Exemptions from Registration for Restricted Securities

In order for a shareholder to clear restricted stock and sell shares in OTC Markets public companies,  he or she must find an exemption from the SEC’s registration requirements.

Clearing Restricted Stock Using Rule 144

SEC Rule 144 provides the most common exemption from SEC registration of restricted securities.  Provided that the proper documentation showing the origin and history of the shares is produced, Rule 144 legal opinion can be provided if the Issuer is not a shell, and the holding period has been met.

Even affiliates (officers, directors, control persons owning greater than 10% of the issued and outstanding securities) can use Rule 144 to sell restricted stock under certain volume limitations.

Section 4(1) for Selling Stock in a Shell Company

Section 4(1) can be used under certain circumstances when Rule 144 does not apply, and where the shareholder is not an underwriter or dealer.   For example, whereas Rule 144 cannot be used to clear restricted stock if the Issuer is a shell company, “shell status” is not among the criteria of Section 4(1).  However, restricted stock must be at least Two (2) Years old for Section 4(1) to be considered, and affiliate stock cannot be cleared using Section 4(1).

3(a)(10) Provides an Exemption to SEC Registration

When a third-party creditor is willing to file a lawsuit against an OTC Markets public company, 3(a)(10) may provide an avenue for clearing restricted stock that would otherwise not be possible under Rule 144 or Section 4(1).  The debt must be bona fide (real and documented) and the creditor may not secretly be an affiliate.  The creditor may also not funnel money back to the Issuer from the proceeds of the sale of stock.

Under 3(a)(10), debt is typically exchanged for free trading common stock under conversion metrics agreed to by the Issuer in a Settlement Agreement.  The terms of this settlement must be heard in a Fairness Hearing, and a Court Order must ratify the settlement.

Shareholders with questions on clearing restricted stock can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.