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When Denying Rule 144 Legal Opinions is a Market Manipulation Scheme

January 25, 2026 Brenda Hamilton, NYSE, Nasdaq, Securities and Going Public Lawyer

 

Why issuer-directed refusals and delays in Rule 144 legend removal despite a holder’s availability to resell restrict float, create artificial scarcity, and mislead the market

A restrictive legend on securities is supposed to be an SEC compliance mechanism. But in practice, particularly with penny stocks quoted on the OTC Markets, it has evolved into a well-used market-manipulation tool. In the ordinary course, a holder seeking to resell restricted securities relies on a Rule 144 legal opinion (often called a “Rule 144 opinion”) addressed to the transfer agent confirming that an exemption is available and the restrictive legend may be removed. The transfer agent typically notifies the issuer (often via issuer counsel) and requires a Rule 144 legal opinion before processing the legend removal.

A problem arises when an issuer (and others working in collusion with the issuer) uses a Rule 144 opinion as a pretext to wrongfully deny, delay, or selectively approve legend removals—not for legal reasons, but to limit the number of shares that can enter the public market to stabilize the trading price, avoid a price decline, or preserve promotional momentum while the issuer is engaged in investor-relations activity. At the same time, the issuer manufactures scarcity and distorts price formation.

This article explains when a refusal to remove a legend becomes unlawful price support, how SEC guidance and precedent map onto that conduct, and why the practice can mislead investors in violation of the federal securities laws’ anti-fraud provisions.

What  Rule 144 Legal Opinion Manipulation looks like

Rule 144 legend gating is the improper use of legend-removals to restrict an issuer’s public float. It often appears in internal instructions and plans such as:

  • “Approve legal opinions / Rule 144 opinions only for friendly holders; delay everyone else.”
  • “Release removals in tranches so the market doesn’t get hit.”
  • “Slow-walk the legal opinion / Rule 144 opinion because selling pressure will hurt price.”
  • “Condition the Rule 144 opinion on the holder agreeing not to sell (or to sell only through a preferred channel).”

These types of activities are a market-facing supply decision. If the issuer’s purpose is price stabilization or price support, the issuer is effectively using legend removal to control the market’s available supply and, in the view of the SEC, FINRA, and DOJ, may be engaging in market manipulation and improper stabilization activities.

The SEC’s Anti-Manipulation Guidance: Price Support Through Manufactured Scarcity

The SEC’s Regulation M materials are unusually candid about the manipulation concept that matters here. As an anti-manipulation measure, Regulation M is designed to prohibit activities that could artificially influence the market for a security, including “supporting the offering price by creating the exaggerated perception of scarcity” or “creating the misleading appearance of active trading.”[1]

Although Regulation M is distribution-focused, the SEC’s explanation is directly useful for legend gating analysis because it describes a core enforcement idea: price support achieved by manufactured scarcity is harmful because it creates an artificial market signal. Legend gating can create precisely that signal if eligible shares are kept out of the public market for a price-related reason, even though a legal opinion or Rule 144 opinion could be delivered (or has been delivered) confirming resale eligibility.

When an issuer restricts float through legend gating while simultaneously promoting the stock (or retaining paid investor-relations services), the market may see a price that reflects promotion-driven demand layered on top of artificially constrained supply. That is the “exaggerated perception of scarcity” problem in practical form.[1]

SEC Precedent: Restricting Supply To Maintain Price Is A Classic Manipulation Theme

The SEC’s opinion in In the Matter of Michael J. Markowski and Joseph F. Riccio is often cited for the proposition that market power cannot be used to restrict supply and maintain prices at artificial levels. The SEC stated:

“A dealer may not exploit his ability both to restrict supply in the marketplace (by buying investors’ unwanted shares) and charge an arbitrarily high price.”

Markowski involved a broker-dealer’s market support activity and found that restricting supply to prevent sales from depressing price can yield a price that no longer reflects genuine supply and demand. If an issuer blocks a legal opinion or Rule 144 opinion from being acted on (or blocks issuance of the legal opinion / Rule 144 opinion) for the purpose of keeping shares from entering the market, the issuer is using administrative control to restrict supply.

Rule 144 Legal Opinion Manipulation Risks Under SEC Frameworks

Rule 144 legend gating can raise SEC risk even without classic manipulative trading patterns (wash trades, matched orders, spoofing). The concern is a course of conduct that operates as a deceptive device by creating an artificial market condition: scarcity by issuer design. This is particularly acute when the issuer is communicating positively to the market or running investor-relations activity while privately suppressing eligible selling without public disclosure to investors.

A recurring defense is: “We are simply waiting for a legal opinion” or “we are waiting for a medallion.” That rationale can be legitimate when the legal opinion or medallion is genuinely needed to resolve legal uncertainty. But it becomes problematic when the Rule 144 legal opinion process is used as a pretext to delay legend removals and share transfers for price reasons. In that setting, the ‘Rule 144 opinion’ is no longer a compliance step it becomes a market-manipulation lever.

