Rule 144 and the Tradability Opinion

The Basic Conditions

For restricted securities, the holder must satisfy a holding period: generally six months if the issuer has been a reporting company for at least ninety days and is current in its reports, and one year otherwise. For non-affiliates, once the applicable holding period has run, resale conditions are limited, and after one year they are largely eliminated, subject to the current public information requirement during the period between six months and one year for reporting companies.

Affiliates face additional conditions whether or not their securities are restricted: current public information about the issuer, volume limits, manner-of-sale requirements for equity securities, and a notice on Form 144 if sales exceed specified thresholds.

The Shell Company Trap

Rule 144 is not available for resale of securities of an issuer that is, or at any time was, a shell company, unless specific conditions are met. The issuer must have ceased to be a shell, must be subject to Exchange Act reporting, must have filed all required reports during the preceding twelve months, and at least one year must have elapsed since it filed information equivalent to a Form 10 registration statement reflecting its status as a non-shell company. If the company later falls behind in its reporting, the exemption is unavailable until it becomes current again.

This rule has ended many shareholders' expectations of liquidity after a reverse merger. It should be analyzed before the transaction, not after.

Legend Removal and the Opinion Letter

Restricted securities typically bear a legend. To sell them, the holder generally needs the transfer agent to remove the legend, and the transfer agent generally requires an opinion of counsel that the resale is permissible under Rule 144 or another exemption.

That opinion is not a formality. The lawyer giving it is making representations that the transfer agent, the broker, and the market rely on. The SEC has brought enforcement actions against attorneys who issued opinions without adequate investigation, including in cases where the shares were later used in pump-and-dump schemes or were issued in transactions that did not qualify for the exemption claimed.

When I review a request for a tradability opinion, I want to see how the shares were acquired, when, for what consideration, under what exemption, whether the holder is or has been an affiliate, whether the issuer is or was a shell, whether the issuer is current, and whether anything about the transaction, including its timing relative to promotional activity, suggests that the holder is an underwriter rather than an ordinary investor. If the answers are not documented, the opinion cannot be given.

Why Brokers Ask Hard Questions

Holders are sometimes frustrated when brokers refuse to deposit shares or demand extensive documentation. Brokers have their own obligations, and they are aware that low-priced securities deposited in volume have historically been a vehicle for unregistered distributions. The best response is a complete file. The worst is an attempt to find a less careful broker.