Tag Archives: Rule 144 holding period

What are the Regulation S Safe Harbor Categories?

There are Three Issuer Safe Harbor Categories under Regulation S

The Regulation S issuer safe harbor contains three categories of offerings, depending on the nationality and reporting status of the Issuer, and whether or not there is substantial US market interest in the securities.

The three categories represent increasing protections to make sure that the securities offered in a Regulation S offering are not part of an unregistered distribution of securities in the United States.

Regulation S Safe Harbor Category 1

The first Issuer Safe Harbor under Regulation S contains the least restrictive conditions and is for offerings of securities of Foreign Companies:

  1. with no substantial US market interest in these foreign securities,
  2. securities offered and sold in “overseas directed offerings,”
  3. securities backed by the full faith and credit of a foreign government, and
  4. securities offered and sold pursuant to certain employee benefit plans.

For offerings in Category 1, there are no requirements other than the Regulation S General Conditions.  Category 1 Regulation S securities are not the subject of legal opinions by US securities attorneys.

Regulation S Safe Harbor Category 2

The second Issuer Safe Harbor under Regulation S applies to offerings that are not eligible for Category 1.  These would include the following:

  1. equity securities of a reporting foreign company; or
  2. debt securities of a reporting foreign or US Issuer or a non-reporting foreign company.

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for a period of 40 days.

Category 2 Regulation S securities are rarely the subject of legal opinions by US securities attorneys.  Today it would be very difficult to find a brokerage firm which would accept for deposit any restricted securities using the 40 day holding period.  Most, if not all, of such brokers were based offshore and have since been shut down.  Nevertheless, when some think if Reg S, they assume the holding period is only 40 days.   Even in the heyday of offshore brokerages, this was only true for stock of “reporting” foreign companies, since debt securities would need to be converted into stock anyway in order for deposit and trading.

Regulation S Safe Harbor Category 3

The third Regulation S Issuer Safe Harbor contains the most restrictive conditions and applies to all securities not eligible for Categories 1 and 2. This includes the following:

  1. equity securities of a reporting US Issuer;
  2. any securities of a non-reporting US Issuer; and
  3. equity securities of a non-reporting foreign company that has a substantial US market interest in its equity securities.

Category 3 encompasses nearly all Regulation S securities which are the subject of legal opinions drafted by US securities attorneys.  In practice, the holding period requirements of Reg S Category 3 are similar to Rule 144 for OTCMarkets or OTC Bulletin Board public companies.

Other Offering Restrictions Under Regulation S for Sales to US Persons under Category 3

In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for the following periods:

Equity securities of Non-Reporting Issuers: One Year.  This is the same as a Non-Reporting OTC Markets Pink Sheet or Voluntary SEC Filer under Rule 144.

Equity securities of Reporting Issuers: Six Months.  This is the same as a Mandatory SEC Filer like an OTCQB or OTCBB stock under Rule 144.

Debt Securities: 40 Days.  In practice, this is of no consequence, because in order for the US Shareholder to deposit and sell stock under Reg S Category 3, “Debt Securities” are converted into “Equity Securities” so the respective Six Months or One Year holding periods will still apply.

Securities Attorneys for Selling Regulation S Stock

As a practical matter, all securities sold pursuant to the registration exemption under Regulation S will undergo scrutiny from brokerage compliance officers when the shareholder attempts to clear stock for resale.

Unless the typical Six Months or One Year holding periods are met, it is highly unlikely that US Shareholders will be able to deposit any Reg S stock, regardless of the public’s impression that the holding period is “only 40 days.”  Once those holding periods are met, it may also be possible to obtain a Rule 144 legal opinion even though the original private offering was done under Regulation S.  If the stock is greater than two years old, it may also be possible for a Section 4(a)(1) opinion to be drafted.

It is important to provide an experienced securities attorney like Matt Stout with all documentation showing the origin and history of the Reg S shares when seeking a legal opinion to clear Regulation S stock.

Regulation S Shareholders can contact securities lawyer Matt Stout at mstout@otclawyers.com or (410) 429-7076 to discuss the Regulation S General Conditions and Safe Harbors at no cost.

