Monetization pathways for restricted shares of U.S.-listed Chinese companies — Introduction to Rule 144

In most cases, you may contact the listed company to request removal of the legend, or—if you have a broker—ask your broker to assist with legend removal. Regardless, an opinion letter is always required. A key concept: Transfer agent: A company that assists a specific issuer in recording ownership of its publicly traded securities by individuals or entities. It issues and cancels stock certificates evidencing share ownership, serves as an intermediary for stock transactions, handles matters related to lost or stolen certificates, and is also responsible for removing legends. Introduction to Rule 144: Adopted by the U.S. Securities and Exchange Commission (SEC) in 1972 as an amendment to the Securities Act of 1933, Rule 144 establishes clearer criteria for determining who qualifies as an underwriter and specifies how and when restricted securities may be sold. It provides guidance to issuers, broker-dealers, shareholders, and transfer agents on conducting transactions involving restricted securities—including rules governing the calculation of the holding period, filing requirements for each sale, and other restrictions. Rule 144 applies to securities acquired through private placements, employee stock incentive plans, mergers and acquisitions, and other non-public transactions. It also covers securities acquired by affiliates—including directors, officers, and significant shareholders—who can influence the company’s management and policies. Rule 144 legend: A transfer agent stamps stock certificates to indicate that the shares are subject to the resale restrictions under Rule 144. Such stamped language is referred to as the “Rule 144 legend.” Which shares carry the Rule 144 legend? Public companies generally affix the Rule 144 legend to all stock certificates. Failure to do so may be viewed as insufficient action to prevent the unlawful resale of unregistered securities—unless registration has been effected or an exemption obtained. Factors determining the holding period: The length of the holding period depends on multiple factors: whether the holder is an affiliate or non-affiliate; whether the issuing company is subject to disclosure obligations under the Securities Exchange Act of 1934; and whether the issuer is a shell company. If the issuer is subject to the reporting requirements of the Exchange Act of 1934, is not a shell company, and satisfies the conditions set forth in Rule 144(i)(2), the holding period is six months following full payment for the restricted shares. Opinion letter: An attorney must be engaged to draft and prepare the opinion letter, which requires submission of evidence demonstrating your legal right to hold the restricted shares—e.g., your stock certificate, proof of full payment, and foundational documents evidencing how you acquired the restricted shares (e.g., the underlying transaction agreement). As a shareholder of a U.S.-listed Chinese company, if your supporting documents are in Chinese, they must be translated into English.

Equity transfer procedures for companies

1. Internal Decision-Making and Confirmation of Right of First Refusal 1.1 Equity Transfer to External Parties (for Limited Liability Companies): 1) Written notice must be provided to other shareholders specifying the transfer details—including quantity, price, and payment terms—and approval by a majority of the other shareholders is required. 2) If more than half of the other shareholders object to the transfer, those objecting shareholders must purchase the equity; failure to purchase within the prescribed timeframe shall be deemed consent to the transfer. 1.2 Right of First Refusal: 1) If other shareholders fail to respond within 30 days of receiving notice, their right of first refusal shall be deemed waived. 2) Where multiple shareholders assert the right of first refusal, they shall first negotiate the respective purchase proportions; if no agreement is reached, the right shall be exercised proportionally based on each shareholder’s capital contribution at the time of transfer. 1.3 Primacy of Articles of Association: 1) Where the company’s articles of association contain special provisions regarding equity transfers, such provisions shall prevail. 2) Ultimately, a legally valid shareholders’ resolution must be adopted. 2. Mutual Due Diligence Transferee: Conduct comprehensive due diligence on the target company’s financial condition, business contracts, intellectual property rights, pending litigation, and other matters to fully assess operational and legal risks. Transferor: Verify the transferee’s financial capacity, credit history, and ability to perform contractual obligations to mitigate payment risk. State-owned equity transfers: Additional review is required—including verification of asset title compliance, appraisal reports, and approval or filing with state-owned assets regulators. 3. Pricing and Contract Execution 3.1 Pricing Methods Non-state-owned equity: Parties may agree on pricing through negotiation, referencing net asset value, profitability, industry valuation benchmarks, etc.; formal appraisal is not mandatory. State-owned equity: An appraisal must be conducted by a qualified institution, and the appraisal result shall serve as the basis for pricing, subject to compliance with state-owned assets regulatory procedures. 3.2 Key Contract Terms: Clearly specify the number of shares, purchase price, payment schedule, and closing date. Include representations and warranties, breach remedies, dispute resolution mechanisms, and other essential clauses. 4. Tax Filing Individual transferors: Must file personal income tax returns with the tax authority where the invested enterprise is located no later than the 15th day of the month following the transfer, submitting supporting documents including the transfer agreement, financial statements, and appraisal reports (if applicable). Corporate transferors: Must report gains from equity transfers during annual corporate income tax reconciliation and submit relevant supporting documentation. 5. Tax Payment 5.1 Stamp Duty Non-listed companies: Both parties pay stamp duty at 0.5‰ of the contract amount. Listed companies: Only the transferor pays stamp duty at 0.1‰ of the contract amount. Payment may be made online via the electronic tax bureau or in person at a local tax service hall. 5.2 Corporate Income Tax The transferring enterprise pays corporate income tax at the standard rate of 25%; gains from equity transfers are included in the enterprise’s annual taxable income.