How Do You Get the Restrictive Legend off Your
US Stock Certificates: Rule 144


You purchased stock in that terrific little US company listed on the OTC Bulletin Board or NASDAQ in a private placement under Regulation D, Regulation S or some other private placement exemption. The shares you received from the company have a restrictive legend on them and you are wondering – "how do I get the legend off these shares in order to sell them?" You have poured through the subscription agreement and offering documents you received at the time of purchase but you are still not sure what you are supposed to or can do.

  • How long is the hold period?
  • When and how can you sell these shares?
  • How do you remove the legend stamped on your share certificate?

Hopefully, this article will point you in the right direction in answering these questions.

Overview

Stock that was issued in a private placement is stamped with a legend describing the applicable resale restrictions. This legend sets out regulatory limitations regarding your ability to resell your securities; it must be removed using the appropriate procedures before you can legally resell the securities. Generally, the underlying securities must either be registered in a registration statement/prospectus or sold pursuant to an available exemption from registration before the legend may be removed by a transfer agent and the underlying securities sold.

In the US the main resale exemption relied on is Rule 144 of the US Securities Act of 1933. Rule 144 allows the resale of restricted and control stock to be sold to the public without a registration statement being filed if a number of conditions have been met. These conditions vary depending on whether the issuing company is a reporting or non-reporting issuer, the holder is arms-length ("Non-Affiliate") or a director, officer or significant shareholder (all are considered an "Affiliate"), and the length of time the securities have been held.

You must also abide by applicable Blue Sky laws in the state in which you reside or plan to sell your securities. Canadian resale rules may also be triggered if you reside in Canada at the time of sale or the company is located in Canada adding another layer of complexity in removing that legend and reselling the underlying securities. When in doubt about these rules check with a securities lawyer residing in your State or Province.

Our focus in this article is on Rule 144, British Columbia resale rules as they apply to US listed or quoted securities, and the mechanics of removing the legend.

Rule 144

Rule 144 was amended by the US Securities and Exchange Commission ("SEC") in February 2008. The changes simplified and at the same time complicated the process of removing a restrictive legend of a US stock. The following chart summarizes the main requirements of Rule 144.

Summary of Rule 144

Requirement Affiliate Non-Affiliate(2)
Reporting Issuer
Hold Period		 Six Month Hold Period – no resales allowed for six months from date of acquisition.

After six months – resales of restricted securities of reporting companies permitted, subject to:
  • Current public information
  • Volume limitations
  • Manner of sale for equity securities only
  • Filing Form 144
After one year – resales of restricted securities of non-reporting companies permitted, subject to all of the above requirements.		 Six Month Hold Period – no resales allowed for six months from date of acquisition.

After six months – resales of restricted securities of reporting companies permitted in unlimited amounts, subject only to current public information requirement

After one year – resales of restricted securities permitted in unlimited amounts without any other requirements
Non-Reporting Issuer Hold Period One year Hold Period – no resales allowed for one year from date of acquisition.

After one year – resales of restricted securities of reporting companies permitted, subject to:
  • Current public information
  • Volume limitations
  • Manner of sale for equity securities only
  • Filing of Form 144
 One Year Hold Period – no resales allowed for one year from date of acquisition.

After one year – resales of restricted securities permitted in unlimited amounts without any other requirements
Current Public Information Reporting Issuers - Current with periodic reports (annual and quarterly reports) filed with Securities and Exchange Commission over past 12 months.

Non-Reporting Issuers - requirement met by making certain information publicly available, including three years’ financial statements.		 None.
Manner of Sale Applies only to equity securities:
  • Must be sold in "broker’s transactions" or directly with "market maker" or through a "riskless principal transaction" (generally, a transaction by a broker or dealer executed at the same price specified in a buy or sale order, exclusive of any explicitly disclosed fee, so long as they can be reported by the rules of the SRO (self-regulatory organization) as riskless)
  • Sellers may not solicit sales or make any payment other than to broker
  • Brokers may insert bid and ask quotations in an electronic trading system if the broker has published these quotations for the last 12 business days.
Sales of debt securities(1) are not subject to manner of sale requirements. 		None.
Volume Limitations Amount sold, together with all sales of any restricted and other securities of the same class sold within the preceding three months, must not exceed the greater of:
  • 1 percent of the outstanding shares of that class; or
  • the average weekly reported trading volume during preceding four weeks
Threshold for resales of restricted debt securities is ten percent (10%) instead of one percent (1%) as with equity securities of all sales of the same tranche within a three-month period.		 None.
Form 144 Filing(3) Filing required for sales in any three-month period over 5,000 shares or $50,000 in value to be sold. Not Required.
Notes (1) The SEC classifies non-participatory preferred stock, as well as asset-backed securities, as debt securities for Rule 144 purposes. Convertible debt securities are considered to be equity securities under Rule 144.
(3) Form 4 and in some cases a Form 13D is required to be filed anytime an affiliate buys or sells securities.		 (2) In all cases, must not have been an affiliate of the issuer during the previous three months

Shell Companies - Rule 144 cannot be relied upon for the resale of the securities of reporting and non-reporting shell companies. A shell company is defined to mean a reporting or non-reporting issuer, other than an asset-backed issuer, that has:
  1. no or nominal operations; and
  2. either:
    1. no or nominal assets;
    2. assets consisting solely of cash and cash equivalents; or
    3. assets consisting of any amount of cash and cash equivalents and nominal other assets.

