the shares in former shell companies?

The Evergreen Rule and Rule 144

Rule 144 is only available for the sale of stock in a former shell company when the following requirements are met:

  1. The former shell must be subject to Exchange Act filing requirements; and
  2. The Issuer must have filed “Form 10 Information” with the SEC, although this could be accomplished through the filing of a Super 8-K, or any filing including all of the information found in a Form 10 filing, including audited financials of the operating company which was the subject of the reverse merger (which caused the vehicle to cease being a shell); and
  3. The Issuer must be current and have filed SEC reports (10-Q, 10-K, 8-K, etc.) for Twelve (12) months since the Issuer ceased to be a shell.

(This last requirement is known as the Evergreen Rule, because if the Issuer misses a filing it is not “current” and the requirement is not met).

The Issuer Must Approve Rule 144 Restrictive Legend Removal

When the public company is a former shell, under some circumstances, it can actually “veto” a Rule 144 opinion letter which requests the removal of a restrictive legend, even if the shareholder is a non affiliate, and has satisfied the holding period…and even if the requirements above are met.   How?

The Issuer Could Miss a Filing and Run Afoul of the Evergreen Rule

The argument to “veto” a request to remove a Rule 144 restrictive legend is that it cannot be removed from the shareholder’s certificate unless the shares are to be deposited immediately for sale with a broker, since in theory, if the Issuer missed the next filing, it could ceased to be “current” and in compliance with the Evergreen Rule.

Shares Must Be Deposited for Sale Immediately

For this reason, most Transfer Agents will spot this and insist that the shares be DWAC’d for deposit and sale at the broker, and that the shareholder rep forms detail this fact.

Alternatives to Rule 144 for Clearing Restricted Stock

This is just one of the many nuances of drafting securities law opinion letters under Rule 144. Shareholders and OTC Markets Issuers with questions about the Evergreen Rule, or alternatives to Rule 144 for clearing restricted stock, such as Section 4(1) or 3(a)(10) can contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com

 

 

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.