Difference in Rule 144 Holding Periods for SEC Filers and Pink Sheets

Shareholders in OTC Markets public companies with audited financials listed on the OTCQB are often surprised to learn that they cannot sell shares even after their six (6) month holding period.  Why?  The answer is usually because the company is a “voluntary filer.”

Only Mandatory SEC Filers Can Use a 6 Month Holding Period Under Rule 144

The Rule 144 holding period of six months only applies to mandatory SEC Reporting Companies.   These are otherwise known as “SEC Filers” or “mandatory filers.”  The technical reason is that under Rule 144, the SEC only considers a “fully reporting company” to be an SEC filer with audited financials that is subject to the reporting requirements of Section 12 of the Securities Exchange Act of 1934.

Voluntary SEC Filers Are Not Subject to Section 12 of the Exchange Act

That means that shareholders of public companies which went public by filing an S-1 Registration Statement under the Securities Act of 1933 may not actually qualify for the Rule 144 six month holding period unless they also filed a form 8A-12g or a Form 10, which are both 34 Act filings.

Voluntary Filers Have a 12 Month Holding Period Like a Pink Sheet

If not, they are subject to a twelve month holding period just like a non reporting Pink Sheet.

Prior to issuing a legal opinion for restricted stock, an experienced securities attorney can review an issuer’s filings to quickly determine your holding period at no cost.

Is there a limit to the number of shares I can sell under Rule 144?

For non affiliates, there is no limit.  If you are an affiliate of an Issuer, you are subject to the volume trading limitations under Rule 144.

In a three (3) month period, an affiliate can sell only

  1. a maximum of one percent (1%) of the number of issued and outstanding shares for an OTC Markets Pink Sheet or Bulletin Board stock; or
  2. if the stock is traded on NASDAQ or an exchange like the NYSE, the average weekly trading volume for the full four (4) week period preceding the date you file your Form 144 with the SEC, if it is higher than the one percent (1%) limitation.

Affiliate shareholders seeking to sell stock under the Rule 144 volume trading limit can contact Matt Stout, securities lawyer at (410) 429-7076 for a review of their documents at no cost.

When does my holding period start for stock I received as a gift?

Under Rule 144 a Donee Can Tack Onto the Donor’s Holding Period

When discussing the gifting of restricted stock, the person giving the gift of shares is called the “donor” while the person receiving the gift is known as the “donee.” Under SEC Rule 144, the donee is allowed to tack onto the donor’s holding period, meaning that there is no additional holding period involved when stock is gifted versus purchased.

Rule 144 Holding Period for SEC Reporting Companies

For “fully reporting” Issuers, that file Forms 10-Q, 10-K and 8-K with the SEC under the Securities Exchange Act of 1934, the holding period is six (6) months from the date the donor acquired the restricted stock.

So if you receive a gift of restricted stock in an OTC Bulletin Board (OTCBB) or OTC Markets OTCQB or OTCQX Issuer that was acquired by the donor seven (7) months ago, you may tack onto the donor’s holding period and your Rule 144 legal opinion can state that you have satisfied the Rule 144 holding period for shares in an SEC reporting company.

Rule 144 Holding Period for OTC Pink Sheet Stocks

The holding period for Non-Reporting companies such as OTC Markets Pink Sheets is one (1) year.  Just like with SEC reporting Issuers, the holding period for your gifted stock in an OTC Markets Pink Sheet begins when your donor’s holding period began, and you can tack onto the donor’s holding period in order to satisfy the one (1) year requirement under Rule 144.

What if the Donor Was an Affiliate at the Time of the Gift?

Whether the Issuer is an SEC reporting company or not, if the Donor was an Affiliate of the company at the time of the gift, you have received Affiliate stock, and you are subject to the Rule 144 trading volume limitations just as if you are were an Affiliate.

This means you must fill out Form 144 to provide notice of your sale of restricted stock, and that you cannot sell more than 1% of the total issued and outstanding shares during any three (3) month period) for OTC Bulletin Board and Pink Sheet stocks.

Moreover, both you and the Affiliate share the same 1%, so you must aggregate your restricted stock sales with your donor’s sales to determine the limit on the number of shares you both can sell under Rule 144.

What if the Donor Had Ceased to Be an Affiliate Prior to the Gift to You?

If, however, the Donor had ceased being an Affiliate of the Company greater than Ninety (90) days prior to the gift of restricted stock to you, then you are not treated as an Affiliate under Rule 144, and you are not subject to trading volume limitations, and you are not required to file Form 144 with the SEC.

Shareholders with restricted stock in OTCBB, OTCQB, OTCQX and OTC Pink Sheet public companes (as well as those with restricted shares in NASDAQ and NYSE MKT issuers) can contact Matt Stout, securities attorney at (410) 429-7076 with questions or find further information at 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.

How Long Can an Affiliate Use Form 144?

SEC Form 144 Is Only Good for Three Months

For an Affiliate of an OTC Bulletin Board or OTC Markets Pink Sheet Issuer, each Form 144 is only good for 3 months from the date Form 144 is filed with the SEC. If any of the Affiliate’s restricted stock remains unsold at the end of the 3 months, those securities can be included in a new Form 144 filing.

The Affiliate’s Broker will most likely be on top of this process and the Affiliate can also benefit by contacting a securities lawyer to issue a new Rule 144 opinion, since the Transfer Agent will most likely request one prior to allowing the sale of shares under the new Form 144 notice.

Shares Unsold Must Be Covered By a New Form 144

Under Rule 144, it is important that the Affiliate promptly issue a new Form 144 and obtain a legal opinion, since any shares that are both unsold and not covered under a new Form 144 must be returned by the broker to the Transfer Agent for the issuance of new  stock certificate with a restrictive or restricted legend.  This unnecessarily complicates the process, and essentially causes the Affiliate, Broker and Transfer Agent to start at square one.

A Securities Lawyer Can Help By Issuing a New Rule 144 Opinion Letter

To streamline the 144 opinion letter process, Affiliate Shareholders of OTC Bulletin Board and OTC Markets Pink Sheet stocks can contact Matt Stout, securities lawyer with OTCLawyers.com for a Rule 144 legal opinion.

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.