What is a Blank Check Shell?

OTC Markets microcap companies are often former shells.   Unfortunately for their shareholders, Rule 144 opinion letters cannot be used to clear stock for former blank check shells unless the Issuer is an SEC filer and meets the requirements of the Evergreen Rule.

However, an experienced securities lawyer may have other options under Section 4(a)(1).

A blank check company or “blank check shell” is a development stage company that has

  1. no specific business plan or purpose or
  2. has indicated its business plan is to engage in a merger or acquisition with an unidentified company.

These blank check companies are also commonly known as “419 shells”  or “Form 10 shells.”

The Evergreen Rule in Layman’s Terms

Even once these companies do merge with an operating business, they are forever known as “former shells” and Rule 144 opinions can only be issued under certain circumstances under the “Evergreen Rule.”

The Evergreen Rule basically means that unless an Issuer is an SEC filer, and has filed “Form 10 Information” including audited financials for one year post shell status, and is current in its SEC filings, Rule 144 can never be used.  As soon as a former shell becomes delinquent in its SEC filings, Rule 144 is not an option.

Unless the Evergreen Rule is satisfied, the SEC does not allow shareholders of former 419 shells to use use Rule 144 as an exemption from the registration requirements when selling stock.

Section 4(a)(1) May Be Used to Clear Stock of Former Shells

A Section 4(a)(1) legal opinion may be possible if the securities are greater than 2 years old and the Shareholder is not an underwriter or dealer.

A microcap securities attorney familiar with issuing legal opinions for former shells under Section 4(a)(1) can review your documents at no cost to determine if this alternative to Rule 144 can be used.

 

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.