Rule 144 Holding Period for Stock-for-Stock Acquisitions

Reverse Mergers of OTC Markets microcap companies are typically achieved using a stock-for-stock exchange under which the public company issues restricted stock in exchange for the private stock of the company being “vended in.”

Holding Period of Private Company Stock Does Not Tack under Rule 144

Shareholders in the private company may have already held their private stock for many years prior to the reverse merger.  Thus these private shareholders are often under the mistaken but intuitive impression that they can tack their ownership of the stock in the private company prior to the reverse merger in order to meet the holding period requirement under Under Rule 144.   However, this is not true.

Rule 144 Holding Period Starts Upon the Closing of the Share for Share Exchange

In a stock-for-stock acquisition or reverse merger achieved via a share exchange, the date of closing determines when the Rule 144 holding period starts.  Why?  Because the shareholders receiving OTC Bulletin Board or OTC Markets Pink Sheet public company shares are not at risk until the transaction actually closes and the public company’s shares are actually issued in exchange for the private company’s shares.

The Date of the Merger Agreement Does Start the Rule 144 Holding Period

For example, if the closing of the reverse merger will be delayed until the private company’s financials are audited, then the date of the Merger Agreement or the 8-K announcing the proposed Merger will not determine the start of the Rule 144 holding period.

When the closing is delayed for any reason, the Rule 144 holding period for those receiving the public company’s stock will not start until the reverse merger closes because the recipients will not be at economic risk until that time.

Rule 144 Securities Attorney Opinions by Matheau J. W. Stout, Esq.

Rule 144 has many nuances and experienced securities attorneys issue legal opinions only after a thorough review of all shareholder documents and Issuer filings.   Shareholders seeking Rule 144 or Section 4(a)(1) legal opinions can email documents to OTC securities lawyer Matt Stout at mstout@otclawyers.com or call (410) 429-7076 for a no cost review.

What is Tacking Under Rule 144?

Tacking under Rule 144 allows a holder of restricted securities to aggregate the separate holding periods of prior holders in order to meet the Rule 144 holding period requirement.

Rule 144 Holding Periods:  Either Six Months or One Year

The holding period for mandatory SEC filers is 6 months.  These are fully reporting Issuers filing 10-K, 10-Q and 8-Ks and “subject to” the requirements of the Securities Exchange Act of 1934.

In contrast, the Rule 144 holding period for voluntary SEC filers and non-reporting Pink Sheets is 12 months.

Rule 144 Tacking is Allowed for Restricted Stock and Convertible Debt

Tacking is used for both restricted stock, and for convertible promissory notes, as well.

For example, if a Note is documented at over a year old, the Rule 144 holding period is likely met even if the Note holder converts into common stock immediately prior to seeking a Rule 144 legal opinion.  This is because the Note holder is allowed to tack the age of the Note onto the age of the newly issued stock to meet the 12 month holding period.

Tacking Under Rule 144 is Only Permitted to Non Affiliates

By permitting tacking, the SEC allows a selling security holder to include the holding period of a prior non-affiliate holder.   However, if the securities were purchased from an affiliate, tacking is not permitted and the holding period starts over.

For example, if a non affiliate shareholder who owned stock in an SEC mandatory filer for seven months sells stock in a private Stock Purchase Agreement to a new non affiliate shareholder today, the new shareholder has already exceeded the 6 month holding period.

Removing the restricted legend on the stock will require the new shareholder to provide documentation which shows the origin and history of the shares, including the prior holder’s purchase date and non affiliate status.

OTC Securities Lawyer Answers Rule 144 Questions on Tacking

Shareholders with questions regarding tacking under SEC Rule 144 or Section 4(a)(1) can contact OTC Bulletin Board and OTCMarkets securities attorney Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

Tacking of Rule 144 Holding Periods for Distributions of Stock

Do pro rata distributions of restricted stock from a corporate entity shareholder to its individual shareholders affect the Rule 144 holding period?

No.  Under Rule 144(d), the holding period of the corporate entity shareholder may be tacked onto the holding period of an individual shareholder who receives the distribution of restricted stock.

Documenting the Origin and History of Rule 144 Restricted Stock

In order for a Rule 144 opinion letter to be issued by an experienced OTC Markets Pink Sheet and Bulletin Board securities attorney like Matt Stout, the shareholder must provide documentation showing the origin and history of the shares.  The main task of an OTC securities lawyer issuing Rule 144 legal opinions is to confirm when and how the securities were first issued, and then to track every transaction from that point forward.

