Tag Archives: Section 4-1 opinion

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.

 

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.

What is the Rule 144 Holding Period for Securities Exchanged under Securities Act Section 3(a)(9)?

When a Shareholder receives new securities in exchange for old securities of the same Issuer under Section 3(a)(9), the new securities received in the exchange assume the same character as the exchanged securities.

Tacking of the Holding Period is Allowed Under Section 3(a)(9) Securities Exchanges

This means that when restricted securities are exchanged, the new securities received under Section (a)(9) are also restricted, but the SEC allows tacking onto the holding period of the former securities.

Rule 144 Legal Opinion Letters by Experienced Securities Counsel

Shareholders receiving shares in 3(a)(9) exchanges can contact OTC Markets and OTC Bulletin Board securities lawyer Matt Stout for a no cost review of their exchange documents, and for the issuance of Rule 144 or Section 4(a)(1) legal opinions at (410) 429-7076 or mstout@otclawyers.com.

 

Rule 144 Holding Period and Employee Stock Options

When does the Rule 144 holding period begin for restricted stock acquired under an Employee Stock Option plan?

The Option Grant Date Does Not Start the Rule 144 Holding Period

The Rule 144 holding period does not begin on the option grant date.  The grant of an option only gives an employee the right to acquire stock in the future.  The date of the employee’s stock option grant can never be used for Rule 144 holding period purposes, even if the exercise does not require the payment of cash or other consideration to the Issuer.

The Option Exercise Date Starts the Rule 144 Holding Period

The holding period under SEC Rule 144 starts on the date the option is exercised by the employee, and, unless the exercise is “cashless”, the full payment of the exercise price is made to the Issuer.  This is intuitive, since prior to exercising the option, the employee is not at risk, and the stock has not been in any way “earned” or “paid for.”

What is the Rationale Behind the Rule 144 Holding Period for Stock Options?

The SEC Rule 144 holding period does not begin to run until until the option is exercised.   The reason behind this is that because the employee did not pay for the option grant, prior to the issuance of the restricted stock, the employee “optionee” holds no investment risk in the Issuer.

The same rationale used here is consistent with that used when restricted stock is purchased through Subscription Agreement, since the Rule 144 holding period would not begin until the date of the check or wire transfer confirmation–when the subscription was actually paid for by the investor.

Rule 144 Securities Lawyer Matt Stout

OTC securities lawyer Matt Stout drafts Rule 144 and Section 4(a)(1) legal opinions for shareholders in OTC Markets and OTC Bulletin Board companies.   Copies of certificates and supporting documentation can be sent for a no cost review via mstout@otclawyers.com.   Shareholders who wish to clear restricted stock using Rule 144 opinion letters can contact Matt Stout at (410) 429-7076.

What is Rule 144?

Rule 144 Safe Harbor for Clearing Restricted Stock

SEC Rule 144 is the most common safe harbor that Shareholders of restricted stock in OTC Markets companies use to sell their shares.

Rule 144 has three major questions that must be answered before it can be used to remove a restricted legend from a stock certificate.  These questions determine Affiliate Status, 144 Holding Period and Shell Status.

Is the Shareholder an Affiliate of the Issuer under Rule 144?

Under Rule 144, an Affiliate is a “control person” which is most often an officer, director, or owner of greater than 9.99% of the total issued and outstanding shares of any class of stock in the Issuer.

If a Shareholder is an Affiliate, or was an Affiliate within the past 90 days, then he or she is subject to trading volume limitations under Rule 144.

What are the Affiliate Trading Volume Limitations Under Rule 144?

Affiliate Shareholders of OTC Bulletin Board and OTC Markets OTCQB, OTCQX and Pink Sheets, can only sell up to 1% of the Issuer’s total issued and outstanding shares during any 3 month period, and such sales must be reported to the SEC on Form 144.

What is the Shareholder’s Holding Period under Rule 144?

Whether or not the Shareholder is an Affiliate, the restricted stock must be held for a certain period of time, known as the Rule 144 “holding period” after the Shareholder acquires the shares and before the Shareholder sells the stock.

What is the 144 Holding Period for SEC Reporting Companies?

For SEC reporting public companies, like those quoted on the OTC Bulletin Board (OTCBB) and the OTC Markets OTCQB and OTCQX, and for those listed on the NASDAQ or NYSE MKT, the Rule 144 holding period is a minimum of six (6) months.

In order to qualify, the public company must be “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.  This is also known as a mandatory SEC filer.

Rule 144 Holding Period for Non Reporting Companies

For Non SEC Reporting Issuers, like those quoted on the OTC Markets Pink Sheets and filing OTC Markets Disclosure Statements, the Rule 144 holding period is twelve (12) months.

Voluntary SEC filers are also considered non reporting companies and have a Rule 144 holding period of twelve (12) months.

Voluntary filers are those which go public via S-1, but which have not yet filed an 8A-12g or 8A-12b or Form 10 under the 34 Act, so they are not yet technically “subject to” the reporting requirements of Section 12 of the Securities Exchange Act of 1934.

Was the Issuer Ever A “Shell Company” under Rule 144?

Current Shells Cannot Use Rule 144 to Clear Stock

Rule 144 does not allow Shareholders of public companies that are currently classified as a “shell company” to use its safe harbor to clear and sell restricted stock.

This is true even if the Shareholder is not an Affiliate, and if the Shareholder has held stock for longer than the required holding period under Rule 144.

Can Former Shells Use Rule 144?

Former shell companies that now have assets and an operating business must wait one (1) year after the Issuer ceases to be a shell before their shares may be sold using Rule 144, and then only if the public company is an SEC filer and subject to the filing requirements of the Exchange Act of 1934.

The moment a public company ceases to be a shell is sometimes clear because it is found in an SEC filing, like a “Super 8-K” for instance.  This could be the date upon which the company acquired an operating business or assets, in a reverse merger.

The Evergreen Rule:  Rule 144 Applied to Former Shell Companies

Former shells that are fully reporting OTCQB, OTCQX and OTC Bulletin Board companies must have filed current SEC reports like the 10-Q, 10-K and 8-K for a minimum of one (1) year from the date they ceased to be a shell, and they must be current in their filings now, before its Shareholders can avail themselves of the exemption from registration offered by Rule 144.

The term “Evergreen Rule” refers to the requirement that former shell companies must remain current in their filings (forever) in order for Rule 144 to be used.  If a former shell becomes delinquent in SEC filings, Rule 144 cannot be used until the Issuer is current.

Non Reporting Pink Sheet Former Shells Cannot Use Rule 144

Former shell companies that are OTC Markets Pink Sheets cannot used Rule 144 even if they are “Pink Current” now meaning that they are up to date on their OTC Markets Quarterly Reports, Annual Reports and their Information & Disclosure Statements.

Section 4(a)(1) Can Be Used to Clear Stock of Pink Sheet Former Shells

If the shares are greater than Two (2) Year old, OTC shareholders in Pink Sheets or delinquent SEC filers may be able to use Section 4(a)(1) (also known as Section 4(1) or simply 4-1) to clear and deposit their restricted stock.

Section 4(a)(1) can only be used if the shareholder is not an Issuer, Underwriter or Dealer, and if the shareholder can document the origin and history of the Shares as dating back greater than Two (2) Years.

OTC Bulletin Board (OTCBB) and OTC Markets Issuers seeking a securities attorney with expertise in Rule 144 and Section 4(a)(1) can contact Matt Stout at (410) 429-7076 or mstout@otclawyers.com for further information.

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