Spongetech Delivery Systems, Inc. (fka SPNGQ)

[bman17]

Since 144's are being thrown around here now, here is a refresher on those rules... ---> educational read

http://www.thebullandbear.com/articles/2002/0302-restricted.html

Restricted Stock
and Rule 144 Sales --
A Short Introduction
for Investors

By Ron Nicklas and Tom Wobker
Pennaluna & Company

You don't read too much about it in the business pages, but restricted stock seems to be making its way into more and more people's portfolios these days.
A key reason may be the boom in private funding for new and emerging companies. Such funding often relies on so-called "private placements" of restricted securities, and this creates a large pool of restricted stock to be resold in the future.
The Securities and Exchange Commission (SEC) says that between 1970 and 1987 private funding of new corporate financings doubled from 17% to 34%. And it has continued to grow since then. The National Venture Capital Association reports that in the year 2,000 alone more than $100 billion in private equity was invested in 5,300 U.S. emerging growth companies.

Unique Characteristics

Much of the restricted stock spawned by this boom is held by institutions, which are usually well versed in securities law. On the other hand, many individual investors now own it as well and often they aren't as familiar with the unique characteristics and limitations of restricted stock. Many don't know exactly what they must do to sell it under the complicated regulations that apply.
We'll try to throw a little light on the sales process by covering a few basic facts about restricted stock and SEC Rule 144, which is the most common way individuals sell these securities.
Note that this short overview is for your general information only. We won't cover everything. Instead, we'll briefly summarize a complex subject, focusing only on the area we work in most often: sales of restricted shares issued by smaller companies. For guidance on your own personal situation, it is important to consult a securities attorney, stockbroker or financial advisor who is familiar with restricted stock.

Restricted Stock
Is Unregistered

A basic tenet of U. S. securities law is that stock generally can't be sold in the public market unless it's first registered with the SEC. Registration requires the issuing company to submit extensive financial and business data. A main aim is to give investors enough information to help stop deception and securities fraud.
Because the registration process can be time-consuming and expensive, firms often don't register the new stock they issue. In that case, the shares are said to be restricted, as opposed to free trading.
Generally speaking, the term "restricted stock" simply refers to shares that have not been registered with the SEC. To show this unregistered status, the certificate is almost always stamped with a legend that announces the fact. (Some folks call this a "bug".)

Such stock is restricted from being sold in the public stock market. It can't be sold there unless it is either: 1) registered or 2) exempt from registration. Because of these limitations, restricted stock is often priced at a substantial discount to free trading shares.

From Private Transactions

Restricted stock is the product of private transactions, not the public market. It is often acquired directly from the company that issues it. It can also come from persons in a control relationship with the company, technically known as affiliates and often called "insiders".
You'll find restricted stock used in many different situations. Some examples include: private placements for start up or expansion capital Regulation D offerings employee stock benefit plans compensation for services gifts and in mergers or acquisitions where owners of an acquired company take unregistered stock in payment.

Exemptions For Public Sales

As we said earlier, shares that haven't been registered with the SEC can't be sold in the public stock market unless they're exempt from registration. Several such exemptions are available.
A few entire classes of securities are declared exempt from the registration requirement for instance, bank and insurance company stocks because the industries are under tight government regulation and financial data is available..
For other securities, the exemptions focus more on the type of transaction involved. For example, the exemption offered by SEC Rule 145 covers certain merger or consolidation activities, while Rule 701 deals with employee stock benefit plans.
But probably the most commonly used exemption for individual investors is SEC Rule 144, which was eased in 1997 to make it more useful to sellers.

