What happens if I do not sell all the shares indicated on my Form 144 within the three months?

Under SEC Rule 144, there are essentially three restrictions on the sale of restricted stock by officers, directors, insiders or shareholders owning greater than 10% of the issuer’s stock, or other control persons of a public company (“Affiliates”).

  1. Affiliates must file Form 144 with the SEC detailing the number of shares being sold under Rule 144, the total number of shares beneficially owned by the Affiliate, showing the total issued and outstanding shares of the same class of securities as those being sold; and
  2. Affiliates must sell their restricted stock through a registered broker-dealer; and
  3. Affiliates must comply with the trading volume limitations for Affiliates under Rule which says that Affiliates of OTC Bulletin Board and OTC Markets public companies cannot sell greater than 1% of the total issued and outstanding shares of stock in any 3 month period.

So, if an Affiliate filed Form 144 and was prepared to meet those three requirements but did not sell all of the shares indicated on Form 144, the Affiliate has two choices:

  1. Affiliates can file a new Form 144, which adds those shares unsold with other shares up to the 1% limit; or
  2. Affiliates can direct their broker to return the unsold shares to the Issuer’s Transfer Agent, which will reissue the Affiliate a certificate with a Rule 144 restrictive legend that adds the unsold shares back in.

Affiliates seeking assistance in preparing a Rule 144 legal opinion for the sale of restricted stock can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com

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.