The Securities and Exchange Commission (SEC) Rule 144 is a regulation under the 1933 Securities Act that provides a safe harbor for the sale of restricted or unregistered securities. It outlines specific conditions that must be met before these types of securities can be sold publicly, ensuring transactions comply with federal securities laws.
Key Components of SEC Rule 144
Definition and Purpose
SEC Rule 144 facilitates the resale of restricted and control securities by defining criteria that help prevent market manipulation and maintain transparency. Restricted securities are typically acquired in private transactions or through employee stock benefit plans, while control securities are held by affiliates of the issuing company.
Holding Periods
Restricted Securities
To resell restricted securities, Rule 144 mandates a minimum holding period. For securities issued by a reporting company (one required to file financial statements with the SEC), the holding period is six months. For non-reporting companies, the holding period extends to one year. This period begins from the date of acquisition from the issuer or an affiliate, not merely the date of the purchase agreement.
Volume Limitations
Selling Restrictions for Affiliates
Affiliated persons must adhere to volume limitations when selling restricted or control securities. The sale cannot exceed the greater of 1% of the outstanding shares of the same class being sold or the average weekly trading volume during the four weeks preceding the sale.
Public Information and Notice of Sale
Adequate Information
The issuing company must be current in its public filings, ensuring adequate public information availability. Investors rely on this information to make informed decisions.
Filing Form 144
For sales of over 5,000 shares or aggregate sales exceeding $50,000 within a three-month period, affiliates must file Form 144 with the SEC.
Historical Context
SEC Rule 144 was implemented in 1972 to provide clarity and structure to the resale of restricted or unregistered securities. The rule has undergone amendments over the years to adapt to market changes and investor needs, reinforcing its role in safeguarding the securities market.
Applicability and Comparisons
Comparison to Rule 144A
While Rule 144 pertains to the resale of restricted securities by any investor, Rule 144A provides a safe harbor for the resale of securities to qualified institutional buyers (QIBs). These rules often interact but serve distinct functions within securities resales.
Exceptions
Certain transactions, such as those involving small amounts of securities or sales by non-affiliates after the holding period, may be exempt from some requirements under Rule 144.
Related Terms
- Control Securities: These are securities owned by an affiliate of the issuing company. Under Rule 144, the term affiliate refers to an individual or entity with the power to influence the management and policies of the company.
- Restricted Securities: These securities are acquired through non-public offerings and are subject to holding period restrictions before they can be resold under Rule 144.
FAQs
What is the purpose of the holding period in Rule 144?
- The holding period prevents short-term speculation and aligns the interests of the security holders with those of other investors by ensuring a longer-term investment perspective.
What happens if an affiliate sells securities exceeding the volume limitations?
- Exceeding volume limitations can result in penalties and violations of securities laws, leading to regulatory action against the affiliating individual or entity.
Do non-affiliates need to file Form 144?
- No, only affiliates are required to file Form 144 for sales of restricted or control securities exceeding specified amounts.
References
- U.S. Securities and Exchange Commission. “Rule 144: Selling Restricted and Control Securities.” SEC.gov.
- Securities Act of 1933, Pub. L. 73–22, 48 Stat. 74.
Summary
SEC Rule 144 is a critical regulation governing the resale of restricted or unregistered securities. By outlining definitions, holding periods, and compliance requirements, Rule 144 ensures a transparent, orderly market and protects investors from potential risks associated with unrestricted sales of these securities.
