- What does the reference to “Rule 144” on my stock certificate mean?
- Why does my stock have a Rule 144 restrictive legend?
- How soon can I sell my restricted shares after I paid for them in full?
- My broker told me that I need a legal opinion regarding my eligibility to sell my shares. How do I obtain the legal opinion, how long does the process take and how much will I have to pay for the legal opinion?
- What happens if I do not sell all of my shares within three months after I remove the Rule 144 legend?
- What is the holding period before I can sell my shares?
- If the company that issued my shares was ever a shell company, how does that impact my ability to sell my restricted shares?
- If the Rule 144 safe harbor is not available, what options are available to me?
- If I have a financial emergency, but I have not held my restricted shares long enough to satisfy the usual holding period, is there a way for me to sell my restricted shares to resolve the emergency?
- What are the steps in the process for clearing and selling my restricted shares?
| Caution: This chart assumes that the issuer has either never been a shell or, if so, has complied with Rule 144(i)(2). |
Affiliate or person selling on behalf of an affiliate. An affiliate is an officer, director or, in most cases, the owner of more than 10% of the issued and outstanding shares of the issuer’s common stock | Non-Affiliate (and has not been an affiliate during the prior three months) |
| Restricted Securities of Reporting Issuers | During six month holding period – no resales under Rule 144 permitted. After six month holding period – may resell in accordance with all Rule 144 requirements including:
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During six month holding period – no resales under Rule 144 permitted. After six month holding period but before one year – unlimited public resales under Rule 144 except that the current public information requirement still applies. After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. |
| Restricted Securities of Non-Reporting Issuers | During one year holding period – no resales under Rule 144 permitted. After one year holding period – may resell in accordance with all Rule 144 requirements including:
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During one year holding period – no resales under Rule 144 permitted. After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. |
If your questions are not answered below, either contact us or check our blog for more information.
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Rule 144 of the Securities Act of 1933 was adopted in 1972 (with major amendments in 2008) by the Securities and Exchange Commission (a) to provide a more clear definition of who is considered an underwriter and, thus, have special limitations regarding how and when the restricted securities may be resold, (b) to resolve different views of several federal Circuit Courts of Appeal regarding how long a person must hold shares after payment in full has been made to be presumed not to have acquired the shares with a “view to distribution” and (c) to clarify the position of the SEC regarding many aspects of the resales of restricted securities to provide guidance to issuers of securities, broker-dealers, shareholders and stock transfer agents. A stamp is used by stock transfer agents to place information on the face of paper stock certificates stating that the shares are subject to the restrictions on resale set forth in the Securities Act of 1933 and Rule 144. If you hold book entry shares and were not issued a paper stock certificate, the account statement from the independent stock transfer agent for the company that issued your shares will have a notation that the shares are restricted and have a Rule 144 restriction on resales. This information is referred to as a “Rule 144 legend.” It is considered to be a best practice in the securities industry for the stock transfer agent to place a Rule 144 legend on each paper certificate and to note the restricted status of the shares on every transfer agent account statement. Link to text of Rule 144:
https://www.law.cornell.edu/cfr/text/17/230.144 -
Unless a public company’s shares are registered for resale under a current, effective registration statement filed with the Securities and Exchange Commission, they may only be sold in the public markets or in private sales if there is an exemption available under the federal securities laws. The stock transfer agents for publicly traded companies place a restrictive legend on all shares, including those issued (a) through a private placement memorandum, (b) as a result of a merger, acquisition of assets or stock, or some other business combination involving a privately owned and a publicly owned company, (c) as a result of converting a debenture, debt or promissory note to common shares, (d) compensation for services to the issuer of the shares or (e) any other transaction resulting in some type of payment in full being made for the shares by the shareholder. Although no specific statute, rule or regulation requires a Rule 144 legend, it is considered best practice by the Securities and Exchange Commission and FINRA to affix one to all paper certificates and to note the restrictions on resale on stock transfer agent account statements. The failure to do so could be viewed as a public company failing to take adequate steps to assure that unregistered securities are not sold unless registered or an exemption is available.
