Tag Archives: rule 144 opinion letter

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.

 

 

What is a Penny Stock?

Penny Stocks are Quoted on the OTC Markets Pink Sheets

Penny Stocks are securities that are not listed on a national securities exchange like the NYSE or NASDAQ, and are also priced under Five Dollars ($5.00) Per Share.  The SEC’s definition of a Penny Stock is found in SEC Rule 3a51-1.  Penny Stocks are usually quoted on the over-the-counter (OTC) Markets on the Pink Sheets.  As a practical matter, most Penny Stocks trade well under a dollar, and many trade below a penny.

Penny Stocks Can Be Quoted on the OTCQB

OTCMarkets has three market tiers where OTC stocks are quoted.  These include Pink Sheets, OTCQB and OTCQX.  While stock price is a criteria for uplisting on the OTCMarkets.com to OTCQB, the minimum share price is One Penny ($0.01), well below the Five Dollars ($5.00) per share used by the SEC to define a penny stock. Since there is no minimum asset or revenue criteria for uplisting to the OTCQB, many OTCQB stocks are considered Penny Stocks.

OTCQX Companies Are Not Technically Penny Stocks

Stock price is not the only criteria for Penny Stocks. Although OTCQX, the highest market tier on OTCMarkets.com, has an initial minimum bid price criteria for US OTCQX companies of only Twenty-Five Cents ($0.25) and an ongoing minimum price of Ten Cents ($.10), OTCQX companies are not technically Penny Stocks because they meet at least One (1) of the exceptions to the Penny Stock Rule below.

Exceptions to the Penny Stock Rules

OTCQX securities are not Penny Stocks, because the criteria for quotation on the OTCQX requires these securities meet One (1) of these exclusions from the Penny Stock Rules:

  1. Net tangible assets  greater than Two Million Dollars ($2,000,000) if the company has been in operation at least Three (3) Years; or
  2. Net tangible assets of greater than Five Million Dollars ($5,000,000) if the company has been in operation less than Three (3) Years; or
  3. Revenue of at least Six Million Dollars ($6,000,000) for the last Three (3) Years.

Legal Opinion Letters for Shareholders with Restricted Penny Stocks

OTC Markets and Bulletin Board securities lawyer Matt Stout issues Rule 144 legal opinions and Section 4(a)(1) opinions for shareholders who own penny stocks and over-the-counter stocks, as well as OTC Markets Pink Sheets seeking to become current or to uplist on the OTCQB.

Contact OTCLawyers at (410) 429-7076 or mstout@otclawyers.com today.

What does an E Suffix Mean for an OTCBB Trading Symbol?

NASDAQ and OTCBB Companies Delinquent in SEC Filings

Whenever a public company trading on the NASDAQ or the OTC Bulletin Board (“OTCBB”) becomes delinquent in its SEC reporting obligations, the letter “E” is added to company’s ticker symbol.

NYSE Companies Delinquent in SEC Filings

Companies listed on the New York Stock Exchange (“NYSE”) which fall behind in their SEC reports receive the suffix “LF” following their trading symbol.

OTCMarkets Companies Delinquent in Filings

Public companies quoted on OTCMarkets.com which are delinquent in their SEC filings are marked “delinquent” first if they are on the OTCQB Market Tier.  After remaining delinquent for a period of time, they get further marked down to Pink Yield and are removed from the OTCQB.

Bulletin Board and OTC Markets Lawyer Matt Stout

Management and shareholders of SEC filers which are delinquent in their filings under the Securities Exchange Act of 1934 can contact securities attorney Matt Stout to discuss the implications for depositing restricted stock using Rule 144 legal opinion letters and Section 4(a)(1) opinions 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

 

Can a Pink Sheet Use S-8 Shares to Compensate Consultants Who Raise Capital?

Exchanging Services for Rule 144 Restricted Stock is Common

Among OTCMarkets public companies, it is commonplace for Issuers to pay for consulting services using restricted shares of common stock.   For non-reporting companies, such as Pink Sheets, the usual way is for the CEO and the consultant to enter into a Consulting Agreement which specifies a certain number of shares for a specific scope of work.

This restricted stock is then held for the standard 12 month holding period under Rule 144 before being sold on the market.  Many times, the type of work for which restricted stock is awarded does include activities associated with raising capital, but Rule 144 is the mechanism for clearing the stock, not S-8.

S-8 Can Only Be Used By SEC Reporting Companies

Most Pink Sheets are not SEC filers, but are instead under the OTCMarkets’ Alternative Reporting Standard.  (Due to a recent change in OTCMarkets’ policies governing its OTCQB market tier, many SEC filers saw their OTCQB status change to Pink Sheet when their share price dropped below a penny.)   Because of this distinction, consultants providing services in exchange for true Pink Sheet stock are awarded Rule 144 restricted stock with a 12 month holding period, not S-8 stock, which is free trading.

S-8 Cannot Be Used for Capital Raising Activities

Even if a Pink Sheet was allowed to use S-8, the capital raiser would still be out of luck because stock issued to consultants in exchange for work associated with capital raising cannot be cleared using S-8.  There are no exceptions for this.  In fact, there are 8 requirements for an SEC reporting company to be able to use S-8, and all of them must be met.

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.

Supporting Documentation for Rule 144 Legal Opinions

One of the most common questions a securities lawyer receives is “What do I need to provide in order to have the restricted legend removed from my certificate?”   The best answer is always for the Shareholder to provide all of the documentation in his or her possession showing the origin and history of the shares.

