The disclosure requirements at the heart of the federal securities laws involve a delicate and complex balancing act. Too little information provides an inadequate basis for investment decisions; too much can muddle and diffuse disclosure and thereby lessen its usefulness. The legal concept of materiality provides the dividing line between what information companies must disclose, and must disclose correctly, and everything else. Materiality, however, is a highly judgmental standard, often colored by a variety of factual presumptions.

Transparency in Financial Markets

The guiding purpose of the many and complex disclosure provisions of the federal securities laws is to promote “transparency” in the financial markets. However, the task of winnowing out the irrelevant, redundant and trivial from the potentially meaningful material falls on corporate executives and their professional advisors in the creation of corporate disclosure, and on investment advisors, stock analysts and individual investors in its interpretation. The concept of materiality represents the dividing line between information reasonably likely to influence investment decisions and everything else. However, materiality is a notoriously elusive, ever changing and unpredictable concept.

Only those misstatements and omissions that are material violate many provisions of the securities laws, including the bedrock provisions requiring accurate financial reporting. In 1976, the U.S. Supreme Court set the standard for a materiality evaluation, which standard remains today. In TSC Industries, Inc. v. Northway, Inc., the Supreme Court held that information should be deemed material if there exists a substantial likelihood that it would have been viewed by the reasonable investor as having significantly altered the total mix of information available to the public.

All Facts Must be Considered

Despite this standard, the concept remains fact driven and difficult to apply. There are no numeric thresholds to establish materiality, and market reaction is inconsistent and not always available. Ultimately professionals and company management must consider all facts and circumstances available to them on any given day to determine the materiality of a given disclosure in light of the standard established by the Supreme Court in TSC Industries.

Generally, professionals and company management must look in the first instance at specific disclosure guidelines set out in the federal securities rules and regulations (such as Regulations S-X and S-K and Forms 10-Q, 10-K and 8-K). Secondly, professionals and company management must consider all facts presently affecting the Company. For instance, a specific disclosure may be highly relevant in light of current economic conditions and of little importance in a different economic climate. Ethical issues are generally not considered material, unless specifically required by statute (such as the Foreign Corrupt Practices Act).

Selective Disclosure Prohibited

The SEC has issued further guidance on materiality in Staff Accounting Bulletin No. 99 (SAB 99). Although SAB 99 is meant to clarify some materiality issues, many practitioners find that it confuses rather than clarifies. For the most part SAB 99 simply reiterates that materiality cannot be defined by law or standards but must be determined anew for each fact and disclosure issue.

In determining materiality practitioners should keep in mind Regulation FD which prohibits the selective disclosure of material information. That is, Regulation FD requires that if material information is to be disclosed, it must be disclosed to the entire market, either through a press release or Form 8-K or both, and not selectively, such as to certain analysts or market professionals.

Professionals and company management should also consider that the SEC has consistently pushed for greater and more complete disclosures. Accordingly, it is better to err on the side of disclosure than against it.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.

Good Faith Practices When Establishing Trading Plans

In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial although all complained of trades were within a 10b5-1 trading plan. The SEC alleges that Mr. Mozila had material nonpublic information about Countrywide’s deteriorating business when he instituted his trading plans. In addition, the SEC found it especially relevant that Mr. Mozila instituted four separate plans in a three month period and that trading began almost immediately in each plan, all while the Company was failing, a fact which was not public knowledge.

Recent SEC Points of Guidance

The SEC’s staff recently provided new guidance about Rule 10b5-1 plans in its Compliance and Disclosure Interpretations. The following is a brief discussion of the key points in the guidance.

First, the SEC has made clear that delaying the commencement of sales until the release of nonpublic information may not legitimize the plan. The SEC takes the position that a person may not rely on a Rule 10b5-1 plan when he or she institutes a trading plan while aware of material non-public information, even if the plan is structured to delay all transactions until after the information becomes public.

Second, the Rule 10b5-1 plan defense to insider trading is only available for plans that are entered into in good faith and not as part of a “plan or scheme to evade” insider trading laws. The SEC has stated that this requirement will be assessed in light of all relevant facts, specifically including the time period between canceling one trading plan and establishing a new one. It is advised that insiders observe a “cooling off” period between terminating and establishing trading plans.

