The SEC proposed amendments to Rule 144 and Rule 145. Rule 144 under the Securities Act of 1933 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act. The last major changes to Rule 144 were made in 1997. At that time, the SEC shortened the required holding period for securities that are defined as “restricted securities.” Before the 1997 amendments, affiliates and non-affiliates could resell restricted securities, subject to limitation, after two years, and non-affiliates (who had not been affiliates during the prior three months) could resell restricted securities without limitation after three years. The 1997 amendments changed these two-year and three-year periods to one-year and two-year periods, respectively.
The currently proposed changes by the SEC would:
- Simplify the Preliminary Note to Rule 144 and text of Rule 144, using plain English principles;
- Amend the Rule 144 holding period requirement for restricted securities of companies that are required to file reports under the Securities Exchange Act of 1934 to provide for a six-month holding period if the security holder has not engaged in certain hedging transactions;
- Require that security holders toll, or suspend, the holding period during the time they enter into certain hedging transactions, although under no circumstance would the holding period extend beyond one year;
- Substantially reduce the requirements for non-affiliates so that they can resell securities freely after the holding period (except that non-affiliates of reporting companies would be subject to the current public information requirement until one year after the acquisition of the securities);
- Eliminate the “manner of sale” limitations with respect to debt securities; and
- Increase the thresholds that trigger a Form 144 filing requirement.
The proposed changes to Rule 144 would also codify 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 if the options or warrants originally did not provide for cashless exercise by their terms. The SEC is also proposing to codify the Division of Corporation Finance’s position that if:
- The original options or warrants do not permit cashless exercise by their terms; and
- The holder provides consideration, other than solely securities of the issuer, to amend the options or warrants to allow for cashless exercise, then the options or warrants would be deemed to have been acquired on the date that the original options or warrants were so amended. This treatment is analogous to the SEC’s treatment of conversions and exchanges.
The proposed Rule would also codify the Division of Corporation Finance’s position that the grant of certain options or warrants that are not purchased for cash or property does not create any investment risk in the holder in a manner that justifies deeming the holding period of the securities received upon exercise of the options or warrants to include the holding period of the original options or warrants. According to the SEC, this is the case for employee stock options. The proposed rules would clarify that in such instances, the holder would not be allowed to tack the holding period of the option or warrant and would be deemed to have acquired the underlying securities on the date the option or warrant was exercised, if the conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of exercise.
Securities Act Rule 145 provides that exchanges of securities in connection with reclassifications of securities, mergers or consolidations or transfers of assets that are subject to shareholder vote constitute sales of those securities. Rule 145(c) deems persons who were parties to such a transaction, other than the issuer, or affiliates of such parties to be underwriters. Rule 145(d) sets forth the restrictions on the resale of securities received in such transactions by persons deemed underwriters. The SEC believes it is appropriate to eliminate the presumptive underwriter provision in Rule 145, as it is no longer necessary in most circumstances. The proposed amendments to Rule 145(c) and (d) would:
- Eliminate the presumed underwriter status provision in Rule 145(c) except with regard to Rule 145(a) transactions that involve a shell company (other than a business- related shell company); and
- Harmonize the requirements in Rule 145(d) with the proposed provisions in Rule 144 that would apply to securities of shell companies.