Understanding Securities Law
The business professional's guide to securities laws
 

There are several important distinctions which will affect your determination as to whether and when you and your investors can resell Restricted Securities. The most significant are for:

• SEC Reporting Companies vs. Non-SEC Reporting Companies
• Operating Businesses vs. Shell Companies
• You and other insiders vs. Non-Insider Investors

Here's the way it works:

RESTRICTED SECURITIES OF SEC REPORTING COMPANIES

Insiders/Affiliates and Persons Selling on Behalf of Insiders/Affiliates

First 6 months after purchase of securities – The stock cannot be resold.

After six-month holding period for as long as the stock is owned and the seller is an insider/affiliate – The stock can be resold in accordance with all Rule 144 requirements including:

• Current public information
• Volume limitations
• Manner of sale requirements for equity securities
• Filing of Form 144.

Non-Insiders/Non-Affiliates (Requiring that such Person Has Not Been an Affiliate During the Prior Three Months)

First 6 months after purchase of securities - The stock cannot be resold.

After six-month holding period but before one year – There is no limit in the amount of stock that can be resold or the manner in which it may be resold. However, the stock is not “fully free trading” in that the company must be current in filing its reports with the SEC at the time of the resale.

After one-year holding period – There is no limit in the amount of stock that can be resold or the manner in which it may be resold. The stock is fully free trading.

RESTRICTED SECURITIES OF NON-SEC REPORTING COMPANIES [INCLUDING PINK SHEET COMPANIES THAT DON’T FILE WITH THE SEC]

Insiders/Affiliates and Persons Selling on Behalf of Insiders/Affiliates

First 12 months after sale of securities - The stock cannot be resold.

After one year holding period for as long as the stock is owned and the seller is an insider/affiliate – May resell in accordance with all Rule 144 requirements including:

• Current public information
• Volume limitations
• Manner of sale requirements for equity securities
• Filing of Form 144.

Non-Insiders/Non-Affiliates (Requiring that such Person Has Not Been an Affiliate During the Prior Three Months)

First 12 months after purchase of securities - The stock cannot be resold.

After six-month holding period but before one year - Unlimited public resales under Rule 144 except that the current public information requirement still applies.

After one-year holding period - Unlimited public resales under Rule 144; need not comply with
any other Rule 144 requirements.

Tacking the Holding Period

Rule 144 in effect deems certain stock ownership transfers not to be sales, in which case you can add, or “tack,” the amount of time the prior owner owned the securities to the ownership time, or “holding period” of the current owner, as follows:

• Stock dividends, splits and recapitalizations.
• Conversions and exchanges.
• Securities acquired as a contingent payment of the purchase price of an equity interest in a business, or the assets of a business.
• Securities which are bona fide pledged for a loan after a default.
• Bona-fide gifts.
• Trusts and Estates Beneficiaries
• Holding company formations.
• Cashless exercise of options and warrants.

All of these “tacking” provisions have significant qualifiers. Make sure you consult a qualified securities lawyer if you are trying to tack the Rule 144 holding period of the person from whom you acquired the securities.

Resale of Restricted Securities of Shell Companies

Rule 144 requirements for legal resales of Unregistered Securities by Shell Companies are significantly different, as set forth in Rule 144.i. Most significantly, these rules apply if the company ever in its entire past history was a shell company, even if it is not a shell company at the time it sold the Restricted Securities in question.

Rule 144.i provides that if the company that sold the Unregistered Securities is at the time of sale, or ever in its past history had been, a Shell Company, then four things must happen before the Restricted Securities can be resold under Rule 144:

The company must no longer be a Shell Company.

• A minimum of one year must have elapsed from the time the Shell Company filed with the SEC, on a different Form, the same disclosure information and financial statements as the company must file in a Form S-1 Registration Statement about its Non-Shell Company business.
• The company must be an SEC Reporting Company.
• The company must have filed all required reports of an SEC Reporting Company for the prior 12 months, or shorter if it has been a Reporting Company for a shorter period.

This rule creates a big problem for OTCBB Public Shells and a disastrous problem for Pink Sheet Shells, as described under the “Public Shells and Reverse Mergers” Button. It has even driven one well-known FINRA broker/dealer who had always used a Reverse Merger with a Public Shells in its financings to abandon that method in favor of the direct filing method described above.