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.

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

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.

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.

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.