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”).
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
Affiliates must sell their restricted stock through a registered broker-dealer; and
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:
Affiliates can file a new Form 144, which adds those shares unsold with other shares up to the 1% limit; or
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 email@example.com
The SEC defines a Shell Company as an Issuer that has either:
Assets consisting solely of cash and cash equivalents; or
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.
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
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:
Is the Shareholder an Affiliate (or has he or she ever been an Affiliate)?
Did the Shareholder acquire the Shares in a registration directly from the Company (S-1 or S-2 etc)?
How long has the Shareholder owned or held the securities?
Did the Shareholder acquire the Shares from an Affiliate?
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.