Rule 144 C & D l Ask Securities Lawyer 101

Ask Securities Lawyer 101

Securities Lawyer 101 Blog

The SEC‘s Compliance and Disclosure Interpretations provide  its interpretations of the rules adopted under the Securities Act of 1933, as amended (the “Securities Act”).  A summary and excerpts of the portions relevant to restricted securities and Rule 144 as interpreted by the SEC are set forth below.

Question: Is Rule 144 available to the issuer of the securities?

Answer: No. Rule 144 is not available to the issuer of the securities.

Question: How long must an underwriter wait before it resells the unsold portion of a “sticky” public offering as if it were compensation?

Answer: An underwriter may resell the unsold portion of a sticky public offering as if it were compensation — wait six months from the last sale under the registration statement and follow Rule 144 except for filing the form.

Question: If an institutional purchaser buys a block of shelf-registered securities directly from the issuer, will the securities be deemed restricted securities?

Answer: When there is a sale of a block of shelf-registered securities directly by the issuer to an institutional purchaser, the securities will not be deemed to be restricted securities that are “acquired directly or indirectly from the issuer … in a transaction … not involving any public offering.” However, the purchaser of the securities will still have to determine whether it may be deemed an underwriter in connection with resales of such securities; such a determination will depend upon the facts and circumstances of the particular case.

Question: May restricted securities be tendered in connection with a tender offer without compliance with Rule 144?

Answer: Yes. Restricted securities may be tendered in connection with a tender offer without compliance with Rule 144. The rule is not the exclusive means for reselling restricted securities.

Question: What is a circumstance under which securities issued under stock option plans and excess compensation plans for directors will constitute restricted securities?

Answer: Securities often are issued under employee benefit plans where the basis for non-registration of the distribution is other than a “no-sale” theory under Securities Act Section 2(a)(3). Such plans include stock option plans and excess compensation plans for directors where the securities are issued pursuant to the Securities Act Section 4(2) private offering exemption or Regulation D.

Question: Are shares acquired in a private transaction from the spouse of an affiliate deemed restricted securities?

Answer: Yes, if the spouse has the same home as the affiliate, as they would then be regarded as the same person under Rule 144(a)(2)(i).

Question: An affiliate donor transfers, by bona fide gift, company stock acquired in the open market (i.e., the securities are not “restricted securities” in the affiliate’s hands) to a donee in a non-public transaction.  What is the status of these securities in the donee’s hands, and what requirements in Rule 144 are applicable to a donee who is a non-affiliate when he or she resells these securities?

Answer: In the donee’s hands, these securities are “restricted securities” because they have been “acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering.”  As these securities were not subject to any holding period requirement in the affiliate donor’s hands, however, the donee need not comply with the holding period requirement in Rule 144(d) for subsequent sales.  If the donee is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1), as applicable.

Question: May the tacking provisions in Rule 144(d)(3) be applied in determining whether, under Rule 144(b)(1)(i), the Rule 144(c)(1) condition has been met for the one-year period?

Answer: Yes.

Question: If securities are sold pursuant to Rule 144 at various times over a three-month period, at which time(s) must the issuer satisfy the “current public information” requirement?

Answer: When the “current public information” requirement must be met in order for the security holder to sell securities under the Rule 144 safe harbor, the issuer must continue to satisfy this requirement at the time each sale is made.

Question: When the conditions of Rule 144(c)(1) must be satisfied in selling securities under the Rule 144 safe harbor, may sales continue during the Rule 12b-25 extension period?

Answer: There is a risk in selling under Rule 144 during the 5-day or 15-day period following the filing of the Form 12b-25 because, if the missing report or portion thereof is not filed during that period, the issuer may be deemed not current until it is filed.

Question: When you have an effective Form S-1 registration statement followed by a registration statement pursuant to Exchange Act Section 12(g), when does the 90-day reporting period required by Rule 144(c)(1) begin?

Answer: The 90-day reporting period commences with the effective date of the Form S-1.