Rule 144 Securities Attorney Matt Stout Drafts Legal Opinions for Shareholders

OTC securities lawyer Matheau J. W. Stout, Esq. reviews documents at no cost in preparation for drafting legal opinions under Rule 144 and Section 4(a)(1) for Pink Sheets and OTCMarkets OTCQB stocks.   Shareholders can email certificates and Rule 144 documentation to mstout@otclawyers.com or call Matt Stout at (410) 429-7076 to discuss Rule 144 and clearing restricted stock.

Tacking onto the Holding Period of Convertible Notes under Rule 144

Does Accrued Interest Affect the Holding Period Under Rule 144(d)?

When Convertible Promissory Notes with accrued but unpaid interest are exchanged for stock in a public company, the Rule 144 holding period for the Notes can be tacked to the holding period for the stock under Rule 144(d)(3)(ii) only if the exchange consists only “of other securities of the same Issuer.”

That means no additional consideration can be paid in the exchange other than the securities themselves and is consistent with Section 3(a)(9) of the Securities Act of 1933,

Accrued Interest is Not Considered Additional Consideration Under Rule 144

This brings up the question of whether or not accrued but unpaid interest on the Note is construed by the SEC as additional consideration inconsistent with Rule 144(d)(3)(ii).

The SEC’s position is that the right to receive payment for the accrued interest is not additional consideration, and the holding period for the Convertible Promissory Notes can be tacked to the holding period for all shares of stock received in the exchange.

Rule 144 Securities Lawyer Opinion Letters for Debt Conversions

Matheau J. W. Stout, Esq. reviews Notes at no cost in preparation for issuing Rule 144 legal opinions for debt holders in OTC Markets and OTC Bulletin Board companies.  Debt holders can email documents to mstout@otclawyers.com or call Matt Stout at (410) 429-7076 for a free consultation on Rule 144, or on the Section 4(a)(1) alternative to Rule 144 if the securities are at least 2 years old.

When Does the Rule 144 Holding Period Begin When Payment is Escrowed?

As many OTC investors know, Bulletin Board and Pink Sheet Issuers raising capital using a Private Placement Memorandum (“PPM”) sometimes choose to escrow all subscription payments until a minimum amount is raised.

When an OTC private placement offering is made on this type of “minimum/maximum basis”, shares are not issued to investors and proceeds are not delivered to the Issuer from an escrow account unless and until the target minimum amount is sold.

Rule 144(d) Applied to PPM Investors with Escrowed Funds

Under Rule 144(d), the holding period for shares acquired in an OTC Markets company using a “minimum/maximum” offering begins when the shareholder pays for the shares and payment is deposited in the escrow account.

When is the Shareholder Committed to Purchase PPM Shares?

The reason that the Rule 144 holding period begins before the release of the escrowed funds is because the shareholder is committed to participate in the offering if the minimum amount is sold, and that factor is not in the shareholder’s control once the payment is sent and accepted for deposit by the escrow agent.

When are the Shareholder’s Funds At Risk under Rule 144?

This is the moment when the shareholder’s funds are “at risk.”  In contrast, if the language of the subscription or escrow agreement somehow gave the shareholder the right to withdraw the funds upon request, then the funds would not be considered “at risk” and the Rule 144 holding period would not begin to run.

Rule 144 Opinion Attorney Offers No Cost Review of Documents

OTC securities lawyer Matt Stout reviews shareholder documents at no cost in preparation for issuing Rule 144 and Section 4(a)(1) legal opinions to clear restricted stock.

Questions about the Rule 144 holding period, Affiliate Status, and Shell Status are reviewed and if a legal opinion cannot be issued there is no cost to the shareholder.  Contact Matt Stout with Rule 144 questions at (410) 429-7076 or mstout@otclawyers.com.

Debt Conversions Under Rule 144(d) and Section 3(a)(9)

Securities exchanged for other securities of the same Issuer under Section 3(a)(9) will be attributed the “character” of the exchanged securities.  This concept is clear under Rule 144(d), which allows for tacking of the old security’s holding period when an Issuer’s convertible debt is exchanged for equity.

