Pennaluna Prospector - Special
Edition - Coeur d'Alene, Idaho - June 15, 2009
How to sell restricted
Canadian stock in the U.S.
a 4-minute briefing
Timothy Major and Tom Wobker
Jun 16, 2009
"So how do I sell my restricted
Canadian shares here in the States? "
As Canada's resource stocks
begin to heat up again, customers lately are asking us questions
like this more often.
Many of these folks are quite
comfortable with normal cross-border trading. But selling restricted
stock is a specialized transaction with more moving parts than
the average trade -- so they sometimes scratch their heads about
how it works.
If you're curious too, here's
a brief overview of the process that should take you about four
minutes to read.
Please note that this isn't
legal or investment advice... we'll paint with a broad brush...
and we'll describe only the run of the mill retail transaction.
Restricted stock needs exemption
First of all, recall that U.S.
securities law requires stock to be registered with the SEC before
it can be publicly traded in this country.
Stock that isn't registered
is "restricted" from public trading. It may be lawfully
sold only under an exemption from registration. The share certificate
itself usually bears a prominent legend that warns of this requirement.
Restricted shares raise special
concerns for brokerage firms, since participating in an unlawful
distribution of unregistered securities is a large no-no. Thus,
brokers tend to handle such sales carefully to help keep everybody
out of legal hot water.
For guidance concerning offshore
securities transactions, including Canadian, U.S. brokers look
to Regulation S under the Securities Act of 1933. Reg S confirms
- in the charmingly impenetrable language of lawyers - that this
nation's registration requirements do not apply to strictly foreign
activity. At the same time, it throws up barriers to end runs
around U.S. securities laws when they do come into
play.
Reg S safe harbors
The complexity of securities
regulation is notorious. One nice thing about Reg S is that it
cuts through a bit of the fog and offers some relatively straightforward
"safe harbor" provisions for investors.
A safe harbor provision gives
you virtually guaranteed protection from a law's penalties when
carefully followed in good faith. While it may not be the only
possible way to comply, the certainty such a provision supplies
gives you the opportunity to sail behind a minesweeper instead
of charting your own course through the minefield. Your odds
are better.
Rule 904 under Reg S offers
a safe harbor for sales by the ordinary investor -- persons who
aren't issuers, distributors or affiliates. (Another rule offers
some protection to these others, but that's outside this overview.)
How the process works
Here's how the Rule 904 process
generally works for an average investor in the States who wants
to sell restricted shares issued by a Canadian company (often
referred to as "the issuer").
Initially your broker will
need to know when you bought the shares. This is to be sure the
required holding period has expired. Usually that's the time
mandated by law, but occasionally the issuer itself imposes a
longer delay.
Also the broker will want to
know how you paid for the stock. That's because shares that weren't
bought for cash - say, for example, shares received in return
for consulting services - may raise other concerns to be addressed.
The broker will provide you
with a Stock Power form to facilitate transfer and a Rule 904
Seller's Representation Letter, sometimes called a Declaration
For Removal of Legend. He'll ask you to sign both and send them
to him along with the stock certificate.
Seller's Letter
The Seller's Letter is important.
In it you're asked to make representations to help verify that
your sale falls within the safe harbor. Among other things, you'll
typically confirm that:
- You aren't an affiliate of
the issuer. (Affiliates generally include 10% shareholders, officers
and directors.)
.
- The buyer of your stock is
not in the U.S. and/or the stock will be sold on a designated
offshore securities market -- Canadian markets qualify -- and
you have no knowledge that the buyer is in the States.
.
- Neither you nor anyone acting
for you is making "directed selling efforts" into this
country. These could include advertising or other promotion aimed
at boosting public demand for the shares in the States.
.
- You truly intend to sell the
shares now meaning you aren't trying to wash the legend off the
cert. so you can use it in some other, perhaps unsanctioned,
transaction. (This is one reason cleaned up stock generally can't
be transferred out of an account unless the restricted legend
is first replaced.)
.
- Your sale isn't part of a
scheme to evade registration.
The issuer or its transfer
agent may also require a Rule 904 Broker's Letter. In that case,
the broker must make several of the same representations.
Sent on its way
Once the paperwork is complete,
the compliance cops give the documentation a once over. Then
together with the certificate it's sent off to the transfer agent
used by the issuer.
These days virtually no public
company handles its own stock transfers. So most transfer agents
maintain securities records for a number of issuers. As a result,
many have grown large and in certain cases a little slow when
it comes to restricted shares.
After the transfer agent receives
the package, staff in due course examines the documents and checks
the relevant stock records. If all is in order, the issuer is
asked for approval to remove the restricted legend.
Some issuers want a legal opinion
before they'll sign off on this. If so, counsel gets into the
act at this point, conducting a review and giving the thumbs-up
if everything passes muster.
Home again
Once the issuer says OK, the
transfer agent removes the restricted status notation on the
company's stock records and issues a new, clean certificate that
it sends back to the broker for deposit to the customer's account.
Thereupon your broker will
call with the happy news that you are now at liberty to sell
your free trading Canadian shares.
(Check your watch. Four minutes
or less?)
###
 The
authors
Timothy Major, an Idaho native, holds a degree in commerce
from the University of the Witwatersrand in Johannesburg, South
Africa. For 14 years he has been a broker with Pennaluna &
Company, a FINRA broker-dealer and market maker with its main
office in Coeur d'Alene, Idaho.
Tom Wobker holds degrees in journalism and law
and is a principal with the firm. Founded in 1926, Pennaluna
trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB
and Pink Sheets.
Phone 800-535-5329
or visit www.pennaluna.com
or www.penntrade.com.
email: help@penntrade.com
321gold Ltd
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