Question: Do reports filed under Section 30(a) of the Investment Company Act satisfy the current public information requirement of Rule 144(c)(1)?

Answer: Yes.

Question: Does the information standard of Exchange Act Rule 15c2-11 require that the information be current?

Answer: Yes. The public information standard of Rule 15c2-11 relating to issuers not subject to Section 13(a) or 15(d) is met only if the Rule 15c2-11 information is current. It is irrelevant that broker-dealers may publish quotes on the issuer’s securities “piggy-backing” from their prior quotes based on Rule 15c2-11 information which was current at the time such quotations were initiated.

Question: Do the financial statements of non-reporting issuers need to be audited or prepared in compliance with Regulation S-X in order to satisfy the “current public information” requirement of Rule 144(c)(2)?

Answer: No. The “current public information” requirement of Rule 144(c)(2) does not require the financial statements of non-reporting issuers to be either audited or prepared in compliance with Regulation S-X, as that is not required by clauses (xii) and (xiii) of Exchange Act Rule 15c2-11(a)(5), to which Rule 144(c)(2) refers.

Question: Is the current public information requirement in Rule 144(c)(1) applicable to an issuer that submits Exchange Act reports on a voluntary basis?

Answer: No. Rule 144(c)(1) applies only to issuers that are, and have been for at least 90 days immediately before the sale, subject to the reporting requirements of Exchange Act Section 13 or 15(d). A voluntary filer is not “subject to” Exchange Act Section 13 or 15(d) because it is not obligated to file Exchange Act reports pursuant to either of those provisions. Accordingly, the current public information requirement in Rule 144(c)(2) is applicable to voluntary filers.

Question: To whom does the phrase “without recourse” in Rule 144(d)(3)(iv) refer?

Answer: The phrase “without recourse” appearing in Rule 144(d)(3)(iv) refers to recourse against the pledgor personally in the usual situation in which the pledgor and borrower are the same person. This interpretation would not apply, however, if the pledgor and borrower were different persons, because Rule 144(d)(3)(iv) requires recourse only against the borrower under the note.

Question: May closely-held entities make in-kind distributions of restricted securities of an affiliated issuer without disturbing the holding period of the restricted securities?

Answer: The transfer of the restricted securities from the portfolio of the closely-held entity to its equity holders will not disturb the holding period if the distribution is made ratably and without the payment of consideration for the transfer. See Securities Act Release No. 6099 (Aug. 2, 1979), at Question 34, and the Hale and Dorr interpretive letter (June 12, 1991) issued by the Division. [Jan. 26, 2009]

Question: After the Supreme Court’s decision in Rubin v. United States, 449 U.S. 424 (1981), do the provisions of Rule 144(d) still permit the tacking of holding periods of a pledgor and pledgee?

Answer: Yes. Notwithstanding the Supreme Court’s decision in Rubin that a pledge may be a sale for determining application of the anti-fraud provisions of the federal securities laws, it is the Division’s view that the provisions of Rule 144(d) expressly permitting the tacking of holding periods of a pledgor and pledgee continue to apply.

Question: Does Rule 144(d)(3)(vii) apply only to securities owned by the decedent?

Answer: Yes. Paragraph (d)(3)(vii) of Rule 144, which provides an exemption from the Rule 144(d) holding period requirement for sales of restricted securities by a non-affiliate estate, applies only to securities owned by the decedent. It does not exempt a non-affiliate estate from the holding period requirement in the case of securities acquired by the estate upon the exercise of stock options held by the decedent.

Question: May a person transfer restricted securities into his or her individual retirement account without interrupting the Rule 144(d) holding period for the securities?

Answer: Yes.

Question: An individual acquires shares pursuant to anti-dilution rights attaching to restricted securities. Are these newly acquired shares restricted securities?

Answer: For purposes of Rule 144, shares acquired pursuant to anti-dilution rights attaching to restricted securities are restricted securities themselves but their holding period dates back to the original placement of shares, not the exercise of the anti-dilution provisions.

