This article was first published in the Sept. 18, 2013 issue of The Review of Securities & Commodities Regulation (Vol. 46 No. 16). Copyright © 2013 by RSCR Publications LLC. ISSN: 0884-2426. Reproduction in whole or in part prohibited except by permission. All rights reserved. It is reprinted here with permission.
By progressively shortening the Rule 144 holding period for resales of restricted securities, the Securities and Exchange Commission has enhanced such securities’ liquidity and reduced the overall cost of raising capital. The authors discuss this and related requirements, the provisions of the rule for affiliates and non-affiliates of the issuer, and the SEC’s numerous interpretations of its conditions as to holding period, issuer information, manner of sale, volume, and filing requirements.
With private issuances of securities representing a vast and critically important segment of capital markets activity in the United States – surpassing the value of securities sold by or on behalf of issuers on public exchanges in recent years1 – investors continue to place great weight on the degree to which they can freely exit a given position and retain flexibility to respond to market trends when selecting the companies who will receive their investment dollars. Similarly, persons deemed "affiliates" of an issuer due to their role on its board of directors or management or their large holdings of shares must keep in mind a range of restrictions and compliance obligations that may apply should they wish to resell their shares. In light of such potential constraints on liquidity, Rule 144 remains an important tool for investors, investment banks, and their counsel, particularly as the revisions to the rule in effect since 2008 provide for an accelerated timetable for resales of restricted securities (six months for securities of reporting companies under the Securities Exchange Act of 1934 (the Exchange Act)).
Rule 144: Overview and Impact
Rule 144, first adopted in 1972, establishes a safe harbor under the Securities Act of 1933 (the Securities Act), offering liquidity to directors, officers, large shareholders, and other affiliates, as well as holders of securities acquired in exempt offerings. Through its direct and indirect effects on exempt and restricted securities and issuers’ access to financing, the provision is something of an unsung cornerstone in the federal securities laws and the integrated scheme of regulation that forms the backdrop for capital formation in the United States. By mandating, among other things, the length of time investors must hold securities issued under most exempt offerings, the rule enhances the value of investing in such offerings in the eyes of individuals and institutions and, thus, the ease with which businesses, large and small, can raise funds for growth or operations through private transactions. The securities’ restricted status typically extracts an illiquidity discount from investors.2
These issues shape the opportunity costs associated with public and private forms of financing,3 thus helping to determine the demand for exempt transactions, such as those under Regulation D and Rule 144A, and overall capital formation levels across the country. Rule 144 also affects the financial position of myriad entities and individuals by regulating how soon they can turn securities into cash so as to reallocate their investment dollars where they will obtain the greatest return or make consumption decisions that, in turn, stimulate other sectors of the economy.
The evolution of the rule over time marks a trend of increasing liberalization of the holding period requirement, enhancing investor liquidity and indirectly promoting private issuances.4 When adopted in 1972, Rule 144 initially required that security holders wait two years before reselling restricted securities (subject to limitations), and permitted resales with no limitations only after three years.5 Changes enacted in 1997 established one- and two-year holding periods for restricted and unrestricted resales, respectively.6 Subsequently, in the amendments effective in 2008, the SEC authorized certain resales after a period as brief as six months.7 Moreover, in shortening the timeframe before resale, the amended Rule 144 may act to reduce investors’ need to require registration rights as a sweetener in executing financing transactions, though registration rights have still remained common in practice.
Rule 144 is also unique in the securities laws in that it allows securities to change character from restricted to unrestricted without undergoing SEC registration. In most contexts, a buyer receives securities with the same level of restriction as the seller. However, in sales under Rule 144, a restricted security in the hands of the seller can transform into an unrestricted security in the hands of the buyer. This "hocus pocus" mechanism has captivated the imagination of investors since the rule’s inception. But the 2008 amendments that reduce the required holding time to a very short period really served to drive home the magical quality of Rule 144 and have taken much of the investor headaches away from purchasing restricted securities.
