One of the most common exemptions employed by shareholders and securities brokers who wish to publicly resell securities with a restrictive legend is Rule 144. Responsibility for compliance with the accompanying conditions falls upon the seller of the securities, not the potential buyer.

Part of the process to use Rule 144 in the removal of these restrictions is to obtain opinion letters from the securities’ issuer or their legal counsel before a transfer agent can remove the legend preventing the sale. It can be a complicated affair and the advice of experienced counsel – like the Easler Law team – can be invaluable.

What are Restricted Securities?

The restrictive legend itself is merely a disclaimer that has been stamped or printed on a securities certificate. What it indicates is far more important: that the sale of the securities in question has not been registered and that they cannot be resold into the public market without certain conditions being met. This also protects the issuing company from risking its private placement exemption for the securities’ initial sale.

These securities typically have a restrictive legend if they have been obtained from the issuing company or their affiliate in a private and unregistered sale; these may include stocks received through an employee benefit plan or as compensation for professional services or exchanged for start-up funding. The restrictive legend can only be removed by a transfer agent, who will typically require an opinion letter from the legal counsel of the issuing party.

What is Rule 144?

The U.S. Securities and Exchange Commission (SEC) established Rule 144 as one exemption from registration requirements, thus making it possible for the owner of restricted securities (i.e. securities with a restrictive legend) to resell them on the public market. Rule 144 lays out five conditions that must be met in order for it to be legal to resell the restricted security in question.

What Are the 5 Conditions of Rule 144?

Rule #1: Hold your horses! At least, hold on to those restricted securities for a little while. Before you can sell them, you must own them for a specific amount of time – at least six months if they were issued by a ‘reporting company’ that is subject to the Securities Exchange Act of 1934’s reporting requirements; at least one year if the issuer is not considered a reporting company. The clock starts counting from when the restricted securities were paid for.

Rule #2: 

Is it google-able? Well, that’s not exactly the condition. The actual condition is that information about the issuing company is publicly available. Companies that fall under the reporting guidelines of the Securities Exchange Act of 1934 must be in compliance with relevant reporting requirements. If the issuing company is a non-reporting company, is current information able to be located? This would include basic data, like annual financial statements, names of officers and directors, and the nature of the business.

Rule #3: The 1% rule. This, and the conditions that follow, apply to affiliates and their control securities, which also require exemptions to be resold on the public market. (An affiliate is defined as a person who has a relationship of control, such as an executive officer or majority shareholder, with the issuing company.) For affiliates, the quantity of equity securities that may be sold in a 3-month period may not exceed the greater of 1% of the outstanding shares being sold in the same class, or the greater of 1% of the average reported weekly trading volume if the class is listed on a stock exchange (daily average in the four weeks leading up to when a notice of sale on Form 144 is filed.) Also of note is the over-the-counter stocks may be sold only in accordance with the 1% measurement.

Rule #4: 

Stick to the routine. The sale of restricted or control securities by an affiliate must follow the same process as ordinary trading transactions. Sellers and brokers are prohibited from soliciting orders to buy the securities in question. In addition. A broker may receive no more than a traditional commission for executing the sale.

Rule #5:

Full disclosure. Does the sale involve greater than 5,000 shares, or will the aggregate dollar amount sold in a 3-month period exceed $50,000? If you’re an affiliate and meet those targets, you must file a notice on Form 144 with the SEC.

What Happens After the Conditions Are Met?

If all of the relevant conditions of Rule 144 have been met, there are still steps that need to be taken. That restrictive legend must come off prior to sale on the public market, and that can only be done by a transfer agent with the consent of the issuer.

The consent of the issuer is typically delivered to the transfer agent in the form of an opinion letter from the legal representation of the issuer. Anyone ready to begin the process of having a restrictive legend removed through Rule 144 should reach out to the securities issuing company. It may also be wise to start the conversation with an attorney who is well-versed in securities laws, rules, and regulations and who can serve as your guide.

It is important to note that the SEC will not intervene in a dispute between the issuing company and the shareholder. If the issuing company refuses to consent to the removal of a restrictive legend, the shareholder should consult with their legal team about the state, not federal, law. This is also why it is imperative to have an opinion letter that has been prepared accurately and is inclusive of all the details necessary to ensure a successful bid for consent to move forward in the sale.