- 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:
||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:
||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.
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 certificate stating that the shares are subject to the restrictions on resale set forth in the Securities Act of 1933 and Rule 144. This information is referred to as a “Rule 144 legend.” It is considered a best practice to place a Rule 144 legend on each paper certificate. Stock transfer agents also place a “stop order” on the shareholder ledger of the issuing company noting which shares are restricted. Link to text of Rule 144: https://www.law.cornell.edu/cfr/text/17/230.144
Unless shares are registered for resale under a current, effective registration statement, they may only be sold in the public markets or in private sales if there is an exemption available under the federal securities laws. Public companies place a restrictive legend on all stock certificates, 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, or (c) as a result of converting a debenture, debt or promissory note to common shares. Although no specific statute, rule or regulation requires a Rule 144 legend, it is considered best practice to affix one to all paper certificates and 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.
The applicable holding periods are shown in the chart at the top of this page. 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. 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, of 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.
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 your securities broker or bank.The fee for preparing and issuing a routine Rule 144 opinion letter is usually $425.00. This assumes that the necessary information and documents are delivered to our firm by the shareholder and its broker or bank. If there are special circumstances, a higher fee will be charged. For example, if all of the necessary documents are not available and our firm is asked to locate them by researching pubic filings or contacting the issuer to obtain them, the fee may be higher. 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 the base price, 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. Any shares that are unsold after three months must be returned by your broker to the issuer’s stock transfer agent. The stock transfer agent will issue a new certificate to you representing the unsold shares (called a balance certificate) which will have a Rule 144 legend. If you seek to sell more restricted shares at a later date, you must repeat the process that you initially followed to sell the remaining shares (new representations letters, new opinion letter, etc.).
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 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? The date of that the stock certificate is issued is not part of the calculation of the holding period. There can be reasons why stock certificates are issued before payment in full has been made (which is a bad practice unless the certificate is held in escrow pending payment) and why delays take place after payment in full has been made before a certificate is issued.
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 started on the later of (a) the date on which both you and the issuer sign the subscription agreement and/or stock purchase agreement and (b) the date on which the issuer received and accepted your funds.
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 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 upon request.
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.
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 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 240.13c2-11, you may be able to rely solely upon 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.law.cornell.edu/cfr/text/17/240.15c2-11 .
Contact us to evaluate the availability of the Section 4(a)(1) exemption in your situation.
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?
Are you having 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? If the only asset 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 six months ago. 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.).
Contact us if you would like to evaluate the availability of the Section 4(a)(1) exemption.
What are the steps in the process for selling my restricted shares?
Here are the procedures that you should follow:
a. Open a brokerage account with a full service broker-dealer or a bank that handles restricted securities transactions. If you do not have a brokerage account (or if your broker is not very experienced 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. Online discount brokers do not accept restricted stock or 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 a discount broker before they are sold. The brokerage commission charged by a full service broker or bank (usually between two percent and four percent) is a cost of doing business and cannot be avoided. If you are likely to do a substantial amount of future business with the broker-dealer or bank, you may be able to negotiate a lower commission.
b. Contact your 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 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. We can provide you with a form of stock power separate from the certificate.
c. Your securities broker will prepare a seller’s representations letter, a broker’s representations letter (if required), a Form 144 (if you are an affiliate), a stock power and other documents associated with the transaction. You may need experienced help to complete a seller’s representations letter or Form 144.
d. You will be asked to make arrangements to pay for the legal opinion unless the company that issued the securities customarily pays for these legal opinions.
e. Please ask your broker to call the Logan Law Firm PLC at 602-957-9320, Ext. 1, so that we can coordinate the information and document sharing process with your representative.
f. If you are eligible to sell your shares, the law firm will issue the appropriate opinion letter, deliver the opinion letter and attachments to your broker and send a copy of the opinion letter and attachments to the Company that issued the shares to you for review.
g. Your broker will send the opinion and attachments, the original certificate(s) and stock power(s), a check for the fees of the Company’s stock transfer agent and a letter of instruction to the stock transfer agent.
h. The stock transfer agent will contact the issuer of the securities and ask if there is any lawful reason why the Rule 144 legend should not be removed. The issuer must consent to the removal unless there are factual or legal reasons why the legend should not be removed. There are state and federal laws that must be followed. Any issuer or transfer agent that ignores these laws and refuses to remove the restrictive legend is subject to substantial liability.
i. 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 return the cleared shares to your broker by the method requested by the broker. Your broker may then sell the number of shares that you have authorized to be sold pursuant to your sell order.