Resales by Affiliates
To explore the current Rule 144 and its application in practice, let us examine a hypothetical resale of securities by an affiliate of the issuer. Sheila Smith, a director of Acme, Inc., holds 20,000 shares of common stock of Acme, Inc., an Exchange Act reporting company whose shares trade on NASDAQ. If Smith decides to sell some or all of her Acme stock, what options are available to her?
Several possibilities may be applicable. First, Smith may be able to sell them immediately in the public market (subject to restrictions on transactions by "control" persons), if the shares were freely tradable when she acquired them. For example, she may have bought them in an ordinary market purchase, or the shares may have been registered for resale by Acme using Form S-1, S-3, S-8, or S-11. Under such a scenario, Smith could order her stockbroker to sell the shares in the open market, or, if necessary, she could pursue a "free stock block" trade – essentially a distribution of freely tradable shares using the special selling efforts of a bank’s syndicate desk. Second, if Smith’s securities are not covered by an effective registration statement or are "control" securities, Smith could still attempt to rely on the Section 4(a)(1) statutory exemption applicable to persons other than issuers, underwriters, and dealers – especially if she has held the shares for a lengthy period of time – or a "Section 4(a)(1½)" reseller private placement. A third option is Rule 144, while a fourth could be Rule 144A, which permits resales to "qualified institutional buyers" (QIBs). In this instance, Rule 144A is probably not available because Smith’s shares are likely of the same class as Acme’s listed securities, thereby running afoul of the "fungibility" restriction under that rule. Furthermore, although not applicable in this case, as Acme is publicly listed, Regulation A, intended for small issues, permits resales of securities by affiliates without full-scale registration under Section 5. However, such resales are limited to an aggregate maximum of $1.5 million by all selling holders.8
Definition of 'Affiliate' and 'Control' under Rule 144
In considering such possible avenues for resale, at least two significant factors must be considered. First, as a director, is Smith an "affiliate," subjecting her resale efforts to the Rule 144 requirements for affiliates of an issuer? The rule defines "affiliate" of an issuer as any person that "directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer."9 The question thus becomes whether Smith "controls" the issuer (either individually or as part of a "control group"). It should be noted that control status is a factual determination, and the SEC generally declines to provide interpretive assistance in particular cases.10 Factors the SEC has indicated as relevant to the determination of "control" include an individual’s status as a director, officer, or 10% shareholder,11 though none of these alone is dispositive.12 Moreover, under SEC no-action relief there is a rebuttable presumption that directors, officers, and 10% stockholders are control persons and anyone claiming an exemption as a non-affiliate bears the burden of proof on the issue.13 For purposes of the hypothetical, let us assume Smith’s status as director gives her sufficient control of Acme to deem her an affiliate.
Second, independent of whether Smith is an affiliate, if Smith received her securities pursuant to a Form S-8 registration statement by Acme, an additional issue remains. Form S-8 permits reporting companies to register securities for issuance to directors, employees, and others under certain benefit plans. However, resales of securities acquired by officers, directors, etc. pursuant to a Form S-8 registration statement are permissible only if accompanied by an updated resale prospectus. For the sake of the present hypothetical, we assume Acme has not provided an updated resale prospectus in the Form S-8 and Smith’s securities must therefore be sold subject to control restrictions arising due to her status as an affiliate.
