The SEC has adopted significant amendments to Rule 144 which will increase the liquidity of privately placed securities and ease the burden on issuers caused by having to grant burdensome registration rights. The amendments shorten the holding periods before affiliates and non-affiliates may sell restricted securities and otherwise loosen restrictions on the public resale of equity and debt securities acquired in private placements1. See the attached charts for a summary of the changes.
The new rules become effective on February 15, 2008 but are applicable to securities acquired before or after that date. Key changes include the following:
- Shortened Holding Periods. Under the new rules, debt and equity securities acquired from an issuer in a private placement may be resold freely subject to the following requirements:
- For reporting companies, non-affiliates may sell freely after six months subject only to the current public information requirement (which requirement disappears after one year)2. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements, which are described more fully in the attached charts.
- For non-reporting companies, non-affiliates may sell freely after one year, and affiliates may sell after one year subject to the Rule 144 requirements described above.
- Elimination of Most Requirements for Non-Affiliates. Non-affiliates will no longer be subject to Rule 144’s volume, manner of sale or notice requirements. After six months, non-affiliates may freely sell securities acquired in a private placement from a reporting company, subject only to compliance with the current public information requirement until the end of the one year period following acquisition. After one year, the securities may be freely sold with no requirements (for both reporting and nonreporting companies). Accordingly, public companies will want to consider providing significantly fewer or no registration rights to non-affiliates if the intention is for the purchaser to hold the securities for at least six months.
The rule amendments make it increasingly beneficial to be considered a non-affiliate rather than an affiliate. For reporting companies, the distinction now becomes relevant after six months rather than two years as under the previous rules. Affiliate status under the securities laws is generally a facts and circumstances test looking at whether a person directly or indirectly controls a company. In order to no longer be deemed an affiliate, holders of equity securities may consider resigning from boards of directors or decreasing the size of their equity position more quickly than previously.
- Relaxation of Requirements for Sales of Debt Securities. The rule changes make Rule 144 much more attractive for the sale of debt securities. For reporting companies, purchasers of privately placed debt securities who are non-affiliates can freely resell these securities after six months, subject only to compliance with the current public information requirement which only continues for one year. Affiliates can also resell debt securities of reporting companies after six months (one year for non-reporting companies), subject to compliance with Rule 144, but the SEC has eliminated the manner of sale requirement and introduced an alternative volume limitation equal to 10% of the tranche of debt securities during any three-month period.
These changes should have a significant impact on the requirement to effect an Exxon-Capital exchange offer for Rule 144A debt securities. Due to the 2-year holding period required previously by Rule 144, underwriters typically would require issuers of Rule 144A debt securities to complete a registered exchange offer, often within 365 days of the closing of the Rule 144A offering. However, with the reduction of the holding period to one year for non-reporting companies (and six months for reporting companies), and the elimination of most other Rule 144 requirements for non-affiliates, the registered exchange offer may no longer be necessary because holders will already have freely tradeable securities as a matter of law after the end of the holding period. Given the additional flexibility in reselling restricted securities, the market will need to consider whether the information and transparency benefits of SEC registration outweigh the additional cost to issuers if filings with the SEC are required. Moreover, if an exchange offer is not required, underwriters and issuers will need to consider including additional informational covenants that will provide debt investors with information substantially consistent with what they would have received upon consummation of an exchange offer. For example, issuers may be required to post information on their website, release information to Bloomberg or other wire services, and/or hold quarterly conference calls.