When is Section 4(1) an Alternative to Rule 144?

Shareholders in OTC microcap public companies seeking legal opinions are not always able to clear stock under Rule 144.

Rule 144 is not available if the Issuer is a shell company.

The SEC defines a shell company as an Issuer which has

  1. Nominal operations;
  2. Assets consisting solely of cash and cash equivalents; or 
  3. Assets consisting of any amount of cash and cash equivalents and nominal other assets.

Rule 144 is not available if the Issuer is a non-reporting former shell.

Under the Evergreen Rule, a former shell cannot use Rule 144 to clear stock unless it becomes an SEC filer (by filing Form 10 information and becoming subject to the reporting requirements of the Securities Exchange Act of 1934).   The Issuer must also have filed SEC reports for the prior 12 months and be current in those filings.

Section 4(1) can be used by both current and former shell companies.

In contrast to Rule 144, shareholders holding restricted stock in current shell companies and former shells may be able to use Section 4(1) to clear their stock.

Section 4(1) may be available if

  1. The holding period is greater than Two (2) Years.  This is twice as long as required for non reporting companies under Rule 144;
  2. The shareholder is not an underwriter or dealer.   Unlike Rule 144, Affiliates cannot use Section 4(1) to clear restricted stock.

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.

How Long Before Former Affiliates Can Sell Stock Under Rule 144?

When Can Former Affiliates Sell 144 Stock Without Trading Volume Limits?

Under Rule 144, an ex officer, director, or “control person” of a publicly traded company can sell shares without the trading volume limits after more than than 90 days have elapsed since he or she stopped being an Affiliate.

How Does Someone Cease to Be an Affiliate Under Rule 144?

An Affiliate becomes a “Non Affiliate” by resigning from positions of control within the company.  This means he or she resigns as an officer or director.

Of course, Shareholders who own more than 10% of a company’s voting stock are also considered Affiliates under Rule 144, and this status ceases once they have transferred enough stock such that they own less than 10%.

Affiliates Can Document Non Affiliate Status Under Rule 144 With These Documents

  1. This provides the date when the Affiliate resigned….A Letter of Resignation from the position as officer or director;
  2. This shows the Company acknowledged the resignation….A Board of Director’s Resolution accepting the resignation and appointing another officer or director in the Affiliate’s place;
  3. This shows that the information was made public….An OTCMarkets.com or SEC filing such as an 8-Ks or Disclosure that lists the date of the Affiliate’s resignation;
  4. This shows when a Shareholder first owned less than 10%….a stock purchase agreement, stock assignment, or a portion of the Transfer Agent’s shareholder’s list showing when the former Affiliate’s ownership percentage dropped below 10%.  This could be due to issuances of stock to others, which raised the issued and outstanding, or due to the former Affiliate’s sale or gift of stock.

Current and former Affiliates can contact securities attorney Matheau J. W. Stout at mstout@otclawyers.com or (410) 429-7076 to discuss how to document non affiliate status under SEC Rule 144.