How Investors Are Misled When Issuers and Participants Restrict the Public Float: False and Misleading Disclosures, Float Signals, Overhang Risk, and Distorted Price Formation

Rule 144 gating can mislead investors in concrete, market-relevant ways:

Artificial float and liquidity signals. Investors may pay prices that assume scarcity and liquidity are genuine because supply appears limited, when the “scarcity” is manufactured by an issuer’s refusal to act on a Rule 144 legal opinion.

Hidden overhang. Blocking Rule 144 legend removals can build a backlog of eligible sellers who are prevented from selling while the backlog is not disclosed to investors. If the market is not informed of that supply overhang, investors cannot evaluate the true dilution and selling-pressure risk.

Promotion-driven demand paired with suppressed supply. If investor-relations activity increases demand while legend gating suppresses eligible selling, stability or upward price movement can be misinterpreted as organic demand when the price is being artificially supported by constrained supply.

Selective liquidity allocation. Selective processing of Rule 144 opinions or legal opinions (approving some holders, denying others) allocates who can sell and when, creating a managed market rather than an independent one. In these circumstances, parties with knowledge who participate in the managed market while restricting others’ shares can face liability alongside the issuer.

FINRA and SEC broker-dealer guidance: Rule 144 Legal Opinions and the limits of reliance

Rule 144 legend removal is not just an issuer-transfer-agent issue. Broker-dealers sit downstream of the legend process. In microcap and low-priced securities, firms may require a legal opinion (often a Rule 144 opinion) before accepting deposits or effecting sales. FINRA has repeatedly warned firms that they must take reasonable steps to avoid participating in illegal unregistered distributions, and that reliance on self-serving statements   even those coming from sellers and their counsel   is not enough.

FINRA Regulatory Notice 09-05 quotes SEC authority explaining that when a dealer is asked to sell a substantial amount of securities, it must take whatever steps are necessary to be sure the transaction is not an unregistered distribution, and that it is “not sufficient” merely to accept “self-serving statements of his sellers and their counsel without reasonably exploring the possibility of contrary facts.”

FINRA also warned that investigations have uncovered situations where firms inappropriately relied on stock certificates issued without restrictive legends or certificates accompanied by false attorney opinions—a reminder that the existence (or absence) of a legend, and even the presence of an attorney legal opinion, do not end the analysis when securities law violations exist.

Complementing FINRA’s guidance, SEC Trading and Markets staff FAQs emphasize that, when there are indicia of an illegal distribution, a broker-dealer cannot claim its sales were exempt “simply because the stock certificates lack a restrictive legend or a clearing firm or transfer agent raises no objections,” and reiterate the “self-serving statements” principle in the context of reasonable inquiry and Rule 144.

These FINRA and SEC statements matter for issuer-side legend gating analysis because they show how regulators view Rule 144 opinions: a Rule 144 opinion is not a substitute for substance. If an issuer is manipulating when and whether a Rule 144 opinion results in legend removal to stabilize price, it is using a compliance artifact to manufacture a market condition. And if broker-dealers or market participants repeat issuer messaging without understanding the suppressed supply, the risk compounds.

The “SEC Will Not Intervene” in Rule 144 Legal Opinion Disputes:  Often Misunderstood

The SEC notes that even if Rule 144 conditions are met, a holder generally cannot sell until the transfer agent removes the legend. The SEC also states that it will not intervene in private disputes about whether a legend should be removed. That non-intervention posture does not mean an issuer may use legend gating to stabilize price. It means the SEC will not act as a referee in a particular shareholder-transfer dispute. If legend gating is used as a scarcity lever to support price while the issuer promotes the stock, the SEC’s broader anti-manipulation framework is still relevant and enforced.

Compliance controls: Rule 144 Legal Opinion Measures to Prevent Market Manipulation

Issuers that want to reduce SEC risk should treat Rule 144 opinions as a compliance process, not a market-manipulation and stabilization mechanism. Controls that help:

  • Written, objective legend-removal procedures with clear documentation requirements for a legal opinion or Rule 144 opinion and defined processing timelines.
  • Consistent treatment across holders; avoid selective approvals based on relationship, promotional timing, or perceived market impact.
  • Contemporaneous documentation of any legitimate legal or factual reasons a Rule 144 opinion cannot be issued or relied upon (missing facts, affiliate status uncertainty, inconsistent representations, shell company issues, etc.).
  • Review of public statements and investor-relations materials for implications about float, liquidity, and selling pressure; avoid half-truths that could be misleading if eligible selling is being suppressed.

Conclusion

The SEC’s guidance identifies price support through an “exaggerated perception of scarcity” as a market manipulation concern, because it can create an artificial market signal rather than a price formed by genuine supply and demand.

If an issuer uses the legal opinion and Rule 144 opinion pipeline to deny, delay, or selectively allow legend removal for the purpose of stabilizing price or limiting selling pressure, particularly while engaging in investor-relations activity, the issuer may be manufacturing scarcity, distorting price formation, and misleading investors about the true supply conditions in the market. In that setting, the risk is not only a market-manipulation theory; the conduct and related communications can also implicate the federal anti-fraud provisions (including Section 10(b) and Rule 10b-5) if they operate as a scheme to defraud or result in materially misleading statements or omissions about float, liquidity, or selling pressure.

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