Restricted Stock Lock Up and Leak Out Periods

Shareholders receiving restricted stock in OTC Markets companies sometimes find out later that their documents contain Lock Up or Leak Out provisions designed to limit the Shareholder’s ability to clear and sell stock.

What is a Lock Up Period?

A Lock Up Period is a time frame in which a Shareholder is prohibited from selling restricted stock.  One reason behind a typical Lock Up Agreement would be that the company is planning an IPO, or initial public offering and its Underwriter insists that existing shares be subject to a “lock up” during that time period.  Another common reason is when employees or consultants receive shares and their work is not yet completed.  A Lock Up Period in that event serves as a way for their shares to “vest over time.”

What is a Leak Out Period?

A Leak Out Period is the time frame in which a Shareholder has volume trading limitations placed on selling restricted stock.  Shareholders are often limited to selling a percentage of the daily trading volume, for instance.

An Experienced Securities Lawyer Can Spot Lock Up and Leak out Restrictions

An experienced securities lawyer can easily locate these clauses within a Shareholder’s Subscription Agreement, Employment Agreement, or Consulting Agreement and inform Shareholders of their rights and restrictions on selling restricted stock under Rule 144 or Section 4(a)(1).

Rule 144 and Section 4(a)(1) Opinions Can Be Issued Despite Lock Up and Leak Out Agreements

Simply having a Lock Up or Leak Out provision in your documents does not automatically mean that an experienced Rule 144 lawyer cannot issue a legal opinion.

On the contrary, with a careful reading of the documents and knowledge of the Rule 144 or Section 4(a)(1), OTC securities lawyer like Matt Stout can issue legal opinions for clearing restricted stock which fully explains to the Broker and Transfer Agent, the scope of the Lock Up or Leak Out language, and clarifies exactly what can be sold and when.

Shareholders with restricted stock can contact Rule 144 lawyer Matt Stout for a no cost review of certs and documents at (410) 429-7076 or mstout@otclawyers.com

Is Stock Purchased from an Affiliate’s Spouse Restricted Under Rule 144?

This depends on whether the Affiliate’s spouse lives in the same household as the Affiliate.

If the Affiliate’s spouse lives in the same home as the Affiliate of the Issuer, the Shares are restricted and considered “Affiliate Shares” as they are still “beneficially owned” by the Affiliate, no matter how long ago the Shares were transferred to the Affiliate’s spouse.

Under Rule 144(a)(2)(i), if they live at the same address the Affiliate and spouse are regarded as essentially the same person.

Is stock received under Section 1145(a) of the Bankruptcy Code restricted?

No. Shareholders who receive stock pursuant to a Bankruptcy Code proceeding under the facts described in Section 1145(a) of the Bankruptcy Code would not receive restricted stock.

The stock is not considered “restricted” because the Shares are considered to have been received in a “public offering” under Section 1145(c) of the Bankruptcy Code.

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 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.

What are Control Securities?

Control Securities are Held By Affiliates Under Rule 144

Control securities are those held by an Affiliate of the Issuer. An Affiliate is a person, such as an Officer, Director or Shareholder owing greater than 10% of the issued and outstanding shares, and is presumed by the SEC to be in a position or relationship of control over the Issuer.  

Under Rule 144 A Control Person Has the Power to Direct the Policies of the Issuer

Under Rule 144, the term “control” is defined as the power to direct the management and policies of the Issuer, either by voting rights, under a contract or agreement, or in any other manner. 

Buyers of 144 Stock from Affiliates Receive Restricted Stock

The important part for buyers of OTC Bulletin Board and OTC Pink Sheets stock to know is that under Rule 144, if you purchase stock from an Affiliate in a private sale, you receive restricted stock.  This is true even if the Affiliate had purchased the stock on the open market.  For this reason, a crucial element of a Rule 144 legal opinion is the Affiliate status of the Shareholder and all prior holders of the stock.

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.

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.