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The applicable holding periods are shown in the chart on our website page entitled “Information for Selling Shareholders.” Your holding period depends on (a) whether you are an affiliate or non-affiliate (b) whether the company that issued the shares is a reporting or a non-reporting company and (c) whether the company that issued the shares is or ever was a shell company and, if so, whether the public company cured that shell status by compliance with Rule 144(i)(2). If the company is subject to the reporting requirements of the Securities Exchange Act of 1934, is current in its filings and has either never been a shell company or, if so, has complied with the requirements of Rule 144(i)(2), the holding period is six months after payment in full was made for the shares and the shareholder had an agreement with
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My broker told me that I need a legal opinion regarding my eligibility to sell the shares. How do I obtain the legal opinion, how long does the process take and how much will I have to pay for the legal opinion?
You are required to obtain a legal opinion satisfactory to the Company stating that you are eligible to sell your shares under Section 4(a)(1) or some other available exemption. If you meet the requirements of Rule 144, you may sell the shares after a holding period that is much less than the two-year period that was required before the adoption of Rule 144 and that is still the minimum holding requirement if the issuing company is not fully compliant with Rule 144. Assuming that you are eligible to remove the Rule 144 legend from your shares, Logan Law Firm typically issues these opinions within one day after all necessary information and documents are submitted to the law firm by you and your securities broker or bank. The fee for preparing and issuing a routine Rule 144 opinion letter can depend on the nature of the transaction that caused the shares to be issued and the complexity of the history of the shares (such as the current shareholder having acquired the shares from a prior owner of the shares). We can quote a fee to you when we have basic information about your situation. It will be necessary for you to deliver relevant information and documents to our firm.
If all of the necessary documents are not available and our firm is asked to locate them by researching public filings or contacting the issuer or another source to obtain them, the fee may be higher than a basic charge for the type of transaction that resulted in the issuance of the shares to you. If the issuer did not properly document some of the corporate actions involving the issuance of the shares and our help is needed to assist the issuer to prepare proper documents to ratify past actions, we will charge for our time. As soon as we become aware
that the fee will exceed our original estimate of the fee for a particular type of transaction, you will be informed, and an explanation will be given to you. -
What happens if I do not sell all of my shares within three months after the Rule 144 legend has been removed?
Unless the Rule 144 legend can be permanently removed because the issuer has never been a shell company and you paid for the shares more than one year ago, you will have a three-month window to sell the restricted shares. Usually, any shares that are unsold after three months are not returned to the stock transfer agent by your broker or bank. However, no further resales of the shares in the public markets will be permitted until an updated opinion letter is provided to your broker or bank.
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Your required holding period (if you and the issuer have met the requirements for you to be able to use the Rule 144 safe harbor) is 6 months if the issuer is subject to the reporting requirements of the Securities Exchange Act of 1934 and 12 months if it is not a mandatory filer of public reports with the Securities and Exchange Commission pursuant to the 1934 Act.
a. When does the holding period begin? The holding period begins on the date that you have taken an investment risk (you purchased a security such as common stock, preferred stock or most types of promissory notes) and you have paid in full for your restricted common stock or that you paid for any other class of securities that was converted to your restricted common shares.
b. Is the date on which my stock certificate was issued important to the analysis of when my holding period started? Generally, no. The date that the stock certificate is issued or the date that the stock transfer agent of the public company that issued your book entry shares is not part of the calculation of the holding period. Stock certificates or book entry shares are sometimes issued (i) after an investment risk has been taken and payment in full was made or (ii) before payment in full has been made.
c. If I acquired my restricted common stock as a result of a direct purchase of the shares from the issuer in a private placement, when did my holding period start? The holding period starts on the later of (a) the date on which both you and the issuer signed the subscription agreement and/or stock purchase agreement and (b) the date on which the issuer received and accepted your payment in full for the securities.
d. If I converted a promissory note, warrants, options, a debenture or preferred stock in exchange for my restricted common shares, when did my holding period start? If you paid in full for one class of securities that was converted to restricted common shares and did NOT pay money or give anything else of value to the issuer as part of the conversion process, the holding period tacks back to (started on) the date on which you paid in full for the original security. If, however, you gave anything of value to the issuer or on behalf of the issuer to a third party as part of the conversion (or agreed to pay something of value in the future), a new holding period started (or will start) when payment in full was/is made.
