Tag Archives: OTCMarkets

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.

S-1Registration Statements

We File S-1 Registration Statements

We represent OTC Bulletin Board and OTC Markets Pink Sheet public companies in the preparation and filing of S-1 Registration Statements with the SEC.

This includes private companies seeking to “go public” via S-1 and those established OTCBB, OTCQB and Pink Sheet companies that are registering a class of securities previously sold through a private placement.

PCAOB Auditors

We work closely with several PCAOB Auditors and can recommend an auditing firm to prepare financials to accompany the S-1 when needed.

If an Issuer already has an auditor, we can work with that firm to prepare the S-1 filing, and to coordinate the timing of the S-1 with the completion of the audit.

Market Makers

We work alongside several market makers that sponsor microcap companies which seek to “go public” through the filing of an SEC S-1 Registration Statement.

In these cases, in order to obtain a trading symbol, and become DTC eligible, the company will need a relationship with a broker-dealer acting as a “market maker” that will complete Form 211 on the company’s behalf.

If a company already has a market maker lined up, chances are good we have worked with the broker-dealer before, and that I can assist with due diligence and issue the legal opinion which accompanies the 15c2-11.

Business Plan

Sometimes companies seeking to file an S-1 worry too much about polishing their “business plan” and would do well to get the process of preparing their S-1 started before the business plan presentation is polished and SEC ready.

This is because PCAOB audits take time, and these S-1 audits should be addressed first.   Until the auditor has been provided with all of the financials needed to complete the SEC audit, the clock has not started ticking on the S-1.

The business plan can be polished while the auditor is at work and when needed we can refer management to specialists who edit business plans for S-1 filings.

We help Coordinate the S-1 Process

We help coordinate the S-1 process by serving as a liaison between the company, its auditors and the market maker, and in the meantime, I can assist with the review of the company’s business plan.

As a practical matter, because the format of an S-1 Registration Statement demands answers to specific questions, the very process of beginning the S-1 will help management complete the business plan.

Matt Stout, OTC securities lawyer, welcomes inquires from both current and future OTC Bulletin Board and OTC Markets Pink Sheet companies with questions on the S-1 process at (410) 429-7076 or mstout@otclawyers.com.

Removing Restrictive Legends from OTC Stock

 The most common questions by shareholders of OTC Markets stocks, including Pink Sheets and OTCBB Bulletin Board securities involve the removal of restrictive legends from stock certificates.

There are two common exemptions from registration which are used every day by OTC shareholders to clear and deposit restricted stock.  They are Rule 144 and Section 4(a)(1).

Rule 144 May Be Available to Remove a Restrictive Legend

Rule 144 is the most commonly used method for removing a legend from restricted stock. Many microcap shareholders quickly learn that their broker and the transfer agent require a Rule 144 legal opinion drafted by a securities attorney in order to sell restricted stock.

But Rule 144 is not available if the Issuer is a current or former “shell” and its filings are delinquent.  In those instances, shareholders can contact an experienced securities lawyer to review their supporting documents to see if Section 4(a)(1) can be used to clear their restricted stock.

Section 4(a)(1) Legal Opinions By Experienced Securities Attorneys

When Rule 144 is not available, and the securities are greater than Two (2) Years old, experienced OTC Markets securities counsel like Matt Stout can often provide a Section 4(a)(1) legal opinion to clear restricted stock.  A Section 4(a)(1) opinion is also commonly referred to by experienced securities lawyers simply as 4(1) opinion or 4-1 legal opinion.

Differences Between Rule 144 and Section 4(a)(1)

The main differences between a Rule 144 opinion and a Section 4(a)(1) opinion are

  1. Rule 144 Legal Opinions cannot be issued for a current shell company.
  2. Rule 144 Legal Opinions cannot be issued for a former shell company unless the company complies with the elements of the “Evergreen Rule” which basically means it emerged from shell status at least one (1) year ago, is subject to the reporting requirements of the Securities Exchange Act of 1934, has filed “Form 10 Information” including audited financials for a year, and is current in its SEC filings at the time of the opinion.
  3. Section 4(a)(1) opinions require that the shareholder and/or prior holders have held the securities for at least Two (2) Years in contrast to a shorter Rule 144 holding period of either six (6) months for mandatory SEC filers or one (1) year for non reporting Pink Sheets.
  4. Section 4(a)(1) opinions can be drafted for either current or former shell companies because “shell status” is not an element of 4-1.
  5. Section 4(a)(1) legal opinions cannot be drafted for shareholders considered an issuer, underwriter or dealer.

Shareholders in OTC Markets companies can contact securities attorney Matt Stout for a no-cost review of their restricted stock certificates and supporting documentation at (410) 429-7076 or mstout@otclawyers.com

 

What is a Spin Off?

Why Would a Public Company Spin Off a Subsidiary?

A public company may choose to  “spin off” a subsidiary when the sub’s operations or assets and liabilities are inconsistent with its target business model.  A spin off is also commonly used as a way to create a new public company with a built in shareholder base.

