What Are American Depositary Receipts?

The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (“ADRs”).

An ADR is basically a stock that trades in the United States representing a specified number of shares in a foreign corporation. ADRs are traded on US markets just like stock in domestic companies, and are issued and sponsored in the U.S. by a bank or brokerage.

An ADR represents one or more shares of foreign stock or a fraction of a share. If an investor owns an ADR, he or she has the right to obtain the foreign stock it represents.  However, most U.S. investors find it more convenient to own the ADR instead. The trading price of an ADR corresponds to the price of the foreign stock in its home country’s market, which is adjusted to the ratio of the ADRs to foreign company shares.

ADRs were introduced beginning in 1927 to make it easier for US investors to counter the the difficulties involved with purchasing foreign stock trading at different prices and currency values. To counter this inherent difficulty, U.S. banks purchase bulk lots of shares from the foreign company, and bundle the shares into ADRs for trading.

Does the Issued and Outstanding Matter When Selling Restricted Stock Under Rule 144?

Yes, it does.  While drafting a restricted stock opinion using Rule 144, an experienced securities attorney like Matt Stout will review the Issuer’s profile at OTCMarkets.com.   The Company Info tab provides useful information such as the total issued and outstanding shares of common stock, which is essential information for Rule 144.

Under SEC Rule 144, a Shareholder must not own greater than ten (10%) percent of the Company’s issued and outstanding shares any class of stock.  Usually this will refer to common stock–both free trading and restricted stock. This applies to any Issuer, whether it is an OTC Bulletin Board (OTCBB), or an OTC Markets OTCQX, OTCQB, Pink Sheet or even an Issuer listed on a national exchange like NASDAQ or NYSE MKT.

If the Issuer is up to date in its OTC Markets filings, the issued and outstanding shares will be current, as well.   Depending on how recently the Issuer’s Transfer Agent updated its shareholder list, the information may be just a few days old, or it may date to the previous quarter or fiscal year end.

This information is cited in the Rule 144 opinion by securities lawyers since it can help demonstrate that a Shareholder is not an insider or “Affiliate” by virtue of owning more than 10% of the Issuer’s voting stock. If the Shareholder is classified as an Affiliate, there are trading volume limitations on the sale of Affiliate stock.

Shareholder with questions on clearing and selling restricted stock under Rule 144 can contact securities lawyer Matheau J. W. Stout, Esq. at (410) 429-7076 or mstout@otclawyers.com.

What is a Section 4(1) Legal Opinion for the Sale of Restricted Stock?

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.

What are Control Securities under Rule 144?

Under SEC Rule 144, Control Securities include restricted stock held by an Affiliate of the Issuer. An Affiliate is a person, such as an executive officer, a member of the company’s board of directors or large shareholder, owning greater than 10%.   These positions imply that the Affiliate is in a position of control with the issuer, and thus Affiliates are also sometimes called “Control Persons” when securities lawyers are analyzing restricted stock.

Control Person means that the Affiliate has the power to direct the management and policies of the Issuer.  This power can be derived through the ownership of 10% or more of the Issuer’s voting securities, by some contract or agreement with the Issuer, or otherwise.

When a Shareholder in an OTC Bulletin Board or OTC Markets Issuer purchases stock from a Control Person or Affiliate, they receive restricted stock.

Removing Restricted Legend from Certificates Under Rule 144

Shareholders of OTC Bulletin Board and OTC Markets OTCQX, OTCQB and Pink Sheets Issuers who purchase stock privately usually have stock certificates bearing a Rule 144 restricted legend.  The same is true when Shareholders receive stock in Over-the-counter microcap public companies in exchange for services, such as consulting.

This 144 legend tells the Transfer Agent and a prospective purchaser of the OTC stock that a legal opinion from an experienced securities attorney will be required before the securities can be sold under the provisions of SEC Rule 144.

The Process of Removing the 144 Legend

The process of removing the restricted or restrictive legend under SEC Rule 144 is straightforward for the Shareholder:

  1. The Shareholder contacts a securities lawyer and provides a copy of the certificate and all supporting documentation showing the origin and history of the restricted shares;
  2. The securities lawyer reviews the Shareholder’s documentation, and reviews the OTC Bulletin Board or OTC Markets Issuers filings at SEC.gov and OTCMarkets.com;
  3. If necessary, copies of agreements, letters from the Shareholder and/or Issuer, and board resolutions are requested to further document the transaction; and
  4. If the elements of Rule 144 are met, the securities lawyer drafts a Rule 144 opinion addressed to the transfer agent, citing each document and filing reviewed.

An Experienced Securities Attorney Can Help

Shareholders of OTCBB and Pink Sheets issuers can make the process of removing a restricted legend from 144 stock easier by contacting an experienced securities lawyer like Matt Stout at OTCLawyers.com or MJWStout.com.  If the requirements of SEC Rule 144 are clearly supported by the documents provided and the Issuer’s filings, a legal opinion can be issued promptly. Where information or documents are missing, a securities lawyer can work with the Shareholder, Issuer, Broker and Transfer Agent to confirm details and check facts.

 

 

 

What is the Current Public Information Requirement Under Rule 144?

Rule 144 Requires Current Public Information Before Stock Can Be Sold

In order for a securities attorney to draft a Rule 144 opinion letter, there must be adequate current information about the Issuer publicly available before the stock can be sold.

SEC Reporting Companies Must Have Filed SEC Forms 10-Q, 10-K, and 8-K

For SEC reporting companies, such as those on the OTCMarkets OTCQB, OTCQX, and OTC Bulletin Board (OTBB), this generally means that the companies have complied with the periodic reporting requirements of the Securities Exchange Act of 1934, which provides for the filing of SEC Forms 10-Q, 10-K, and 8-K.  This is easy for securities lawyers at the Law Office of Matheau J. W. Stout, Esq. to verify, either at OTCMarkets.com or via SEC.gov.

OTCMarkets Bulletin Board and Pink Sheet Companies Need to Be Current

For non-reporting companies, such as Pink Sheets, this means that certain company information about its business, its officers and directors, and its financial statements, is publicly available in Disclosure Statements and Quarterly and Annual Reports.

OTCMarkets Makes It Easy To See Which Companies Are Current in Their Filings Under Rule 144

As a practical matter, OTCMarkets.com has made confirming this requirement easy through its market tier system.  Simply put, a securities attorney can tell at a glance whether the current public information requirement of Rule 144 is met–if the Issuer is an OTCQX, OTCQB or Current Pink, then the Issuer is “current” under the Alternative Reporting Standard.

What to Do If the Issuer is Not Current Under Rule 144

If the Issuer is listed on OTCMarkets.com as Yield Sign (Pink Limited Information), the Company may only be late in one of its Quarterly or Annual Reports or a Disclosure Statement, which might easily be corrected by communicating with management and finding out how much longer they expect it will take to catch up.  

If, on the other hand, the Issuer is listed as a Stop Sign on OTCMarkets.com, the Company may be delinquent anywhere from a few months to several years in its filings, and there may be little hope of clearing the stock under Rule 144.  (When that happens, contact an experienced securities attorney like Matt Stout to inquire about other SEC provisions, such as 4(1), which might allow the stock to be cleared).

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.”