Finally, the new interpretations confirm that a corporate insider may transfer a long standing 10b5-1 plan to a new broker, if the broker that has been executing the plan’s transactions goes out of business, even if the insider knows of material nonpublic information at the time of transfer. Provided, however, the transfer must be timed to avoid any cancellation of transactions under the plan and the new broker must observe the plan’s original terms.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

A Form S-8 registration statement is popular with small business issuers because it becomes effective immediately upon filing and allows for incorporation by reference, two benefits not always available to smaller public companies. A Form S-8 registration statement can be used by Issuers to register securities to be offered to employees under certain employee benefit plans.

To qualify to use an S-8 registration statement the Issuer must: (i) be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended; (ii) have filed all reports required to be filed during the preceding 12 months, or such shorter period of time that the Issuer has been subject to the reporting requirements; (iii) is not a shell company and has not been a shell company for at least 60 calendar days previously; and (iv) if it has been a shell company at any time previously, has filed current Form 10 information with the Securities and Exchange Commission (SEC) at least 60 days previously reflecting that it is no longer a shell company.

S-8 Stock, Employees and Consultants

An S-8 registration statement is used to register securities to be offered to employees under certain employee benefit plans. For purposes of an S-8 the term employee benefit plan means any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan or written compensation contract solely for employees, directors, general partners, trustees (where the registrant is a business trust), officers, or consultants or advisors.

Form S-8 is available for the issuance of securities to consultants or advisors only if: (i) they are natural persons; (ii) they provide bona fide services to the registrant; and (iii) the services are not in connection with the offer or sale of securities in a capital raising transaction, and do not directly or indirectly promote or maintain a market in the Issuer’s securities. Accordingly, the SEC has taken the position that Form S-8 cannot be used to register an employee benefit plan that allows for the issuance of securities to unqualified consultants or advisors, even if the Issuer does not intend to issue such securities under the plan following registration.

S-8 and Employee Benefit Options

The Form S-8 is also available for the exercise of employee benefit plan options and the subsequent resale of the underlying securities by an employee’s family member who has acquired the options from the employee through a gift or a domestic relations order. The payment of compensation by the family member will disqualify the use of Form S-8. The S-8 registration is strictly for use by qualifying individuals. If an employee transfers options received under a benefit plan, to a non-employee other than a family member, such recipient may not use the S-8 registration to exercise the option and receive registered shares. Accordingly, upon exercise of the option, the third party would receive restricted, unregistered shares.

Form S-8 and Bad Boy Provisions

Form S-8 is also subject to the Securities Act of 1933 bad boy provisions. That is, any Issuer or any entity that at the time was a subsidiary of the issuer, that within the past three years “was convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of [S]ection 15(b)(4)(B) of the Securities Exchange Act of 1934” if ineligible to use Form S-8. The described wrongdoings include convictions which: (i) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, any substantially equivalent activity however denominated by the laws of the relevant foreign government, or conspiracy to commit any such offense; (ii) arises out of the conduct of the business of a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, investment adviser, bank, insurance company, fiduciary, transfer agent, nationally recognized statistical rating organization, foreign person performing a function substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.) or any substantially equivalent foreign statute or regulation; (iii) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or substantially equivalent activity however denominated by the laws of the relevant foreign government; or (iv) involves the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of Title 18, or a violation of a substantially equivalent foreign statute.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

One of the most common inquiries received by securities attorneys today involves Issuers wanting to know when they and their shareholders can sell their shares on the open market following a merger with a Pink Sheet shell. In many cases, the answer they get is not the answer they want; twelve months after the Pink Sheet Company becomes a fully reporting entity.

If a private entity has merged with a Pink Sheet shell under the assumption that they can avoid the Securities and Exchange Commission (SEC) reporting requirements, this revelation is devastating. As a result of the amendments to Rule 144 and Rule 145, enacted in February, 2009, private companies that wish to go public on the Pink Sheets are advised to do so directly, and not through a reverse merger with a shell company.

