Tag Archives: Section 4(a)(1)

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.

 

 

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.

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.

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 are Convertible Securities?

Convertible securities include bonds and preferred stock.  For OTC Markets and Bulletin Board companies, the term usually means a debt secured by a Promissory Note, which can be converted into common stock.  These are known as Convertible Notes or simply Convertible Debt.

Convertible Debt in OTC Markets Companies

Most convertible promissory notes issued by OTC Markets public companies include provisions that allow the debt holder to decide if and when to convert a Note into common stock.  SEC Rule 144 usually allows a debt holder to trace their holding period to the date of the Note, rather than the date of conversion, which could be months or years after the Note was issued.

Why Do OTC Markets Companies Issue Convertible Debt?

OTC Markets companies issue Promissory Notes primarily to raise capital or to pay for services. It is a fact of life for services providers that OTC public companies often lack the cash to pay their vendors.

Why Do Debt Holders Convert Promissory Notes into Stock?

Statistically, experienced OTC lenders and service providers accepting Convertible Notes in lieu of cash know that microcap companies quoted on the over-the-counter markets will probably default on their obligation to pay.  Given that probability, drafters of Convertible Promissory Notes must take into consideration that the debt holder will later need to convert a defaulted Promissory Note into common stock after the Rule 144 holding period has been satisfied.

9.99% Blocker Clauses in Convertible Promissory Notes

Convertible Promissory Notes issued by OTC Markets  companies usually include “blockers” which are clauses preventing the debt holder from owning greater than 9.99% of the OTC company’s issued and outstanding shares of stock at any one time.  This blocker is intended to prevent the debt holder from being classified as an Affiliate, which would cause Rule 144 Affiliate volume trading limitations to be applicable under Rule 144.

Exceeding 9.99% ownership in an SEC reporting company also brings the obligation of filing SEC Forms 3, 4 and 5.

Institutional financiers that specialize in providing capital to OTC Markets Pink Sheets and Bulletin Board companies using convertible debt typically do not convert a Note again until they are “flat.”  Being “flat” means that the common stock in their brokerage account from the prior conversion has all been sold, such that it is easy to verify with the Company and Transfer Agent that the debt holder has complied with the 9.99% blocker.

4.99% Blocker Provisions in OTC Markets Convertible Debt

For SEC reporting companies filing under the Securities Exchange Act of 1934, sometimes the blocker clause will specify a maximum of 4.99% if the debt holder also wants to avoid the additional obligation of filing a Schedule 13d or Schedule 13g.

When a debt holder converts a Note into 5% of the common stock in company subject to the reporting requirements under Section 12 of the Securities Exchange Act of 1934, the debt holder is required to file a Schedule 13D or 13G.

The rationale behind the 4.99% blocker is that the institutional financiers who provide capital to multiple OTC Markets and Bulletin Board companies tend to do many conversions.  Typically these lenders will only convert after the stock can be cleared using a Rule 144 legal opinion or Section 4(a)(1) opinion, and they will convert the debt in regular increments which are then immediately sold into the market, such that their accounts are flat before each subsequent conversion.

Such repeated and regular conversions in which stock is owned for perhaps only a few days at a time would cause an administrative burden to file multiple SEC forms each time the debt holder’s ownership in a particular OTC Issuer fluctuated above and below 5%.

Conversion Metrics and Formulas in OTC Convertible Debt

Convertible Promissory Notes issued by OTC Markets and Bulletin Board companies to raise capital or pay for services usually contain a conversion ratio based on fluctuating market prices.

Converting OTC Stock at a Discount to Market

That ratio or formula of a market price conversion is typically referred to as a “discount to market” which means that the debt holder will have the right to convert at a share price that is a particular percentage of the share price on the date of conversion or based on some average during a trailing conversion period.

Rule 144 and Section 4(a)(1) Legal Opinions for Debt Conversions

Management and Debt Holders of OTC Markets and OTC Bulletin Board companies can contact OTC Securities Lawyer Matt Stout for Rule 144 legal opinions and Section 4(a)(1) legal opinions at (410) 429-7076 or 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 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.

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.