Legal Opinions on the Resale of Securities: The Rule 144 Safe Harbor and Private and Public Resale Exemptions

Any attorney writing a Rule 144 opinion, a Section 4(a)(1) opinion when Rule 144 is not available, or a legal opinion regarding the available exemptions for private secondary market resales should have a thorough understanding of the circumstances under which an exemption and the Rule 144 safe harbors are available and what facts, opinions, assumptions, and qualifications should be part of each type of opinion.

Stock transfer agents and compliance officers of banks and broker-dealers who review opinion letters from counsel for shareholders can benefit from this webinar, especially the discussion of what workarounds should be acceptable if one or more documents typically required to establish that the shares were validly issued and fully paid cannot be located.

Regarding private secondary market resales, the so-called Section 4(1 ½) exemption is a court-established hybrid of Section 4(a)(1) and Section 4(a)(2) of the Securities Act of 1933. This was the only exemption available for private resales of securities until Section 4(a)(7) of the Securities Act of 1933 became law in 2015. Section 4(a)(7) is not available in some circumstances when the Section 4(a)(1 ½) exemption can be used. A strong foundation of documents and information related to the original purchase of the shares from the issuer and the private resale is essential. Representations letters setting forth facts that fit the legal criteria for each exemption are necessary to support a proper opinion letter.

The panel will discuss (1) the criteria for qualifying for each public and private resale exemption, (2) how to convincingly establish that the shares were validly issued and fully paid, (3) how to establish the shell status of the issuer, (4) what documents and information are needed to support the availability of each exemption, and (5) how to deal with challenging situations involving availability of essential documents and information.

Listen as our authoritative panel discusses these and other important considerations in connection with writing an opinion regarding a public or private resale of securities.

1. Overview of exemptions from registration on the resale of securities
   • Rule 144 (it is a safe harbor, not an exemption)
   • Section 4(a)(1) and 4(a)(3) exemptions for public resales
   • Section 4(1 ½) and Section 4(a)(7) exemptions for private secondary market resales
2. Opinions typically provided by shareholder's counsel or issuer's counsel regarding the availability of (1) an exemption under the federal securities laws to the requirement that shares must be registered for resale in a current and effective registration statement, (2) the Rule 144 safe harbor, and/or (3) a registration statement to permit a public or private resale of restricted stock
   • Assumptions and qualifications contained in legal opinions: ABA opinion letter guidelines and recommendations of state bar associations
   • Analysis of whether a seller acquired the shares with a view to distribution of the securities (holding periods), underwriter status, tacking of holding periods
   • Due diligence: establishing that the shares were validly issued and fully paid, supporting the facts in the opinion with relevant documents, and analysis of corporate history and shell history
   • Use of representations of the seller and buyer to provide solid support for Section 4(a)(1 ½) and Section 4(a)(7) opinions
   • What essential opinions must be expressed in each letter? What are the necessary and acceptable assumptions and qualifications?
3. Medallion Signature Guarantee programs seemed like a good idea at the time that they were adopted, but the arbitrary policies of some stock transfer agents and lack of availability of these guarantees have created nightmares for many shareholders
4. Lost stock certificates--surety bonds, indemnification agreements

The panel will review these and other critical issues:

• What requirements must be met for a shareholder to use the Rule 144 safe harbor and the exemption under Section 4(a)(1) to clear the restrictive legend from and resell stock in the public markets that is not registered for resale in a current and effective registration statement?
• What requirements must be met for a shareholder to use the Section 4(a)(1 ½) and Section 4(a)(7) exemptions for private secondary market resales of stock?
• How can counsel use representations letters from the issuer of securities, sellers, and buyers to provide solid factual foundations for opinions?
• What assumptions and qualifications are necessary and appropriate in opinion letters and what assumptions and qualifications should be rejected by the broker and stock transfer agent?
• What opinions must be stated regarding the circumstances of the issuer of the securities and the seller so that the seller, issuer, stock transfer agent, and the broker can reasonably rely on the legal opinion?
• Why the path of opinion must start with the shareholder’s securities broker or bank and not with the stock transfer agent
• Tacking issues
• Frequently encountered stock transfer agent issues