Rule 144 Legal Opinions and Legend Removal Q&A

Section 5 of the Securities Act of 1933, as amended, (the “Securities Act”) requires the offer and sale of securities to be registered under the Securities Act, unless the security or transaction qualifies for an exemption from registration. Rule 144 of the Securities Act provides a safe harbor that permits holders of “restricted securities” to resell their securities in the public market if specific conditions are met. To resell restricted securities, the Company’s transfer agent will require a legal opinion as to the tradability of the shares. The legal opinion will discuss the resell exemption relied upon for the resale of the shares. Most often, this will be Rule 144.

This blog post discusses the most common questions we receive about Rule 144’s Safe Harbor.

Q. What is Section 5 of the Securities Act of 1933 (the “Securities Act”)?

A. Section 5 of the Securities Act requires that all offers and sales of securities be registered with the Securities and Exchange Commission (the “SEC”) or exempt from the registration requirements.

Q. What is the “safe harbor” provided by Rule 144?

A. Rule 144 provides shareholders with a safe harbor for the resale of shares from the registration requirements of Section 5 of the Securities Act to certain holders of securities, if certain requirements are met.  The requirements of Rule 144 vary depending upon whether the holder of the shares is an affiliate or non-affiliate of the issuer.

Q. What are the requirements for non-affiliates of the issuer to rely upon the “safe harbor” under Rule 144, for their resales?

A. So long as the issuer has never been a shell company as defined by Rule 144, the conditions of Rule 144 safe harbor for a non-affiliate are: (i) adequate current public information with respect to the issuer, (ii) a holding period of six months for shares of an SEC reporting issuer and twelve months for a non-reporting issuer.  In addition, there may be a notice requirement if the amount of securities sold, exceeds certain amounts.

Q. How are the rules different for affiliates who seek to sell shares in reliance upon Rule 144?

A. In the case of affiliates’ sales, certain volume limitations and manner of sale requirements and the holder must file a Form 144 with the SEC if their proposed sales in reliance on Rule 144 within a three-month period exceed 5,000 shares or $50,000. Non-affiliates no longer need to file Form 144.

Q. How does a shareholder comply with Rule 144’s adequate current public information requirement?

A. For purposes of Rule 144, the informational requirements depend upon whether the issuer is an SEC reporting issuer.  An  SEC reporting issuer is a company with securities registered under the Securities Act and/or the Securities Exchange Act of 1934 (the “Exchange Act”).

For shareholders of an SEC reporting company to comply with the informational requirements of Rule 144, the company must have been subject to the SEC’s reporting requirements for at least 90 days prior to the proposed sale date and have filed all reports required by the Exchange Act during the preceding 12 months or for such shorter time period that the issuer was required to file reports.

For a non-reporting issuer to comply with the reporting requirements of Rule 144, it must provide the information required by Rule 15c2-11 of the Exchange Act.

Q. What is the holding period required by Rule 144?

A. Shareholders seeking to sell restricted securities of an SEC reporting issuer who has complied with the requirements above, must hold their shares for six months.  Shareholders seeking to sell securities of non-reporting companies must hold their shares for twelve months.

Q. When does the holding period of Rule 144 start?

A. Generally, the holding period starts on the date that consideration was paid for the securities, except in certain circumstances where the issuer is a former shell company.

Q. What is a shell company?

A. Rule 144(i)(1) generally defines a shell company as a company that has:

(A) No or nominal operations; and
(B) Either:

  1.   No or nominal assets;
  2.   Assets consisting solely of cash and cash equivalents; or
  3.   Assets consisting of any amount of cash and cash equivalents and nominal other assets.

Q. What are the requirements to sell shares of a Shell Company?

A. Rule 144 is only available for the resale of securities initially issued by a shell company (reporting or non-reporting) or a former shell if certain conditions are met. These conditions are:

  • the issuer of the securities has ceased to be a shell company;
  • the issuer is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act;
  • the issuer has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other than Form 8-K reports; and
  • one year has elapsed since the issuer has filed current ‘‘Form 10 information’’ with the Commission reflecting its status as an entity that is no longer a shell company.

If these conditions are satisfied, then the securities can be sold subject to all other applicable Rule 144 conditions.

Q. When does the holding period begin under Rule 144 or a cashless exercise of options or warrants?

A. If the options or warrants were acquired from the issuer and have a cashless exercise, the underlying security shall be deemed to have been acquired at the same time as the options or warrants.

Q. What is tacking for the purposes of Rule 144?

A. Rule 144 allows the holding periods of holders to be added to that of prior non-affiliate holders.

Q. When does the holding period start for securities purchased by a promissory note or other similar obligation?

A. A promissory note or similar obligation to pay the purchase price, or entering into an installment purchase agreement with a seller, is deemed full payment only if the promissory note, obligation or contract (1) provides the seller full recourse against the purchaser of the securities, (2) is secured by collateral, other than the purchased securities, with a fair market value at least equal to the purchase price of the purchased securities, and (3) shall have been discharged by payment in full prior to the sale of the securities.

Q. When does the holding period start for securities acquired through a dividend or stock split?

A. Securities that were acquired from an issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to have been acquired at the same time as (i) the securities upon which the dividend was paid, (ii) the securities subject to the split, or (iii) the securities surrendered in the recapitalization.

Q. When does the holding period start for securities acquired from the issuer in a conversion?

A. If the securities sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms.

Q. What are the informational requirements of Rule 15c2-11 that apply to shareholders of non-reporting companies relying upon Rule 144?

A. Rule 144 requires that the company have current public information available. For a non-reporting company, this means the issuer must have the information required by Rule 15c-211 available. Rule 15c-211 requires that the broker or dealer have extensive specified information about the issuer in its records and make such information reasonably available to potential investors.  Rule 15c-211 requires the following information be disclosed:

  • The exact name of the issuer and any predecessor;
  • The address of the issuer’s principal executive offices;
  • The state of the issuer’s incorporation;
  • The exact title and class of the security;
  • The par or stated value of the security;
  • The number of shares outstanding as of the end of the issuer’s most recent fiscal year;
  • The name and address of the issuer’s transfer agent;
  • The nature of the issuer’s business;
  • The nature of the issuer’s products or services;
  • The nature and extent of the issuer’s facilities;
  • The names of the chief executive officer and members of the board of directors;
  • The issuer’s most recent balance sheet and profit and loss and retained earnings statements;
  • Similar financial information for that part of the two preceding fiscal years as the issuer or its predecessor, if any, has been in existence;
  • Whether the broker or dealer or any associated person is affiliated, directly or indirectly, with the issuer; and
  • Whether the quotation is being submitted or published directly or indirectly on behalf of the issuer or any director, officer or other person, who is directly or indirectly the beneficial owner of more than 10% of the outstanding equity securities of the issuer, and, if so, the identity of such person, and the basis for any exemption under the federal securities laws for any sales of securities on behalf of that person.

The following chart summarizes the revised conditions applicable to affiliates and non-affiliates selling restricted securities under Rule 144:

What are the new Form 144 filing thresholds for affiliates’ sales of securities?

For further information about Rule 144, please contact Brenda Hamilton, Securities Attorney at 200 E. Plantation Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].  This securities law Q&A is provided as a general informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar results.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
200 E. Plantation Park Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855