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

Investors in OTC Markets stocks usually sign a Subscription Agreement when purchasing shares through a Private Placement Memorandum (“PPM”).  For the purposes of Rule 144, the holding period does not necessarily start on the date the Subscription Agreement is signed.  Why?

Rule 144 Holding Period Begins on the Date Shares Were Acquired

Often, a Subscription Agreement will be signed days or weeks prior to an OTC Investor actually paying for the PPM stock.  An Investor cannot “lock in” a Rule 144 holding period until the OTC shares are actually paid for.

Rule 144 Holding Period Starts on the Date of Wire Transfer or Check

When a Subscription Agreement is signed before the stock is actually purchased, the Rule 144 holding period begins on the date of the wire transfer or check.   The reason is that the Investor’s funds were not actually at risk until the wire transfer or check was used to pay for the PPM subscription.

Rule 144 Opinions by Securities Lawyer Matt Stout

Shareholders of SEC Rule 144 stock acquired in PPMs via Subscription Agreement can contact Rule 144 lawyer Matt Stout for a no cost review of their certificates and supporting documentation at (410) 429-7076 or mstout@otclawyers.com.


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.

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.

How to Sell Stock in a Former Shell Company Under Rule 144

Shareholders of Current Shells Cannot Use Rule 144 to Clear Stock

Most shareholders already know restricted stock cannot be cleared under SEC Rule 144 if the Issuer is currently a “shell company.”

An Issuer’s Past Shell Status Does Affect How Rule 144 is Applied

Shareholders holding restricted stock in OTC Bulletin Board (OTCBB) and OTC Markets OTCQB and Pink Sheet companies often wonder if the former “shell status” of the Issuer will affect the free trading status of their shares under Rule 144.

Rule 144 Requires Issuers to Be Fully Reporting For 1 Year

Yes, the Issuer’s former shell status is always important when a securities lawyer performs due diligence prior to drafting a Rule 144 opinion letter.

SEC Reporting Companies Have to Be Fully Reporting for 12 Months

This is because Rule 144 requires the Issuer to file all required SEC reports (10-Q, 10-K and 8-K) for at least 12 months after ceasing to be a shell before a shareholder can clear stock under Rule 144, even if all other requirements are met.

Pink Sheets Have to Be Fully Reporting for 1 Year Following Shell Status

OTC Pink Sheets, which do not report to the SEC, must file all of their Quarterly, Annual and Information and Disclosure Statements with OTC Markets for 1 year after ceasing to be a shell before Rule 144 can be used by a Shareholder to clear restricted stock.

144 Opinions Require Detail Regarding Past Shell Status

Rule 144 Opinions drafted by experienced securities lawyers like Matt Stout always go into detail to document the assets and operations in former shell companies.

It is important to demonstrate clearly that the Issuer ceased to be a “shell company” on a certain date, and to show that the proper post-shell reporting has remained current for the required amount of time.

Shareholders holding restricted stock in current or former shell companies can contact Matheau J. W. Stout, securities attorney at (410) 429-7076 with questions and find more information on 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.