Question: When does the holding period begin for restricted securities acquired pursuant to a subscription agreement?

Answer: The holding period for restricted securities acquired pursuant to a subscription agreement begins at the time the agreement is accepted by the issuer, rather than the date it is signed by the purchaser or the date the shares are issued, assuming that the full purchase price has been paid.

Question: What is the restricted security and holding period status of securities exchanged for other securities of the issuer under Securities Act Section 3(a)(9)?

Answer: When securities are exchanged for other securities of the issuer under Section 3(a)(9), the securities received assume the character of the exchanged securities. Thus, for example, if restricted securities are exchanged, the new securities are deemed restricted and tacking of the holding period of the former securities is permitted.

Question: Does the one-year holding period requirement in Rule 144(d)(1)(ii) apply to the restricted securities of an issuer that submits Exchange Act reports on a voluntary basis?

Answer: Yes. The six-month holding period requirement in Rule 144(d)(1)(i) is applicable only to the restricted securities of an issuer that is, and has been for at least 90 days immediately before the sale, “subject to” the reporting requirements of Exchange Act Section 13 or 15(d). A voluntary filer is not “subject to” Exchange Act Section 13 or 15(d) because it is not obligated to file Exchange Act reports pursuant to either of those provisions. Consequently, the one-year holding period requirement in Rule 144(d)(1)(ii) applies to the restricted securities of a voluntary filer.

Question: How is the six-month holding period computed under Rule 144(d)(1)(i)?

Answer: Under Rule 144(d)(1)(i), a minimum of six months must elapse between the date of acquisition of the restricted securities from an issuer or from an affiliate of the issuer, whichever is later, and any resale of such securities under Rule 144. This period covers the six months immediately preceding the date of sale under the rule. For example, on May 15, X acquires restricted securities in a transaction not involving any public offering from an issuer. Assuming that the six-month holding period did not restart at any point since May 15 and that the other applicable conditions of Rule 144 would be met at the time of sale, X may sell the securities under Rule 144 on November 15, provided that the issuer is, and has been for at least the immediately preceding 90 days, subject to the reporting requirements of Exchange Act Section 13 or 15(d) at such time.

Question: On what date does the holding period begin for restricted securities acquired under an employee stock option?

Answer: The holding period for restricted securities acquired under an employee stock option always begins on the exercise of the option and full payment to the issuer of the exercise price. The date of the option’s grant may never be used for this purpose, even if the exercise involves no payment of cash or other consideration to the issuer. Because the option is issued to the employee without any payment for the grant, the optionee holds no investment risk in the issuer before the exercise.

Question: Does a change in the legal form of enterprise restart the holding period for restricted securities of the issuer?

Answer: A change in the legal form of an enterprise from a partnership or a limited liability company to a corporation normally will restart the holding period for restricted securities of the issuer. However, a holder may tack holding periods in this context if the following conditions are satisfied:

(1) the controlling agreement entered into at the time of the partnership or limited liability company’s formation specifically contemplated the change of form;

(2) the partners or members seeking to tack had no veto or voting rights over the reorganization;

(3) the reorganization does not result in a change in the business or operations of the surviving entity;

(4) the proportionate equity interests in the successor are the same as the interests in the predecessor entity; and

(5) the equity holders provide no additional consideration for the securities they receive in exchange for their equity interests in the predecessor entity.

Question: Does the payment of even a de minimis amount of cash upon a warrant exercise preclude the holder from tacking the holding period of the warrant to that of the common stock under Rule 144(d)(3)(x)?

Answer: Yes. The payment of even a de minimis amount of cash upon a warrant exercise would preclude the holder from tacking the holding period of the common stock to the warrant under Rule 144(d)(3)(x). The warrant exercise must be “cashless” (similar to the analysis under Section 3(a)(9)) in order to tack the holding period of the common stock to the warrant.

