The SEC has made significant changes to Rule 144 and 145 that are intended to facilitate public and private capitalraising actions and ease disclosure requirements for small companies. Specifically, the SEC has shortened the holding period requirement under Rule 144 for “restricted securities” of issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) to six months.

The rule changes also reduce the restrictions applicable to the resale of securities by non-affiliates. In addition, the rule changes amend the manner of sale requirements and eliminate them with respect to debt securities, amend the volume limitations for debt securities, increase the Form 144 filing thresholds, and codify several staff interpretations that relate to Rule 144. Finally, the SEC has eliminated the presumptive underwriter provision in Rule 145, except for transactions involving a shell company, and revised the resale requirements in Rule 145(d).

The rule changes, described below, are effective sixty days after publication in the Federal Register and apply to securities acquired both before or after the effective date.

Amendments to Holding Period for Restricted Securities

Six-Month Rule 144(d) Holding Period For Reporting Companies

  • The SEC has reduced from one year to six months, the holding period requirement for restricted securities of issuers that have been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days before the Rule 144 sale. Restricted Securities of non-reporting issuers remain subject to a one-year holding period requirement.

Reduction of Conditions Applicable to Non-Affiliates

  • Non-affiliates may freely resell the restricted securities after the applicable holding period without any volume or manner of sale restrictions, except that non-affiliates of reporting issuers are still subject to the public information requirements of Rule 144(c) for an additional six months after the initial six month holding period.

Tolling Provision

  • Under the rule changes, there is no tolling provision that would suspend the holding period where the holder had a “short position” or “put equivalent position” in the issuer’s security.

Attached as Annex I is a chart contained in the SEC release summarizing the new resale restrictions.

Amendments to the Manner of Sale Requirements Applicable to Resales by Affiliates

  • The SEC has adopted two changes to the manner of sale requirements that apply to resales of equity securities of affiliates under Rule 144. The amendment permits the resale of securities through riskless principal transactions in which trades are executed at the same price, exclusive of any explicit disclosed markup or markdown, commission equivalent, or other fee, and the rules of a selfregulatory organization permit the transaction to be reported as riskless. The second amendment permits a broker to insert bid and ask quotations for the security in an alternative trading system, as defined in Rule 300 of Regulation ATS, provided that the broker has published bona fide bid and ask quotations for the security in the alternative trading system on each of the last twelve business days.

Changes to Rule 144 Conditions Related to Resales of Debt Securities by Affiliates

  • The SEC has eliminated the manner of sale requirements for resales of debt securities held by affiliates. The definition of debt securities under Rule 144 includes non-participatory preferred stock and asset-backed securities in addition to other types of nonconvertible debt securities.
  • The SEC has also raised the Rule 144(e) volume limitations for debt securities to permit the resale of debt securities in an amount that does not exceed ten percent of a tranche (or class when the securities are non-participatory preferred stock), together with all sales of securities of the same tranche sold for the account of the selling security holder within a three-month period.

Increase of Thresholds that Trigger the Form 144 Filing Requirements for Affiliates

  • The SEC has raised the thresholds that trigger the Form 144 Filing Requirements to cover sales of 5,000 shares or $50,000 within a three-month period. The SEC has also indicated that it intends to issue a release in the future which would allow affiliates that are subject to both the Form 4 and Form 144 filing requirements greater flexibility in satisfying their requirements.

Codification of Staff Positions

The SEC has codified several interpretive positions issued by the staff of the Division of Corporation Finance.

Securities Acquired under Section 4(6) of the Securities Act are Considered “Restricted Securities”

  • Section 4(6) provides for an exemption from registration for an offering that does not exceed $5,000,000 that is made only to accredited investors, and that does not involve any advertising or public solicitation by the issuer or anyone acting on the issuer’s behalf and for which a Form D has been filed. The SEC has added securities acquired under Section 4(6) to the definition of restricted securities. Tacking of Holding Periods When a Company Reorganizes into a Holding Company Structure
  • The SEC has codified the Division of Corporation Finance’s position that permits security holders to tack the Rule 144 holding period in connection with transactions made solely to form a holding company, where the following conditions are met: (a) the newly formed holding company’s securities were issued solely in exchange for securities of the predecessor company as part of a reorganization of the predecessor company into a holding company; (b) security holders received securities of the same class evidencing the same proportional interest in the holding company as they held in the predecessor company, and the rights and interests of the holders of such securities are substantially the same as those they possessed as holders of the predecessor company’s securities; and (c) immediately following the transaction, the holding company had no significant assets other than securities of the predecessor and its existing subsidiaries and had substantially the same assets and liabilities on a consolidated basis as the predecessor had before the transaction.

Tacking of Holding Periods for Conversions and Exchanges of Securities

  • The SEC has codified the Division of Corporation Finance’s position that, if securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms.

Cashless Exercise of Option Warrants

  • The SEC has codified the Division of Corporation Finance’s position that, upon a cashless exercise of options or warrants the newly acquired underlying securities are deemed to have been acquired when the corresponding options or warrants were acquired, even of the options or warrants originally did not provide for cashless exercise by their terms. Aggregation of Pledged Securities
  • The SEC has added a note that clarifies how a pledgee of securities should calculate the Rule 144(e) volume limitation condition. The note codified the Division of Corporation Finance’s position that, so long as the pledgees are not the same “person” under Rule 144(a)(2), a pledgee of securities may sell the pledged securities without having to aggregate the sale with sales by other pledgees of the same securities from the same pledgor, as long as there is no concerted action by those pledgees.

Treatment of Securities Issued by “Reporting and Non-Reporting Shell Companies”

  • The SEC has codified the Division of Corporation Finance’s position that prohibits reliance on Rule 144 for the resale of securities of a company that is a reporting or non-reporting shell company. Under the rule, Rule 144 will not be available for the resale of securities initially issued by either a reporting or non-reporting shell company (other than a business combination shell company) or an issuer that has been at any time previously a reporting or non-reporting shell company, unless the issuer is a former shell company that: (a) had ceased to be a shell company; (b) is subject to Exchange Act reporting obligations; (c) has filed all required Exchange Act reports during the preceding twelve months; and (d) at least ninety days have elapsed from the time the issuer filed “Form 10 information” reflecting the fact that it had ceased to be a shell company before any securities were sold under Rule 144. Under the new rule, there is a one year holding period commencing from the time Form 10 information is filed before a security holder can resell any securities of an issuer that was formerly a shell company subject to Rule 144 conditions.

Representations Required from Security Holders Relying on Exchange Act Rule 10b5-1

  • The SEC has codified the Division of Corporation Finance’s position that permits Form 144 filers to make the required representation that he or she “does not know any material adverse information in regard to the current and prospective operations of the issuer of the securities to be sold which has not been publicly disclosed” as of the date they adopted written trading plans or gave trading instructions that satisfied Rule 10b5-1.

Amendments to Rule 145

  • The SEC has eliminated the presumptive underwriter provision of Rule 145 that required affiliates to comply with Rule 144 with respect to registered securities acquired in a business combination transaction, except for shell companies.

Other Amendments

Regulation S Distribution Compliance Period for Category Three Issuers

  • The SEC has amended Regulation S to conform the one-year distribution compliance period in Rule 903(b)(3)(iii) for Category 3 issuers (U.S. reporting issuers) to the new six-month Rule 144(d) holding period.

Underlying Securities in Asset-Backed Securities Transactions

  • The SEC has amended Rule 190 to clarify that two-year holding period for restricted securities that are to be resecuritized in publicly registered offering will remain in place despite changes to the Rule 144 holding period.

Annex 1 is on the back page.