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.

Securities Lawyers Opinion Letters

Rule 144 Letters Written By Securities Counsel

Perhaps the most common type of securities attorney opinion letter for the sale of restricted stock is the Rule 144 opinion letter.  A 144 opinion is written by a securities attorney after careful research of not only the issuing company, but also the current Shareholder and all predecessor holders of the stock.

Rule 144 Exceptions to SEC Registration of Restricted Stock

Rule 144 deals with exceptions to registered securities and it is basically a safe harbor, or series of opportunities for Shareholders to sell restricted stock without SEC registration of the securities.  Several different rules exist for how long an investor must own or hold the stock, and a lot depends on whether or not the Shareholder is or was an Affiliate of the issuing company.

What is an Affiliate According to Rule 144?

An Affiliate is basically an “insider” and Rule 144 has many different criteria for deciding if one is an Affiliate.  However, in a broad sense Affiliates include officers, directors, founders and their immediate family members living in the same household because they are all presumed to have control over the company and thus the stock.  Another name for an Affiliate is a “control person.”

Rule 144 Exemptions for Non Affiliates Selling Restricted Stock

Rule 144 Opinions Discuss Safe Harbor Requirements

Shareholders of restricted stock who are not Affiliates now, or for the past ninety (90) days can sell their restricted stock under Rule 144 if the stock has been held by the Shareholder for a minimum of one (1) year.

Rule 144 Is More Lenient on OTC Bulletin Board Companies That Provide Current Public Information

If the Issuing Company of the stock is subject to the Exchange Act reporting requirements (typically reporting by posting regular filings, and listed on the OTC Bulletin Board, NASDAQ, etc) and the Shareholder has owned the stock  for at least six (6) months but less than one (1)  year, the SEC allows the Shareholder to sell the restricted stock, provided that the Company has satisfied the requirement to provide current public information to investors.

This requirement is researched by a securities attorney when drafting a 144 opinion letter and companies that file the typical 10-Q, 10-K and 8 reports with regularity and on time for the year prior to the Shareholder’s proposed sale of under 144 generally meet that requirement