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 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).