Rule 144 Regulatory Intent and Requirements: Overview
As titles go, Rule 144’s says it all: "Persons deemed not to be engaged in a distribution and therefore not underwriters." By relying on the rule, a reseller is shielded from being deemed an "underwriter" under Section 5 of the Securities Act and will be permitted to freely sell securities, without registration, pursuant to the Section 4(a)(1) exemption, while the issuer likewise obtains assurance that its initial private placement is not placed in jeopardy. What is more, upon satisfaction of the relevant conditions, persons purchasing from affiliates or non-affiliates who resell securities under Rule 144 receive non-restricted, freely tradable securities (except where a purchaser is himself an affiliate or has been such within the past three months).14 Finally, the conditions required to be satisfied to obtain the benefit of the rule differ for affiliates and non-affiliates: in outline, affiliate resales of restricted securities must fulfill holding period, issuer information, manner of sale, volume, and filing requirements, while non-affiliate resales effectively need only comply with the holding period condition.15
The rule thus furthers the intent of Section 5 of the Securities Act and SEC and judicial interpretations thereof restricting "distributions" of securities while endorsing "routine trading" of securities already issued and in the hands of investors.16 As the SEC indicates in its preliminary notes to Rule 144, the unclear boundary separating the conduct of investors engaging in trading and those who "act as links in a chain of transactions through which securities move from an issuer to the public" (and thus are to be deemed "underwriters") had formerly resulted in uncertainty in the market, necessitating a clear safe harbor.17 Rule 144 is non-exclusive;18 hence resellers may still rely on Section 4(a)(1), "Section 4(a)(1½)," or other avenues.19 Moreover, in connection with a tender offer, compliance with Rule 144 is not required in order to tender restricted securities so long as the tendering holder otherwise complies with the Securities Act.20
Restricted and Control Securities
Rule 144 governs the public resale of two categories of securities: restricted and control securities.21 "Restricted securities" are acquired directly or indirectly from the issuer or an affiliate of the issuer, generally in connection with a private transfer or sale. "Control securities" refers to any securities of the issuer held or acquired by an affiliate of the issuer, regardless of how they are acquired (including in the open market).22 A security held by an affiliate is inherently a "control security" and, to the extent it falls within the definition in Rule 144(a)(3), such security may be both a control and restricted security.23 On the other hand, if an affiliate meeting the threshold for "control" acquires unrestricted securities from a non-affiliate in the open market, the affiliate will be deemed to hold "control" securities, but not "restricted" securities.24
Applicability of Rule 144
Rule 144 is an exemption for any security holder other than the issuer of the securities,25 and may be used in domestic or non-U.S. markets.26 However, with the exception of "business-combination-related shell companies" and "asset-backed issuers," the rule is not available for securities of shell companies or of any entity formerly a shell company unless issued at least one year following such a company’s filing of Form 10 information and certain reporting requirements are satisfied.27 Any provision in Rule 144 governing the resale of securities by a person also applies to the relatives or spouse of such person (or relative of such spouse) who share the "same home" as the security holder and any trust, estate, corporation, or organization (other than the issuer) of which 10 percent or more is owned by the security holder (alone or with relatives or spouse).28 In general, provisions applicable to affiliates of the issuer also apply to any person who had been an affiliate within the preceding 90-day period.
Conditions for Affiliate Resales
Condition 1: Holding Period.
With respect to the minimum period for which affiliates must hold securities before being able to resell pursuant to Rule 144, if shares are merely "control" securities and not restricted, no holding period would apply29 (such as in the case of Smith’s registered securities), nor would one apply to securities obtained on the open market or to privately issued securities under certain bonus plans.30 For restricted securities in the hands of an affiliate, the mandatory time before resale is six months if the issuer has been an Exchange Act reporting company for at least 90 days or one year for non-reporting company issuers31 (in either case, the public information condition (discussed below) must be independently satisfied).
To correctly calculate an investor’s holding period, it is necessary to ascertain precisely when the period begins. As a general principle, the SEC has interpreted "date of acquisition" to indicate the time that full risk of economic loss was assumed by the transferee.32 If acquired by outright purchase, the holding period commences upon payment in full by the acquiror.33 When securities are purchased under a subscription agreement, the acquisition date will be the date on which the subscription agreement is accepted by the issuer (and not necessarily the date of execution of the agreement or of transfer), provided the full purchase price has been paid.34 With respect to securities obtained pursuant to an option, the holding period begins upon the exercise of the option, including payment.35 Subsequent acquisition of additional securities of the same class does not alter the holding period with respect to securities already held by the investor.36 Finally, as the SEC noted in its release adopting Rule 144, "Certain securities acquired in connection with, or as a result of ownership or acquisition of, other securities, are deemed to have been acquired when such other securities were acquired." The Commission, characteristically, expresses in 29 words what is commonly understood by practitioners in a single term, "tacking." (This crucial concept will be more fully explored below.)
Condition 2: Issuer Information.
