What Is The Section 4(1) Exemption? Securities Lawyer 101

Section 4(1) Attorney

Securities Lawyer 101 Blog

Rule 144 (“SEC Rule 144”) under the Securities Act of 1933 (“Securities Act”) provides a safe harbor from the registration provisions of the Securities Act for resales of restricted and control securities by persons other than the issuer if all conditions of the rule are complied with.  Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.”

If the requirements of Rule 144 are met, the seller will not be deemed an underwriter and will be entitled to rely upon the safe harbor of Rule 144 to resell their securities.

Section 4(1) is often referred to as the “ordinary trading” exemption. The main obstacle to the use of Section 4(1) is whether the seller is an underwriter under Section 2(11) of the Securities Act and whether the resale involves a distribution of securities.

Restricted Securities

Restricted securities include, among others, (a) securities acquired directly or indirectly from the issuer, or from a control person, in a chain of transactions not involving any public offering, (b) securities acquired from an issuer or control person that are still subject to the resale limitations of Rule 502(d) of Regulation D, and (c) securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A.

Shell Companies l Reverse Merger

Since February of 2008, when Rule 144 was amended, its safe harbor has been unavailable for sales of securities of issuers who engaged in reverse mergers with former shell companies.  Under such circumstances, after a reverse merger, the issuer must file “Form 10” information with the SEC. It is only one year after the filing of Form 10 Information with the SEC that an issuer’s Shareholders can rely upon Rule 144 if it  at any time engaged in a reverse merger with a shell company. Issuers who engaged in reverse mergers with former shell companies must be current in their SEC ‘s reporting requirements on the date of the Shareholder’s resale.

Representations of Selling Shareholders

In order to confirm compliance with Rule 144, issuers should obtain written representations from all Shareholders seeking to remove the legend from the certificates representing their securities.  This is particularly true for reverse merger issuers. The representations for Shareholders should include the following representations:

●  The Shareholder is not an affiliate of the issuer and does not hold more than 10% of its securities;

● The Shareholder is the beneficial owner of the shares represented by the certificate;

● The Shareholder has been the beneficial owner of the securities represented by the certificate for the required holding period of six months for an SEC reporting company or one year if a non-reporting company;

●  The Shareholder is not an underwriter and is not selling the securities for the purpose of making a distribution for or on behalf of the Issuer;

● The Shareholder is selling for his/her own account and not for the benefit of a third party, or the Issuer; and

● The Shareholder  has read and understands Rule 144 and will sell its shares in compliance with Rule 144.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com