Introduction
SEC Rule 144 is a regulation that provides guidelines for the sale of restricted and control securities. This rule is crucial for investors, companies, and legal professionals as it outlines the conditions under which these securities can be sold without registration under the Securities Act of 1933. Understanding Rule 144 is essential for ensuring compliance with federal securities laws and facilitating the lawful resale of securities.
Overview of SEC Rule 144
Definition and Purpose
SEC Rule 144, promulgated under the Securities Act of 1933, establishes the conditions under which restricted and control securities can be sold in the public market. The primary purpose of Rule 144 is to provide a safe harbor for the resale of these securities, ensuring that such transactions do not constitute a distribution, which would require registration with the SEC.
Key Terms
- Restricted Securities: These are securities acquired in unregistered, private sales from the issuing company or an affiliate. They are typically obtained through private placements, Regulation D offerings, or employee stock benefit plans.
- Control Securities: These are securities held by an affiliate of the issuing company. An affiliate is a person, such as an executive officer, director, or large shareholder, who has control over the company.
Conditions for Resale Under Rule 144
Holding Period
One of the primary conditions for the resale of restricted securities under Rule 144 is the holding period. The holding period is the length of time the securities must be held before they can be sold.
- For Reporting Companies: If the issuing company is subject to the reporting requirements of the Securities Exchange Act of 1934, the holding period is six months.
- For Non-Reporting Companies: If the issuing company is not subject to these reporting requirements, the holding period is one year.
Current Public Information
For the resale of restricted securities, there must be adequate current public information about the issuing company. This means that the company must have complied with the reporting requirements of the Securities Exchange Act of 1934, providing sufficient information to the public.
Trading Volume Formula
The amount of securities that can be sold by an affiliate in any three-month period is limited. The volume of securities sold cannot exceed the greater of:
- 1% of the outstanding shares of the same class being sold, or
- The average weekly trading volume of the securities during the four weeks preceding the filing of a notice of sale on Form 144.
Manner of Sale
The manner of sale requirement stipulates that the securities must be sold in a routine trading transaction. This means that the securities must be sold in brokers' transactions or directly with a market maker. Solicitation of orders to buy the securities is generally not permitted.
Filing a Notice of Proposed Sale
Affiliates must file a notice of proposed sale with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate sales price exceeds $50,000 within a three-month period.
Restricted Securities
Acquisition of Restricted Securities
Restricted securities are typically acquired through private placements, Regulation D offerings, or employee stock benefit plans. These securities are not registered with the SEC and are subject to resale restrictions to prevent the circumvention of the registration requirements of the Securities Act of 1933.
Legend on Restricted Securities
Restricted securities often bear a restrictive legend indicating that they cannot be sold or transferred without registration or an applicable exemption. This legend serves as a notice to potential buyers and brokers that the securities are restricted.
Removal of Restrictive Legend
To remove the restrictive legend, the holder of the restricted securities must obtain the consent of the issuing company and provide evidence that the securities can be sold under Rule 144. This typically involves obtaining a legal opinion from the company's counsel.
Control Securities
Definition of Control
Control securities are held by affiliates of the issuing company. Control is defined as the power to direct the management and policies of the company, whether through ownership of voting securities, by contract, or otherwise. Affiliates include executive officers, directors, and large shareholders.
Resale of Control Securities
The resale of control securities is subject to the same conditions as restricted securities under Rule 144, including the holding period, current public information, trading volume formula, manner of sale, and filing requirements.
Exemptions and Safe Harbors
Rule 144A
Rule 144A provides a safe harbor for the resale of restricted securities to qualified institutional buyers (QIBs). This exemption allows for the sale of restricted securities without the need for registration, provided that the securities are sold to QIBs, which are institutions that own and invest at least $100 million in securities.
Regulation S
Regulation S provides an exemption for the sale of securities outside the United States. Under Regulation S, offers and sales of securities that occur outside the U.S. are not subject to the registration requirements of the Securities Act of 1933.
Section 4(a)(1) and Section 4(a)(2)
Sections 4(a)(1) and 4(a)(2) of the Securities Act provide exemptions for certain transactions by persons other than issuers, underwriters, or dealers. Section 4(a)(1) exempts transactions by any person other than an issuer, underwriter, or dealer, while Section 4(a)(2) exempts transactions by an issuer not involving any public offering.
Compliance and Reporting Requirements
Form 144
Affiliates must file Form 144 with the SEC if they intend to sell more than 5,000 shares or if the aggregate sales price exceeds $50,000 within a three-month period. Form 144 provides notice of the proposed sale and includes information about the seller, the securities to be sold, and the manner of sale.
Reporting Obligations
Issuing companies must comply with the reporting requirements of the Securities Exchange Act of 1934 to ensure that adequate current public information is available. This includes filing annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.
Legal and Regulatory Considerations
Securities Act of 1933
The Securities Act of 1933 requires the registration of securities with the SEC before they can be sold to the public. Rule 144 provides an exemption from this registration requirement, allowing for the resale of restricted and control securities under certain conditions.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 establishes reporting requirements for publicly traded companies. Compliance with these reporting requirements is essential for ensuring that adequate current public information is available for the resale of restricted securities under Rule 144.
SEC Interpretations and Guidance
The SEC provides interpretations and guidance on Rule 144 through various releases, no-action letters, and interpretive letters. These interpretations provide clarity on the application of Rule 144 and help ensure compliance with the rule's requirements.
Practical Considerations for Investors and Companies
For Investors
Investors holding restricted or control securities should be aware of the conditions for resale under Rule 144. This includes understanding the holding period, current public information requirements, trading volume limitations, manner of sale requirements, and filing obligations.
For Companies
Issuing companies should ensure compliance with the reporting requirements of the Securities Exchange Act of 1934 to facilitate the resale of restricted securities by their investors. Companies should also provide clear guidance to their affiliates on the conditions for resale under Rule 144.
Conclusion
SEC Rule 144 provides a framework for the resale of restricted and control securities, ensuring that such transactions do not constitute a distribution requiring registration under the Securities Act of 1933. By understanding and complying with the conditions set forth in Rule 144, investors and companies can facilitate the lawful resale of securities and maintain compliance with federal securities laws.
References
- Rule 144: Selling Restricted and Control Securities - SEC.gov
- Securities Act Rule 144 | Investor.gov
- Frequently asked questions about exempt offerings - SEC.gov
- Rule 144 Holding Period and Form 144 Filings - Federal Register
- Revisions to Rules 144 and 145 - SEC.gov
- Rule 144 - Persons Deemed Not to be Engaged in a Distribution ...
- Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules ...
- Resales of Restricted and Other Securities (Release No. 33-6099)
- Securities Act Rules - SEC.gov
- Private Placements - OCC.gov