Rule 144 also imposes a public information requirement, mandating that if the issuer of the securities to be resold is an Exchange Act reporting company, its periodic reports and required Interactive Data Files must be current for the preceding 12 months.37 For non-reporting company issuers, certain specified company information must be publicly available.38 It should be noted that, for reporting issuers, the condition is that reports have been filed for 12 months, without technically mandating that they be "timely" filed (a requirement most often used for Form S-3/F-3 eligibility purposes).
Condition 3: Manner of Sale.
For equity (but not debt) securities,39 Rule 144 transactions must be executed by one of three designated methods. The permissible approaches are (i) "brokers’ transactions" pursuant to Section 4(a)(4) of the Securities Act, (ii) sales to or through a market maker,40 or (iii) "riskless principal" transactions.41 In any such trade, the security holder and its representatives may neither solicit nor arrange for the solicitation of orders for the purchase of the security nor make any payment in connection with the resale other than to the broker or dealer who executes the sale.42 In Rule 144 deals, investment banks will act as "agents" in the sale and not as underwriters. Such transactions need not be filed with the Financial Industry Regulatory Authority, Inc. (FINRA) as a distribution pursuant to FINRA Rule 5190.
Condition 4: Volume Limitation.
During any rolling three-month period, resales of the issuer are subject to a volume limit (excluding from such calculation resales of registered securities and those sold in exempt transactions or under Regulations A or S).43 During the period, resales by an affiliate such as Smith may not exceed the greater of the following:44
(i) 1 percnet of the outstanding securities of the same class as the securities being sold, or
(ii) for listed securities (not those traded over-the-counter), the average weekly trading volume, excluding public offerings by the issuer,45 during four calendar weeks prior to the filing of the Form 14446 (or the order or execution date of the trade, if no filing is required), as reported (a) on national securities exchanges or an automated quotation system of a registered securities association, or (b) under an effective transaction reporting plan/national market system plan.47
However, for securities classified as debt securities under Rule 144 (which includes non-participatory preferred stock and asset-backed securities), the applicable limit during the three-month window is 10 percent of sales of securities of the same tranche or class.48
Sales by affiliates of the seller or certain others, such as pledgees (e.g., financial institutions to which investors have made a collateral assignment of securities), may be aggregated in computing the permitted amount. For example, as noted above, sales by a spouse or relatives of the primary reseller who live in the same household as such reseller will be combined to determine whether total resales are within the limit. Similarly, sales by two or more affiliates of the issuer or other persons who "agree to act in concert" to resell securities will be aggregated.49 Moreover, in some cases, sales are aggregated when analyzing the volume limit as it applies to certain parties but not others. For example, a donor must aggregate its sales with those of all donees for six months or one year (depending on the issuer’s status), while each donee’s sales aggregate only with those of its donor.50 In addition, for volume limit purposes, convertible securities are computed as if they had been converted whenever the underlying securities are sold in the same three-month period as the convertibles.51
Condition 5: Resale Notice and Timing.
Finally, affiliates of the issuer reselling under the rule must file with the SEC a notice of the intended sale on Form 144 concurrently with the broker order or execution directly through a market maker.52 The form may be provided via paper filing or EDGAR and, if applicable, the reseller must also forward a copy to the relevant exchange.53 However, Form 144 is required only for sales representing, in any-three month period, over 5,000 shares or other units or over $50,000 in aggregate price.54 Following any filing of Form 144, the resale should be consummated within a "reasonable time" (generally understood to be three months), reflecting a "bona fide intention" to resell as required at the time of filing.55
Resales by Non-Affiliates
To further understand the many types of investors and situations to which Rule 144 applies, we now consider a hypothetical resale of securities by a non-affiliate of the issuer. A real estate developer named Steve Lynn sells a Nevada hotel to a real estate investment trust (REIT) in exchange for one million common shares of the REIT in a private transaction. The REIT’s common shares trade on the New York Stock Exchange. Lynn’s shares are not covered by an effective registration statement, and he does not have demand registration rights. Should Lynn wish to sell some or all of his shares of the REIT, what are his choices?
