SEC Rules 144 & 145

Registering sales of stock can be an arduous requirement, especially for relatively small offerings. Generally, resales of restricted stock or securities transferred during mergers and acquisitions are required to be registered with the SEC, regardless of the size of the sale. SEC Rules 144 and 145 make this possible without registration provided that the sale meets certain requirements. If you are planning a stock resale —even in cases where their sale does not need to be registered with the SEC, you should always consult a securities lawyer first to ensure compliance with relevant regulations. Priori Legal can help you find the best attorney for your unique needs.

Understanding Rule 144

SEC Rule 144 provides the conditions under which public resale of restricted securities without registering such a sale with the SEC is permitted. The rule provides a safe harbor to sell common stock, preferred stock, debt securities, asset-backed securities, and nonparticipating preferred stock with restrictions on resale once the restrictive legend has been removed from the stock certificate.

Requirements

There are five requirements that must be met in order to sell restricted securities under the Rule 144 exemption:

  • There must be current public information available about the issuer. There must be adequate public information about the issuer easily available to review, including information regarding the nature of its business, the identity of its officers and directors and its financial statements. For public companies, this means complying with the SEC reporting requirements detailed in the Securities Exchange Act.

  • You must comply with the appropriate holding period. All securities issued by a reporting company (i.e. a company that is required to make public filings with the SEC) must be held at least six months. All securities issued by a non-reporting company must be held at least a year.

  • The sale cannot exceed a certain threshold for trading volume. The number of securities any individual can sell under Rule 144 during any three-month period cannot exceed 1% of the outstanding shares of the same class being sold. If the company is publicly traded, the number of shares sold cannot exceed 1% of the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale.

  • The sale must be carried out as an ordinary brokerage transaction. The sale must be dealt with the same as other routine trading transactions. Also, brokers may not receive more than a normal commission for the transaction, and neither the seller nor the broker can solicit orders.

  • You must file a notice of proposed sale with the SEC when appropriate. You must file Form 144 notifying the SEC of the sale if the sale involves more than 5,000 shares or the aggregate value sold exceeds $50,000 in any three-month period.

Affiliates vs. Non-affiliates

Although the holding period and the public information conditions are required no matter who is selling the securities, the other three requirements are only applicable to affiliates of the issuing company. An affiliate is anyone in a relationship of control— or who has been in a relationship of control within the past three months— with the issuer, such as an executive officer, a director, or large shareholder. Non-affiliates are subject to fewer conditions of sale under Rule 144.

Rule 144 and Shell Companies

Rule 144 cannot be applied to sales of restricted stock and stock held by affiliates if the issuing company is now or ever has been a shell company. A shell company is defined as a company other than an asset-backed issuer that has no or nominal operations, as well as one of the following:

  • no or nominal assets,

  • assets consisting of only cash and cash equivalents, or

  • assets consisting of any amount of cash and cash equivalents and only nominal other assets.

The exception to this rule is if all of the following conditions have been met:

  • the former shell company is no longer a shell with only nominal operations,

  • the issuing company is now subject to the reporting requirements of the Securities Exchange Act,

  • such reports have been filed as appropriate for the last 12 months, and

  • least one year has passed since the time that the issuer filed with the SEC that it is no longer a shell company.

Understanding SEC Rule 145

SEC Rule 145 establishes that exchanges of securities in connection with reclassifications of securities, mergers and acquisitions, consolidations, or asset transfers subject to shareholder vote are subject to securities regulations. Also, Rule 145 establishes a way to sell these securities without registering them with the SEC. The same restrictions established in Rule 144 for restricted stocks apply to those securities defined in Rule 145.  

FAQ

What are restricted and control securities?

These types of securities are subject to special rules associated with their resale. Restricted securities are securities acquired in unregistered, private sales by the issuing company or an affiliate, such as through private placement offerings, Regulation D offerings, and employee stock benefit plans or in exchange for providing start-up capital or professional services. Control securities are those held by an affiliate of the company. These automatically become restricted upon transfer, even if they were not originally restricted when first granted.

What is a restrictive legend how do I get it removed?

Restricted stocks generally have a stamp known as a restrictive legend showing that the securities may not be resold except under certain circumstances—and these cannot be resold even through a Rule 144 offering unless it is removed by an authorized transfer agent. The easiest way to get a restrictive legend removed is to get consent from the issuer in the form of an opinion letter from the issuer's counsel. If the issuer does not consent to the removal of a restrictive legend, you must resolve the dispute under processes dictated by the state law applicable where the securities were originally sold. This can be complex, so it is best to consult a securities lawyer for specialized counsel.

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