Question: Is the applicable length of the Rule 144(d) holding period requirement for restricted securities (i.e., whether it is six months under Rule 144(d)(1)(i) or one year under Rule 144(d)(1)(ii)) determined as of (1) the date of the acquisition of the securities from the issuer or an affiliate of the issuer, or (2) the time of the proposed sale under Rule 144?

Answer: The applicable length of the Rule 144(d) holding period requirement is determined as of the time of the proposed Rule 144 sale.

For example, on March 5, 2008, a non-reporting issuer sold shares of its common stock to an investor pursuant to a private placement. Three weeks later, the issuer filed a registration statement on Form 10 to register its common stock under Exchange Act Section 12(g). On October 1, 2008, the investor wished to resell the shares he had acquired on March 5 from the issuer. The applicable holding period requirement for such shares as of October 1 would be the six-month holding period under Rule 144(d)(1)(i), since the issuer was, and had been for at least the immediately preceding 90 days, subject to the reporting requirements of Exchange Act Section 13 or 15(d) on such date.

Conversely, if the issuer had been an Exchange Act reporting issuer on March 5, 2008, but was not subject to the reporting requirements of Exchange Act Section 13 or 15(d) (or had not been for at least the immediately preceding 90 days) as of October 1, 2008, the one-year holding period under Rule 144(d)(1)(ii) would be applicable to such securities as of October 1. Hence, the investor would not have satisfied the Rule 144(d) holding period requirement as of that date.

Question: A pledgor who is an affiliate defaults on a loan that had been secured, in a bona fide pledge situation, by restricted securities. What conditions of Rule 144 apply to a non-affiliate pledgee who is selling such restricted securities under Rule 144?

Answer: A non-affiliate pledgee (who has not been an affiliate during the preceding three months) may resell the restricted securities pursuant to the Rule 144 safe harbor by complying with the applicable conditions in Rule 144(b)(1). Depending on the circumstances, tacking pursuant to Rule 144(d)(3)(iv) may be permitted in determining whether the holding period requirement in Rule 144(d) has been satisfied.

Question: After receiving a gift of restricted securities from an affiliate donor, what conditions of Rule 144 apply to a non-affiliate donee who is selling such restricted securities under Rule 144?

Answer: A non-affiliate donee (who has not been an affiliate during the preceding three months) may resell the restricted securities pursuant to the Rule 144 safe harbor by complying with the applicable conditions in Rule 144(b)(1). Tacking pursuant to Rule 144(d)(3)(v) may be permitted in determining whether the holding period requirement in Rule 144(d) has been satisfied.

Question: Is tacking under Rule 144(d)(3)(ii) available when the securities to be sold were acquired in an exchange transaction that was exempt under Securities Act Section 4(2) instead of Section 3(a)(9)?

Answer: Yes, provided that the conditions in Rule 144(d)(3)(ii) are satisfied.

Question: Company A sells mandatorily exchangeable Notes to an investor in a private placement transaction. Under the terms of the Notes, the Notes can be exchanged for a fixed number of shares of Company B, an affiliate of Company A, either at Company A’s option or upon the occurrence of certain events outside the investor’s control. If such an exchange takes place, when does the holding period for the Company B Shares begin to run for purposes of Rule 144(d)(1)?

Answer: When Company A sells the Notes, there is deemed to be a concurrent private offering of the underlying Company B Shares, and the investor has no subsequent investment decision to make because the exchange is either at Company A’s option or occurs automatically upon the occurrence of certain events outside the investor’s control. Accordingly, the investor’s Rule 144(d) holding period for the Company B Shares would begin at the time the investor originally acquired the Notes from Company A, and not when the investor later receives the Company B Shares in exchange for the Notes.

If the Notes also include a provision allowing the exchange to occur at the investor’s option and the investor decides to exchange the Notes for Company B Shares, then the holding period for the Company B Shares would begin on the date of the exchange. If the Notes also include this provision but the exchange occurs not because of the investor’s decision but because of either Company A’s decision or the occurrence of certain events outside the investor’s control, then the holding period for the Company B Shares would begin at the time the investor originally acquired the Notes from Company A.

