What is a Rule 144 Non Shell Opinion?

Clearing Firms Can Request Opinions Regarding the Issuer’s Non Shell Status Even if the Certificate is Without Restriction

Sometimes Shareholder already hold stock certificates with the restricted legend removed, so a typical 144 letter is not requested by a clearing firm.  However, even when the cert appears free trading, sometimes the Issuer’s financials and filings are light on detail, leading some to question whether or not the Issuer is an undeclared shell.  When this happens, Shareholder’s can obtain a Non Shell Opinion Letter from an experienced securities attorney, like those at OTCLawyers.com.

What is a Shell According to Rule 144?

Under Rule 144, a Company does not meet the definition of a “shell” if it has more than

  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.

When a staff attorney or compliance specialist at a brokerage requests a Non Shell Opinion Letter, they are looking for specific details which demonstrate that the Issuer has an operating business and significant assets.

Not All Securities Attorneys Draft Rule 144 Non Shell Opinions

Not every securities attorney will be comfortable with drafting a Non Shell letter under Rule 144 if the Issuer’s filings show zero dollars on the balance sheet.

However, an experienced securities law firm like the Law Office of Matheau J. W. Stout, Esq. knows that sometimes Issuers hold significant assets that are not highlighted in their financials, but may be referenced within their disclosures, such as intellectual property, land, equipment, accounts receivable and leases.

Shareholders should consult with a securities attorney who is willing to research the Non Shell issue thoroughly, and who can document an OTC Issuer’s assets and operations in a detail Non Shell Opinion Letter.

When Does the Rule 144 Holding Period Start for Consulting Services?

At the Law Office of Matheau J. W. Stout, Esq., we are often called upon to research and draft SEC Rule 144 legal opinions for Shareholders who acquired stock as payment for consulting services.

The Consulting Agreement Should State the Holding Period Under Rule 144

The underlying Consulting Agreement is the most important document for a securities attorney to review when preparing a 144 letter in this situation because the language in the document will determine the holding period.  Sometimes consultants working with OTCMarkets Issuers do not specify when the services are fully performed, and that can be problematic.

Under Rule 144, the Holding Period Does Not Start Until the Stock is Fully “Paid For”

The key here is that the holding period does not begin until the stock was fully earned, or paid for by the services.  Sometimes Consulting Agreements are not specific in this regard, and that makes clearing restricted stock difficult, even when all other aspects of Rule 144 are met.   Situations like this call for an experienced securities law firm, which can thoroughly review all of the facts and documents on which the legal opinion relies.

Vague Wording in Consulting Agreements Can Make Clearing Restricted Stock Difficult

If the Consulting Agreement states that in exchange for 1,000,000 shares, “the Consultant will provide services until August 1, 2020”, then the consideration paid for the Shares may not be fully “paid” until 2020 even if the document is over a year old. That is a terrible result due to vague language.   That ambiguity can sometimes be remedied by a Board Resolution or letter from an Officer or Director of the Issuer, provided that relationship is still good.  But what if the Consultant and Issuer are no longer working together?  Or what if the Issuer is under the control of new management?

Specific Rule 144 Language in Consulting Agreements is Recommended

Contrast that with a Consulting Agreement that specifically states

“Issuer agrees that all 1,000,000 Shares shall be fully earned on June 1, 2010.  Upon Consultant’s request, Issuer shall issue a Board Resolution and Transfer Agent instructions confirming that on June 1, 2010, Consultant shall be deemed to have paid full consideration for the 1,000,000 Shares under SEC Rule 144.”

Language like this is a good indicator that a securities attorney with expertise in Rule 144 drafted the document.    Whether you are a consultant who would like a tightly drafted Consulting Agreement to use when providing services to OTC Bulletin Board and Pink Sheet companies, or a Shareholder trying to clear restricted stock, visit OTCLawyers.com to learn the next steps.

Selling Restricted and Control Securities under SEC Rule 144

SEC Rule 144 Provides Exemptions from SEC Registration Under Certain Conditions

If a Shareholder wants to remove a restricted legend in order to sell restricted stock or control stock, he or she must qualify for an exemption to the normal registration process for securities mandated by the SEC. The SEC Rule 144 criteria including different provisions for Affiliates and Non Affiliates.

Rule 144 Affiliate

An Affiliate is a control person (giving rise to the term control stock), usually an officer, company founder, director, spouse or child of such persons living under the same roof.   Affiliates have more stringent requirements in order to qualify for the safe harbor provisions in Rule 144.

Restricted Stock Opinion Considerations for Securities Attorneys

The main points to consider when talking with an experienced broker and securities attorney are:

  1. Is the Shareholder an Affiliate (or has he or she ever been an Affiliate)?
  2. Did the Shareholder acquire the Shares in a registration directly from the Company (S-1 or S-2 etc)?
  3. How long has the Shareholder owned or held the securities?
  4. Did the Shareholder acquire the Shares from an Affiliate?
  5. Has the Company been a “shell” or “blank check company” within the last year?

An experienced stockbroker familiar with 144 stock can be of great help to Shareholders hoping to sell restricted stock.  These brokers are often the quarterback and main point of contact for the team that includes a qualified securities attorney and the Company’s transfer agent.

Can RestrictedStockOpinion.net Accept My Broker’s Rule 144 Forms?

Securities Attorneys Research SEC.gov When Drafting 144 Opinions

We Accept All Brokers’ Rule 144 Documentation

Yes, absolutely.  We can accept your broker’s standard 144 forms including the legend removal request, and usual certifications of non affiliate and non shell status.  These forms can simply be emailed to us to start the process.   If your broker also provides a template 144 opinion letter known as a seller representation letter, we can also use this as part of the documentation our securities attorneys review when drafting a 144 opinion.  But we always draft our own Rule 144 opinion letters, which transfer agents expect.

These Rule 144 Forms Are Just The Beginning of a Thorough Research Process

No matter what documentation the shareholder is able to provide, our securities attorneys review the issuing company’s filings on SEC.gov or OTC Markets.  They also review the company’s history, and the transactions between affiliates and related parties leading up to the issuance of the restricted stock.

144 Opinion Letters Will Address All Relevant Provisions of SEC Rule 144

After that process is complete, a thorough 144 opinion letter is drafted within one day and addressed to the company’s transfer agent.  In all of the 144 opinion letters issued by the securities lawyers working with RestrictedStockOpinion.net, the requisite provisions of SEC Rule 144 are systematically addressed, so that the transfer agent is able to rely with confidence on the 144 opinions they receive from us.