Shareholders seeking Rule 144 legal opinions should first create PDF files of the stock certificates, and any other supporting documents which can show that the elements of Rule 144 are met.  Then email all of this to the securities lawyer.  The securities lawyer’s process cannot really begin until this information is reviewed and very few questions can be answered until then since most answers depend on the specific facts of the Rule 144 transaction.

SEC and OTC Markets Filings That Mention the Rule 144 Transaction

If the Shareholder is aware of a past SEC filing (10-Q, 10-K, 8-K) or OTC Markets filing (Quarterly Report, Annual Report, or Information and Disclosure Statement) that mentions their transaction, they should note this.   A reference in a public filing to their shares, or the transaction which originated their shares is perhaps the most helpful, and the most rare piece of documentation that can be provided.

Aside from documentation in the Issuer’s public filings, depending on the transaction which originated the shares, this documentation could include:

Documents in Support of a Debt Conversion Under Rule 144

Not all of these documents may be available to the Shareholder in every Rule 144 transaction, but in a best case scenario, all of these would be provided:

  1. Promissory Note; and
  2. Debt Purchase Agreement, if applicable; and
  3. Conversion Agreement signed by the Issuer, if possible; and
  4. Conversion Notice; and
  5. Board Resolutions in which the Issuer acknowledges the debt and the conversion; and
  6. Proof of payment via check or wire transfer; and
  7. Non Affiliate letters signed by the Shareholder and the Prior Debt Holder.

Documents in Support of a Private Stock Purchase Under Rule 144

Many of these documents may not be available, but they are helpful to establish the chain of ownership under Rule 144.  Since the Issuer is not usually involved, there are less Board Resolutions and documents provided:

  1. Stock Purchase Agreement (“SPA”); and
  2. Proof of payment via check or wire transfer; and
  3. Non Affiliate letters signed by Shareholder and the Prior Holder (unless the SPA clearly states this); and
  4. Documents showing how the Seller acquired the Shares in the first place.

Documents in Support of Shares Earned Under a Consulting Agreement Under Rule 144

Not all of these may be in a Shareholder’s packet, but more is better:

  1. Consulting Agreement between Shareholder and Issuer, which hopefully sets forth exactly when the Shares are considered fully “paid for” or earned under Rule 144; and
  2. Board Resolution acknowledging Consulting Agreement and confirming how and when the Shares were earned.  This essentially takes the place of “proof of payment” in the other examples; and
  3. Non Affiliate letter signed by Consultant unless non affiliate status is addressed in the Consulting Agreement.

It is rare when Shareholders have all of these documents handy when they go to sell restricted stock, since this is often years after the Shares were originally acquired.   On those occasions, a securities lawyer with expertise in drafting legal opinions under Rule 144 looks at the total picture and can request additional letters, affidavits and information when necessary.

Shareholders can contact securities lawyer Matt Stout with questions regarding Rule 144 legal opinions, Section 4(1) opinion letters and clearing restricted stock in general at (410) 429-7076 or mstout@otclawyers.com.

 

 

Beneficial Ownership Reporting Under Exchange Act Sections 13(d) and 13(g)

Many Affiliate Shareholders of OTC microcap companies are familiar with the Rule 144 reporting requirements and volume trading limitations for the beneficial owners of greater than 10% of an Issuer’s securities.

Section 13 Applies to Exchange Act Reporting Issuers

However, many are unaware that all owners of greater than 5% in any Issuer which has registered a class of its equity securities under Section 240.13 of the Securities Exchange Act of 1934 (“Exchange Act”), are supposed to file Beneficial Ownership Reports with the SEC.

Investors Owning Greater than 5% Must File Schedule 13 Reports

Under Regulation 13D-G, beneficial owners must continue to file these Schedule 13D or the more abbreviated 13G reports as long as their holdings exceed 5%. These Beneficial Ownership Reports provide the SEC with certain background information as well as the investor’s “intentions” which is why these Schedule 13 reports are filed in connection with a tender offer.

Investors seeking further information on the reporting requirements in connection with a tender offer, or with questions on securities law compliance in general, can contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com.

 

How Do Stock Splits and Reverse Splits Affect Trading Volume Under Rule 144?

Affiliates of OTC Issuers Can Sell 1% Every 3 Months under Rule 144

Under Rule 144, Affiliates of OTC Bulletin Board (“OTCBB”) and OTC Markets OTCQB, OTCQX and Pink Sheet Issuers are only allowed to sell 1% of the total issued and outstanding shares during any 3 month period.

Affiliates of Exchange Listed Issuers Have a Choice Under Rule 144(e)

Affiliates of Issuers listed on national exchanges like the NASDAQ or NYSE MKT are allowed to sell either

  1. 1% percent of the issued and outstanding shares; or
  2. The average weekly trading volume during the 4 weeks before the Affiliate filed Form 144.

Stock Splits Do Not Affect the Affiliate’s Percentage of Ownership

Whether the Issuer is quoted on the Over-the-Counter markets or listed on a stock exchange, neither forward stock splits nor reverse stock splits will affect the trading volume limitations under Rule 144(e) since a forward or reverse split would not change the percentage of the Issuer’s stock that the Affiliate is allowed to sell during the time period chosen.

Calculate Available Volume Under Rule 144 Following a Stock Split

To calculate available trading volume following a forward stock split or reverse stock split, an Affiliate should measure the trading volume as if the split had occurred on the 1st day of the 3 month period, even if it occurs at some later point during the 3 months.

Affiliates of OTC, NASDAQ and NYSE MKT Issuers with questions regarding selling restricted stock under SEC Rule 144 can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.