On November 15, 2007, the Securities and Exchange Commission (the “Commission”) adopted significant amendments to Rule 144 and Rule 145 under the Securities Act of 1933, as amended, largely as proposed (the “Amendments”). The Commission believes the Amendments will increase the liquidity of privately sold securities and facilitate capital formation. Among other important changes, the Amendments significantly reduce the required holding period for affiliates and non-affiliates that seek to resell restricted securities of reporting companies and considerably lessen the other Rule 144 requirements applicable to resales by non-affiliates. The Amendments will be effective sixty days after their publication in the Federal Register.
The Amendments include the following principal changes: Rule 144
- Affiliates (i.e., generally persons who are directors, officers or more than 10 percent shareholders) may resell:
- restricted securities of reporting companies after a six-month holding period (previously one year) if the other Rule 144 conditions relating to current public information, volume limitations, manner of sale and notice of sale are satisfied; and
- restricted securities of non-reporting companies after a one year holding period (previously one year as well) if the other Rule 144 conditions relating to current public information, volume limitations, manner of sale and notice of sale are satisfied.
- So long as they have not been affiliates for at least three months, non-affiliates (i.e., generally persons who are not directors, officers or more than 10 percent shareholders) may resell:
- restricted securities of reporting companies after a six-month holding period (previously one year) if the Rule 144 condition relating to current public information is satisfied and, after one year, without any restrictions; and
- restricted securities of non-reporting companies after a one-year holding period (previously two years) without any restrictions.
- The Form 144 filing thresholds for affiliates have been increased from 500 shares or an aggregate sales price of $10,000 to 5,000 shares, or $50,000. The Form 144 filing requirement has been eliminated for non-affiliates.
- The manner of sale limitations under Rule 144 have been eliminated for resales of debt securities, including non-participating preferred stock and asset-backed securities that are to be treated similarly to debt securities. In addition, although not proposed, at the suggestion of commenters, the Amendments relaxed the volume limitations for debt securities by adding a new alternative test that would permit the resale of up to 10 percent of a tranche of debt securities in any three-month period.
- Certain staff interpretations relating to Rule 144 have been codified, including:
- tacking of holding periods when a company reorganizes into a holding company structure;
- tacking of holding periods for conversions and exercises of securities;
- tacking of holding period with respect to cashless exercise of options and warrants that were purchased for cash or property;
- treatment of securities issued by reporting or non-reporting shell companies;
- aggregation of securities for purposes of the volume limitations when sold by a pledgee of securities; and
- changes to representations in Form 144 required from security holders relying on previously adopted written trading plans or prior trading instructions.
- The presumptive underwriter provision under Rule 145 has been eliminated, except with respect to transactions involving blank check or shell companies.
- The resale provisions of Rule 145(d) have been revised so that persons and parties presumed underwriters may resell their securities to the same extent that affiliates of a shell company may resell their securities under Rule 144.
With respect to asset-backed securities, the Commission has retained the current two-year period for resecuritization of privately placed debt or other assetbacked securities that do not require registration of the underlying securities. This two-year period conforms with the current requirements of Rule 190 of the Commission’s Regulation AB.
The Commission did not adopt a proposed “tolling” provision under Rule 144 that would have required the tolling, or suspension, of the holding period for restricted securities of reporting companies while an affiliate or non-affiliate is engaged in certain hedging transactions. The Commission’s staff indicated that they were persuaded by public commenters that the tolling provision would unduly complicate Rule 144 and require security holders and intermediaries to incur significant costs to monitor hedging activities to comply with the provision in the absence of strong evidence that hedging activity has resulted in abuses in the context of Rule 144. The staff will continue to monitor hedging activities of holders of restricted securities and revisit the issue if necessary.
In the proposing release for the amendments to Rule 144, the Commission had solicited comments on how best to coordinate the Form 144 filing requirement with the filing requirements under Section 16 of the Securities Exchange Act of 1934 (i.e., Forms 3, 4 and 5). The Amendments did not contain any provisions intended to effect that coordination effort. Nevertheless, the staff of the Commission has put that effort on its list of near term topics to be addressed in future rulemaking activities.
The Commission’s amendments to Rule 144 are the most significant in over a decade. The complete text of the Commission’s final rule release is expected to be available in the near future from the Commission at its website at http://www.sec.gov/rules/finalshtml.