Rule 144 Rule Revisions

Rule 144 under the Securities Act of 1933 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act.  The SEC has recently published final rules amending Rule 144 that substantially reduce the restrictions on the resale of non-registered securities.


The Securities Act requires registration of all offer and sales of securities, unless an exemption from the registration requirement is available.  Section 4(1) of the Securities Act provides an exemption for transaction by any person other than issuer, underwriter, or dealer.  Section 2(a)(11) of the Securities Act defines an underwriter as any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking.

Rule 144 was originally adopted to provide a safe harbor from this definition of “underwriter” to assist security holders in determining whether the Section 4(1) exemption is available for their resale of securities.  If a selling security holder satisfies all of Rule 144’s applicable conditions in connection with a transaction, he is deemed not to be an “underwriter,” and the Section 4(1) exemption would be available for the resale of the securities.

Rule 144 regulates the resale of two categories of securities, restricted securities and control securities.  Restricted securities are securities acquired pursuant to a Rule 144(a)(3) transaction, and control securities are securities held by affiliates of the issuer, regardless of how the affiliates acquired the securities/

SEC Adoption of Changes to Rule 144

The SEC recently published final rules amending Rule 144 to reduce the restrictions on the resale of non-registered securities, with a goal toward increasing the liquidity of privately sold securities and decreasing the cost of capital for all companies, without compromising investor protection.

The amendments to Rule 144:

  • Reduce the Rule 144(d) holding period for restricted securities for both affiliates and non-affiliates of reporting companies from one year to six months.
  • Permit non-affiliates of reporting companies to freely resell securities after the six-month holding period, subject only to the current public information requirement.
  • Permit non-affiliates of non-reporting companies to freely resell securities after the one-year holding period.
  • Eliminate the requirement that non-affiliates file a notice of proposed sale on Form 144.
  • Increase the Rule 144(h) filing threshold for Form 144 on the part of affiliates from 500 shares or $10,000 within a three-month period to 5,000 shares or $50,000 within a three-month period.

Although the SEC did not change the one-year holding period for restricted securities in non-reporting companies, the SEC did eliminate the resale restrictions imposed on non-affiliates of non-reporting companies after the one-year holding period has expired.  Under the new Rule 144, non-affiliates of non-reporting companies (like non-affiliates of reporting companies),  are not subject to any other Rule 144 condition after meeting the one-year holding period.

With regard to reporting companies, the SEC believes that holding securities for six months is a reasonable indication that an investor has assumed the economic risk of investment in those securities, and thus is not an underwriter.  In addition, the SEC believes that it is appropriate to reduce the complexity of resale restrictions that may inhibit sales by, and impose costs on, non-affiliates.

The changes to Rule 144 will take effect on February 15, 2008, and they are applicable to restricted securities and control securities acquired before the effective date of the new rules.

These amendments to Rule 144, by shortening the holding period and eliminating certain other resale restrictions, have the potential to increase the liquidity of privately sold securities and decrease the cost of capital for reporting companies without compromising investor protection.   By reducing the holding period for restricted securities

and simplifying the resale process, the amendments could enable companies to raise capital more often through the issuance of securities in unregistered transactions, such as offshore offerings under Regulation S or other transactions not involving a public offering, rather than through financing structures such as extremely dilutive convertible securities.

By Steve Kronengold and David C. Zuckerbrot. © December 2007.All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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