Question: What exchanges are encompassed by the term “national securities exchanges” in Rule 144(e)?

Answer: The term “national securities exchanges,” as used in Rule 144(e), encompasses only exchanges that are registered with the Commission pursuant to Section 6(a) of the Exchange Act. Because Canadian exchanges are not so registered, the volume of securities traded on such an exchange may not be taken into account when computing the volume limitation under Rule 144. 

Question: Is the OTC Bulletin Board an “automated quotation system” for purposes of Rule 144(e)?

Answer: No. Consequently, the market-based volume limitation that the rule allows for is unavailable for securities quoted only over the OTC Bulletin Board. 

Question: What effect(s) do stock splits and reverse stock splits have on available volume under Rule 144(e)?

Answer: Stock splits and reverse stock splits, which are not events of sale under the Securities Act, have no real effect on available volume under Rule 144(e) because the split or reverse split should not change the proportion of the issuer’s securities that an affiliate is permitted to sell during the rule’s three-month measuring period. To calculate available volume after a split or reverse split, an affiliate should give effect to the split or reverse split throughout the whole three-month period, as though it had occurred on the first day of the period, even though the record and effective dates were later. This method may be used for the rule’s one-percent measurement or the market-based alternative for securities listed on an exchange. 

Question: In determining the amount of securities that an individual may sell pursuant to General Instruction C.2(b) of Form S-8, does the individual need to aggregate the amount of securities that the individual has sold pursuant to Rule 144?

Answer: No. General Instruction C.2(b) to Form S-8 provides that if the registrant, at the time of filing, does not satisfy the registrant requirements for use of Form S-3 or Form F-3, the amount of both control and restricted securities to be reoffered by means of the reoffer prospectus by each person, and any other person with whom such person is acting in concert for the purpose of selling securities of the registrant, shall be limited during any three-month period to the amount specified in Rule 144(e). This limitation is strictly a limitation on the number of securities to be resold pursuant to the registration statement, and does not require aggregation of such securities with securities to be sold by the same person pursuant to Rule 144. The application of this instruction is reassessed each time the Form S-8 is updated pursuant to Securities Act Section 10(a)(3).

Question: Is a public offering included in the volume computation when computing the average weekly trading volume of the issuer during the four-week period?

Answer: In computing average weekly trading volume where there is a public offering of shares by the issuer during the four-week period, the public offering is not included in the volume computation; however, increased volume in the aftermarket as a result of the offering can be included for purposes of the rule.

Question: How is the four-week period for computing the average weekly trading volume computed?

Answer: For purposes of computing volume limitations under Rule 144(e)(l)(ii) and (iii), the “four calendar weeks preceding the filing of notice” on Form 144 are the four weeks preceding the week in which the form is transmitted for filing in accordance with Rule 144(h).

Question: Are an affiliate’s sales of securities back to the issuer in a non-public transaction excludable when calculating the amount of securities that may be sold by the affiliate under Rule 144?

Answer: Yes.  Under Rule 144(e)(3)(vii)(C), securities sold in a transaction that is exempt pursuant to Securities Act Section 4 and does not involve any public offering need not be included in determining the amount of securities that may be sold under Rule 144.  This would include an affiliate’s non-public sales of securities back to the issuer.

Question: Can a principal of a brokerage firm use that firm to effect ordinary “brokers’ transactions” for the principal’s personal account under Rule 144(f)?

Answer: Yes. A principal of a brokerage firm may use that firm to effect ordinary “brokers’ transactions” for the principal’s personal account under Rule 144(f).

Question: Does the publication of a customer limit order in accordance with Exchange Act Rule 11Ac1-4 constitute the solicitation or arrangement for the solicitation of orders to buy securities within the meaning of Rule 144(f)(2)?

Answer: No. The publication of a customer limit order in accordance with Exchange Act Rule 11Ac1-4 would not constitute the solicitation or arrangement for the solicitation of orders to buy securities within the meaning of Rule 144(f)(2).