Rule 144

Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In layman terms, Rule 144, allows shareholders to sell their unregistered shares. When a private entity merges with a Pink Sheet shell, the shareholders of the private entity receive restricted shares. Historically, other than registration, Rule 144 provided the only method for such shareholders to sell their shares on the open market. The February 2009 amendment eliminated this ability.

Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.

When a Shell is No Longer a Shell

In order to use Rule 144, a Company must have ceased to be a shell company, be subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and have filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer a shell company, then those securities may be sold subject to the requirements of Rule 144 after one year has elapsed from the date that the issuer filed “Form 10 information” with the SEC.

Lastly, Rule 145, which is the rule that addresses the issuance of securities in mergers, consolidations and reclassifications, was amended to provide an analogous provision.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Serving as an independent director carries serious obligations and responsibilities.

Following the passage of the Sarbanes Oxley Act of 2002 (SOX), the role of independent directors has become that of securities monitor. They must be informed of developments within the company, ensure good processes for accurate disclosures and make reasonable efforts to assure that disclosures are adequate. Independent directors, like inside directors, should be fully aware of the company’s press releases, public statements and communications with security holders and sufficiently engaged and active to questions and correct inadequate disclosures.

Disclosure and Transparency

The basic premise of federal securities laws is disclosure and transparency. The theory behind this regulatory structure is that if a Company is forced to disclose information about particular transactions, plans or programs, the company and its officers and directors will take greater care in making business decisions. If a director knows or should know that his or her company’s statements concerning particular issues are inadequate or incomplete, he or she has an obligation to correct that failure.

It is the Securities and Exchange Commission’s (SEC) viewpoint that independent directors should play a significant role in the direction of a company’s affairs, particularly when they have relevant expertise, experience and sophistication. According to the SEC, independent directors must not only be familiar with their company’s communications to the public, but must also compare these communications with what they know to be the facts. Additionally, they are then responsible to follow up and practice vigilance in ensuring that communications are complete and accurate.

Internal Systems Protect Company Operations

All independent directors have an obligation to question employees or legal counsel as to the background of issues or the need for disclosure of specific information. If they are aware of specific non-disclosures, they must inquire into the situation. All independent directors should insist on internal systems so that they have regular and sufficient information about the company’s affairs. Moreover, directors who review, approve, or sign their company’s proxy statements and periodic reports must take steps to ensure the accuracy and completeness of the statements, or face personal regulatory liability for the failure to do so.

The SEC has the power to bring actions against independent directors for misstatements or omissions in offering documents under the Securities Act of 1933, as amended, for fraud under Section 10 of the Securities Exchange Act of 1934, as amended or for aiding and abetting Company securities laws violations. SOX specifically authorizes the SEC to seek “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC often utilizes this power to pursue injunctive relief such as a prohibition to act as a public company director in the future, which reputational damage potential can act as a motivator.

Although all directors have direct personal liability for statements made in a registration statement or other filing signed by such directors, Rule 176 promulgated under the Securities Act of 1933, as amended, provides a due diligence defense to such actions. To invoke the due diligence defense the defending director needs to be diligent and verify facts and statements.

Better Compliance Limits Exposure

Even though independent directors are not responsible for every single company statement or even all of the company’s securities compliance, certain directors may be well situated to achieve better compliance, such as members of the audit committee or directors who sign company filings. The SEC has indicated that it intends to utilize its powers to require directors to take their role as securities monitors seriously. To date, however, the SEC has pursued very few cases against independent directors, and most of such cases have been settled without fanfare and generally involve injunctive relief. Moreover, successful private litigation against independent directors is rare.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 of the Securities Act for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” (“Intrastate Exemption”) Rule 147 promulgated under the Securities Act provides for further application of the Intrastate Exemption.

Rule 147, Issuers and Corporate Counsel

In addition to complying with Rule 147, Issuers and their counsel need to be cognizant of and comply with applicable state securities laws regulating intrastate offerings. The Intrastate Exemption is only available for bona fide local offerings. That is, the Issuer must be a resident of, and doing business, within the state in which all offers and sales are made and no part of the offering may be offered or sold to nonresidents. Because of the strict rules against any sales or offers to non-residents, Issuers conducting concurrent or consecutive offerings, need to be extra careful to avoid the integration of any non-intrastate transactions with the Intrastate Exemption. Integration occurs when two or more offerings are considered a single offering such that all requirements for the exemption relied on in each offering must be present for each and every sale in all of the integrated offerings.

