What is the Rule 144 Exemption from SEC Registration?

The Securities Act of 1933 (“Securities Act”) requires all sales of securities to be registered with the SEC, unless the transaction is exempt from registration.

Rule 144 Exemptions for Shareholders That are Not Issuers, Dealers or Underwriters

In general, there are provisions in securities law that allow stock sales to be exempt if the Seller is not an Issuer, Dealer, or Underwriter.  Rule 144 is just one of those provisions.  The term Issuer is self explanatory–this is the public company issuing the stock.  Dealer is a “broker-dealer.”  Most Shareholders do not have to wonder if they fall into those categories.  But under the Securities Act, the term Underwriter does not have to be an investment banking firm–it can include those Shareholders that acquire stock from an Issuer “with a view to distribution.”

Rule 144 Allows a Safe Harbor for Shareholders

The clause “with a view to distribution” is where Rule 144 comes in. SEC Rule 144 allows Shareholders of restricted stock a “safe-harbor” from being treated as an Underwriter as long as the sale complies with all Rule 144 requirements.

Rule 144 Works Due to the Holding Period and Limitations on Affiliate Sales

This works primarily because Rule 144 requires certain holding periods before restricted stock can be sold by Shareholders, making a “distribution” less likely.

Rule 144 also works because Affiliates (Officers, Directors, Control Persons or Shareholders Who Beneficially Own Greater than 10%) who are closest to the Issuer, must file Form 144 whenever they sell securities, and are then subject to trading volume limitations.

Shareholders with questions regarding selling their restricted stock, removing restricted legends, or Rule 144 can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

Does Holding Restricted Stock in an IRA affect Rule 144?

Ownership of Securities in Retirement Accounts Does Not Interfere With Rule 144

Many Shareholders of restricted stock choose to transfer their securities into an Individual Retirement Account (“IRA”).  This transfer of 144 stock to an IRA will not affect the holding period under Rule 144(d).

The Normal Rule 144 Holding Period Analysis Applies

Even though this isn’t technically a “transfer” in the normal sense of a sale or gift of securities (since it involves the same social security number), the same rationale when it comes to analyzing the Rule 144 holding period applies.

The Same Documentation to Show the Origin and History of the Shares Applies

Just like with any other transfer, provided that the documentation is provided to show the origin and history of the shares, an experienced securities attorney with expertise in drafting Rule 144 opinions will demonstrate that any new “holder” may “tack onto” the holding period of the previous holder.


Are Audited Financials Required for Current Public Information under Rule 144?

Issuers Listed on National Stock Exchanges Have Audited Financials

Shareholders of restricted stock in SEC Reporting Issuers such as those traded on national exchanges like the NASDAQ and NYSE MKT do not have to worry about this since all SEC Reporting public companies listed on these stock exchanges are required to submit PCAOB audited financials.

Issuers on the OTC Bulletin Board and OTC Markets OTCQB are Audited

Issuers which are currently quoted on the OTC Bulletin Board or “OTCBB” and the OTC Markets OTCQB and OTCQX marketplaces likewise have audited financials, and if they are shown as “current” on OTC Markets, this satisfies the requirement under Rule 144.

Non Reporting Pink Sheets Do Not Need to Be Audited Under Rule 144

Do the financial statements of non-reporting issuers (OTC Markets Pink Sheets) need to be audited in order to meet the “current public information” requirement under Rule 144(c)(2)?

No. The “current public information” requirement under Rule 144(c)(2) does not require the financial statements of OTC Markets Pink Sheets to be audited since PCAOB audits are not required under Exchange Act Rule 15c2-11(a)(5).

How Does Rule 144 Treat Stock Earned Under a Consulting Agreement?

Securities attorneys who have experience in drafting Rule 144 opinions often review Consulting Agreements under which services are performed in exchange for restricted stock in OTC Bulletin Board or OTC Markets public companies.

Consultants are Often Paid in Restricted Stock

Many OTC Bulletin Board or OTC Markets OTCQB, OTCQX or Pink Sheet Issuers use their restricted stock as a type of currency to hire professionals such as attorneys, accountants, and marketing or investor relations Consultants.  This makes sense from a balance sheet point of view, as it conserve cash and provides the Consultants with an incentive to help the Issuer, since if the stock price rises, in theory everyone benefits.

The Rule 144 Holding Period Begins When the Consultant’s Fee is Earned

Of the elements of Rule 144, the most important when dealing with a Consulting Agreement is determining the proper “holding period” for restricted stock paid to the Consultant.   Under SEC Rule 144, the holding period for restricted stock does not start until the securities have been fully paid for, or fully earned.

Rule 144 Holding Period for SEC Reporting Companies

SEC Reporting Companies such as OTC Bulletin Board (OTCBB), OTC Markets OTCQB, OTCQX and microcap Issuers listed on the NASDAQ or the NYSE MKT exchanges have a holding period of six (6) months.

Rule 144 Holding Period for OTC Markets Pink Sheets

Non Reporting Companies like OTC Markets Pink Sheets generally have a one (1) year holding period for restricted stock, though some would argue that if the Issuer is Pink Current, that it can be said to be fully reporting under the Alternative Reporting Standard.  Different broker-dealers and clearing firms have varying opinions on this.

Calculating When the Consultants Rule 144 Holding Period Starts

This sounds simple enough–calculate the Consultant’s holding period under Rule 144 from the day the shares were earned.   However, often Consulting Agreements are vague, and provide for a block of shares to be earned in exchange for services provided over a set period of years.

But at what point are all of the shares (or a portion thereof) earned?  Is it upon signing the Consulting Agreement….or only at the end of the term? Do the shares get prorated if the Consultant stops performing work before the term ends?

When there is ambiguity, a Rule 144 securities attorney needs to request Board Resolutions, and correspondence between the Issuer and the Consultant so that it is clear when the shares were earned, and when the Rule 144 holding period starts.

Consultants and OTC Issuers can assist securities lawyers drafting Rule 144 opinions by clearly stating in the Consulting Agreement when the shares are fully earned.

A Securities Lawyer Can Draft Consulting Agreements to Comply with Rule 144

Consultants who provide services to microcap public companies in exchange for restricted stock may contact securities lawyer Matt Stout with questions concerning Rule 144 at (410) 429-7076 or find more information on how to structure Consulting Agreements to comply with SEC Rule 144 at OTCLawyers.com.