As many of our clients attempt to navigate the waters of listing on a National exchange it sometimes leads us to discussions regarding their equity structure and how it is reflected to the exchange. Per ChatGPT we note the below information related to Float requirements:
Nasdaq and Public Float Requirements:
For the purpose of Nasdaq listing and public float calculations, restricted shares that are eligible for resale (e.g., those that have satisfied the requirements of Rule 144) can be included in the public float.
Nasdaq's definition of public float includes shares that are available for trading by the public, which would include restricted shares that are eligible for resale under Rule 144.
Shares held by affiliates (e.g., insiders, officers, directors) are generally subject to Rule 144's holding period requirements and may be counted toward the public float once they are no longer restricted and available for resale.
As many of our issuers start out with some form of Reg D offering most of the securities on their Cap table tend to be restricted as they were never the subject shares of a registration statement that has been kept current. Thus it becomes imperative to know which shares on the Cap table are eligible to be counted toward float and how that affects the shareholders subsequent to listing.
Upon listing shares that are counted toward the float may still retain restricted characteristics even if they were counted toward the float requirements. With that being said here are the basic facets of what a shareholder's involvement would be tied to as the process moving those shares into their brokerage account for sale.
Under Rule 144 of the Securities Act of 1933, an issuer generally cannot remove the restrictive legend unilaterally without the shareholder's involvement or request. The removal of a restrictive legend typically involves the shareholder requesting the removal, often through the transfer agent, and providing documentation to show that the conditions of Rule 144 have been met. This however does not preclude the issuer from counting them toward the public float requirement for the purposes of listing on a national exchange.
Key Points:
Rule 144 and Legend Removal:
Rule 144 provides an exemption from registration for the resale of restricted securities. It specifies that once the conditions of the rule (such as the holding period, volume limits, and the availability of information about the issuer) are satisfied, the restrictive legend on the securities may be removed.
While the conditions of Rule 144 are met, the issuer or transfer agent is usually responsible for verifying that those conditions are fulfilled. However, the shareholder typically initiates the request to remove the restrictive legend, usually by providing a legal opinion or other documents to prove that the securities meet Rule 144's requirements.
Shareholder's Involvement:
The shareholder’s request is central to the process because the shareholder is typically the one asking for the legend to be removed. This can occur because the shareholder may wish to sell the security or make a transfer of the security that does not require the restrictive legend. Even if the shareholder is not selling, the process usually starts with their request, as they are the ones who may want the restriction lifted for future flexibility.
In practice, the shareholder provides information to the issuer (or transfer agent) that demonstrates compliance with Rule 144 conditions, such as the holding period, and asks for the legend to be removed. The issuer or transfer agent then verifies the shareholder’s compliance and proceeds with removing the legend if all conditions are met.
Issuer's Role:
The issuer may be involved in the process to the extent that they need to verify the compliance with Rule 144. However, the issuer cannot act unilaterally without the shareholder's involvement. The issuer may confirm whether the conditions are satisfied but typically cannot initiate or remove the restrictive legend without the shareholder’s request. If the shareholder has met the Rule 144 requirements, the issuer and transfer agent would act in accordance with the shareholder’s request.
Transfer Agent’s Role:
The transfer agent is typically responsible for removing the restrictive legend, but this is generally done based on the issuer's instructions and the shareholder's request. The transfer agent may require confirmation from the issuer that the conditions of Rule 144 have been satisfied, but they cannot act without the shareholder’s involvement or request.
When Can the Issuer Remove the Legend?:
In the specific situation where the issuer is not involved in a shareholder-initiated transaction but simply wishes to remove the legend as part of a corporate action (e.g., a stock split or recapitalization), the issuer may, in rare instances, remove the legend unilaterally. However, this is not typical under Rule 144 for sales or transfers, and the action would generally need to be documented with respect to the shareholder’s agreement, especially in a public offering or secondary market transaction. In situations such as this typically legal counsel would provide a blanket opinion letter for the securities which are being processed and the legend not continuing to be in place going forward.
Conclusion:
Generally speaking, an issuer cannot remove the restrictive legend unilaterally without the shareholder’s involvement. The issuer's or transfer agent’s role is to verify compliance with Rule 144 or other applicable exemptions and to act on the shareholder's request, not to unilaterally remove the legend.
Exceptions:
There are some exceptions in other specific circumstances (e.g., corporate actions like mergers, reclassifications, or certain issuer-initiated exchanges) where the issuer may play a role in legend removal, but in the context of Rule 144, shareholder involvement is almost always necessary.
Please note that as an issuer one of the most important points to take away from this is that shareholder communication in the listing process is paramount. During the process of listing and determining the available shares for float requirements it is highly advisable to communicate that to the shareholders which are being deemed to be a part of the float. Such that they can understand the process to bring their shares into their brokerage account in a compliant and easily understand able process.
If there are any questions about this process please reach out to us at 619-664-4780 or at CS@wcsti.com