For sales of restricted securities by a non-affiliate, possibilities include taking advantage of any piggyback registration rights – if parties holding demand rights opt to exercise them – the Section 4(a)(1) statutory exemption, "Section 4(a)(1½)" or Rule 144. Much as was the case for Sheila Smith’s securities, use of Rule 144A to sell to a QIB would most likely be foreclosed under that provision’s "fungibility" rules. If Lynn decides to sell in reliance on the Rule 144 safe harbor, what are the requirements?
Definition of Restricted Security
The threshold question in connection with the resale of securities by a non-affiliate of the issuer is to determine whether, in fact, the securities are restricted. "Restricted" securities are defined in Rule 144 as those acquired "directly or indirectly from the issuer [or] an affiliate . . . in [one or more transactions] . . . not involving any public offering," and also include those acquired under the following: 56
Regulation D (except Rule 504)
private placements (including "Section 4(a)(1½)" and Section 4(a)(2)) and other non-public transactions (even open-market securities "acquired by an affiliate and then transferred in a non-public transaction to another person . . . become restricted"57)
private issuances under stock-based compensation plans (e.g., Rule 701)
Regulation S (at least as to equity securities of U.S. issuers)
Section 4(a)(6) crowdfunding, and
Rule 801 and 802 transactions, both of which involve foreign private issuers.58
Securities received pursuant to an approved bankruptcy plan under Section 1145(a) of the Bankruptcy Code are not restricted securities59 (though other bankruptcy securities may be60) nor will be securities issued under the "Regulation A+" exemption to be enacted by the SEC pursuant to the Jumpstart Our Business Startups (JOBS) Act.61 Additionally, certain spin-offs not required to be registered pursuant to Staff Legal Bulletin No. 4 also do not result in restricted securities.62 Assuming Lynn received his securities in a private transaction from the REIT, the shares would be restricted.
Conditions for Non-Affiliate Resales
Resales by non-affiliates under Rule 144 are considerably more streamlined than those by affiliates of the issuer. In essence, for non-affiliates who have not held affiliate status within the past 90 days, the only Rule 144 requirement is the holding period. The rule thus offers the majority of investors a simplified pathway to being able to sell restricted securities in six months (for reporting issuers who are current on their periodic reports) or one year otherwise. Under Rule 144, non-affiliates need not concern themselves with filing forms or comparing the amount of their sales to the float or trading volume, or even the restrictions as to sales through brokers and the like. Upon an aggregate of one year after acquisition (including tacking), non-affiliates’ previously restricted securities can be resold freely with no limitations and in an unlimited amount.
Non-affiliates are frequently in a position to take advantage of the tacking principles of Rule 144, under which a non-affiliate holder (who has been such for at least three months) can amass the requisite minimum time for a resale by combining its period of ownership with the period accrued by one or more previous holders from the time each prior party acquired the securities. The SEC Staff has published voluminous interpretative guidance on tacking, primarily in the form of Compliance and Disclosure Interpretations, which should be consulted prior to making any tacking conclusions. As a fundamental concept, tacking is not available under circumstances that suggest, in the determination of the SEC Staff, a new investment decision. Hence, tacking, in general, is disqualified in cash transactions. Significantly, tacking is not permitted in the context of a purchase of restricted securities from an affiliate of the issuer,63 but is permitted for gifts of securities from an affiliate64 and for trusts, estates, and beneficiaries of an affiliate.65 Securities received in a cashless conversion or exchange66 or cashless exercise of warrants/options67 are generally deemed acquired when the initial securities were acquired. The same principle of tracing the date of acquisition of the original underlying securities generally applies for stock splits/dividends68 and securities acquired pursuant to anti-dilution rights.69
Moreover, tacking as to securities of the predecessor issuer is also allowed in connection with certain holding company reorganizations.70 Pledgees can tack on to their pledgors’ holding period when such pledgees sell the pledged securities upon a default by the borrower, except if the securities were pledged without recourse and the pledgor was the borrower under the obligation in question.71 In addition, persons receiving restricted securities in a spin-off may tack on to the parent’s holding period, provided the parent is a closely held investment entity.72
Removal of Restrictive Legends
An additional concern for investors and issuers is the placement and removal of restrictive legends on securities. Such warning statements are commonly placed on restricted shares or bonds advising that any resale or transfer of the security requires registration or an exemption from registration; such legends are rarely inserted on control securities. Legended securities are not eligible for The Depository Trust Company’s clearing system and usually have their own Committee on Uniform Securities Identification Procedures number (commonly referred to as a "CUSIP" number).
