On November 1, 2016, the SEC issued a no-action letter with respect to the required Rule 144 holding period after the exchange of partnership interests in an umbrella operating partnership (OP units) into shares of its parent corporation (Corporation shares) in an up-C structure (see our prior post and Practice Pointers on up-Cs).
Rule 144 lists the conditions under which restricted and control securities may qualify for public resale under a safe harbor exemption from registration. Among other requirements, Rule 144(b) states that an issuer may rely on the safe harbor if the holding period requirement set out in Rule 144(d)(1) has been satisfied. The holding period requirement may be between six months and one year depending on the issuer’s reporting requirements, and generally commences at the time a person acquires a security.
The SEC’s interpretative guidance clarifies that for purposes of Rule 144(d)(1), the holding period for Corporation shares issued in up-C transactions consistent with the below conditions commences upon the earlier acquisition of the OP units. The SEC noted the following conditions in reaching this conclusion: (i) the OP unit holders paid the full purchase price for the OP units at the time they were acquired from the umbrella operating partnership; (ii) the up-C governing documents contemplate and provide the terms for the exchange of OP units for Corporation shares such that the OP unit holder has the same economic risk as if it were a holder of the Corporation shares during the entire period it holds the OP units; and (iii) no additional consideration is paid by the OP unit holders for the Corporation shares. The no-action letter can be found here.
This no-action letter relief is consistent with the Staff’s relief relating to REITs. Given the popularity of the up-C structure, especially for private equity-backed IPOs, the relief will be quite useful and makes the up-C format more compelling.