Can I Sell Shares Under Section 4(1)? Going Public Lawyers

Selling Shares Under Section 4(1)

Rule 144 (“SEC Rule 144”) under the Securities Act of 1933 (“Securities Act”) provides a safe harbor from the registration statement provisions of the Securities Act for resale 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 for securities not covered by a registration statement, the seller will not be deemed an underwriter and will be entitled to rely upon the safe harbor of Rule 144 to resell their restricted stock.

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 stock includes, 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

Since February of 2008, when Rule 144 was amended, its safe harbor has been unavailable for sales of securities of shell companies.  Additionally, one year must elapse from the time an issuer files “Form 10” information with the SEC before its Shareholders can rely upon Rule 144 if it was at any time a shell company.  Additionally, 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 restricted securities. 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 restricted 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 a SEC reporting company or one year if a non-reporting company;
  • The Shareholder is not an underwriter and is not selling the restricted 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 article, 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].  This memorandum 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 and compliance advice on any specific matter, nor does this message create an attorney-client relationship.

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