The Mechanics of a Spin Off

Technically, a spin off is when a parent company distributes shares of its subsidiary to the parent company’s shareholders.  The result is the subsidiary becoming a separate, stand-alone company completely independent of its parent.

The shares in the subsidiary are typically distributed on a pro-rata basis to each shareholder of the parent. The resulting new company then has the same shareholders as the parent, and if that shareholder base is large, it may be easier to attract market makers for the new stock.

Certain states of incorporation and the rules of stock exchanges may require a company to receive majority shareholder approval before a spin off can be executed.

What Does Caveat Emptor or Skull & Crossbones Mean on OTC Markets?

caveat-emptor The Caveat Emptor or “Buyer Beware” warning on OTC Markets means that there is  a public interest concern involving the Issuer, its Management or Securities.

Although the skull and crossbones implies that there is something possibly toxic about the stock, and looks scary, it really functions to alert the Issuer to provide documentation requested by a regulatory authority like the SEC in order to clear up what might just be a misunderstanding.

Caveat Emptor is Inevitable When Issuers Ignore SEC Inquires

In many cases, the existing Management or prospective Buyers of Caveat Emptor pubic vehicles will discover that the source of the skull and crossbones is a matter easily explained when a securities lawyer takes the time to follow the process.

Another way of looking at a Caveat Emptor is that the skull and crossbones is the inevitable result when an Issuer ignores an SEC inquiry, even if there is nothing whatsoever wrong.

Issuers Should Respect the Process and Hire Counsel to Respond

The difference between having a skull and crossbones for a few days or forever comes down to whether an Issuer respects the process enough to respond properly.  Hoping it will go away doesn’t work.  Management hiding their heads in the sand won’t remove it.

It is not the goal of the SEC, OTC Markets or any other organization to blacklist companies for life; those with good management and transparent numbers, that take the time and demonstrate good faith by cooperating fully are often rewarded quickly.  There is nothing to lose by responding and Shareholders have a lot to gain if the stock can start trading again.

Even if there was a legitimate public interest concern which caused the Caveat Emptor warning, once the Issuer takes affirmative steps to address past problems, it can distance itself from bad actors or past mistakes.   This process is all about disclosure, and more transparency is always better for both Management and Shareholders.

Pink Current Issuers who suddenly find themselves saddled with the Caveat Emptor badge should pick up the telephone and hire experienced securities counsel, who can coordinate the process of providing the regulatory authority with the information they need.

When is the Caveat Emptor Warning Removed By OTC Markets?

OTC Markets quoted companies may have the Caveat Emptor warning removed by providing their investors with detailed disclosures following the Alternative Reporting Standard.  This is accomplished by using either the OTC Markets Disclosure & News Service or, if the Issuer is an OTCQB, by becoming current again in their SEC filings.  Even after filings are brought current, OTC Markets may continue to mark an Issuer as Caveat Emptor if it believes there might still be a public interest concern.  For this reason, Issuers should specifically address any public interest concerns in their disclosures rather than trying to pretend it didn’t happen.

Experienced Securities Counsel for Caveat Emptor Vehicles

OTC Markets Issuers facing a Caveat Emptor situation should contact experienced securities legal counsel to discuss what is required to remove the skull and crossbones.  There are many reasons why the Caveat Emptor warning can be added to an Issuer’s trading symbol and the proper actions in response depend on why the Issuer was flagged.

Caveat Emptor May Create An Opportunity for Buyers of Public Vehicles

When existing Management of a Caveat Emptor vehicle gives up in frustration or chooses not to respond properly to an SEC inquiry, this can create an opportunity for a group with the money and patience to deal properly with any lingering public interest concerns.  Due diligence is essential in evaluating the difficulty of removing the Caveat Emptor warning, and this should be factored in when looking at a skull and crossbones vehicle that is for sale.

Management or Shareholders of OTC Markets skull and crossbones public vehicles can contact securities attorney Matt Stout at (410) 429-7076 for further information.

What is the Alternative Reporting Standard for OTCQX Issuers?

Most public companies that qualify for the OTCQX market tier are SEC reporting companies and already file the typical 10-Q, 10-K and 8-K forms.  In other words, they are the same fully reporting Issuers you would see on the OTCQX or OTC Bulletin Board….but they make more money and have more assets.

However, even when SEC registration is not required, OTCQX companies must still make information publicly available pursuant to Rule 10b-5 under the Securities Exchange Act of 1934 (“Exchange Act”) and pursuant to Rule 144(c)(2) under the Securities Act of 1933 (“Securities Act”).

In order to comply with these requirements, OTC Markets Group offers the Alternative Reporting Standard for companies that elect to make material information publicly available to investors.

To qualify for OTCQX, U.S., companies not already fully reporting to the SEC can follow the Alternative Reporting Standard.  These companies submit information to OTC Markets per the OTCQX U.S. Disclosure Guidelines and are then subject to the eligibility requirements, terms and conditions of the OTCQX Rules for U.S. Companies.

Under the Alternative Reporting Standard, OTCQX Issuers provide investors with all material information necessary for the investor to make an informed investment decision.  This essentially amounts to the same information SEC reporting companies put in their Form 10 filings.

