Restricted Stock Lock Up and Leak Out Periods

Shareholders receiving restricted stock in OTC Markets companies sometimes find out later that their documents contain Lock Up or Leak Out provisions designed to limit the Shareholder’s ability to clear and sell stock.

What is a Lock Up Period?

A Lock Up Period is a time frame in which a Shareholder is prohibited from selling restricted stock.  One reason behind a typical Lock Up Agreement would be that the company is planning an IPO, or initial public offering and its Underwriter insists that existing shares be subject to a “lock up” during that time period.  Another common reason is when employees or consultants receive shares and their work is not yet completed.  A Lock Up Period in that event serves as a way for their shares to “vest over time.”

What is a Leak Out Period?

A Leak Out Period is the time frame in which a Shareholder has volume trading limitations placed on selling restricted stock.  Shareholders are often limited to selling a percentage of the daily trading volume, for instance.

An Experienced Securities Lawyer Can Spot Lock Up and Leak out Restrictions

An experienced securities lawyer can easily locate these clauses within a Shareholder’s Subscription Agreement, Employment Agreement, or Consulting Agreement and inform Shareholders of their rights and restrictions on selling restricted stock under Rule 144 or Section 4(a)(1).

Rule 144 and Section 4(a)(1) Opinions Can Be Issued Despite Lock Up and Leak Out Agreements

Simply having a Lock Up or Leak Out provision in your documents does not automatically mean that an experienced Rule 144 lawyer cannot issue a legal opinion.

On the contrary, with a careful reading of the documents and knowledge of the Rule 144 or Section 4(a)(1), OTC securities lawyer like Matt Stout can issue legal opinions for clearing restricted stock which fully explains to the Broker and Transfer Agent, the scope of the Lock Up or Leak Out language, and clarifies exactly what can be sold and when.

Shareholders with restricted stock can contact Rule 144 lawyer Matt Stout for a no cost review of certs and documents at (410) 429-7076 or mstout@otclawyers.com

Can Rule 144 Be Used By a Shell Company?

The SEC defines a Shell Company as an Issuer that has either:

  1. Nominal operations;
  2. Assets consisting solely of cash and cash equivalents; or
  3. Assets consisting of any amount of cash and cash equivalents and nominal other assets.

Issuer Must File Reports for 12 Months After Ceasing to Be a Shell

SEC Rule 144 may not be used to sell stock in a current Shell Company.  Rule 144 also cannot be relied upon by a Shareholder to sell stock in a former Shell Company, unless the Issuer has been reporting to the SEC for at least 12 months after it ceased to be a “shell” and is current in its reports.

Alternatives to Rule 144 for Shareholders Stuck With Stock in Former Shells

This requirement does not concern the Shareholder or the shares themselves, and applies even if the Shareholder’s holding period is greater than 12 months…and even if the Issuer was not a “shell” when the Shareholder acquired the stock.

Shareholders stuck with illiquid stock in a former Shell Company that is not current in its reporting to the SEC or to OTCMarkets.com can contact an experienced securities attorney to discuss alternatives to Rule 144 when clearing restricted stock.