In November of 2007, the SEC adopted significant amendments to Rule 144. This article reflects those changes, and outlines the dictates of Rule 144.
At the foundation of our securities laws is the premise that shares of stock that are not registered with the SEC are subject to limitations on resale. Naturally, however, exceptions to this premise evolved. Perhaps the most well-known exemption to the limitation on resale rule is Rule 144. Rule 144, promulgated under the Securities Act of 1933, is a safe harbor provision that allows holders of restricted securities to make sales of stock when certain conditions are met. The most familiar condition imposed by Rule 144 is a one-year or six-month holding period before any resales may be made–but that is certainly not the only condition.
Rule 144’s Mandatory Conditions
Rule 144’s mandatory conditions are the following, and all of the conditions must be met for Rule 144’s safe harbor to apply to a transaction, and we’ll cover each of the requirements in detail below:
Form 144 Filing
Under the 2007 amendments, the Form 144 filing requirement depends on the affiliate or non-affiliate status of the seller:
I. Non-Affiliate Seller: Form 144 is no longer required to be filed.
II. Affiliate Seller: The affiliate seller must file a Form 144 with the SEC if the proposed sale transaction exceeds a $50,000 threshold, or 5,000 shares of stock. The $50,000/5,000 share threshold was raised in the 2007 amendments from $10,000/500 shares of stock. This liberalization will eliminate the need for Form 144 filings for most selling shareholders.
Current Public Information
There must be “current public information” available on the issuer.
Under the 2007 amendments, the “manner of sale” requirement depends on the affiliate or non-affiliate status of the seller:
I. Non-Affiliate Seller: The manner of sale provisions no longer apply.
II. Affiliate Seller: The sales must be in arm’s-length broker transactions, without pre-arrangement or broker’s solicitation of orders.
Intention to Sell
The seller must have a bona fide intention to sell the shares at the time he/she files the Form 144.
The “Current Public Information” Requirement
Paragraph 144(c) dictates that current public information regarding an issuer must be available regarding an issuer before a 144 sale takes place. This requirement protects potential purchasers in 144 transactions; ideally, purchasers can thereby research companies before buying shares. The current public information requirement is met automatically if the issuer is fully reporting and is current in its filings (OTCBB companies, and those on the larger exchanges). With respect to pink sheet companies, the issuer must have information publicly available equivalent to that information found in a 15c2-11 filing. Many pink sheet issuers satisfy this requirement by subscribing to the pink sheet news service or by posting corporate information and financials on their website. Whether the scope of the information that an issuer provides meets the current public information requirement is a factual question that should be addressed to an attorney.
Rule 144’s Holding Period(s)
At its core, Rule 144 allows a holder of restricted stock to resell such stock upon the expiration of a one year or six month holding period. The foundational principle underlying 144’s holding period is that securities acquired and held for one year or six months were most likely purchased with investment intent and not with a “view towards distribution.” The holding period begins upon the “date of acquisition of the securities.” Securities are deemed acquired when the full purchase price or other consideration is paid. Securities issued, but not fully paid, do not start the 144 holding period until full payment is made.
And after a longer holding period, Rule 144’s dictates are further relaxed. After a one-year holding period, Rule 144 eliminates the current public information requirement for non-affiliate sellers. Section (d) of Rule 144 is the section upon which holders rely when they have the restrictive legends removed from their stock certificates–the former subsection was Rule144(k); Rule 144(k) has been removed in the revision, and subsection (k) has been integrated into the rule generally. Affiliates, however, remain bound by the major restrictions in Rule 144 until they cease to be affiliates.
Holding periods in the case of gifts require special consideration and are discussed here: Gifts of Securities Under Rule 144.
Rule 144’s Volume Restrictions, and the Importance of Affiliate Status
Rule 144 treats affiliates of the issuer much more strictly than it treats non-affiliates. The Rule applies to the sale of restricted (unregistered) stock by a non-affiliate. However, the Rule is far more imposing on affiliates; the Rule governs any sale of stock (both restricted and registered shares) by an affiliate of the issuer, and the Rule applies to affiliates indefinitely. Loosely defined, affiliates are control persons and other insiders, but we’ll take a closer look at the definition of affiliates below.
With respect to sales of stock by an affiliate, Rule 144 imposes significant sales volume restrictions upon non-affiliates selling restricted stock, and upon affiliates selling either restricted or registered stock. Rule 144 ‘s volume restrictions are commonly referred to as “dribble out” provisions. We can distill the volume limitations as follows:
*Non-affiliates are not subject to any volume restrictions after holding a reporting issuer’s stock for six months, or a non-reporting issuer’s stock for one year.
*Affiliates are subject to volume restrictions as long as they are affiliates.
The dribble out provisions limit the amount of stock that can be sold in any 90-day period. The volume restriction dictates that sales in a 90-day period cannot be more than the greater of the following:
*1% of the issuer’s total outstanding shares, or,
*The average reported weekly volume in an issuer’s stock for the four weeks immediately preceding the filing of Form 144 (if the issuer trades on a stock exchange or NASDAQ–OTC and pink sheet companies can only be sold using 1% rule).
As an example, assume ABC Corp., listed on NASDAQ, has 10,000,000 shares outstanding and traded 25,000 shares in each of the 4 weeks prior to the filing of a potential seller’s Form 144. The dribble out provisions allow a seller to sell the greater of 1% of the total shares outstanding (in this case, 100,000 shares), or the average weekly volume for the prior four weeks (in this case, 25,000 shares). Thus, the seller can sell the greater number, up to 100,000 shares in the 90-day period.
Who Is an Affiliate?
Because Rule 144 applies differently to affiliates and non-affiliates, it is important to know who is an affiliate. The Rule dictates that affiliate status attaches to any person who directly or indirectly controls, is controlled by, or is under common control with the issuer. Rule 405 defines “control” as the “power to direct . . . the management and policies” of an issuer, whether by ownership or position. Thus, directors, officers, and upper-level managers are clearly affiliates. Owners of 5% or more are typically considered affiliates, but be careful–while the 5% figure is widely relied upon, you won’t find the 5% figure in any rule or statute on the subject.
Manner of Sale Restrictions
Finally, the Rule dictates the manner in which shares can be sold under its protections. The sales must be handled in all respects as routine trading transactions, and brokers may not receive more than a normal commission. Neither the seller nor the broker can solicit orders to buy the securities.A private sale of restricted shares is neither governed nor protected by Rule 144. That is not to say that private sales of restricted shares are illegal. By its own terms, Rule 144 is not exclusive, and sellers of restricted stock have a few other potential safe harbors to protect their resales. Private sellers of restricted shares commonly rely upon what is known the “4(1 and ½)” exemption.
Why Are Opinion Letters Necessary?
A Rule 144 seller must also secure an opinion letter from the attorney for the issuer. This is because before a sale can take place, the transfer agent for the issuer must agree to remove the restrictions (and hence the restrictive legend) from the share certificate. The transfer agent will only agree to remove a restrictive legend if it receives a letter from the issuer’s counsel carefully presenting the legal argument why the shares are available for sale under Rule 144 .
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