more articles by

Tom Wobker - Pennaluna & Co.

Click to enlarge Click to enlarge


How to sell restricted Canadian mining stock in the U.S. – a 4-minute briefing

By Tom Wobker - Pennaluna & Co.      Printer Friendly Version Bookmark and Share
Jul 8 2009 3:24PM

“So how do I sell my restricted Canadian mining shares down here in the States? ?

With gold up about 7% year-to-date and silver up nearly 27%, many Canadian mining equities are showing signs of life again after last fall’s brutal beatdown.  Some of our customers are taking advantage of this opportunity to lighten their share load, and as a result we’re getting questions like this more often lately.

Many of the folks who ask 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. 

Mining securities or other stocks that aren’t registered are “restricted? from public trading.  They 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 docome 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 mining 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 company itself imposes a longer delay. 

Also the broker will want to know how you paid for your mining stock.  That’s because shares that weren’t bought for cash – say, for example, shares received in return for geologic services or financial consulting– 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 mining 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 will examine the documents and check the relevant stock records.  If all is in order, the issuer is asked for approval to remove the restricted legend. 

Some Canadian miners 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 mining shares.

(Check your watch.  Four minutes or less?)


Timothy Major and Tom Wobker