When is a Section 4(1) Opinion an Alternative to SEC Rule 144?

Section 4(a)(1) Legal Opinions are also Known as Section 4(1) Opinion Letters or Simply 4-1 Opinions

Sometimes Shareholders can be stuck with illiquid, restricted stock in Issuers that are not currently reporting, and marked as “No Information” or Stop Sign at OTCMarkets.  When this happens, SEC Rule 144 is rarely available, because the current public information requirement is not met.  This is especially problematic if the Issuer was ever marked as a “shell.”  However, if the Shareholder has owned the Shares for a minimum of 2 years, there may be a ray of hope under Section 4(a)(1), which is commonly referred to as Section 4(1) or simply 4-1.

Most securities attorney do not draft Section 4(1) legal opinions.   At the Law Office of Matheau J. W. Stout, Esq., we are often called upon to research and draft 4(1) opinion letters when Pink Sheet issuers are marked as Stop Signs as long as the following is true:

1.  The Shareholder is a Non-Affiliate who has held the stock for a long time.   Section 4(1) case law suggests that at least 2 years is a good rule of thumb.

2.  The Shareholder acquired the stock in a non-public offering, is not a dealer or underwriter, held the shares for his/her own account, and not with a goal of distributing the Shares to others.  This means basically that the Shareholder is not in the business of of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.    Most often, this stock relates to debt owed by the Issuer which is several years old and subject to conversion.

In our experience, transfer agents and brokers have accepted Section 4(1) legal opinions in situations where the Shareholder has held the stock (or the underlying debt) for several years, and where Rule 144 would have applied if the Issuer was current in its reporting.

In other words, so long as the Shareholder has met his/her obligations under this provision, the SEC does not hold the Issuer’s lack of reporting against the Shareholder.

Section 4(1) legal opinions are often lengthy, as a detailed discussion of the facts and case law is required.  For that reason, a securities attorney may require more than one day to issue these legal opinions. However, the wait is worth it, as there is often no alternative to clearing these stocks.

2 thoughts on “When is a Section 4(1) Opinion an Alternative to SEC Rule 144?

  1. Pingback: Can Rule 144 Be Used By a Shell Company? | Restricted Stock Opinion Letters

  2. Pingback: What is a Section 4(1) Legal Opinion for the Sale of Restricted Stock? | Buy and Sell Restricted Stock

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