Restricted Legends, Removal Requirements, Rule 144 – Going Public Lawyers
The Securities Act of 1933, as amended (the “Securities Act”) does not require that issuers place restricted legend (“Restricted Legends” or “Restrictive Legend“) on certificates representing restricted securities. It has become routine for public companies and private companies seeking to go public to place Restricted Legends on certificates. It is also common practice for an issuer’s transfer agent to require that the issuer place Restricted Legends on stock certificates representing restricted securities. Restricted Legends provide notice to shareholders as well as to third parties that the securities represented by the stock certificate cannot be resold unless registered under the Securities Act or an exemption from registration is available.
Because of the fraud associated with reverse merger transactions, the SEC as well as NASDAQ and the NYSE established special rules applicable to restricted legends and reverse merger issuers. A typical Restricted Legend looks something like this:
“The Securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state of the United States or in any other jurisdiction. The Securities represented hereby may not be offered, sold or transferred in the absence of an effective registration statement for the Securities under applicable securities laws unless offered, sold or transferred pursuant to an available exemption from the registration requirements of those laws.”
When restricted securities become eligible for resale under Rule 144, shareholders often seek to remove the Restricted Legend from their stock certificates and deposit their shares with their stockbroker. For reverse merger issuers, broker-dealers require additional documentation including representations about the issuer’s status as a “shell company”.
Under all scenarios, shareholders of public companies frequently ask the issuer’s securities attorney if the Restricted Legend on a stock certificate can be removed once Rule 144 has become available. Where shell companies and reverse mergers are concerned, the requirements of Rule 144 are often misunderstood.
In SEC Release No. 33-8869, the SEC stated with respect to restricted securities that it did not “object if issuers remove Restricted Legends from securities held by non-affiliates after all of the applicable conditions in Rule 144 are satisfied.” With respect to the requirements of Rule 144, the unique SEC requirements for reverse merger issuers are applicable. The SEC acknowledged that the decision of whether to remove a Restricted Legend is a matter solely in the discretion of the issuer of the securities, and that disputes about the removal of legends “are governed by state law or contractual agreements, rather than federal law.”
Issuers should be cautious about removing Restricted Legends from stock certificates representing unregistered securities after only six months for SEC reporting issuers unless a prior or specific sale is contemplated. This is particularly true where the issuer has engaged in a prior reverse merger. In order for the reduced six month holding period to be applicable to a particular resale, the SEC Reporting Company must have been subject to the SEC’s reporting requirements for a period of at least 90 days. Additionally, the issuer must have filed all SEC reports required during the preceding 12 months or such shorter period that they were required to file. Where the issuer engaged in a reverse merger with a public shell company, it must have filed “Form 10” information more than 10 years prior to the anticipated sale date.
If the issuer becomes delinquent in its SEC Reporting obligations, Rule 144 is unavailable or if the issuer does not have current public information available at the time of the sale, the Rule 144 holding period is increased to one year. As such, a restricted legend cannot be removed until such time.
Securities lawyer, Brenda Hamilton provides legal advice to private companies and public companies in securities matters including SEC registration, Rule 144 resales and going public transactions.
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