An Affiliate under Rule 144 is typically an officer, director, or large shareholder of an OTC public company who is in a “relationship of control” with the issuer. Before an Affiliate may sell restricted securities under SEC Rule 144, he or she must hold them for a certain period of time, depending on whether the issuer is an OTC Bulletin Board, or an OTC Markets Pink Sheet.
Holding Period for SEC Reporting Companies and Pink Sheets
If the Issuer is an “SEC reporting company” under the Securities Exchange Act of 1934, such as an OTCBB, OTCQB, or OTCQX, then the Affiliate must hold the securities for a minimum of six (6) months before resale.
If the Issuer of the securities is a Pink Sheet, and thus not subject to SEC reporting requirements, then the Affiliate must hold the securities for at least one (1) year before resale.
Holding Period Begins When Shares Are Paid For
Either holding period begins when the securities are purchased and fully paid for or earned (if acquired for services). It is important to remember that the holding period (and Rule 144 in general) only applies to restricted securities.
If Affiliates purchase securities in the public markets, these shares are free trading, and not restricted, so there would technically be no holding period under Rule 144.
However, this is often difficult to document, especially if the shares are intermingled or held at the same broker. Affiliates wishing to purchase securities of the Issuer in the public markets would do well to keep good records, since it may become necessary to trace these non-restricted shares back to their source to prevent them from unduly being classified by the Transfer Agent or clearing firm as restricted.
Affiliates Should Wait Greater Than Ninety Days After Resigning
If an Affiliate purchases additional stock from the Issuer, this will not affect the holding period of earlier purchased stock of the same class. However, Affiliates who sell stock to Non-Affiliate Shareholders can inadvertently cause those shares to be considered Affiliate Shares unless greater than 90 days has past since the Seller has ceased to be an Affiliate.
In practice, it is best for Affiliates of OTC Bulletin Board and OTC Markets Pink Sheet companies to fully document their holding period, and especially to document when they cease to be an officer, director, control person or 10% holder of the Issuer’s stock.
Likewise, it is important for investors purchasing stock privately from “former” Affiliates to review the Issuer’s Board Resolutions and filings to determine when the Seller officially ceased to be an Affiliate, since the Transfer Agent, broker and clearing firm will want to know these details. An OTC Securities Lawyer like Matheau J. W. Stout can provide legal advice to the purchasers of Affiliate stock and draft 144 legal opinion letters that detail the origin, history and affiliate status of the shares.