Revisions to Rules 144 and 145 — A Small Entity Compliance Guide1
Introduction
The Securities Act generally requires all sales of securities to be registered, unless the transaction is exempt. A sale of securities by anyone who is not an issuer, underwriter, or dealer is exempt from registration. Although the Securities Act defines “underwriter” to include those who acquire securities from the issuer with a view to distribution, the determination of when securities are acquired “with a view to distribution” is a fact-sensitive inquiry. To provide market participants with greater certainty, Rule 144 of the Securities Act provides a non-exclusive safe-harbor from being treated as an “underwriter”: if a sale of securities meets all applicable Rule 144 requirements, the person selling the securities is deemed not to be an underwriter, making the transaction exempt from the Securities Act’s registration requirements.
In general, Rule 144 requires restricted securities to be held for a particular length of time, and prescribes the conditions which must be satisfied prior to the sale of the securities. The rule also distinguishes between security holders who are affiliates of the company and those who are not, and between companies that report information publicly and those that do not. Finally, information about certain sales made in reliance on Rule 144 must be filed on Form 144.
The Securities and Exchange Commission recently adopted amendments that ease many restrictions in Rule 144. Among other things, these amendments:
- Shorten the holding period for restricted securities of reporting issuers to six months;
- Substantially reduce the restrictions applicable to non-affiliates’ sales of securities;
- For sales of debt securities, eliminate the manner of sale limitations and raise volume limitations;
- Increase the Form 144 filing thresholds; and
- Codify several staff interpretations relating to Rule 144.
The Commission also adopted amendments to Rule 145 of the Securities Act. Rule 145 governs registered transactions in connection with reclassifications of securities, mergers or consolidations or transfers of assets. Before Rule 145 was amended, the Commission presumed affiliates of the target entity to be underwriters in any sale of securities received in the transaction. The Commission eliminated this “presumptive underwriter” provision, except when the transaction involves a shell company. The amendments to Rules 144 and 145 are effective on February 15, 2008.
What are the new Rule 144 holding periods for restricted securities?
Rule 144(d) requires restricted securities to be held for a period of time before they can be resold. Under the amendments, if the issuer of the securities has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for at least 90 days, then the restricted securities of such an issuer are subject to a six-month holding period. Restricted securities of issuers that are not subject to the Exchange Act reporting requirements, however, must be held for one year before any public resale.
How does a non-affiliate resell restricted securities under Rule 144?
The amendments substantially reduce the restrictions applicable to resales of securities by a person who is not an affiliate of the issuer and has not been an affiliate for three months prior to the sale of the securities. Under the amendments, a non-affiliate that has held restricted securities of a reporting issuer for more than six months and less than one year can resell the securities in reliance on Rule 144, if current information (Exchange Act reports) is available about the issuer. After one year, the non-affiliate may freely resell the restricted securities of a reporting issuer without regard to any of the Rule 144 conditions.
A non-affiliate of a non-reporting issuer must hold the securities for one year before any public resale. After one year, a non-affiliate may freely resell such securities without regard to any of the Rule 144 conditions.
How does an affiliate resell securities under Rule 144?
An affiliate of the issuer reselling securities in reliance on Rule 144 must comply with a current public information requirement, a volume limitation, manner of sale requirements (for equity securities), and a requirement to file a notice of proposed sales on Form 144. An affiliate reselling restricted securities must also comply with a six-month or one-year holding period requirement, as applicable.
The following chart summarizes the revised conditions applicable to affiliates and non-affiliates selling restricted securities under Rule 144:
Affiliate or Person Selling on Behalf of an Affiliate | Non-Affiliate (and Has Not Been an Affiliate During the Prior Three Months) | |
|---|---|---|
Restricted Securities of Reporting Issuers | During six-month holding period — no resales under Rule 144 permitted. After six-month holding period — may resell in accordance with all Rule 144 requirements including:
| During six-month holding period — no resales under Rule 144 permitted. After six-month holding period but before one year — unlimited public resales under Rule 144 except that the current public information requirement still applies. After one-year holding period — unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. |
Restricted Securities of Non-Reporting Issuers | During one-year holding period — no resales under Rule 144 permitted. After one-year holding period — may resell in accordance with all Rule 144 requirements, including:
| During one-year holding period — no resales under Rule 144 permitted. After one-year holding period — unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. |
What are the new Form 144 filing thresholds for affiliates’ sales of securities?
The Commission raised the Form 144 filing thresholds so that affiliates must file Form 144 if their proposed sales in reliance on Rule 144 within a three-month period exceed 5,000 shares or $50,000. Non-affiliates no longer need to file Form 144.
How can securities of shell companies be resold?
The Commission also codified a staff interpretation relating to the treatment of the securities of shell companies. Under the amendments, Rule 144 is not available for the resale of securities initially issued by a shell company (reporting or non-reporting) or a former shell company. These securities can be resold only through a resale registration statement, unless certain conditions are met. These conditions are:
- the issuer of the securities has ceased to be a shell company;
- the issuer is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act;
- the issuer has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other than Form 8-K reports; and
- one year has elapsed since the issuer has filed current ‘‘Form 10 information’’ with the Commission reflecting its status as an entity that is no longer a shell company.
If these conditions are satisfied, then the securities can be sold subject to all other applicable Rule 144 conditions.
How did the Commission amend Rule 145?
Except when a shell company is involved, the Commission eliminated the provision that previously deemed parties (other than the issuer) to a reclassification, merger, or asset transfer, or any affiliate of such party, underwriters in any sale of the securities received in the transaction. Under the amendments, this “presumptive underwriter” provision now only applies to any party, other than an issuer, to a Rule 145 transaction involving a shell company (other than a business combination related shell company), and any affiliates of such party.
Those presumed underwriters can resell their securities in accordance with revised resale provisions which require that:
- the issuer is not (or has ceased to be) a shell company, is reporting and has filed the requisite Exchange Act reports and registration statement reflecting the issuer’s status as no longer a shell company; and
- one of the following three conditions is met:
- The securities are sold in accordance with Rule 144’s current public information, manner of sale, and volume limitation requirements and at least 90 days have elapsed since the date the securities were acquired from the issuer in the Rule 145 transaction;
- The seller is not, and has not been for at least three months, an affiliate of the issuer, and at least six months have elapsed since the date the securities were acquired from the issuer in the Rule 145 transaction, and current information regarding the issuer is publicly available; or
- The seller is not, and has not been for at least three months, an affiliate of the issuer, and at least one year has elapsed since the date the securities were acquired from the issuer in the Rule 145 transaction.
Other Resources
The adopting release for the revisions to Rules 144 and 145 can be found on the SEC’s website at http://www.sec.gov/rules/final/2007/33-8869.pdf.
The text of Rules 144 and 145 can be accessed through the “Rules, Regulations, and Schedules” section of the SEC’s website at http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml, and the revised Form 144 can be accessed through the “Securities Act Forms” section of the SEC’s website at http://www.sec.gov/divisions/corpfin/forms/exchange.shtml.
Additional materials regarding Rules 144 and 145 generally are available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.
Contacting the SEC
The SEC’s Division of Corporation Finance is happy to assist small entities with questions regarding Rules 144 and 145. The Division’s Office of Chief Counsel answers questions submitted by e-mail and telephone. You can submit a question by e-mail to cfletters@sec.gov and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Chief Counsel at (202) 551-3500. Questions on other matters concerning small entities may be directed to the Division’s Office of Small Business Policy by e-mail at smallbusiness@sec.gov, or by telephone at (202) 551-3460.
Footnotes
1
This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.