Rule 144 "Safe Harbor"

Rule 144 provides a fairly clear way to sell restricted stock in the public market without running afoul of the law. It offers "safe harbor" protection to sellers who follow the five main requirements. Essentially, these are:
1. Holding period. You must own restricted stock for at least one year before you can begin to sell it in the market. The clock starts running when the stock is fully paid for.
2. Current information. The issuing company must provide adequate current financial information. If it reports to the SEC, it must be current with required periodic reports for example, its 10-K or 10-Q. If it is not a reporting company, similar information needs to be publicly available.
3. Volume limits. Only a limited number of shares may be sold during any three-month period. You can sell the larger amount of either: 1% of the total outstanding shares of the class being sold or the average reported weekly trading volume for the last four weeks, if the class is listed on a stock exchange or Nasdaq. (Stocks quoted on the OTC Bulletin Board and Pink Sheets use only the 1% measure.)
4. Ordinary brokerage transactions. Sales must be handled as routine trading transactions with a broker or a market maker. And you'll need to sign a Seller's Letter to the broker confirming that the sale complies with Rule 144.
5. SEC filing. When you place your sell order, you must notify the SEC by sending in a completed Form 144. If the sale doesn't take place within three months, you have to file an amended Form 144. No filing is required if your sales for any three-month period total less than 500 shares or $10,000.

Legend Must Come Off

Even if you've satisfied Rule 144, you still can't resell restricted stock into the public market until you get the restrictive legend removed from the certificate. And only the stock transfer agent can do that.
The transfer agent is usually a specialized outside firm appointed by a company to maintain stock records. It issues and cancels certificates; deals with problems like lost, stolen or destroyed certificates; removes outdated legends; and handles other such chores.
But the transfer agent's authority is limited. It can't erase a restrictive legend until the issuer of the stock says it's OK to do so. Issuers usually require an attorney's opinion letter before they give the green light for this. The letter is often written by issuer's counsel, but the seller frequently must pay for it.

Removal Takes Time

Because of the paperwork required, the number of parties involved, and the logistics entailed, it takes some time to have the legend removed. The period varies. It usually depends largely on the transfer agent, the issuing company and the attorney who reviews the matter and writes the opinion letter.
We find the entire process often takes three to four weeks, and sometimes significantly longer.

Restrictions End in 2 Years

Rule 144 restrictions end after you've owned the restricted stock for two years provided that you haven't been an affiliate for at least three months. After the two-year point, you may sell the stock in the public market without further concern for the rule, although you still must have the legend removed first.
You can put Rule 144 in a nutshell this way:
Year 1 = no selling
Year 2 = limited selling under Rule 144 restrictions
Year 3 = sell freely
[Ed. note: Although control stock is outside the scope of this article, note an important point here. If you're a company affiliate, your stock is always considered control stock and is always subject to most of the Rule 144 restrictions. That's true no matter how you acquired it, or how much time has passed even if it's registered stock that you bought in the public market.]

General Steps In 144 Sales

With all these extra legal requirements, a sale of restricted stock under Rule 144 is more involved than an ordinary sale.
When you sell restricted stock, a broker familiar with 144 requirements can help guide you through the steps of the process. The drill usually goes something like this:

* First, the broker confirms that the stock is in fact restricted by reviewing information you supply and then contacting the transfer agent or issuing company, if required;
* He or she helps you complete and submit SEC Form 144, as well as the Seller's Letter;
* They help determine your volume limitations;
* They help obtain legal and other needed approvals to have the legend removed;
* They follow up on questions, monitor the progress of each step, and honcho the process until the new "cleaned up" certificate comes in;
* and, finally, they execute the trade for you.

In summary, restricted stock differs in substantial ways from free trading stock. Sales of restricted shares are carefully regulated, involve extra steps, and take much more time than normal transactions. On the other hand, the stock may be attractively discounted to compensate for these limitations. It will pay you to keep these factors in mind whenever you consider buying or selling restricted securities.
Editor's Note: The authors Ron Nicklas is president of Pennaluna & Company, a NASD broker-dealer and market maker with its main office in Coeur d'Alene, Idaho, and clients in a number of states. Tom Wobker 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 [phone] or visit www.pennaluna.com. The firm offers online 0discount trading at www.penntrade.com.