When Does the Rule 144 Holding Period Start for Consulting Agreements?

Under SEC Rule 144, the shareholder’s holding period begins once the shareholder has paid for the restricted stock.  In the case of receiving stock in exchange for services, like in a Consulting Agreement, the shares are “paid for” when they are considered “earned” by the Consultant.

A securities lawyer who drafts Rule 144 opinions for shareholders of OTC Markets companies will review many Consulting Agreements which are ambiguous or silent regarding the date on which the shares are considered earned by the Company.

For this reason, consultants who wish to document their proper holding period under Rule 144 should pay close attention to the language in their compensation clause.

In general, it is wise for the Consulting Agreement to specify exactly when the shares are to be considered “fully earned” under Rule 144.

This is especially true when the Consultant is signing an agreement whereby services will be provided on a monthly or annual basis, since it is not always obvious when the shares are earned, or if they are non refundable.

This compensation clause can later be referred to by the securities lawyer, the Transfer Agent, and the Broker, when it comes time to clear stock.

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.