Transfer agents will typically remove such a legend upon an opinion of issuer’s counsel that the resale is exempt from the Rule 144 holding period, notice, and manner of sale requirements (and sometimes a concurrence letter from the company).73 This process also generally requires certifications from the reseller, as well as the agent in some cases. Except when removal is requested by a non-affiliate holder in connection with a specific proposed resale, prudent practice suggests retaining legends on security certificates for one full year, even for securities of reporting issuers, which would otherwise be eligible for resale after six months assuming the Rule 144 conditions are met. Such an issuer could become delinquent in its filings, thus eliminating eligibility for resale at the six-month mark.
Finally, it is instructive to note the SEC’s statement in an online publication for investors: "If a dispute arises about whether a restrictive legend can be removed, the SEC will not intervene. Removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends."74
Legend removal can sometimes be compared to "herding cats," and holders who are keen to sell shares quickly should manage expectations, as the process involves back- and middle-office processes within transfer agents and broker-dealers. Rarely can a legend be removed and shares be free to trade on a same-day basis.
While the rule may sometimes be overlooked as more in the nature of a technical or ancillary measure, the SEC’s progressive relaxation of the holding period requirement, extensive fact-based and situation-based hypothetical interpretations by the SEC Staff, and other reforms of Rule 144 have allowed the provision to contribute, in no small way, to overall corporate financing activity in the United States and overseas. Without tools such as Rule 144 permitting certain and relatively prompt resale of restricted securities, the feasibility of private capital raising efforts might be sharply diminished, as market participants would hesitate to invest or may demand a greater discount for more illiquid investments.
By authorizing "outside the box" investor resale, Rule 144 – together with other avenues such as Rule 144A, "Section 4(a)(1½)" and Regulation S – facilitates exempt issuances of debt and equity by U.S. and non-U.S. companies. In this sense, the post-2008 Rule 144, as well as other recent reforms to the securities laws,75 have served to promote private financing over more costly and burdensome public offerings. Such role in promoting liquidity (whether of restricted or control securities) ? one of the most crucial criteria for any investor ? has cemented the rule’s enduring value since its adoption in 1972, making it all the more appropriate that, in the words of an influential commentator, "Rule 144 is widely viewed as one of the Commission’s most successful undertakings."76
1 See, e.g., Vlad Ivanov & Scott Bauguess, SEC Div. of Risk, Strategy, & Fin. Innovation, Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption (2012), available at http://www.sec.gov/info/%20smallbus/acsec/acsec103111_analysis-reg-d-offering.pdf.
2 As the SEC stated in its release adopting changes to Rule 144 effective in 2008, "Investors, suppliers, or employees who are restricted from selling securities and who cannot hedge their positions are generally exposed to more risk than those who are not subject to such limitations, and generally require higher compensation (or a larger discount with respect to the securities) for this risk." SEC Rel. No. 33-8869 (2007) (hereinafter "2008 Adopting Release").
3 Such costs include not only advisor and filing fees associated with a public offering, but also the significant reporting obligations and more intangible but no less material effects of operating a business under continual public investor and analyst scrutiny, including pressures on short-term earnings.
4 For an additional discussion of the effects of the liberalization of the holding period and other regulatory requirements relevant to the resale of privately issued securities, see William K. Sjostrom, Jr., Berle IV: The Future of Financial and Securities Markets: The Fourth Annual Symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society: Rebalancing Private Placement Regulation, 36 SEATTLE UNIV. L. R. 1143 (2013).
5 See 2008 Adopting Release.
8 Securities Act Rule 251(b).
9 Rule 144(a)(1). This definition is substantively identical to the definition of "affiliate" in Rule 405.
10 "Affiliate or control status [under the Securities Act] . . . is an area involving factual questions which the staff is not in a position to resolve." SEC Rel. No. 33-6253 (1980). See also First General Resources Company (SEC No-Action Letter 1988), '88-'89 CCH Dec. P 78,836 ("The Division has historically declined to express any view on the affiliation of any person to an issuer of securities on the ground that the question is a matter of fact best determined by the parties and their advisors.").
