Tag Archives: rule 144 opinion letter

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 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.

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

How is the Six Month Holding Period Computed under Rule 144(d)(1)(i)?

For mandatory SEC filers, the Rule 144 holding period is Six (6) Months.  This means that under Rule 144(d)(1)(i), a minimum of Six (6) Months must pass from the date restricted securities are acquired from an Issuer or from an Affiliate of the Issuer, whichever is later (the “Acquisition Date”) and any resale of the restricted securities under Rule 144 (the “Resale Date”).

What is a Mandatory SEC Filer?

The Six (6) Month holding period only applies to mandatory SEC Filers.  A mandatory SEC filer is a public company that is, and for at least the immediately prior 90 days, has been subject to the reporting requirements of Exchange Act Section 13 or 15(d).

What is the Acquisition Date for the Purposes of Rule 144?

The Acquisition Date is the date on which the restricted securities were acquired by being “paid for” or “fully earned.”  This is often much earlier than the date of a stock certificate.

How to Calculate the Rule 144 Holding Period in a Debt Conversion

For shares originating in a debt conversion, Rule 144 allows tacking onto the holding period of a Promissory Note.   In that case, the Acquisition Date would be the later of the date of Note, or the date funds were paid to the Company in the form of wire transfer or check, if the Note is evidence of a loan.   The Acquisition Date could then be years before a Notice of Conversion or a stock certificate was even issued.

How to Calculate the Rule 144 Holding Period for a Subscription Agreement

For stock purchased from the Issuer via Subscription Agreement, the Rule 144 holding period will begin on the later of the date the Subscription Agreement was countersigned, or on the date the Shareholder purchased the shares via wire transfer or check.  That is, a Shareholder cannot start the Rule 144 holding period merely by promising to buy shares by signing the Subscription Agreement–the shares must be paid for.

How to Calculate the Rule 144 Holding Period for a Consulting Agreement

For stock awarded as compensation under a Consulting Agreement, when the Rule 144 holding period would start depends on the language of the document and when the services were provided.  The shares awarded under a Consulting Agreement must be “fully earned” by providing services.

In some cases, the document itself will specify the “term” or period of time in which services are to be provided, and the rate at which a number of shares is earned.  In cases where the document was vague, confirmation from the Company’s CEO or confirmed by correspondence between the parties or Transfer Agent can be used to verify when the shares were considered “fully earned.”

Rule 144 Legal Opinions by OTC Securities Lawyer Matheau J. W. Stout, Esq.

OTC Securities attorney Matt Stout reviews documents at no cost for Shareholders seeking legal opinions under Rule 144 or Section 4(a)(1).   Shareholders who want to clear and sell restricted stock, or who want to remove the restricted legend from securities can contact OTCLawyers at (410) 429-7076 or mstout@otclawyers.com.

Rule 144 Holding Period for Voluntary SEC Filers

What is a Voluntary SEC Filer?

A “voluntary filer” in a public company which continues filing SEC reports like the 10-K, 10-Q and 8-K, after its S-1 Registration Statement becomes effective, without technically being required to do so.

For the purposes of calculating a Rule 144 holding period, Voluntary SEC filers are not considered “subject to” the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) because they are not obligated to file Exchange Act reports under either of those sections.

Does Having an Effective S-1 Affect the Rule 144 Holding Period?

Having an S-1 Registration Statement, which is filed under the Securities Act of 1933, rather than under the Exchange Act, does not make a filer “mandatory.”  An SEC filer goes from “voluntary” to “mandatory” by filing certain Exchange Act forms, like the 8A-12g or the Form 10 Registration Statement.   These Exchange Act forms obligate the public company to file the 10-K, 10-Q, and 8-K, by making the company “subject to” the filing requirements of Exchange Act Section 13 or 15(d).

Mandatory SEC Filers Have a Six Month Holding Period Under Rule 144

The Six (6) Month holding period requirement in Rule 144(d)(1)(i) applies only to the restricted securities of a public company that is, and has been for at least 90 days immediately prior to the sale, “subject to” the reporting requirements of Exchange Act Section 13 or 15(d).

Voluntary Filers Have a One Year Holding Period Under Rule 144

Because of this distinction, the One (1) Year holding period requirement in Rule 144(d)(1)(ii) applies to the restricted securities of voluntary filers.

Rule 144 and Section 4(a)(1) Opinion Letter Attorney Matt Stout

Shareholders in OTCQB and OTC Bulletin Board companies can contact Rule 144 and S-1 lawyer Matt Stout with questions on clearing and depositing restricted stock at (410) 429-7076 or mstout@otclawyers.com for a no cost review.

What is the Rule 144 Holding Period for a Warrant Exercise?

Rule 144 Holding Period for Cashless Warrant Exercise

If the exercise of a warrant is “cashless” then a Shareholder is allowed to tack the holding period of the warrant onto the common stock under Rule 144(d)(3)(x).  This means that as long as there is no consideration whatsoever paid in order to exercise the warrant, the holding period of the common stock will tack back to the date of the warrant itself.

Rule 144 Holding Period for Warrant Exercises Upon Payment of Cash

In contrast, if the warrant exercise is not “cashless”, then the holding period will begin on the date of the warrant exercise.

De Minimus Payments to Exercise Warrants Under Rule 144

This is true even if the payment to exercise the warrant is “de minimis.”  That is, even if the amount paid to exercise the warrant is a very tiny amount of cash, the Shareholder will be prevented from tacking the holding period of the warrant to that of the common stock under Rule 144(d)(3)(x).

No Cost Review of Documents by Rule 144 Legal Opinion Lawyer Matt Stout

Shareholders in need of Rule 144 or Section 4(a)(1) legal opinions can contact OTC Bulletin Board and OTC Markets securities attorney Matt Stout for a no cost review of documents at (410) 429-7076 or via email at mstout@otclawyers.com.