Brandon Lee
Rule 144 regulates the resale of restricted, unregistered, and control securities. It provides a safe harbor exemption from registration requirements for the sale of securities through the public markets if certain conditions are met. These conditions include the holding period, the manner of sale, and the amount that can be sold at one time. The rule is designed to prevent insider trading and ensure buyers receive adequate information. It applies to all types of sellers, including issuers of securities, underwriters, and dealers. In the context of bank-issued securities, Rule 144 would typically apply to restricted securities acquired through private placements or stock benefit plans offered to bank employees.
| Characteristics | Values |
|---|---|
| Definition | Rule 144 establishes specific criteria for determining whether a person is not engaged in a distribution and creates a safe harbour exemption for sellers. |
| Purpose | To thwart insider trading, ensure buyers of unregistered securities receive adequate information, increase transparency and fairness in the sale of restricted and control securities. |
| Applicability | Rule 144 applies to all types of sellers, including issuers of securities, underwriters, and dealers. It also applies to restricted securities, control securities, and unregistered securities. |
| Conditions | Rule 144 permits the resale of restricted securities if certain conditions are met, including holding periods, the way securities are sold, and the amount that can be sold at one time. |
| Holding Periods | The minimum holding period is generally one year, but can vary depending on the type of issuer and whether the company is a reporting company. |
| Exemption | Rule 144 provides an exemption from registration requirements for the sale of securities in the public markets if specific conditions are met. |
| Restricted Securities | Securities acquired in unregistered, private sales from the issuing company or an affiliate. Restricted securities are not freely tradable and typically have a restrictive legend. |
| Control Securities | Securities held by company insiders, controlling or majority shareholders, or other individuals with significant influence on the issuer. |
| Underwriter | Rule 144 creates a safe harbour from the definition of "underwriter" and provides conditions for exemption from registration. |
| Non-exclusive | Rule 144 is not the only means for selling restricted or control securities, and other exemptions may be available under the Securities Act. |
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What You'll Learn
Restricted securities
Rule 144 allows for the public resale of restricted and control securities if certain conditions are met. The rule is not the exclusive means for selling restricted or control securities, but it does provide a "safe harbor" exemption to sellers. The five conditions of Rule 144 are:
- Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class.
- If restricted securities are purchased from another non-affiliate, the non-affiliate's holding period can be added to the buyer's holding period.
- For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities, not on the date of the gift.
- In the case of a stock option, including employee stock options, the holding period begins on the date the option is exercised, not the date it is granted.
- Before selling restricted securities in the marketplace, they must be held for a certain period. If the company that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934, they must be held for at least six months. If the issuer is not subject to these reporting requirements, the securities must be held for at least one year.
If you are an affiliate, you must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period. If you are not (and have not been for at least three months) an affiliate of the company issuing the securities and have held the restricted securities for at least one year, you can sell the securities without regard to the conditions in Rule 144. If the issuer of the securities is subject to the Exchange Act reporting requirements and you have held the securities for at least six months but less than one year, you may sell the securities as long as you satisfy the current public information condition. Even if you have met the conditions of Rule 144, you cannot sell your restricted securities to the public until you have gotten the legend removed from the certificate.
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Control securities
The resale of control securities is subject to additional obligations under Rule 144. Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission (SEC) that sets the conditions for the sale or resale of restricted, unregistered, and control securities. It provides an exemption from registration requirements for the sale of securities through the public markets if certain conditions are met.
Rule 144 is not the exclusive means for selling control securities, but it provides a "safe harbor" exemption to sellers. Affiliates looking to sell control securities must comply with the non-holding period requirements of Rule 144, including volume limitations, continued issuer satisfaction of Exchange Act reporting obligations, manner of sale requirements, and filing requirements. For example, an affiliate can only sell a limited amount of the company's shares—specifically, they cannot sell more than 1% of the total outstanding shares within any three-month period.
If Rule 144 is too restrictive, the Securities Act requirements regarding the resale of any control security can be resolved by registering the resale of the control securities with the SEC.
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Registration exemptions
Rule 144 provides a safe harbour exemption from registration requirements for the sale of restricted and control securities in the public markets. This rule was designed to prevent insider trading and ensure that buyers of such securities receive adequate information.
Restricted securities are securities acquired in unregistered, private sales from the issuing company or an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing "seed money" or start-up capital to the company. Control securities are held by insiders or others with significant influence or control over the issuer of the securities, such as executive officers, directors, or large shareholders.