11 American-Standard (SEC No-Action Letter 1972), '72-'73 CCH Dec. P 79,071.
12 Id. Moreover, the significance of these factors is heightened by the fact that directors, officers, and holders of over 10 percent of any registered class of any equity security of an issuer must file statements disclosing the total ownership of equity securities in the issuer under Section 16(a) of the Exchange Act. Concurrently with adopting the 1997 changes to Rule 144, the SEC also made proposals for additional modifications to the rule, including adopting a "bright-line" test for the definition of "affiliate," SEC Rel. No. 33-7391 (1997), but, as the 2008 Adopting Release notes, the SEC took no further action to adopt such proposals.
13 American-Standard, supra note 11.
14 Rule 144 (preliminary note); SEC, Div. of Corp. Fin., Compliance & Disclosure Interpretations: Securities Act Rules § 530.07 (Jan. 26, 2009) (hereinafter "Compliance & Disclosure Interpretations").
15 Rule 144(b).
16 SEC v. Holschuh, 694 F.2d 130, 137-38 (7th Cir. 1982).
17 Rule 144 (preliminary note).
19 Nevertheless, market participants should remain mindful of the SEC’s statement in the 1972 release originally adopting Rule 144: "[P]ersons who offer or sell restricted securities without complying with Rule 144 are hereby put on notice by the Commission that in view of the broad remedial purposes of the Act and of public policy which strongly supports registration they will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers and other persons who participate in the transactions do so at their risk." SEC Rel. No. 33-5223 (1972).
20 Compliance & Disclosure Interpretations § 128.05.
21 2008 Adopting Release.
22 The 2008 Adopting Release acknowledges that although the term is not defined in Rule 144, this is the typical definition of control securities (citing the 1997 release in which the SEC proposed additional reforms to Rule 144, SEC Rel. No. 33-7391 (1997)); see also American-Standard, supra note 11.
23 2008 Adopting Release.
24 Compliance & Disclosure Interpretations § 529.02.
25 Id. at § 128.01
26 Id. at § 528.02. However, "[a]ny arrangement to return the restricted securities to U.S. markets may indicate . . . an evasive scheme to avoid registration, which would invalidate any safe harbor claim." Id.
27 Rule 144(i). Certain short sales and securities granted to an underwriter as compensation for services in connection with a registered public offering (with exceptions) are also ineligible. Compliance & Disclosure Interpretations § 528.03-04.
28 Rule 144(a)(2).
29 Compliance & Disclosure Interpretations § 529.02.
30 SEC Rel. 33-6188 (1980). Securities sold on behalf of an estate or a beneficiary thereof (if neither is an affiliate of the issuer) are also exempt from the minimum holding period, even where the decedent was an affiliate, Rule 144(d)(3)(vii), except securities acquired by the estate after the death occurred (e.g., through the exercise of an option), Compliance & Disclosure Interpretations § 132.04.
31 Rule 144(d)(1).
32 See, e.g., SEC Rel. 33-6099 (1979) (Question 23).
33 Rule 144(d)(1)(iii). Consideration in the form of promissory notes, other obligations or installment contracts is deemed full payment only to the extent there exists a full right of recourse against the purchaser of the securities, the obligation is secured by collateral (other than the securities purchased) with a fair market value at least equal to the purchase price, and such obligation is discharged by payment in full prior to the resale of the securities. Id. at (d)(2).
34 Compliance & Disclosure Interpretations § 132.07. Restricted securities issued under an employee benefit plan are deemed "acquired" when the securities are allocated to the account of an individual plan participant, even if the securities vest on a future date. SEC Rel. 33-6099 (1979) (Question 22). By contrast, the time of vesting is deemed the date of acquisition for securities granted pursuant to an individually negotiated employment agreement. Compliance & Disclosure Interpretations § 532.06.
