We are often asked to outline the requirements for a Rule 144 resale and thought to provide some general guidance on the topic in this post. Please note, however, that Rule 144 is complicated and this post is only intended to provide limited background information – if you intend to resell pursuant to Rule 144, we urge you to consult with a qualified professional.
The following short answer applies to a seller that is not an affiliate of the company whose securities are to be sold, and applies only to securities of a company that is not currently a “shell company” and that has been a reporting company in the United States for at least 90 days immediately prior to the sale.
In the situation described above, Rule 144 may be available for resale by a seller if the following two conditions are satisfied:
- the seller has owned the securities for at least six months; and
- if the seller has not owned the securities for at least one year, the company is current in its reporting obligations (other than Form 8-K reports).
Rule 144 imposes additional conditions for the resale of securities initially issued by a shell company or a former shell company. If the securities to be sold were initially issued by a shell company or a former shell company that has since ceased to be a shell company, Rule 144 can be used if:
- the company is subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports; and
- at least one year has elapsed since the company filed a document (typically on Form 8-K) containing the type of disclosure about the company and its business that would normally be included in a Form 10 initial registration statement, reflecting the company’s status as an entity that is no longer a shell company. Form 10 is the initial registration form used to register a company as a reporting company with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934.
Rule 144 is a safe harbor available for the sellers of restricted securities (e.g. securities acquired in a private placement) or control securities (i.e. securities held by an affiliate of the issuer).
Under the Securities Act of 1933 (the “Securities Act”), if any person (including an investor) offers to sell or sells a restricted security, the offer and sale must be registered with the SEC unless an exemption from the registration requirements is available.
A common registration exemption is provided by Section 4(a)(1) of the Securities Act, which exempts “transactions by any person other than an issuer, underwriter, or dealer.” It is relatively easy to determine if a person is an issuer or dealer; however, the term “underwriter” is broadly defined to mean “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates, or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking”. Simply put, an “underwriter” is one who purchases with the intent to resell.
Rule 144 is a ‘safe harbor’ adopted by the SEC to protect investors from “underwriter” status. A person who satisfies the applicable conditions of the Rule 144 safe harbor will be deemed not to be an underwriter, but the SEC insists on strict compliance with the rule by those looking for the safe harbor.
A “restricted security” is generally a security purchased from the issuer or an affiliate of the issuer without registration. Once securities are sold pursuant to Rule 144, they are no longer restricted securities.
Two very important classifications are key to any use of Rule 144. First, is the company a reporting company and, second, is the seller an affiliate of the company? Different conditions apply depending on the answers to those questions.
Rule 144 has different conditions for reporting companies and non-reporting companies. Companies that have been reporting companies for less than 90 days are considered non-reporting companies. Also voluntary filers (e.g. companies that did not file a registration statement on Form 10 or Form 8-A) are also considered non-reporting companies.
This blog post discusses Rule 144 as it applies to reporting companies only.
Rule 144 has different conditions for affiliates and non-affiliates. An affiliate of an issuer is “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer”. Officers, directors and stockholders owning 10% or more of the issuer’s outstanding securities are generally presumed to be affiliates, but such presumption may be rebuttable depending on facts and circumstances.
This blog post considers Rule 144 as it applies to persons who are not affiliates and have not been affiliates for the three months before the date of sale.
Rule 144 Conditions
A non-affiliate wishing to sell the restricted securities of a reporting company must comply with at least two conditions: holding period requirement and current information requirement. If the restricted securities were initially issued by a shell company or a former shell company, Rule 144 imposes additional conditions.
Holding Period Requirement
For restricted securities, the seller must have held the securities for at least six months.
Current Information Requirement
Adequate current public information with respect to the issuer of securities must be available. For reporting companies, such information is deemed to be available only if the following conditions are satisfied:
- the company is, and has been for a period of at least 90 days immediately before the Rule 144 sale, subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
- the company must have filed all reports required by section 13 or 15(d) of the Securities Exchange Act of 1934 (e.g. Forms 10-K and 10-Q) during the 12 months preceding such sale, other than Form 8-K reports; and
- the company must have submitted electronically and posted on its corporate website, if any, every interactive data file (XBRL) required to be submitted and posted during the 12 months preceding such sale.
This current information requirement is not required to be satisfied if the non-affiliate seller held the securities for at least one year (but subject to the requirements applicable to former shell companies, discussed below).
Requirements for Former Shell Companies
Rule 144 imposes additional conditions for the resale of securities initially issued by a shell company or a former shell company. A shell company is an issuer that has (A) no or nominal operations and (B) either: (1) no or nominal assets; (2) assets consisting solely of cash and cash equivalents; or (3) assets consisting of any amount of cash and cash equivalents and nominal other assets.
Additional conditions are:
- such company must have ceased to be a shell company;
- the company must be subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
- the company must have filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports;
- the company must have filed current “Form 10 information” with the SEC reflecting its status as an entity that is no longer a shell company; and
- at least one year has elapsed since the date that the company filed “Form 10 information” with the SEC.