When you acquire restricted securities or hold control securities, you must find an exemption from the SEC’s registration requirements to sell them in a public marketplace. Rule 144 allows public resale of (1) unregistered securities, which are securities directly from an issuer, referred to as “restricted” securities; and (2) unrestricted securities held by an affiliate of the issuer, referred to as “control” securities–if a number of conditions are met.
The easiest way to tell if a security is “restricted” is to look for a “restrictive” legend. If you acquire restrictive securities, you almost always will receive a certificate stamped with a “restrictive” legend–usually in red print. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements.
Certificates for control securities usually are not stamped with a legend.
There are five basic requirements of Rule 144, although not all requirements apply to every sale, as discussed below:
- Current public information. Specified current information concerning the issuer must be publicly available. See “Rule 144(c) – Current Public Information Requirement.”
- Holding period. A six-month holding period is required for “restricted securities” of an issuer that has been a reporting company for at least 90 days. A one-year holding period is required for “restricted securities” of a non-reporting company.
- Volume limitation. The amount of securities that can be sold in any three-month period for listed companies is limited to the greater of (i) one percent of the shares or other units of that class outstanding, or (ii) the average weekly trading volume during the four calendar weeks preceding the filing of a Form 144, or if no such notice is required, the date of receipt of the order to execute the transaction. The amount of securities that can be sold in any three-month period for companies with over-the-counter, or OTC, securities is limited to one percent of the shares or other units of that class outstanding. See “Rule 144(e) – Limitation on Amount of Securities Sold.” Rule 144 also has an alternative volume limit of up to 10% of the tranche (or class) outstanding for debt securities.
- Manner of sale. Equity securities (but not debt securities) must be sold in unsolicited “brokers’ transactions,” directly to “market makers,” or in “riskless principal transactions.” See “Rule 144(f) and (g) – Manner of Sale Requirements.”
- Notice of sale. The seller must file a Form 144 with the SEC at the time the sell order is placed with the broker if the seller is an affiliate and intends to sell during any three-month period more than 5,000 shares or securities with a value in excess of $50,000. See Rule 144(h).
In the next post we will discuss Tacking of the Holding Period under Rule 144.
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