Question: Does an amendment to Form 144 need to be filed in the event that a person does not sell the securities referred to in the Form?

Answer: No. If a person who has filed a Form 144 does not sell the securities referred to therein, no amendment reflecting this fact need be filed.

Question: Does an amended Form 144 need to be filed to reflect a company’s listing on a national securities exchange or a stock split?

Answer: No. A Form 144 need not be amended to reflect: (1) a company’s listing on a national securities exchange; or (2) a stock split.

Question: If a person intends to use two brokers, must the person allocate a specific number of shares to each broker on the Form 144?

Answer: A person who files a Form 144 indicating that it may sell shares through either of two brokers need not allocate a specific number of shares to each broker on the form.

Question: Does the de minimis exemption of Rule 144(h) apply to each individual seller who is required to file a Form 144 when sales are required to be aggregated under Rule 144(e)?

Answer: Yes. In a situation in which sales under Rule 144 are required to be aggregated for purposes of Rule 144(e), the de minimis exemption of Rule 144(h) (for filing Form 144), nonetheless, applies to each individual seller who is required to file a Form 144.

Question: When a Form 144 is required to be filed, is a waiting period required between the time the person places an order with a broker and the time the broker executes the order?

Answer: When a person is required to file a Form 144, no waiting period is required between the time the person places an order with a broker and the time the broker executes the order so long as the person concurrently, with giving the order, transmits the form to the Commission and the principal exchange on which the securities are listed.

Question: Should a Form 144 be amended to reflect a change in broker?

Answer: Yes. A Form 144 should be amended to reflect a change in broker. However, amending Form 144 to reflect a change in the broker does not permit the calculation of a new volume limitation based on trading.

Question: What is the effect of an amended Form 144 that is filed to correct inaccuracies?

Answer: An amended Form 144 may be filed to correct inaccuracies in the original Form 144 at the time of, or subsequent to, its filing. However, the filing of an amended Form 144 does not cure any deficiencies with regard to sales made after filing the initial Form 144 and prior to the filing of the amended Form 144.

Question: Under what circumstances does a sell order that is placed with a broker at above the current market price contravene the requirement in Rule 144(h) that the person filing a Form 144 have a bona fide intention to sell the securities referred to in the Form 144 within a reasonable time?

Answer: The fact that a sell order is placed with a broker at a price above the current market price does not contravene this requirement in Rule 144(h), unless the price reflected in the sell order was not consistent with a bona fide intention to sell within a reasonable time.

Question: Rule 144(h) provides that the Form 144 shall be transmitted for filing “concurrently” with either the placing of a sale order with a broker or the execution of the sale directly with a market maker. Does “concurrently” mean that the Form 144 should be transmitted for filing on the same day as the placing of a sale order or the execution of the sale?

Answer: Yes. For example, if a person is filing a Form 144 by mail, he or she meets the requirements of Rule 144(h) if the Form is mailed on the same day as the placing of a sale order or the execution of the sale. The envelope should be addressed to the Commission’s Office of the Secretary.

Question: If an issuer had previously been a shell company but is an operating company at the time that it issues securities, is the Rule 144 safe harbor available for the resale of such securities if all of the conditions in Rule 144(i)(2) are not satisfied at the time of the proposed sale?

Answer: No. Rule 144(i)(1) states that the Rule 144 safe harbor is not available for the resale of securities “initially issued” by a shell company (other than a business combination related shell company) or an issuer that has “at any time previously” been a shell company (other than a business combination related shell company). Consequently, the Rule 144 safe harbor is not available for the resale of such securities unless and until all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale.

Question: Does Rule 144(i) apply to securities issued before February 15, 2008, which was the effective date of the amendments to Rule 144 in which the Commission adopted Rule 144(i)?

Answer: Yes.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at info@securitieslawyer101.com or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or info@securitieslawyer101.com. Please note that the prior results discussed herein do not guarantee similar outcomes.

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