On June 22, the SEC published in Release No. 33-8813 proposals to revise Rules 144 and 145 under the Securities Act of 1933. The proposals would liberalize many restrictions on resales of restricted securities and securities held by affiliates, and codify various interpretations by the SEC staff. Under the proposals, a non-affiliate who has not been an affiliate during the preceding three months would be able to sell under Rule 144 unlimited amounts of restricted securities of a reporting company after holding the securities for six months (as contrasted to the two-year holding period currently required for unlimited sales). Affiliates also could sell restricted securities of a reporting company after a six-month holding period, but generally would continue to be subject to the volume limitations and other requirements of the rule. The Rule 145 proposals would eliminate presumptive underwriter status for affiliates of all companies, other than shell companies, who acquire securities in a Rule 145 business combination or similar transaction. The comment period for the proposals will close on September 4, 2007.
Rule 144 Resales of Restricted Securities and Securities Held by Affiliates
Rule 144 provides a safe harbor from registration under the Securities Act for resales of restricted securities and securities held by affiliates that satisfy the applicable conditions of the rule. (Restricted securities are securities acquired from the issuer or an affiliate in a private offering or one of the several other types of exempt offerings specified in the rule.) The proposals, which would recast the rule in plain English, are described below.
The SEC is proposing to simplify the lengthy Preliminary Note to the rule by replacing the detailed explanation of the legal theory underlying the rule with a straightforward two-paragraph statement of the rule’s principal effects. Among other things, the revised Preliminary Note would make clear that (1) the rule provides a safe harbor from the definition of the term “underwriter” for a seller who complies with the applicable conditions of the rule, (2) the buyer of restricted securities sold in compliance with the rule will receive securities that are not restricted, and (3) the rule is not the exclusive means of selling restricted or affiliate securities. The last item reflects the position presently expressed in paragraph (j) of the rule, and therefore would permit that paragraph to be deleted.
The SEC is proposing to expand the definition of “restricted securities” in Rule 144(a)(3) to include securities acquired from the issuer in an offering to accredited investors that is exempt under Section 4(6) of the Securities Act.
Conditions to be Met
Non-Affiliates. Under the proposals, non-affiliates who have not had an affiliate relationship with the issuer during the preceding three months could sell unlimited amounts of restricted securities of a reporting company if the company is in compliance with the reporting requirements and the non-affiliate has satisfied a holding period of six months from the date the securities were acquired from the issuer or an affiliate. (A reporting company is one that has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for at least 90 days.) A holding period of one year would be necessary in the case of restricted securities of a nonreporting company or a company that is not in compliance with the reporting requirements. No other conditions would apply to non-affiliates.
The principal effect of this rule change would be to shorten the one and two-year holding periods presently required for restricted securities by paragraphs (d) and (k) of Rule 144, respectively. Paragraph (k) would be subsumed by this new approach and no longer would exist. Another effect would be to deny persons who cease to be affiliates the ability to sell securities under Rule 144 until a waiting period of three months has elapsed from the date on which they last were an affiliate. Currently, these persons may sell restricted securities within the volume limits of the rule immediately after ceasing to be an affiliate if they have held the securities for at least one year. Affiliates. The proposals would require affiliates to sell all securities, whether restricted or not, in accordance with the applicable conditions of the rule, including the current public information requirement, the limits on the amount that can be sold, and the requirement that the securities be sold in brokers’ transactions or in transactions directly with a market maker. The holding period requirement, however, would continue to apply only to restricted securities, and the requirement to file a notice of sale would apply only if the amount sold exceeds increased thresholds, as discussed below.
In addition to the changes in the holding period requirements for restricted securities described above, the SEC is proposing to add a provision that would reinstate to a large extent a former requirement that the holding period be tolled (i.e., suspended) during any period the seller held a short position or engaged in a hedging transaction (as described in the rule) with respect to securities of the class being sold. Unlike the former provision, however, this new approach would have a ceiling on its application because the maximum holding period under the rule after taking tolling into account would be one year. One aspect of the tolling provision that may create difficulties for sellers who seek to “tack” the holding period of a previous non-affiliate owner is the requirement that the seller exclude any period in which the prior owner hedged or shorted the securities. This will require some due diligence by the seller to determine whether the previous owner entered into such a position.
