Overview
The Securities and Exchange Commission has recently adopted significant amendments to Rule 144 which will become effective February 15, 2008. Although Rule 144's restrictions will be liberalized in several important ways, the scope of its coverage is not affected by the amendments. As before, Rule 144 is a safe harbor permitting the unregistered public sale of both "control securities" and "restricted securities." The following summary assumes that the securities are those of a reporting company under the Securities Exchange Act of 1934, as holding periods and other limitations will differ for securities of a non-reporting company.
Control Securities -vs- Restricted Securities
To understand how the amendments to Rule 144 will specifically affect affiliates (i.e., directors, executive officers or principal shareholders) of an issuer, it is important to understand the difference between "control securities" and "restricted" securities."
- Control Securities include: securities that are held by a director, executive officer or principal shareholder of an issuer
- Restricted Securities generally include: securities acquired directly from an issuer in a private placement‚ securities acquired directly from a director or executive officer of an issuer (including shares that have been gifted or pledged)
Changes to Rule 144
Control Securities held by Affiliates. In the case of "control securities" held by affiliates, the restrictions imposed by Rule 144 have been relaxed as follows:
- Rule 144(g), which defines "brokers transaction" for purposes of complying with Rule 144's manner of sale requirements, has been liberalized. A broker will be able to include bid and ask quotations for the security in an alternative trading system, so long as the broker has published bona fide bid and ask quotations for the security in such system for each of the 12 previous trading days.
- In the event of "restricted securities" held by an affiliate, the minimum holding period is reduced from one year to six months. Following the six month holding period, an affiliate may resell restricted securities in accordance with Rule 144's limitations and conditions. (Note: Control securities that are not "restricted securities" are not subject to a holding period).
- The Form 144 filing threshold has been raised. Form 144 will need to be filed only if the intended sale exceeds either 5,000 shares (up from 500) or $50,000 (up from $10,000) within a three month period. However, please note that a Form 4 must still be filed in a timely manner.
- The remaining restrictions for sales by affiliates under Rule 144 (current public information about the issuer and volume limitation) remain the same.
Restricted Securities held by Non-Affiliates. A "non-affiliate" for purposes of Rule 144 is a person who is not an affiliate of the issuer and has not been an affiliate of the issuer during the preceding 90 days.
In the case of "restricted securities" held by non-affiliates, the restrictions imposed by Rule 144 have been relaxed as follows:
- The minimum holding period is reduced from one year to six months.
- Non-affiliates of the issuer may sell unlimited amounts of restricted securities under Rule 144 after the six month holding period, subject only to Rule 144's "current public information" requirement.
- Non-affiliates of the issuer may sell restricted securities without any conditions after a one year holding period (reduced from the current two year period).
- Form 144 notice requirements are eliminated for sales by non-affiliates.
Gifts
As has always been the case, affiliates may gift their shares, but the donee stands in the shoes of the affiliate and takes on the same restrictions imposed on the affiliate. Since the shares received by the donee are "restricted," the securities are subject to a holding period. However, under the amended Rule 144, the holding period has been reduced to one year. Once the shares have been held for one year, and provided such person as not been an "affiliate" of the issuer for at least three months, the shares are freely tradable. In determining the one year holding period, the donee may "tack" on the period in which the affiliate owned the shares.
Conclusion
Despite the liberalization of certain of its requirements as summarized above, Rule 144 remains a complex and potentially confusing regulation. We will be happy to assist you with any questions that may arise in connection with Rule 144 or other securities related matters. Please feel free to contact us.