Debt Conversions into OTC Stock Under Rule 144(d)

This concept is seen whenever a Debt Holder in an OTC Markets or OTC Bulletin Board company converts a Promissory note into Common Stock.  In that instance, the old security (Promissory Note) is exchanged for the new security (Stock).

Tacking of Rule 144 Holding Period in Debt Conversions

A debt conversion is usually done by a Debt Holder when the Rule 144 holding period has already been met by the Note, so that the Debt Holder may then deposit and sell the newly converted Stock without any additional waiting.

Securities Attorney for Debt Holders in OTC Companies

Debt Holders in OTC Markets and Bulletin Board companies can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers for Rule 144 legal opinions or Section 4(a)(1) opinions based on debt conversions.

 

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.

 

 

 

Voluntary Filers and the Rule 144 Current Public Information Requirement

The “current public information” requirement under Rule 144(c)(1) is what allows Shareholders of mandatory SEC filers to use the shorter Six (6) Month holding period in order to clear restricted stock.  Only current mandatory SEC filers, which are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) are eligible for this Six (6) Month holding period under Rule 144.

Does the 6 Month Rule 144 Holding Period Apply to Voluntary Filers?

No. A “voluntary filer” is an SEC filer which continues to file SEC forms 10-K, 10-Q and 8-K after its S-1 Registration Statement is declared Effective by the SEC Staff, but which is not required to do so.  Voluntary Filers are not technically “subject to” the Exchange Act reporting requirements because an S-1 Registration Statement is filed under the Securities Act of 1933.

How Can a Voluntary SEC Filer Become a Mandatory Filer?

In order to become “subject to” the Exchange Act reporting requirements (and qualify for the Six (6) Month Rule 144 Holding Period), a voluntary filer must post an 8A-12G, 8A-12B or a Form 10.

What is the Rule 144 Holding Period for a Voluntary Filer?

Until doing so, the current public information requirement in Rule 144(c)(2) is applicable to voluntary filers, and along with it comes the One (1) Year Holding Period before restricted stock can be cleared for sale.

Rule 144 Lawyer for Legal Opinions to Clear Restricted Stock

OTC Bulletin Board and OTC Markets securities lawyer Matt Stout drafts Rule 144 legal opinion letters and Section 4(a)(1) opinions, and reviews documents at no cost.  Contact an experienced Rule 144 attorney at (410) 429-7076 or mstout@otclawyers.com

Pink Sheets and the Current Public Information Requirement of Rule 144(c)(2)

One of the requirements of Rule 144 is that current information about the Issuer must be publicly available before the sale.

SEC Filers Must Have Audited Financials to Be Current

For SEC reporting companies, this means that the Issuer is current in its reporting obligations under the Securities Exchange Act of 1934, which includes audited financials on forms 10-K, and 10-Q.  Without “current information” an SEC filer will be marked “delinquent” and its Shareholders will not be permitted to use the abbreviated Six (6) Month Holding Period for removing restricted legends on their OTC stock.

Non-Reporting Issuers Do Not Need Audited Financials to Be Marked Pink Current

Non-reporting companies, and voluntary SEC filers, are not eligible for the Six (6) Month holding period even if they are “current” since they are not “subject to” the Exchange Act.

For non-reporting Pink Sheets, being current under the Alternative Reporting Standard means filing an up-to-date Information and Disclosure Statement and either the latest Quarterly Report or Annual Report on OTCMarkets.com.

Together, these OTC Markets filings contain information regarding the nature of the Issuer’s business, its officers and directors, and its financial statements, similar to what would be found in a Form 211 filed under 15c211.

Non-Reporting Pink Sheets are not required to have audited financials in order to meet the current reporting requirement under Rule 144(c)(2).

Securities Attorney for OTC Bulletin Board and OTC Markets Filers

Securities lawyer Matt Stout works with public companies that are delinquent in SEC and OTC Markets filings in order to help them become “current.”   In this context, he can review or draft SEC filings and issue OTC Markets Current Information Legal Opinions for those Issuers filing on OTCIQ.   Matt Stout, securities attorney can be reached at (410) 429-7076 or mstout@otclawyers.com.