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.