In an initiative to modernize and enhance capital raising for public and private companies, the Securities and Exchange Commission voted on November 15, 2007 to shorten the holding periods and simplify the compliance standards applicable to restricted securities under Rule 144 and Rule 145.

Background

Rule 144 is a key exemption under the Securities Act of 1933 affecting the liquidity and transferability of securities. The rule permits a person who acquires “restricted” securities in a non-registered offering or an affiliate who holds restricted “control” securities to resell without being deemed a statutory underwriter engaged in a distribution. In the absence of compliance with Rule 144 or another exemption, securities must be resold through a registration statement pursuant to Section 5 of the 1933 Act. To constitute an exempt Rule 144 transaction, the resale of securities must satisfy strict holding periods and other limitations. Prior to the SEC’s amendments, Rule 144 mandated that a non-affiliate hold restricted securities for one year to engage in limited resales and two years to engage in essentially unlimited Rule 144(k) resales. Affiliates, in turn, also could engage in limited resales after one year (but may not rely on Rule 144(k) for unlimited resales). Rule 145 extends similar principles to securities acquired in a business combination transaction.

Rule 144

As amended, Rule 144(d) will decrease the base holding period to (i) six-months for restricted securities of public issuers current in their reporting and to (ii) twelvemonths for restricted securities of private issuers and non-current public issuers.

Thereafter, non-affiliates may resell without any limitation or Form 144 filing. While also benefiting from the same shortened holdings periods, securities held by affiliates remain subject to limits on resale. Yet the manner of resale limitations are relaxed for equity securities and eliminated for debt securities. Further, the Rule 144(e) volume provisions now will contain a new alternative test permitting the resale of up to 10 percent of a tranche in any three month-period. Moreover, a raised threshold for affiliate Form 144 filings will now trigger at resales exceeding 5,000 shares or $50,000. The SEC opted against combining Form 144 and Form 4, but will revisit the concept as part of a separate project.

In addition, amended Rule 144 simplifies and streamlines the Preliminary Note and other rule provisions. The SEC also codified certain staff interpretations of Rule 144 governing matters such as tacking holding periods in exchanges and reorganizations.

Notably, the SEC did not adopt a proposal to toll the holding period in the event of hedging transactions.

Rule 145

Consistent with its relaxation of Rule 144, the SEC likewise adopted amendments to Rule 145. Specifically, the Rule 145(c) “presumptive underwriter” doctrine has been eliminated except with respect to transactions involving blank check or shell companies. As a result, affiliates of a target in a business combination may more readily resell the issuer securities received as consideration in accordance with revised provisions in Rule 145(d).

Impact

The Rules 144 and 145 amendments will be effective 60 days after publication in the Federal Register. Representing the most significant revisions for resale transactions since 1997, the SEC’s amendments should prompt issuers and their counsel to reassess key areas relevant to restricted securities:

  • In weighing whether to go public or private, management should factor in the six-month advantage to freely resell restricted securities in public companies under Rule 144.
  • Public companies must maintain effective disclosure controls and procedures to ensure remaining current in their reporting obligations so shareholders may benefit from the six-month holding period.
  • The ability of investors to freely resell securities in a shortened period signifies that companies may be able to negotiate a smaller discount to market price when selling unregistered securities in an exempt offering, such as in accordance with Regulation D.
  • For companies negotiating an unregistered offering of securities, the shortened Rule 144 holding period also signifies that some investors may not require resale registration rights at all. 
  • Companies with existing effective resale registration statements may be able to terminate the offering sooner than otherwise contemplated once the securities are eligible to be freely resold under Rule 144.
  • Insiders, investment banks, and market professionals should evaluate shortened holding periods in negotiating lock-up agreements and calculating potential liquidity under Rules 144 and 145.
  • Management and counselors in business combinations should more favorably evaluate restricted securities as acquisition currency in the absence of Rule 145’s presumptive underwriter doctrine.
  • Given the increased attractiveness to more easily resell restricted securities, compliance officers (including transfer agents, banks, and brokers) should exercise additional care to ensure adherence to Rule 144, including carefully evaluating tacking and affiliate status questions.