On June 22, 2007, the U.S. Securities and Exchange Commission (SEC) released proposed amendments to Rules 144 and 145 governing safe harbor exemptions related to the resale of unregistered securities. The proposed amendments demonstrate the SEC’s continued focus on balancing market efficiency with investor protection. The proposed amendments to Rule 145, although not the focus of the SEC’s proposals, are particularly important to the mergers and acquisitions (M&A) community, in light of its application to securities issued in connection with business combination transactions.


Section 4(1) of the Securities Act of 1933, as amended, provides exemptions from the registration requirements of the Act and the associated resale restrictions for transactions by any person who is not deemed an issuer, underwriter or dealer.[1] The Act defines an underwriter broadly, as any person who has purchased securities from an issuer with a view to distribution.[2] Rule 144 provides a safe harbor exemption from being deemed an underwriter if the transaction satisfies certain objective criteria. Rule 145 regulates securities issued in connection with business combination transactions and provides a narrower exemption from being deemed an underwriter.[3] Both safe harbors are intended to balance investor protection against the need for market liquidity and capital formation.

Rule 144’s Reduced Holding Period

Currently, one criterion for exemption under Rule 144 is the expiration of a holding period, the length of which varies based on the type of securities and the status of the holder. In general, the proposed amendment to Rule 144 would shorten the holding period under Rule 144(d) from not less than 12 months to six months for restrictedsecurities held by affiliates and non-affiliates of SEC-reporting companies.[4] The effect of the reduced holding period would be to enable small businesses to raise capital more efficiently through the issuance of unregistered securities, because purchasers of restricted securities expect, and receive, an illiquidity discount on restricted securities, thereby preventing companies from receiving full value on the securities issued. In this respect, it is expected that reducing the holding period to six months would limit the discount to be applied to unregistered securities.[5] The proposed rules do not reduce the holding period for non-reporting companies, which remains at one year, due to the disparity of information available for non-reporting companies. The SEC’s release explains that the lack of information on non-reporting companies increases risk to investors and, therefore, requires additional safeguards.[6]

With regard to securities hedged by a put-equivalent position (e.g., a short position), the amendments provide that the holding period would be tolled (i.e., suspended) for any period that such securities were hedged, up to a maximum of 12 months.[7] In its release, the SEC expressed concern that certain hedging activities, designed to shift the economic risk from the security holder, make it more difficult to determine if the investor has held the security as an investment without a view to distribution. As a result, the SEC noted that the reduced six-month holding period would be insufficient to show that an investor has accepted the economic risk of an investment in unregistered securities.[8]

Volume, Manner of Sale, Current Information and Reporting Requirements

Currently, Rule 144 allows only limited resales by non-affiliates after one year, subject to volume, manner of sale, current information and reporting requirements. Free resales (i.e., those not subject to these requirements) are permitted only after two years. The proposed amendments would effectively eliminate this distinction and permit free resales by non-affiliates after expiration of the applicable holding period, subject only to a one-year current information requirement.[9] Non-affiliate status is available to any person or entity that has not been an affiliate of the issuer for a period of three months from the date of resale.>[10]

For affiliates, the proposed amendments would eliminate the manner of sale restriction after expiration of the applicable holding period with respect to fixed income securities but not equity securities, in general.[11] In addition, because of inflation the proposed amendments would raise the thresholds for triggering the reporting requirements applicable under Rule 144, from 500 securities or an amount more than $10,000 over a three-month period, to 1,000 securities or an amount more than $50,000 over a three-month period.[12] Note that due to the proposed reduction of Rule 144 requirements applicable to non-affiliates, this proposed amendment applies only to affiliates of the issuer that are otherwise subject to the reporting requirements of Rule 144.[13]

Proposed Changes to Rule 145

Rule 145 provides a narrow safe harbor for the resale of restricted securities obtained in connection with business combination transactions. Rule 145 provides that exchanges of securities in connection with reclassifications of securities, mergers or consolidations or transfers of assets that are subject to shareholder vote constitute sales of securities subject to the registration requirements of the Act.[14] Under Rule 145(c), any party to the transaction, other than the issuer, or any affiliate of such party at the time of relevant shareholder vote, is presumed to be an underwriter.[15] In general, the proposed amendments would eliminate this presumption, except for shell companies that are not business combination-related shell companies, and permit securities held by certain of these parties to be freely transferable without restriction under Rule 145.[16]

In addition to these changes, the SEC proposes to harmonize the resale restrictions of Rule 145 with the new resale restrictions of Rule 144 with respect to shell companies.[17]


The proposed rules were subject to a 60-day comment period that ended on September 4, 2007. If adopted, the rules will allow for significantly broader application of the Rule 144 and Rule 145 exemptions. However, it is difficult to ascertain the extent to which the SEC will adopt the proposed amendments. Nonetheless, the proposed amendments make clear that the SEC is moving in the right direction, easing the resale and manner of sales restrictions for capital rainsing and M&A transactions.