Rule 144 is a highly technical, but practically important, rule because it provides a safe harbor from the definition of “underwriter” to determine whether a resale of “restricted securities” or “control securities” violates the securities laws. “Restricted securities” are securities acquired in one of the transactions listed in Rule 144(a)(3), such as stock that has been acquired in a private placement transaction directly from an issuer. “Control securities” is a term commonly used to refer to securities held by an affiliate of an issuer, such as an officer or director, regardless of how the affiliate acquired the securities. The SEC recently made important amendments to Rule 144.
One of the principal benefits of the revised rule is the shortening of the holding period for restricted securities. Operation of the new rule depends on whether the securities were issued by a reporting issuer or a non-reporting issuer, and whether the securities are held by an affiliate or a non-affiliate. A reporting issuer is an issuer that has been subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, i.e., a public reporting company, for a period of at least 90 days before the Rule 144 sale. In general, non-reporting issuers are private companies.
Restricted Securities of Reporting Issuers
Affiliates and Sales on Behalf of Affiliates Rule 144 now provides for a six-month holding period for securities of reporting issuers. No sales may be made during the holding period by an affiliate. After the six-month holding period, an affiliate may resell the securities held in accordance with all of the Rule 144 requirements, which include:
- Current public information
- Volume limitations
- Manner of sale requirements for equity securities
- Filing of Form 144
Non-affiliates (who must not have been affiliates during the prior three months) are also subject to a six-month holding period for securities of reporting issuers during which no sales can occur. After the six-month holding period, a non-affiliate can engage in unlimited public resales—subject only to the current public information requirement. After the one-year period, a non-affiliate can engage in unlimited public resales and does not need to comply with any of the Rule 144 requirements.
Cashless Exercises of Options and Warrants
The revised rule includes the codification of several SEC staff positions, including positions related to tacking upon the cashless exercise of options and warrants. The rule now provides 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. However, tacking is not permitted if the holder provides consideration, other than solely securities of the issuer, to amend the options or warrants to provide for cashless exercise.
The foregoing interpretation does not apply to options granted under an employee benefit plan. According to the new rule, if the options or warrants are not purchased for cash or property and do not create any investment risk to the holder, as in the case of employee stock options, the newly acquired securities shall generally be deemed to have been acquired at the time the options or warrants are exercised.
Prior to the amendments, a selling security holder was required to file a notice on Form 144 if the security holder intended sales that exceed 500 shares or $10,000 within a three-month period. As a result of the amendments, a Form 144 is now required only if a selling security holder intends to sell in excess of 5,000 shares or $50,000 in the aggregate during a three-month period.
Changes to Rule 145
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(a) requires the registration of these sales unless an exemption from registration is available.
The SEC has amended Rule 145(c) to eliminate the presumptive underwriter provision, except in the case of transactions involving shell companies, other than business combination shell companies. In circumstances where the presumptive underwriter doctrine still applies, the SEC has harmonized the resale provisions of Rule 145(d) with Rule 144 where appropriate.