In the U.S., all sales of securities must be either registered with the Securities and Exchange Commission (SEC) or exempt from such registration, or else they are illegal. Of the various exemptions available for the resale of restricted securities, the most commonly used is Rule 144.
Rule 144 was promulgated under Section 4(a)(1) the Securities Act of 1933, as amended (Securities Act). It provides shareholders with a “safe harbor” for the sale of restricted or control securities without the need for registration. In addition to allowing shareholders to sell their securities, Rule 144 also permits the restrictive legend to be removed in most cases.
However, in order to rely on the exemption provided by Section 4(a)(1) or the safe harbor provided by Rule 144, most transfer agents and brokers require that a shareholder obtain a legal opinion letter confirming that the shares may legally be sold.
Rule 144 Information
The determining factors for whether a security qualifies for Rule 144 are:
Whether or not the issuer is subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 and fully current in its reporting obligations
- If the issuer is a fully current, SEC-reporting company, the applicable holding period for their shares is six months.
- If the issuer is not current or is non-reporting, the applicable holding period for their shares in one year.
Whether the security holder is an affiliate of the issuer
- Affiliates of the issuer are limited in the manner of sale and number of shares they may sell at any given time. For example, affiliates and control persons may only sell up to 1% of the issuer’s total outstanding stock every three months and generally must sell through a broker-dealer transaction.
Whether the issuer is or has ever been a shell company
- Rule 144 is not available for securities of uncured shell companies.
- If an issuer was a shell company in the past (i.e. it once had nominal operations and no or nominal assets at the same time), the only way for it to cure its shell status is to (i) cease being a shell company, (ii) be a fully current, SEC-reporting company for at least 12 months, and (iii) have had filed “Form 10 type” information indicating its non-shell status at least one year prior to the time of the letter being written.
How long the restricted securities have been beneficially owned
- As mentioned above, the securities must be held by the shareholder for either six months or one year, depending on the issuer’s reporting status.
- A shareholder may be able to “tack” onto a previous shareholder’s hold period in order to meet the applicable hold requirement so long as the previous shareholder was not an affiliate of the issuer at any point during the 90 days prior to the date of acquisition.
- Additional exceptions apply when the restricted securities are received in exchange for other securities of the issuer, such as a conversion of preferred stock into common shares or a cashless exercise of warrants, and the exchanged securities were held for more than six months or one year, as applicable.
Austin Legal Group will be happy to prepare your Rule 144 legal opinion letter for you. In order for us to draft your opinion letter, you will need to download our Rule 144 Opinion Letter Retainer Agreement and Rule 144 Equity Information Form below or contact our office to request we email or mail the documents to you. We will also need copies of the front and back of your stock certificate(s) and copies of all documents supporting how you acquired the securities (e.g. purchase agreement, proofs of payment, services agreement, debt conversion documents, etc.). All requests and documents can be emailed to opinionletters@austinlegalgroup.com.
We charge a flat fee of $400 for a standard Rule 144 opinion letter covering shares from a single transaction. If your shares were acquired from multiple transactions, the flat fee will increase depending on the number of transactions involved and the similarities between the transactions. If you have shares from multiple transactions, please reach out to our Opinion Letter Department at opinionletters@austinlegalgroup.com for additional details and to have a retainer agreement for the applicable flat fee sent to you.
Section 4(a)(1) Information
As mentioned above, Rule 144 is the most common safe harbor used to sell restricted shares. In cases where Rule 144 is unavailable, for example if an issuer was previously a shell company and hasn’t cured its shell company status, a Section 4(a)(1) opinion letter may be used instead.
Who is eligible to use Section 4(a)(1)?
- Section 4(a)(1) is available to any person other than other than an issuer, underwriter, or dealer.
- Section 2(a)(4) of the Securities Act defines “issuer” to include every person who issues or proposes to issue a security. Nolan is not the Issuer of the subject shares.
- Section 2(a)(11) of the Securities Act sets forth a broad-based definition of “underwriter,” which includes: (1) persons who acquire securities of the issuer with a view towards distribution, (2) all persons who directly or indirectly participate in the offering, selling or underwriting process, and (3) persons selling on behalf of a control person or the issuer.
- Section 2(a)(12) of the Securities Act defines “dealer” to include any person who, for all or part of his or her time, is in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by others (it does not matter whether such sales activity is direct).
How is Section 4(a)(1) different from Rule 144?
- Whereas Rule 144 takes aspects of the issuer into consideration for determining eligibility, the eligibility requirements for Section 4(a)(1) rely entirely on the shareholder and the sale of shares in question.
- The magnitude of the sale in question is a material consideration for using Section 4(a)(1). The exemption of Section 4(a)(1) could be deemed unavailable if the proposed sale would constitute a “distribution,” which has generally been prohibited under Section 4(a)(1) by case law and administrative actions.
- In determining whether or not a sale may constitute a “distribution” factors to consider are how the securities to be sold compare to the issuer’s total issued and outstanding common shares, the public float, and the average trading volume for the issuer’s securities in the prior 30 days.
- It is important to note that Section 4(a)(1) is transaction-specific and cannot be used to remove the restrictive legend from the securities like Rule 144 can. Section 4(a)(1) allows the restricted securities to be sold, but the purchaser will need a separate opinion letter if and when they decide to resell the securities.
How long must the securities be held in order to use Section 4(a)(1)?
- In United States v. Sherwood, 175 F.Supp 480 (SDNY 1959), the court held that the subject securities had come to rest since at least two years had passed since their acquisition. However, since Sherwood, securities legislation has been modernized, including a reduction in Rule 144’s maximum holding timeframe from two years down to one year, and many industry professionals consider holding a security for at least a year as sufficient evidence of lack of intent towards distribution.
- Notwithstanding the foregoing, some transfer agents and brokers are hesitant to accept a Section 4(a)(1) legal opinion if the subject securities have been held for less than two full years. If you have held your securities for less than two years and require a Section 4(a)(1) opinion letter, we strongly encourage you to check with your transfer agent and broker to make sure they will accept such a Section 4(a)(1) opinion before proceeding with the opinion letter process.
Austin Legal Group will be happy to prepare your Section 4(a)(1) legal opinion letter for you. In order for us to draft your opinion letter, you will need to download our Section 4(a)(1) Opinion Letter Retainer Agreement and Section 4(a)(1) Equity Information Form below or contact our office to request we email or mail the documents to you. We will also need copies of the front and back of your stock certificate(s) and copies of all documents supporting how you acquired the securities (e.g. purchase agreement, proofs of payment, services agreement, debt conversion documents, etc.). All requests and documents can be emailed to opinionletters@austinlegalgroup.com.
We charge a flat fee of $1,000 for a standard Section 4(a)(1) opinion letter covering shares from a single transaction. If your shares were acquired from multiple transactions, the flat fee will increase depending on the number of transactions involved and the similarities between the transactions. If you have shares from multiple transactions, please reach out to our Opinion Letter Department at opinionletters@austinlegalgroup.com for additional details and to have a retainer agreement for the applicable flat fee sent to you.
