Shareholders of restricted stock in over-the-counter Issuers soon become familiar with SEC Rule 144 since it is the most popular method by which a securities lawyer can help a Shareholder remove the restrictive legend from their shares. However, there are some instances when Rule 144 cannot be used.
Rule 144 Holding Period for SEC Reporting Issuers
Rule 144 has a holding period requirement of six (6) months for shares in an SEC Reporting Company like an OTC Bulletin Board, OTCBB, and OTC Markets OTCQB and OTCQX. This means that a Shareholder must have held the shares for that long before trying to sell under Rule 144.
Rule 144 Holding Period for Pink Sheets
The holding period under Rule 144 for shares in a Non Reporting Company such as an OTC Markets Pink Sheet Issuer is twelve (12) months. So a Shareholder in a Pink Sheet must have held the shares for a year before using Rule 144 to clear the restricted stock.
Current Public Information Requirement Under Rule 144
Rule 144 also requires that the Issuer of the restricted stock provide “current public information” and this is where many Shareholders in OTC stock are prevented from removing the restrictive legends and selling their restricted stock.
Some companies fall behind in their filings and soon become Pink Sheet No Information (Pink Sheet Stop Sign) on OTC Markets. This happens when an Issuer is more than a quarter behind in its SEC filings or the posting of its financials and disclosures on OTCMarkets.com.
Section 4(1) Can Be Used to Sell Restricted Stock in Pink Sheet Stop Signs
When an Issuer is a Pink Sheet Stop Sign, Rule 144 cannot be used to sell the restricted stock, even if the Shareholder is a Non Affiliate and the Shares have been held for greater than a year. This is a problem for many Shareholders because it is difficult to persuade or force an Issuer to become current in its filings, especially in development stage public companies that may have little cash flow.
Holding Period Under Section 4(1)
For Shareholders that have held their restricted stock in a Pink Sheet Stop Sign for at least two (2) years, Section 4(1) may be available where Rule 144 is not. This is because the elements of a Section 4(1) legal opinion are centered around the identity and role of the Shareholder, rather than the Issuer itself.
Shareholder Must Not Be an Underwriter, Broker or Dealer Under Section 4(1)
If the Shareholder can be shown not to be an Underwriter, or Broker, or Dealer, and if the origin and history of the Shares can be documented, an experienced securities attorney like Matt Stout can draft a Section 4(1) opinion. These Section 4(1) opinions are often longer and more detailed than a standard Rule 144 opinion because they discuss case law in depth.
As always, the best policy is to provide a securities lawyer with a copy of the Shareholder’s restricted stock certificate, and as much of the underlying documentation as possible, including stock purchase agreement, promissory notes and debt conversion paperwork or consulting agreements, as applicable.
The more detail provided to the securities lawyer, the faster the restricted stock opinion can be researched and drafted, whether that is under Rule 144 or under the provisions of Section 4(1). Securities lawyer Matheau J. W. Stout can be reached at (410) 429-7076 with questions on clearing restricted stock.