Rule 502(a) and Securities and Exchange Commission (SEC) release 33-4434 set forth the factors to be considered in determining whether two or more offerings may be integrated. In particular, the following factors need to be considered in determining whether multiple offerings are integrated: (i) are the offerings part of a single plan of financing; (ii) do the offerings involve issuance of the same class of securities; (iii) are the offerings made at or about the same time; (iv) is the same type of consideration to be received; and (v) are the offerings made for the same general purpose.

Safe Harbor Provisions

In addition, Rule 147(b)(2) provides an integration safe harbor. That is, offerings made under Section 3 or Section 4(2) of the Securities Act or pursuant to a registration statement will not be integrated with an Intrastate Exemption offering if such offerings take place six month prior to the beginning or six month following the end of the Intrastate Exemption offering. To rely on this safe harbor, during the six month periods, an Issuer may not make any offers or sales of securities of the same class as those offering in the intrastate offering. Rule 147(b)(2) is merely a safe harbor. Issuers and practitioners may still conduct their own analysis in accordance with the five factor test enumerated above.

For purposes of the Intrastate Exemption, an Issuer shall be deemed to be a resident of the state in which: (i) it is incorporation or organized if it is an entity requiring incorporation or organization; (ii) its principal office is located if it is an entity not requiring incorporation or organization; or (iii) his or her principal residence is located, if an individual.

Earmarks of Intrastate Exemptions

For purposes of the Intrastate Exemption, an Issuer shall be deemed to be doing business within a state if: (i) the Issuer derived at least 80% of its gross revenues in the past six months from that state; (ii) the Issuer had 80% of its assets located in that state in the most recent semi-annual fiscal year; (iii) the Issuer intends to use and uses at least 80% of the net proceeds from the Intrastate offering in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services in that state; and (iv) the principal office of the Issuer is located within that state.

For the purpose of determining the residence of an offeree or Purchaser: (i) a corporation, partnership, trust or other form of business organization shall be deemed to be a resident of a state if, at the time of the offer and sale, it has its principal office within such state; (ii) an individual shall be deemed to be a resident of a state if, at the time of the offer and sale, his or her principal residence is within that state; and (iii) a corporation partnership, trust or other form of business organization formed specifically to take part in an Intrastate offering, will not be resident of the state unless all of its beneficial owners are resident of that state.

Resale Prohibitions

Even though securities issued relying on the Intrastate Exemption are not restricted securities for purposes of Rule 144, Rule 147(e) prohibits the resales of any such securities for a period of nine months except for resales made in the same state as the Intrastate Offering. Moreover, market makers or dealers desiring to quote such securities after the nine month period must comply with all the requirements of Rule 15c2-11 regarding current public information.

There is no prohibition in Rule 147 regarding general advertising or general solicitation as long as such general advertising or solicitation complies with applicable state law and does not result in an offer or sale to non-residents of such state.

Although the Intrastate Exemption is available for sales by Issuers only, and not for resales, the SEC has interpreted the rule to permit offers and sales by control persons of the Issuer as well. The Intrastate Exemption rule is not available to any person with respect to any offering which, although in technical compliance with the rules, is part of a plan or scheme to make interstate offers or sales of securities.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Securities which are bona fide pledged may be tacked to the holding period of the pledgor as long as the pledge has full recourse against the pledgor. Gifted securities may be tacked with the holding period of the donor. Securities transferred to a trust may be tacked with the holding period of the settlor. Likewise securities transferred to a 401(k) or other individual retirement account will tack to the original issuance date. Securities obtained by beneficiaries of an estate may be tacked with the holding period of the deceased.

Securities acquired solely by the cashless exercise of an option or warrant are deemed to have been issued on the date of issuance of the underlying option or warrant; provided however, that the payment of any consideration, even a de minimus amount of cash, for the newly issued securities will restart the holding period. Accordingly, securities issued upon exercise of options or warrants in a stock option plan are deemed issued upon exercise of such option or warrant and not before.