The SEC also is proposing to codify the following three helpful interpretations previously issued by its staff:
Formation of Holding Company. A holder of restricted securities of a company that is reorganized into a holding company structure may tack the holding period of the predecessor company’s securities to that of the holding company’s securities where the securities of the two entities are substantially equivalent and the economic risks of the investment in the predecessor are not significantly altered by the acquisition of the holding company’s securities. Conversion or Exchange. A holder of restricted securities acquired from the issuer solely in exchange for other securities of the same issuer may tack the holding period of the surrendered securities to that of the newly acquired securities, even if the securities were not convertible or exchangeable by their terms. Tacking, however, would not be permitted where the surrendered securities were amended to allow for cashless conversion or exchange and the holder provided consideration other than solely securities of the issuer for the amendment. Cashless Exercise of Options or Warrants A person who acquires restricted securities upon a cashless exercise of options or warrants may tack the holding period of the options or warrants to that of the newly acquired securities, even if the options or warrants originally did not provide for cashless exercise by their terms. Tacking, however, would not be permitted where the options or warrants were amended to allow for a cashless exercise and the holder provided consideration other than solely securities of the issuer for the amendment.
The limits on the amount of securities sold under the rule would apply only to affiliates. The only other significant change would be the addition of a note indicating that a pledgee of securities need not aggregate its sales with sales by other pledgees of the same borrower unless the pledgees are acting in concert.
Manner of Sale
With two exceptions, affiliates selling in reliance on Rule 144 would continue to be required to sell their securities in brokers’ transactions or in transactions with a market maker. The existing exception for non-affiliate estates and non-affiliate estate beneficiaries would continue to apply, and a new exception for debt securities would be added. The term “debt securities” would include nonequity securities, non-participatory preferred stock, and asset-backed securities.
Notice of Sale
Only affiliates would be required to file a notice of sale on Form 144 under the proposals, unlike the current rule which also subjects to the notice requirement non-affiliate sellers who have not satisfied the requirements of Rule 144(k). Further, in a long overdue move, the SEC is proposing to increase the thresholds for filing the notice, which have not been changed since their adoption in 1972. The new thresholds for filing would be a sale in excess of 1,000 shares or other units (rather than 500) or a sale in excess of $50,000 (rather than $10,000). Additionally, the SEC proposes to codify a staff interpretation that a seller who has adopted a written Rule 10b5-1 trading plan or given trading instruction under Rule 10b5-1 may indicate on Form 144 that the representation required by the form as to lack of knowledge of any material adverse information regarding the issuer is made as of the date of adopting the trading plan or giving the instructions. Finally, an affiliate seller would have to disclose on the form hedging activities involving securities held less than a year.
An important issue on which the SEC has solicited comment (without publishing an actual proposal) is how best to coordinate the requirement to file a Form 144 notice with the requirement to file a Form 4 under the insider reporting requirements of Section 16(a) of the Exchange Act. One difficulty with coordination is the difference in the due dates for the respective forms. Form 4 is not due until two business days after a reportable transaction has occurred, while Form 144 is required to be transmitted for filing concurrently with either the placing with a broker of an order to sell or the execution directly with a market maker of a sale under the rule. Another problem is that the two forms do not require identical information.
The SEC is proposing to include a new paragraph (i) in Rule 144 indicating that the rule is not available for sales of the securities of a shell company (i.e., a company with no or nominal operations and non-cash assets). Securities of companies that formerly were shell companies, however, could be sold under the rule if specified Exchange Act disclosure conditions are met.
Conforming Changes to Rules 190 and 701
To fully implement the proposed changes to Rule 144, the SEC is proposing to make conforming changes to Rule 190 relating to asset-backed securities, and Rule 701 relating to offers and sales pursuant to compensatory benefit plans of non-reporting companies.
Resales under Rule 145
Rule 145(d) provides that parties (other than the issuer) to a Rule 145 transaction and their affiliates are deemed to be underwriters of the securities acquired in the transaction and must comply with the restrictions on resales of those securities set forth in the rule. Transactions subject to Rule 145 include reclassifications, mergers, consolidations and transfers of assets subject to a vote of security holders. The SEC now believes that the presumptive underwriter provision of Rule 145(d) “no longer is necessary in most circumstances.” Accordingly, the SEC is proposing to restrict the application of that provision solely to business combinations involving shell companies and their affiliates and promoters. Consistent with this approach, the SEC also is proposing to harmonize the requirements of Rule 145(d) with the proposed revisions to Rule 144 that would apply to shell companies
Rule 144 was the first of several rules adopted by the SEC to provide a “safe harbor” from the registration requirements of the Securities Act, and was considered experimental at the time of its adoption in 1972. The safe harbor approach has proven to be a resounding success, in large part because of the SEC’s willingness to reexamine periodically how these rules have operated. In the case of Rules 144 and 145, this had led to several revisions in prior years that relaxed requirements that had proven to bemore stringent than necessary. The latest proposals, many of which have their origin in proposals issued in 1997 that were not acted upon, are a significant step along the same path.
If adopted substantially in their present form, the proposals will improve the liquidity of restricted and affiliate securities, lessen the risk of holding them, and reduce or eliminate burdensome filing requirements. Although there are aspects of the proposals that can be improved or refined, there is ample reason to expect that the proposals will result in rule changes that will have dramatic beneficial effects.