OTCBB stock: broker/issuance/tax advice

April 27, 2006 8:08 PM

I'm about to be eligible to exercise stock options on a stock traded on the Over The Counter Bulletin Board (OTC). Advice on getting my university to issue them to me, exercising (tax) and brokers (sale) please.

I was given options almost 3 years ago, but because I'm an 'inventor' in the company, I wasn't allowed to sell for 3 years. They are about to 'become liquid', and I'd like to exercise and sell immediately. Some advice please:

Basic questions:

1) My organization (a major private university) is being tardy about instructing the company to issue me the stock. How can I firmly remind them to do so (in best legalese) as soon as they become liquid.

2) I'd need a broker that trades these stocks. I only want to make this one trade (sell) - advice on particular brokers?

3) Do I need to watch out for anything when I exercise them tax-wise -apart from the fact that as soon as they are issued, I'm liable for the tax on their net worth as capital gains, yes?


Other, more detailed question

The quantity of shares I'm being issued is about 90,000. The otcbb info says the 'volume' is 50k. I presume this means 50,000 shares traded in today's time period. There have been days when none are traded - the average seems at about 25,000 shares per day, and apart from a couple of days where 0.5-1m were traded, this occurs all the way back to the stocks inception.
How do I set up buyers for this quantity of shares (since I presume there is no 'exchange' for stock like this) - or is this stuff a broker will do? What kind of fees should I expect for this service?


Many thanks....

posted by lalochezia to work & money (23 comments total)

For the letter to the university, I was thinking something like:

It's been >2.5 years since I signed my inventor distribution memo. I request that you assist me in obtaining this stock as promised by that memo.

I am willing and able to meet tax demands on this issuance, and am willing and able to seek outside council for assistance in compliance in this request.

I will be sending this request as a registered and notarized letter.

Yours

etc.


posted by lalochezia at 8:10 PM on April 27, 2006

your stock will need the legend removed if it comes with one.

are you not allowed to sell for 3 years after getting the stock? because according to what you said, the stock was never issued, even as restriced shares, to you at all...
posted by Izzmeister at 8:18 PM on April 27, 2006

I *think* I'm allowed to sell 3 years from the date that I signed the 'inventor stock distribution memo' agreeing that the stock would be issued to me. This was the impression I got - I can try and dig that doccument out.

Dumb question: what's a legend?
posted by lalochezia at 8:21 PM on April 27, 2006

"Restricted" securities are securities acquired in an unregistered, private sale from an issuer or from an affiliate of the issuer. They typically bear a legend clearly stating that you may not resell them in the public marketplace unless the sale is exempt from the SEC's registration requirements.

see this @ SEC.gov
posted by Izzmeister at 8:31 PM on April 27, 2006

How much would the stock be worth on today? (bid price x no. of shares)
posted by Izzmeister at 8:32 PM on April 27, 2006

yes, the 50k volume is th e"per day" volume.

a broker like scotttrade or etrade would work fine for you... is the stock an OTCBB or pink sheet stock?

(does the yahoo finance quote for the stock put the letters .OB or .PK behind the ticker?)
posted by Izzmeister at 8:34 PM on April 27, 2006

They're OTCBB (.OB).

At todyas prices, >$10k and < $100k. (i don't want to give away my all my financial info the internet!).br>
I presume they are free to be sold without restriction, but will find out. Any other words 'o wisdom?
posted by lalochezia at 8:52 PM on April 27, 2006

well...

1) dont sell em all in one shot.

2) the company make give you a pain in the neck to get the legend (restriction off)
posted by Izzmeister at 8:58 PM on April 27, 2006

otcbb stocks are traded by most brokers... especially a sale! (for a purchase you may have to fill out some forms that say how risky they are, blah blah.)

have you researched the company and its prospects going forward? maybe you should keep a few shares long term if the prospects are good....
posted by Izzmeister at 9:05 PM on April 27, 2006

Ive marked izzmesiters last answer as best but they're all good.

I'm better off with the $$ (expenses v.high this year).

Any advice from people on tax/ friendly arm twisting?
posted by lalochezia at 9:11 PM on April 27, 2006

I dont know what state you are in, but I know of an attorney in new york somewhere that does this stuff reasonably cheap.

his info can be found here: http://sec.freeedgar.com/displayText.asp?ID=2245172 in the filing.
posted by Izzmeister at 9:19 PM on April 27, 2006

I would write the letter stated above, and cc a copy to the ombusdman...

I would also let them know by email in advance that the letter will be arriving shortly...
posted by Izzmeister at 9:20 PM on April 27, 2006

I assume you would be taxed as a short term capital gain if you held for under twelve months???

careful!!!
posted by Izzmeister at 9:23 PM on April 27, 2006

Izzmeister, your name Steve is it? And if your name is Steve, you don't own a title company, do you?
posted by I Love Tacos at 10:07 PM on April 27, 2006

I second the thought not to unload these shares all at one time. Putting in a sell order of this size for a low volume stock would drastically reduce bid. Sell it gradually in blocks.
posted by lemhuxley at 10:47 PM on April 27, 2006

... on days the company has volume... study it a bit, such as if there is volume when news is released, etc?
posted by Izzmeister at 10:51 PM on April 27, 2006

You probably know this and I wouldn't comment on it if you weren't going to send a letter based on what you said here, but it is outside counsel, not "council."
posted by grouse at 7:30 AM on April 28, 2006

grouse.. good catch (a spellchecker would miss that too!)
posted by Izzmeister at 8:10 AM on April 28, 2006

Lalo, I agree with all the others who have said "don't sell it all at once." If you try to dump double the daily volume of a stock all at one shot, you'll cost yourself a lot of money.

On the other hand, there are risks associated with exercising the options and then holding the stock, because your tax liabilities kick in as soon as you exercise. To avoid this, you could exercise the options in chunks, say of 10K each, and sell each chunk as soon as it is exercised. If you put a week or two between, it should help spread out the pain.
posted by alms at 8:22 AM on April 28, 2006

lem/grouse thanks. this is exactly the kinda info I'm looking for.

Alms: Is my tax exposure really that great: if I exercise my options and get issued the shares in may and sell 9x10k blocks by aug? I want to deal with the people who give me the shares as little as possible!

I can't believe I was going to write council. Oooh look at him, he's threatining us with his council and a turnkey!
posted by lalochezia at 9:13 AM on April 28, 2006

You will have to pay tax on the difference between the strike price on your options and the market price of the stock the year you exercise them. Doesn't matter how long you hold the stock afterward (although if it increases in value while you hold it, you'll also owe tax on that, and in that case your rate will be lower if you hold it for at least a year). The bulk of the taxes involved will be on the options exercise, anyway.
posted by kindall at 2:22 PM on April 28, 2006

Just to add some detail to what kindall said: you have 2 types of income to worry about here for tax purposes. First, as he mentioned, when you exercise the option, you must pay tax on the difference between the strike price (that you pay) and the current market value. That is ordinary income and will be taxed at your marginal rate.

If the stock appreciates at all between the time you exercise the options and the time you sell them, then you will have a capital gain as well. If you really intend to turn around and sell them ASAP, that will also be taxed at your marginal rate; if you held the shares more than one year, you would be taxed at the special capital gains rate, which is 15% (or less, depending on your gross income) if I recall correctly.
posted by rkent at 2:54 PM on April 28, 2006

A board member at a dot-com where I worked exercised several hundred thousand dollars worth of options and then failed to exercise them before they became worthless. He had a massive tax bill and nothing to pay it with. That's the tax risk of not selling as soon as you exercise, in an extreme case.
posted by alms at 6:01 PM on April 28, 2006