Subscription Agreements

For purposes of Rule 144, shares acquired pursuant to anti-dilution rights attaching to restricted securities are restricted securities themselves, but their holding period dates back to the original placement of shares, not the exercise of the anti-dilution provisions. The holding period for restricted securities acquired pursuant to a subscription agreement begins at the time the agreement is accepted by the issuer, rather than the date it is signed by the purchaser or the date the shares are issued, assuming the full purchase price has been paid.

When relying on Rule 144 for the resale of over the counter traded securities (Pink Sheets or Bulletin Board), sellers may only sell 1% of the outstanding securities of the issuer in every 90 day period. Calculations of volume restrictions based on trading volume are only available for the sale of exchange traded securities.

The manner of sale requirements, require that securities sold in reliance on Rule 144 be sold only in broker’s transactions, directly with a market maker or in a riskless principal transactions. Moreover, the person selling the securities may not arrange for the solicitation of sale orders. The posting of a customer limit order is not considered a solicitation for purposes of this rule.

Finally, and importantly, Issuers and sellers must be aware that Rule 144 is not available for the sale of securities initially issued by a shell company or any issuer that has at any time previously been a shell company unless all the requirements of Rule 144(i)(2) are met. These requirements include that the issuer no longer be a shell company, is subject to the reporting requirements of the Exchange Act for 12 months following the time that it filed Form 10 information indicating it was no longer a shell company, and is current with all Exchange Act reporting requirements.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Rule 145 addresses the registration and resale requirements for securities issued in a merger, consolidation, acquisition of assets or reclassification of securities. Rule 145 sets forth the Securities and Exchange Commission (SEC) view that an offer, offer to sell, offer for sale or sale occurs when there is submitted to security holders a plan or agreement pursuant to which such security holders are asked to vote on an exchange of their existing securities for new securities in a merger, consolidation, acquisition of assets or reclassification of securities transaction. Offers, offers to sell, offers for sale or sales all require registration pursuant to Section 5 of the Securities Act of 1933, as amended (Securities Act) unless an exemption to such registration is available.

Securities Registration Required

Accordingly, unless an exemption is otherwise available, Rule 145 requires that the following transactions require registration if security holders vote on such transaction (i) reclassifications of securities which involve the substitution of a security for another security; (ii) a merger or consolidation or similar plan or acquisition in which securities of a corporation or other entity are exchanged for securities in another corporation or other entity (other than a transaction solely for the purpose of a change of domicile); and (iii) transfers of assets where the consideration paid is securities of the purchaser corporation or entity and such securities will be distributed to the seller’s security holders.

The key points of Rule 145 are that the security holders vote on the transaction, thus making an investment decision and those voting security holders will be giving up the securities in one corporation or entity in exchange for the securities in another corporation or entity. In the case of an asset sale, the securities given up are the beneficial interest in the assets sold.

Restricted versus Unrestricted Securities

Securities received in a Rule 145 transaction are restricted or unrestricted to the same extent that the tendered or exchanged securities were restricted or unrestricted. However, unlike dividends and other in-kind distributions, restricted securities received in a Rule 145 transaction do not tack with the holding period of the securities surrendered or exchanged in the transaction. That is, a new holding period begins for restricted securities received in a Rule 145 transaction.

Provided however, if either party to the Rule 145 transaction was a shell company at the time the security holders voted on the transaction, Rule 145 specifically prohibits the resale of securities received in the transaction unless all of the requirements of Rule 144(i)(2) are met. These requirements include that the issuer no longer be a shell company, is subject to the reporting requirements of the Exchange Act for 12 months following the time that it filed Form 10 information indicating it was no longer a shell company, and is current with all Exchange Act reporting requirements.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

The current public information requirement is measured at the time of each sale of securities. That is, the Issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. Most attorney opinion letters and Forms 144 cover a three month period and many Sellers sell securities over that three month period. However, the Seller (or person selling on behalf of Seller such as the broker dealer) is required to make a determination that current public information is available at the time of each sale.

