What is a Rule 144 Legal Opinion?

If you own shares of a Smaller Reporting Company, chances are they are “restricted.” But what does that mean?? If you have tried to deposit and sell those shares with a Broker you may have been told that you need a Legal Opinion— and here you are, trying to figure out just what that is.

In short…

The general principle behind securities law is that every offer or sale of a security (a what?) must be registered with the SEC, unless an exemption applies. The fact that your stock certificate or shares are “restricted” means that they have not been registered, and thus, are not  what’s call “free trading”– meaning you can freely trade (sell, transfer, gift, etc.) whenever you want.  When you want to deposit your restricted share 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 reporting company’s counsel, and it is a verification that the shares are eligible to use Rule 144-  a safe harbor from the principle that all securities need to be registered, above.

The letter itself may look pretty simple, but there is actually quite a bit of research, due diligence and analysis that goes into preparing the opinion for a certain set of shares.  Overall however, there are 5 basic requirements to be able to use Rule 144:

  1. Current Public Information
    1. The issuer must be subject to Section 12 or 15(d) of the Securities Exchange Act of 1934 for 90 days, and must have filed all requisite periodic filings for the preceding 12 months.
      • *simplified- the company needs to have filed everything they were required to have filed with the SEC for the past 12 months.
  2. Holding Period
    1. 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.
      • *simplified- if you are not an officer, director or larger shareholder, you must have owned the shares for at least 6 months.
  3. Volume Limitation
    • an “affiliate” of the company can only sell one percent  (1%) of the outstanding shares, or the average weekly trading volume for four weeks, during any 3 month period.
      • If you are an officer, director or larger shareholder you are subject to several restrictions (include those not related to Rule 144) and should definately seek advice of counsel before selling.
  4. Manner of Sale Requirement
    1. shares may be sold only through unsolicited broker’s transaction, transactions directly with a market maker and/or a riskless principal transaction.
      • You need to use a Broker.
  5. Form 144
    1. 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 and how familiar they are with the Company

If you have any questions, you can email  jennifer@tm-lawgroup.com or christina@tm-lawgroup.com


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