e. When does the holding period start if the issuer owed you a debt (not represented by another class of securities), and you and the issuer converted the debt to restricted common stock or another class of securities? The holding period begins on the later of two dates–(a) the date that the issuer became obligated to pay a debt of some type to you and (b) the date on which you took an “investment risk.” An example of a debt that could be exchanged for a class of securities would be services of an employee or consultant for which the issuer did not fully pay that was later converted to a security. Other examples of non-cash payment for the shares include sales of assets such as furniture, intellectual property or equipment to the issuer. If the issuer cannot afford to pay (or the creditor prefers to accept stock for) part or all of the services of the employee or consultant or the purchase price of assets when payment was due, the issuer and the creditor may agree that the creditor will accept restricted stock or another class of securities for the debt. In that event, the issuance of the security and cancellation of the debt constitutes an “investment risk” taken by the creditor. The investment risk plus payment in full for the securities (exchange of the debt for the securities) starts the holding period.
f. What kind of evidence of loans and non-cash payments will be required? Depending on the type of debt that was exchanged for a class of securities, different documents and information may be needed. We will provide you with a list of essential documents to support the opinion letter related to your particular situation upon request.
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If the company that issued my shares was ever a shell company, how does that impact my ability to sell my restricted shares?
If your restricted shares were issued by a reporting or non-reporting company that is now or ever has been a shell company as defined by SEC Rule 405, the Rule 144 safe harbor is available only if the issuer has fully complied with Rule 144(i)(2). Rule 405 defines a shell company as one that has: (1) no or nominal operations; and (2) either: (a) no or nominal assets; (b) assets consisting solely of cash and cash equivalents; or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets. Compliance with Rule 144(i)(2) requires that a former shell company (a) must have ceased being a shell company, (b) must be subject to the reporting requirements of the Securities Exchange Act of 1934, (c) must have filed “Form 10-like information” at least 12 months ago and (d) must have filed all reports required by Rule 144(c) during the previous 12 months. Form 10-like information can be included in a “Super 8-K,” a registration statement (such as an S-1), a Form 10-K or a Form 10-Q but it must be the type and detail of information required to be included in a Form 10 registration statement.
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If the Rule 144 safe harbor is not available, what options are available to me?
If the issuer has not complied with Rule 144(i)(2) or any other part of Rule 144, there may be another path available to sell your shares in the public markets. If you paid in full for the shares more than two years ago and the issuer meets the current public information requirement of 17 CFR 240.15c2-11(b)(5)(i)(A-M), you may be able to rely solely upon the exemption provided by Section 4(a)(1) of the Securities Act of 1933 to sell your shares even if Rule 144’s safe harbor is not available. https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.144
Contact us to evaluate the availability of the Section 4(a)(1) exemption in your situation.
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If I have a financial emergency, but I have not held my restricted shares long enough to satisfy the typically required holding period, is there a way for me to sell my restricted shares to resolve the emergency?
If you have a serious financial emergency, such as the impending foreclosure of your home, possible repossession of your vehicle, inability to pay your child’s college tuition or a threat of collection steps to collect large medical or tax bills that you owe, you may be able to sell your shares prior to meeting the holding period set forth in Rule 144 and adopted by the courts for the Section 4(a)(1) exemption. If the only asset with sufficient liquidity that is available to you to resolve this emergency is your restricted stock, you may be able to sell your shares in the public markets even if you paid for the shares less than the typically applicable holding period. You must establish the existence of a true emergency situation and the lack of any source of funds other than your restricted stock. You can only sell enough shares to cover the debt, your attorneys’ fees for the opinion letter and other costs associated with the sale of the securities (brokerage fees, stock transfer agent fees, cost of overnight delivery of stock certificates and stock powers, etc.). Any shares remaining after selling enough shares to resolve the emergency must be returned to the stock transfer agent which will place a Rule 144 legend on the shares until the usual process if followed for legend removal after the holding period has been satisfied.
Contact us if you would like to evaluate the possibility of using this exception to sell your shares to resolve a financial emergency.
