Tag Archives: former shell under Rule 144

Securities Law Opinion Letters Under Rule 144 and 4(1)

Legal Opinions for OTC Markets Issuers and Shareholders

A large part of Matheau Stout’s securities law practice includes the research and drafting of legal opinions for the sale of restricted stock of Issuers listed on the OTC Bulletin Board, Pink Sheets and OTCMarkets.

Rule 144 Opinion Letters

The most common type of securities opinion letter is known as the 144 Letter, or Rule 144 Legal Opinion.   144 Letters are used by Transfer Agents when removing restricted legends from OTC stocks. Most brokerages specializing in OTC Bulletin Board and Pink Sheet stocks will not accept deposits of certificates without a Rule 144 legal opinion drafted by an experienced securities attorney like Matt Stout.

Section 4(a)(1) Legal Opinion Letters

When Rule 144 is not available because the OTC Markets company is a current or former shell, experienced securities attorneys like Matheau J. W. Stout, Esq. can review certificates and documentation to see if Section 4(a)(1) can apply.

Section 4(a)(1) is also known commonly as Section 4-1, and is available only if the securities in question are greater than Two (2) Years old, and the Shareholder is not an Issuer, Underwriter or Dealer.

OTC Markets Securities Lawyer Matt Stout

Shareholders and Brokers can request SEC Rule 144 opinions from Matt Stout, Securities Lawyer by calling (410) 429-7076 or via email, at mjwstout@gmail.com or mstout@otclawyers.com.

More information on clearing restricted stock using Rule 144 and Section 4(a)(1) is available at securities law blogs published by Matheau J. W. Stout including 144letters.net144-Opinions.comRestrictedStock.co, andRestrictedStockOpinion.net.

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.