If you own shares of a Smaller Reporting Company, chances are they are “restricted.” But what does that mean??
The general principle behind securities law is that every offer or sale of a security must be registered with the SEC, unless an exemption applies. The fact that your stock certificate or shares are “restricted” means that have not been registered and thus, are not free trading. When you want to deposit those shares with your brokerage or perhaps sell them to a third party you will be asked to obtain a Legal Opinion.
The Legal Opinion is generally obtained from the issuer’s counsel and it is a verification that the shares are eligible to use Rule 144- a safe harbor from the principle above.
The letter itself may look pretty simple, but there is actually quite a bit or research and analysis that goes into preparing the opinion for a certain set of shares. Overall however, there are 5 basic requirements of Rule 144
- Current Public Information
- The issuer must be subject to Section 12 or 15(d) for 90 days, and must have filed all requisite periodic filings for the preceding 12 months.
- Holding Period
- a non affiliate must hold the shares for 6 months after the shares become “fully paid and non-assesable.” this is not always when they were issued. There are a number of ways to “tack-back” to a previous date that can be considered.
- Volume Limitation
- an affiliate of the company can only sell one percent of the outstanding shares, or the average weekly trading volume for four weeks, during any 3 month period.
- Manner of Sale Requirement
- shares may be sold only through unsolicited broker’s transaction, transactions directly with a market maker and/or a riskless principal transaction
- Form 144
- an affiliate must file a Form 144 with the SEC
Note that there are a number of considerations not listed and it gets further complicated is the Issuer was ever a “shell” company.
When you need an opinion the best way to expedite the process is to be prepared to provide the following items.
- Copy of the front and back of the certificate you are requesting an opinion for
- Proof of purchase- any agreement the shares were issued under. ie Stock Purchase Agreement, Consulting Agreement etc.
- Brokers Letter
- Seller’s Letter indicating the intent to sell the shares.
There is generally a fee for the opinion and it varies from firm to firm. Also, the turn-around time can vary and generally depends on whether the counsel has been given adequate information.
If you have any questions, you can email firstname.lastname@example.org
Author: Jennifer Trowbridge, Stoecklein Law Group