Rule 144 outlines five conditions that must be met to qualify for the exemption:
- Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class.
- If restricted securities are purchased from another non-affiliate, the non-affiliate's holding period can be added to the buyer's holding period.
- For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities, not on the date of the gift.
- In the case of a stock option, including employee stock options, the holding period begins on the date the option is exercised, not the date it is granted.
- Holding Period: Restricted securities must be held for a certain period before being sold in the marketplace, typically six months to one year.
It is important to note that Rule 144 is not the exclusive means for selling restricted or control securities. If a seller of a covered security is not associated with the issuing company and has owned the securities for more than a year, the five conditions are waived, and the security can be sold without restrictions. Additionally, securities that are exempt from registration requirements may only be offered to or purchased by "accredited investors," such as banks, insurance companies, registered investment companies, or specific employee benefit plans.
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Holding periods
Rule 144 is a regulation that provides an exemption from registration requirements for the sale of restricted and control securities through the public markets if certain conditions are met. The rule applies to all types of sellers, as well as issuers of securities, underwriters, and dealers. It is designed to prevent insider trading and ensure that buyers of unregistered securities receive adequate information.
The holding period requirement under Rule 144 depends on the type of issuer. The minimum holding period is generally one year. For reporting companies, the holding period can be as little as six months, while for non-reporting companies, it can be up to two years. The holding period begins when the securities are bought and fully paid for.
If the issuing company is a "reporting company", subject to the reporting requirements of the Securities Exchange Act of 1934, then the holding period is at least six months. If the issuer of the securities is not subject to these reporting requirements, then the holding period is at least one year.
For non-affiliates, once the applicable holding period for restricted securities has been met, they are exempt from volume limits, manner-of-sale requirements, and Form 144 filing requirements. They must, however, ensure that the issuer of the securities provides current public information.
Rule 144A, a modification of Rule 144, was created in 2012 under the Jumpstart Our Business Startups (JOBS) Act. It shortens the holding periods of securities for qualified institutional buyers, allowing sales to take place without the need for SEC registrations. Critics argue that the rule lacks transparency and does not clearly define what constitutes a qualified institutional buyer.
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Safe harbour
Rule 144 provides a "safe harbour" exemption for sellers of restricted and control securities. This means that sellers will be protected from legal or regulatory liability as long as they follow the conditions set out in the rule.
The rule establishes specific criteria for determining whether a person is not engaged in a distribution and is therefore not an underwriter of the securities. A person satisfying the applicable conditions of the Rule 144 safe harbour is deemed not to be engaged in a distribution of the securities and is therefore not an underwriter for purposes of Section 2(a)(11).
The safe harbour provision is particularly relevant for affiliates or persons selling restricted securities on behalf of an affiliate of the issuer. In such cases, the person will be deemed not to be engaged in a distribution and will not be considered an underwriter for that transaction. This is significant because, under the Securities Act, an "underwriter" includes "those who acquire securities from the issuer with a view to distribution". Selling securities in the public market without registration as an underwriter could result in non-compliance with SEC regulations.
Rule 144 provides objective standards that a security holder can rely on to meet the requirements for exemption from registration. It permits the resale of restricted securities if certain conditions are met, including holding the securities for six months or one year, depending on the issuer's filing status under the Exchange Act. The rule may also limit the amount of securities that can be sold at one time and may restrict the manner of sale, depending on whether the security holder is an affiliate.
It is important to note that Rule 144 is not the exclusive means for selling restricted or control securities, and there may be other exemptions available under the Securities Act.
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Frequently asked questions
Rule 144 is a regulation that establishes criteria for determining whether a person is engaged in the distribution of securities. It provides a safe harbor exemption from the definition of "underwriter" and allows for the public resale of restricted and control securities if certain conditions are met.
The conditions for selling restricted or control securities under Rule 144 include holding periods, the way the securities are sold, and the amount that can be sold at any one time. The holding period depends on the type of issuer and whether the company is a reporting company. For reporting companies, the holding period can be as little as six months, while for non-reporting companies, it can be up to two years.
Rule 144 applies to all types of sellers, including issuers of securities, underwriters, and dealers. It also applies to restricted securities acquired through private placements or stock benefit plans, as well as control securities held by company insiders or those with significant influence on the issuer.
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