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What are the steps in the process for selling my restricted shares?
Here are the procedures that you should follow:
- Open a brokerage account with a full-service broker-dealer or a bank that has a restricted securities transactions desk. If you do not have a brokerage account (or if your broker lacks experience in processing restricted securities), we can provide you with the names of securities brokers who handle a high volume of restricted stock transactions and who will welcome your business. Most securities brokers that operate only through the Internet do not process the removal of restrictive legends. You will not be permitted to clear shares using the services of a full-service broker or bank and move the shares to your account at a discount broker. The brokerage commission charged by a full-service broker or bank (usually between two percent and five percent) is a cost of doing business and cannot be avoided.
- If your shares are not held in book entry form and you have a paper stock certificate, it is a good idea to contact your bank or brokerage firm account representative before you send your original certificate(s) to your financial institution and confirm that it will accept the certificate(s) in safekeeping while the restriction removal process is completed. Always send original paper certificates using an overnight or two-day delivery service that provides a tracking number. Never sign the stock power on the back of the stock certificate. Always sign a stock power that is separate from the certificate and send the stock power and certificate in separate envelopes. If your broker does not send you one, we can provide you with a form of stock power separate from the certificate.
There are two electronic delivery systems: (i) DWAC stands for Deposit/Withdrawal At Custodian. It is a system used by the Depository Trust Company (DTC) to facilitate the electronic transfer of securities between brokers and the company’s transfer agent. In essence, DWAC allows for the electronic deposit or withdrawal of shares from a broker’s account, either by the broker or by the shareholder themselves, directly to the transfer agent’s books; and (ii) DRS stands for Direct Registration System. The Direct Registration System (DRS) enables investors to elect to hold their assets in book entry form directly with the issuer by leveraging DTC’s connectivity with FAST transfer agents. Through DTC’s DRS Service, assets can be electronically transferred to and from the transfer agent and broker/dealer to easily move shares in and out of DRS.
DWAC requires a Medallion Signature Guarantee, but DRS does not.
- Your securities broker will require you to provide a signed a seller’s representations letter, a broker’s representations letter (if required), a Form 144 (if you are an affiliate or control person, an attorney’s opinion letter stating the factual and legal basis for the legend removal and other documents associated with the transaction the resulted in the issuance of the restricted stock to you. Part of our service is to assist you to comply with these requirements.
- You will be asked to pay for the legal opinion at the time that work begins. It is almost always the responsibility of the shareholder to pay for the opinion. In rare cases, the company that issued the securities may pay for the legal opinion.
- If your broker or banker would like to speak with us during the Rule 144 legend removal process, ask him or her to call the Logan Law Firm PLC at 602-957-9320, Ext. 1.
- If you are eligible to resell your shares in the public markets, we will issue the appropriate opinion letter and supporting documents by email to your broker and send a copy to the company that issued the shares for review. The responsibility for the process of restriction removal then shifts to your broker
- Your broker will conduct a compliance review and, if it is satisfied with the opinion letter and supporting information and documents, it will send the opinion letter and attachments, other essential documents, including a request to the stock transfer agent to remove the Rule 144 legend from the shares, to the stock transfer agent of the company that issued your stock.
- The stock transfer agent will review the opinion letter and other documents to determine if they are adequate. If so, it will submit the opinion letter and attachments to the issuer of the securities and ask if there is any valid legal reason why the Rule 144 legend should not be removed. The issuer must consent to the removal unless there are legitimate factual or legal reasons why the legend should not be removed. There are state and federal and state statutes, rules and regulations that must be followed, particularly Uniform Commercial Code Article 8, Sections 401-409. Any issuer or transfer agent that ignores these laws and refuses to remove the restrictive legend is subject to substantial liability.
- Assuming that there are no valid reasons why the Rule 144 legend should not be removed, the issuer will inform the stock transfer agent that the restrictive legend may be removed. The stock transfer agent will send the cleared shares to your broker by the method requested by the broker (DWAC or DRS in most cases). If the issuer is not DTC eligible, a paper stock certificate will be sent to the broker. Your broker may then sell the number of shares that you have authorized to be sold pursuant to your sell order.