How Does A Trading Halt Affect the OTC Issuer’s Stock?

Who Can Place a Trading Suspension or Trading Halt on an OTC Security?

Only the SEC or FINRA can suspend or halt trading in a public company’s stock quoted on the OTCQX, OTCQB or OTC Pink Sheet marketplaces.  OTC Markets does not suspend trading or stop publishing quotations for any Issuer on its own accord.

A trading suspension or halt has nothing to do with whether or not an Issuer has continued to subscribe to the OTC Markets Disclosure and News Service, to OTCIQ, or even if the Issuer’s filings are not current on OTC Markets.  Pink Sheet Stop Signs can, in theory, remain Pink No Information forever without having trading in their stock suspended or halted.

What happens if the SEC or FINRA Issues a Trading Halt in an OTC Markets stock?

When trading in an OTC stock is suspended by the SEC or halted by FINRA, OTC Markets Group removes all quotes from its inter-dealer quotation system and displays a “Halted/Suspended” message.

How Long Do Trading Suspensions Last?

SEC suspensions for OTC Markets OTCQX, OTCQB and OTC Pink Sheets last Ten (10) business days.

Once the suspension has ended, market makers may re-enter their bid and ask quotes if a new Form 211 is filed with FINRA that includes the Issuer’s current financial information.

Without the new 15c2-11, the trading symbol will remain a Caveat Emptor or skull and cross bones.

What Can Caveat Emptor Issuers Do About SEC Suspensions or FINRA Trading Halts?

Management or Shareholders of OTC Markets Caveat Emptor or skull and cross bones Issuers can contact Matt Stout, securities lawyer, with questions on the process of addressing SEC trading suspensions or FINRA trading halts, and to discuss the 15c2-11 process at (410) 429-7076 or mstout@otclawyers.com

 

What Happens to Stock When a Company is Delisted from an Exchange?

If an Issuer is “Delisted” from the NASDAQ or NYSE, Does This Affect its Shares?

No.  If a Shareholder owns stock in an Issuer that was delisted from a national exchange like the NYSE or NASDAQ and is now being quoted on OTC Markets, nothing changes regarding the shares themselves.

A Shareholder will remain the beneficial owner of the stock even after the Issuer is delisted and that stock can be traded through any broker-dealer that regularly deals in the Over-the-Counter Markets or in OTC securities.

Which Brokers Accept Delisted Stock?

Will the delisted stock be accepted by E-Trade or TD-Ameritrade?  Probably not, but those are not your broker of choice for OTC Bulletin Board or OTC Markets Pink Sheet stocks anyway.

Can companies get “delisted” from the OTCQX, OTCQB and OTC Pink marketplaces?

No. OTC Markets quotes stocks but is not an exchange so there are no “listings.”  The only way a public company’s stock stops being quoted in either the OTCQX, OTCQB and OTC Pink Sheet marketplaces is if every broker-dealer stops quoting the stock.

In those rare circumstances when public companies shares no longer exist, but they still have a trading symbol, and are still being quoted, the Issuer has an obligation to notify FINRA.  FINRA will investigate and, if warranted, eliminate the trading symbol, and inform OTC Markets that the ticker is no longer valied. OTC Markets  will then remove the quotations in that stock from OTCMarkets.com.

Shareholders needing referrals to brokers who specialize in the OTCBB, OTCQB, OTCQX and Pink Sheet stocks can contact Matt Stout, securities attorney, for a referral at (410) 429-7076.

Current Public Information and the Alternative Reporting Standard Under Rule 144

Current Public Information Under Rule 144

Under SEC Rule 144, there must be “adequate current information” about the OTC Markets Issuer publicly available before the sale of restricted stock can be made. According to the SEC for “reporting companies” that file quarterly and annual financial reports with the SEC via its EDGAR filing system, this generally means that those Issuers have complied with the periodic reporting requirements of the Securities Exchange Act of 1934.

The reporting companies’ compliance with those reporting requirements is easily seen on OTC Markets via the current OTCQB or OTCQX designation, which demonstrates that an Issuer is current in its filings.

Current Information Under the Alternative Reporting Standard for Pink Sheets

For “non-reporting” companies, that are not subject to the reporting requirements under the Securities Exchange Act of 1934, this current information requirement means that certain company information is publicly available via OTCMarkets.com in the form of Quarterly and Annual reports showing the Issuers unaudited balance sheet, profit & loss statement and cash flow statement are posted.

It also means that the Pink Sheet Issuer’s Information and Disclosure Statement is posted on time, as well as.   The OTC Markets disclosures include information regarding the nature of the Issuer’s business operations, the bios of its officers and directors, and its share and debt structure.

OTC Pink Current

A Pink Current designation on OTCMarkets.com provides investors with the knowledge that the Pink Sheet Issuer has timely filed all of its disclosures and financials on OTCIQ in compliance with the Alternative Reporting Standard.

If those disclosures and financials are detailed and professionally prepared, they can be as informative and revealing to investors as an SEC Form 10-Q or 10-K.

A Pink Current Issuer is considered to have satisfied the requirement of “adequate public information” under Rule 144.

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.