Accordingly, if a reporting issuer does not file a required Q or K during this period, or 15c2-11 information lapses for a non-reporting issuer, sales must cease until the current public information requirement is again satisfied. Moreover, Sellers are taking a risk by selling during the 5-day or 15-day period following the filing of a Form 12b-25 because if the late report is not filed, such sales would not have been made in compliance with Rule 144. On the contrary, if the report is filed, the sales made after the filing of the 12b-25, still satisfy the current public information requirements.

Non-Reporting Issuers

For non-reporting issuers, the current public information requirement requires that information set forth in Rule 15c2-11 be publicly available and current. It is irrelevant that broker dealers may publish quotes on the securities or that the securities are piggy-back qualified. Although pinksheets.com is not affiliated with the Securities and Exchange Commission (“SEC”) and the SEC has not commented on the Pink Sheets self-imposed reporting requirements and tiers of reporting information, in light of the fact that the Pink Sheets models its voluntary reporting requirements after Rule 15c2-11, attorneys and sellers of securities, should feel confident relying on the existence of current information on pinksheets.com to satisfy the current public information requirement of Rule 144.

In lieu of relying upon information posted on PinkSheets.com, a Seller desiring to rely on Rule 144 for the sale of securities of a non-reporting issuer, would need to ensure themselves that such 15c2-11 information was available and current by other means. These other means could include if such information was posted on the Issuers website, or such information was in the possession of the broker-dealer facilitating the sale.

Holding Periods

The holding period is determined as of the date of the proposed sale, provided however, that Rule 144 makes numerous specific provisions for the calculation of the holding period and enumerates specific instances when a holding period may be tacked onto the holding period of previously issued securities. In determining the holding period where the securities were paid with a promissory note, installment contract or other obligation to pay in the future, the holding period does not begin until payment has been made in full unless the promissory note or installment contract provides for full recourse against the purchaser of the securities, is secured by fair value collateral other than the securities purchased, and has been paid in full prior to the proposed Rule 144 sale date.

Securities acquired from the issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to have acquired at the same time as the securities on which the dividend is paid or the securities surrendered in the recapitalization. If securities were acquired by the Issuer solely in exchange for other securities of the same issuer, such as in a 3(a)(9) transaction, the newly acquired securities are deemed to be acquired at the same time as the securities surrendered in the exchange or conversion.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

There are many questions regarding the application of Securities Act of 1933 (“Securities Act”) Rule 144 for the resale of securities. Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Therefore, an understanding of the term “underwriter” is important in determining whether or not the Section 4(1) exemption from registration is available for the sale of the securities. Rule 144 provides a safe harbor from the definition of “underwriter”. If all the requirements for Rule 144 are met, the seller will not be deemed an underwriter and the purchaser will receive unrestricted securities.

As Rule 144 only addresses the resale of restricted securities, the rule first defines “restricted securities”. Restricted securities include: (i) securities acquired directly or indirectly from the Issuer, of from an affiliate of the Issuer (affiliate includes spouses and family members living in the same household), in a transaction or chain of transactions not involving a public offering; (ii) securities acquired from the Issuer in a Regulation D or Rule 701 transaction; (iii) securities acquired in a transaction or chain of transaction under Rule 144A; (iv) Securities acquired from the Issuer in a Regulation CE transaction; (v) Securities acquired in a transaction under Regulation S; (vi) Securities required in a rights offering to the same extent that the holder already held restricted securities; (vii) Securities required in a Rule 145 transaction to the same extent that the tendered or exchanged securities were restricted; and (viii) Securities acquired from the Issuer in transaction exempt under Section 4(6).

Condition of Rule 144

Rule 144 provides certain conditions to be met for sales by both affiliates and non-affiliates which conditions vary depending on whether the Issuer of the securities is a reporting or non-reporting Issuer. The following chart summarizes the Rule 144 requirements:

 
The six month holding period only applies to issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). As a voluntary filer is not subject to the Exchange Act reporting requirements, the longer one year holding period is applicable. However, the determination of whether the issuer is reporting or non-reporting is made as of the time of the proposed sale, as is the determination of the other Rule 144 requirements. Accordingly, if following the issuance of securities, a non-reporting issuer files a Form 10 registration statement and becomes subject to the reporting requirements of the Exchange Act, the six month holding period would apply.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!