Resales of Restricted Securities Under Rule 144

Individuals that acquire restricted securities or hold “control” securities generally would like to have the flexibility to resell such securities to the public market. Rule 144 permits the public resale of restricted or control securities by providing an exemption to the Securities Act of 1933 registration requirements. A number of conditions must be satisfied in order to use Rule 144.

“Restricted Securities” and “Control Securities”

Restricted securities are unregistered securities that are acquired in a private placement transaction. Control securities are restricted securities that are acquired by an affiliate of the company. Affiliates include directors, executive officers, and large shareholders owning more than 10% of a company’s outstanding shares. Control securities are issued with a “restrictive” legend that indicates that such securities cannot be resold in the public marketplace unless they are either be registered with the SEC or subject to an exemption from registration.

Form 144

A Form 144 must be electronically filed with the SEC by an affiliate of the issuer in order to provide notice of a proposed sale of restricted or control securities pursuant to Rule 144. The Form 144 deadline is within two business days of the deemed transaction date.

Under Rule 144(h), an affiliate who intends to resell at least 5,000 shares of restricted or control securities within a three-month period with an aggregate sales price of more than $50,000 is obligated to file a Form 144.

Satisfaction of Rule 144 Conditions

Assuming satisfaction of the conditions set forth in Rule 144, restricted or control securities may be sold in a public marketplace. The Rule 144 conditions relate to the manner of sale, volume limitations, holding periods, and providing current public information.

Holding Period: Under Rule 144, shares acquired directly or indirectly from the company in a private placement transaction are subject to a 6-month minimum hold period before they can be sold in a public offering. This holding period only applies to restricted securities.

Volume Limitations: The number of restricted shares that can be sold are subject to volume limitations under Rule 144. The number of equity securities that can be sold during any 3-month period is limited to the greater of: (i) 1% of the company’s outstanding shares of common stock or (ii) the average weekly reported volume of trading for the four calendar weeks preceding the filing of the Form 144.

Manner of Sale: Under Rule 144, the sales must be handled as ordinary course trading transactions. Neither a directors or officers, nor a broker of such individual, may solicit orders to buy his or her securities.

Current Public Information: The company is obligated to keep up with its periodic reporting requirements. This includes having filed any Form 10-K annual reports and Form 10-Q quarterly reports by the applicable deadlines.

Other Considerations

Tacking Provisions: Rule 144 contains “tacking” provisions that apply under specific circumstances. This enables holders to count other holding periods in order to satisfy the 6-month holding period requirement. For example, holders may be able to “tack,” or combine, the holding periods of prior owners of the securities. Holders may also be able to tack the period of time that they hold different securities.

Restrictive Legends: Once the conditions of Rule 144 are satisfied, holders of control securities will have to get the restrictive legends removed from their securities before they can sell them to the public. This process is completed by the company’s transfer agent. A legal opinion usually has to be issued by the company’s legal counsel to confirm that the transfer agent has permission to remove the restrictive legends from the securities.

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