Unregistered securities cannot be sold to the public without an exemption from the registration requirement. The exemption of choice for most holders of restricted stock is Rule 144. Rule 144 provides a path to liquidity for investors who are willing to hold the shares for a relatively long period of time and comply with the other requirements of the rule. The main provisions are:
Rule 144 (a)
Defines restricted securities as securities acquired directly or indirectly from the issuer or an affiliate of the issuer in a private deal.
Rule 144 (b)
Extends the rule to also include non-restricted securities held by an affiliate of the issuer.
Rule 144 (c)
Requires the issuer to be current on its filing requirements (for example, annual and quarterly reports) before any of its shareholders rely on the exemption.
Rule 144 (d)
Sets the holding period requirement to six months before any resale of restricted securities held can begin. Defines the holding period’s start. Allows a holder to tack a previous holder’s holding period on to his own, which is a great benefit in private sales transactions. However, a private sale from an affiliate would restart the holding period.
Rule 144 (e)
Limits the number of shares sold after the end of the holding period is over to the greater of:
- One percent of total shares outstanding and
- The average weekly trading volume during the four weeks prior to the sale.
(Note: investors in bulletin-board stocks cannot rely on the trading volume rule.)
Rule 144 (f) and (g)
Limits the amount of solicitation that is possible and the commissions that can be paid in any sale that relies on the rule.
Rule 144 (h), (i) and (j)
Provides reporting requirements prior to the sale of restricted securities and requires that the seller have a bona fide intention to sell when filing. Specifies that the rule is not exclusive.
Rule 144 (k)
Allows any non-affiliate investor to sell securities after a two-year holding period, without regard to paragraphs (c), (e), (f) and (h) of the rule.
Proposed Changes
The SEC revised Rule 144 in 2008. Changes included the following:
A shortened six-month holding period for companies subject to the ’34 Act reporting requirements.
- Extending the holding period by up to an additional six months for any period the holder has hedged the position.
- Eliminating the filing and certain other requirements for non-affiliates.
- Codifying prior staff interpretations; for example, with respect to cashless warrant exercises.
Long-term, these changes should improve the liquidity of restricted shares, possibly reducing the discounts taken and very likely increasing the volume of restricted securities issued in PIPEs, as the transaction form becomes more attractive to both issuers and investors.