Shell companies are not eligible to use Rule 144 until 12 months after they have filed Form 10 level information (e.g., under Item 5.05 of Form 8-K) with the SEC.

Canadian and British Columbia Resale Requirements

BC residents holding securities of a US reporting or non-reporting issuer that is not a reporting issuer in Canada have a few extra hurdles to overcome in removing any restrictive legend that may be on the securities they hold in a US issuer. It is not enough to comply with Rule 144. You also need to be certain that you can comply with and rely on an exemption from the registration and prospectus requirements in BC to resell your securities. The two main resale exemptions in BC relied on by holders of US stock is National Instrument 45-102 – Resale of Securities ("NI 45-102") and British Columbia Instrument 72-502- Trades in Securities of U.S. Registered Issuers ("BCI 72-502").

Section 2.14 of the NI 45-102 provides an exemption for non-reporting issuers who trade outside of Canada where Canadians represent less than ten percent (10%) of the outstanding securities and ten percent (10%) of the total number of owners of the securities of the issuer. The trade to be exempt must be made through an exchange, or a market, outside of Canada, or to a person or company outside of Canada.

BCI 72-502 provides an exemption for resale of securities of US issuers who are registered under section 12 of the Exchange Act, or the issuer is required to file reports under section 15(d) of that Act. The requirements are more extensive than that set out in section 2.14 of NI 45-102 and include the following:
  • The seller’s residential address or registered office is in British Columbia;
  • A 4-month period has must have passed since the date the stock was issued to the seller (does not apply to director or employee stock options);
  • A 6-month hold period must have passed since the date the stock was issued to the seller if the seller is a control person of the issuer;
  • The number of securities the seller proposes to sell under this Order, plus the number of securities of the issuer of the same class that the seller has sold in the preceding 12-month period, does not exceed 5% of the issuer’s outstanding securities of the same class.
  • The seller sells the securities through a registered investment dealer.
  • The registered investment dealer executes the trade through an exchange, or market, outside Canada.
  • There has been no unusual effort made to prepare the market or create a demand for the securities.
  • The seller has not paid any extraordinary commission or other consideration for the trade.
  • If the seller is an insider of the company, the seller reasonably believes that the company is not in default of the securities legislation (including U.S. federal and state securities legislation) that governs the company.

There are no filing requirements related to either of these resale exemptions.

The Mechanics of Removing the Legend

You may remove your legend by directly dealing with the transfer agent of the issuer whose securities you hold or through your stockbroker where you want your securities deposited.

You will need to provide the transfer agent or stockbroker’s brokerage firm with the following documents in order to remove any restrictive legend:
  • Seller's Form 144 for the proposed transaction (required if Seller is an affiliate);
  • Seller's representation letter/questionnaire;
  • Broker's representation letter (required if Seller is an affiliate or selling shares from Canada);
  • Each original Stock Certificate representing shares to be sold;
  • Executed Power of Attorney with Medallion Signature Guarantee;
  • Documents explaining any differences in the spelling or form of Seller’s name as it appears on the certificate(s);
  • Corporate resolution if Seller is a corporation;
  • Social Security or Social Insurance Number; and
  • A legal opinion letter from Issuer’s legal counsel (or your attorney if the Issuer agrees) regarding the tradability of the shares.

The transfer agent and brokerage firm often have their own form of seller’s representation letter and or questionnaire. The attorney writing the legal opinion letter will probably ask you to provide certain information as well which may take the form of a questionnaire. The transfer agent, brokerage firm and attorney providing a legal opinion require this information from you to ensure that the stock can indeed have the legend removed and be traded. Transfer agents will often "check-in" with the Issuer and ask for their authorization to remove a legend unless the request to remove the legend is from Issuer's counsel.

Links to samples of these various documents have been provided but you should confirm with the Issuer’s transfer agent, your stockbroker and the attorney providing the legal opinion the exact form of these documents that they will require.

This article is provided as a guideline for planning purposes only. You are advised to contact legal counsel prior to undertaking any resale of securities. Laws change and there are subtle nuisances to the rules that may apply in your particular circumstance.


Alixe B. Cormick
Venture Law Corporation
618 - 688 West Hastings Street
Vancouver, B.C.
V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
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