35 Compliance & Disclosure Interpretations § 132.11.
36 See, e.g., id. § 532.09.
37 Rule 144(c)(1).
38 Rule 144(c)(2).
39 Rule 144(f)(3)(ii). Securities sold on behalf of an estate or a beneficiary thereof (if neither is an affiliate of the issuer) are also exempt from manner of sale requirements. Id. at (f)(3)(i).
40 Defined in Exchange Act § 3(a)(38).
41 Rule 144(f)(1). In a "riskless principal" transaction, a broker or dealer purchases or sells a security as a principal in the market for its own account to offset a customer order to buy or sell, respectively. See Note to Rule 144(f)(1).
42 Rule 144(f)(2).
43 Rule 144(e)(3)(vii).
44 Rule 144(e)(1). However, the volume limitation does not apply to estates and estate beneficiaries that are not affiliates of the issuer. Note to Rule 144(d)(3)(vi).
45 Compliance & Disclosure Interpretations § 133.05.
46 "[T]he ‘four calendar weeks preceding the filing of notice’ . . . are the four weeks preceding the week in which the [Form 144] is transmitted for filing . . . ." Compliance & Disclosure Interpretations § 133.06.
47 Defined in Exchange Act Regulation NMS.
48 Rule 144(e)(2).
49 Rule 144(e)(3)(vi).
50 Rule 144(e)(3)(iii).
51 Rule 144(e)(3)(i). However, where warrants are traded separately from the underlying security, sales are likewise computed separately under the rule. Compliance & Disclosure Interpretations § 533.06.
52 Rule 144(h)(1).
54 Rule 144(h)(2).
55 Id. No amendment to Form 144 is needed if a holder does not sell the securities referred to in the form, Compliance & Disclosure Interpretations § 136.01, but an amendment should be filed upon a change in broker, id. § 136.06.
56 Rule 144(a).
57 SEC Rel. 33-6099 (1979) (Question 9(a)).
58 For additional examples, see, e.g., Compliance & Disclosure Interpretations §§ 132.08, 528.08, and 529.05.
59 Id. § 128.03.
60 Id. § 528.05.
61 Securities Act § 3(b)(2)(C).
62 SEC, Div. of Corp. Fin., Staff Legal Bulletin No. 4 (CF) (Sept. 16, 1997).
63 Rule 144(a)(3)(i).
64 Rule 144(d)(3)(v).
65 Rule 144(d)(3)(vi)-(vii).
66 Rule 144(d)(3)(ii). Where the securities surrendered in the conversion or exchange did not provide for cashless exercise at the time of acquisition, but the holder subsequently provides consideration in connection with an amendment permitting such cashless exercise, then the securities received are deemed to have been acquired at time of such amendment. Note to Rule 144(d)(3)(ii). A functionally identical rule applies to amendments permitting cashless exercise of warrants and options under Note 1 to Rule 144(d)(3)(x).
67 Rule 144(d)(3)(x). Even a de minimis cash payment in connection with a warrant exercise bars such exercise from being deemed cashless, however. Compliance & Disclosure Interpretations § 132.13.
68 Rule 144(d)(3)(i).
69 Compliance & Disclosure Interpretations § 132.06.
70 Rule 144(d)(3)(ix).
71 Rule 144(d)(3)(iv).
72 SEC, Div. of Corp. Fin., supra note 62. The securities are not required to be registered if the parent has held them for at least two years and the spin-off satisfies the additional conditions in Staff Legal Bulletin No. 4. Id.
73 As the SEC states, "[W]e do not object if issuers remove restrictive legends from securities held by non-affiliates after all of the applicable conditions in Rule 144 are satisfied." 2008 Adopting Release n.65.
74 SEC, Rule 144: Selling Restricted and Control Securities, http://www.sec.gov/investor/pubs/rule144.htm (last updated Jan. 16, 2013); see also 2008 Adopting Release n.65.
75 These include the increased shareholder-based registration and deregistration thresholds applicable to the Exchange Act under Titles V and VI of the JOBS Act. Pub. L. No. 112-106, 126 Stat. 306 (2012).
76 JAMES D. COX ET. AL., SECURITIES REGULATION: CASES AND MATERIALS 362 (6th ed. 2009).Rule