What is a Section 4(a)(1) Legal Opinion?

When the conditions of SEC Rule 144 cannot be not met, an experienced securities attorney like Matheau J. W.  Stout, Esq. can review documents to see if Shareholders can rely on the so called “4(a)(1½) exemption.”

Section 4(a)(1) legal opinions cite case law in order to provide an exemption from registration if a Shareholder is not an Issuer, Underwriter, or Dealer.

The minimum holding period under Section 4(a)(1) is 2 years.

Experienced Rule 144 and Section 4(a)(1) Securities Attorney

Shareholders can receive a no cost review of their documents by emailing them to OTC securities lawyer Matt Stout at mstout@otclawyers.com or by calling (410) 429-7076.

Section 4(a)(1) as an Alternative to Rule 144 for Shells

Most shareholders holding restricted stock in OTC Markets companies use Rule 144 to clear and deposit that stock.  However, there are some circumstances when Rule 144 is not available.

Rule 144 is Not Available for Current Shell Companies

If an Issuer is currently a shell company, Rule 144 cannot be used to clear and sell restricted stock.  There are no exceptions to this if the public company is a shell today, but there are exceptions for former shells.

Former Shells May Only Use Rule 144 Under the Evergreen Rule

Under the so called “Evergreen Rule” a former shell company may use Rule 144 to clear restricted stock only under the following circumstances:

  1. The Issuer is a fully reporting SEC filer and subject to the reporting requirements of the Securities Exchange Act of 1934; and
  2. The SEC filer is current in all of its filings (i.e. not marked “delinquent”); and
  3. The Issuer has filed “Form 10” Information, including audited financials (which is already factored into its fully reporting SEC filer status); and
  4. One (1) Year has elapsed since the Issuer emerged from shell status.  This date is often found in a “Super 8-K” but could be confirmed using other SEC filings.

Section 4(a)(1) May Be Used if the Rule 144 Evergreen Rule is Not Met

So the Evergreen Rule says that former shells can only use Rule 144 if they are fully reporting SEC filers with audited financials and it has been more than Twelve (12) Months since the company ceased to be a shell.   What if the issuer is non reporting?

Current and Former Shells May use Section 4(a)(1) Instead of Rule 144

In those cases where the former shell is a non reporting Pink Sheet, or a so called “voluntary filer” which is technically not subject to the Exchange Act, an experienced securities lawyer can use a Section 4(a)(1) legal opinion (also known as a Section 4(1) or simply a 4-1 opinion).

Section 4(a)(1) Opinions Require a Minimum Two Year Holding Period

Unlike Rule 144, which requires a Six Month holding period for SEC filers and a One Year holding period for non reporting companies, Section 4(a)(1) requires a Two Year holding period.

Shareholder Must Not Be an Issuer, Underwriter, or Dealer Under Section 4(a)(1)

Section 4(a)(1) opinions cannot be drafted if the Shareholder is an Issuer, Underwriter or a Dealer.  What does this mean?   It basically deals with Affiliate Status and whether or not a Shareholder is a Control Person.   Another way to put this is that an experienced securities attorney will not draft a Section 4(a)(1) legal opinion for a Control Person or Affiliate of the Issuer.

Rule 144 and Section 4(a)(1) Lawyer Matt Stout Drafts Legal Opinions

Shareholders in OTC Markets companies can contact Rule 144 and Section 4-1 attorney Matt Stout for a no cost review of their certificate and supporting documentation at (410) 429-7076 or mstout@otclawyers.com.

 

Will the SEC Intervene in a Dispute With an Issuer Over Restricted Stock?

No, the SEC will not normally intervene to help a shareholder if a public company refuses to clear a restricted stock certificate.   Instead, to resolve a dispute, the shareholder needs a detailed Rule 144 or Section 4(1) legal opinion drafted by an experienced securities attorney.

According to the SEC, removing a restrictive legend is “solely in the discretion of the issuer” and that State law, rather than federal law, covers disputes over the removal of restrictive legends.

Even if a shareholder has technically met all the requirements of Rule 144, those shares cannot be sold on the public market until the restrictive legend is removed from the certificate.

Only the public company’s Transfer Agent can remove a restrictive legend. However, the Transfer Agent won’t remove the restrictive legend if the Issuer refuses.  Rule 144 legal opinions are addressed to the public company’s Transfer Agent, and cite specific documentation provided by the shareholder.

 

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.