In February, amendments went into effect for a rule that plays a critical role in U.S. Securities laws. The rule, Rule 144, provides a safe harbor for the public resale of securities without registration under the Securities Act of 1933 (the “Securities Act”). Without Rule 144, holders of securities that were acquired directly from the issuer of the securities in a private (unregistered) transaction (called “restricted shares” in the Rule) and holders of securities who are affiliates of the issuer cannot be certain that their public resale of those securities will not require registration of the sale with the SEC (an expensive and time-consuming process). Rule 144 includes a series of conditions that, if properly met, will give the reselling shareholder a safe harbor from those registration requirements and allow the shareholder to resell the restricted shares. These latest amendments are an attempt by the SEC to liberalize some of the resale restrictions in the Rule. Holders of securities issued by insurance companies have always been subject to slightly different requirements under the Rule, and the new amendments preserve those differences. Anyone issuing securities should be aware of the amendments and plan accordingly in its dealings with its investors and affiliates.
Background on Rule 144
The Securities Act requires that anyone selling securities must register the sale of those securities with the SEC, unless they have a proper exemption from this registration requirement. One such exemption can be found in Section 4(1) of the Securities Act. This section provides for an exemption from registration for sales of securities in “transactions by any person other than an issuer, underwriter, or dealer.” The definition of “underwriter” under the Securities Act is, however, broad and includes “any person who has purchased from an issuer with a view to … the distribution of any security….” The difficulty of determining when someone that has acquired shares from an issuer could safely sell those shares without being considered an “underwriter” prompted the SEC to promulgate Rule 144 in 1972 to provide a safe harbor from the definition of underwriter for certain types of sellers engaged in certain types of resale transactions. The types of resellers using Rule 144 to avoid underwriter status are divided into two types: (1) “affiliates” of the issuer that are attempting to sell any securities of the company (restricted or unrestricted), and (2) non-affiliates of the issuer that are attempting to sell restricted securities. The definition of the term “affiliate” in the Rule is vague, but its references to people that “control” the issuer usually leads to a focus on the issuer’s insiders and shareholders holding a significant number of the issuer’s shares.
Under the provisions of the Rule, affiliates of the issuer must have held the securities for a minimum amount of time and then may only publicly resell them if certain requirements have been satisfied, including the availability of current public information on the issuer, limits on the volume of securities to be sold, prescribed methods for making the sales and the filing of a form with the SEC in certain circumstances. The recent amendments to Rule 144 reduce a number of these restrictions and, in the process, make it easier for a holder to resell securities.
The Conditions of Rule 144 and the 2008 Amendments
Rule 144 sets conditions for sales of restricted securities in order to qualify for its safe harbor. Which specific condition is applicable to a particular sale depends largely on whether the seller is or, during the ninety days before the sale, was an affiliate of the issuer, whether the issuer is a reporting company, and how long the securities have been held by the seller.
Affiliate or Not? The first step in assessing the application of the Rule’s safe harbor is to determine whether the seller is affiliated with the issuer or has been an affiliate in the previous ninety days. Affiliates selling under Rule 144 are required to meet a number of requirements that non-affiliated sellers are not required to follow (see Additional Requirementsbelow).
Reporting Company or Not? The second step is to determine whether the issuer of the securities is subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Securities Exchange Act”) (the requirements to file periodic reports with the SEC) and has been subject to those reporting requirements for at least 90 days. Whether the issuer of the securities proposed to be resold is a reporting company has an impact on the minimum holding period required for restricted securities, as well as certain other requirements.
Holding Period for Restricted Securities: Six Months or One Year? The holding period requirement is the centerpiece of Rule 144. Once an applicable holding period has been met, a seller that is an affiliate of the issuer may sell, subject to certain conditions, and a non-affiliated seller of restricted securities may sell without registration under the Securities Act and the securities received by the purchaser are no longer restricted. The amended Rule 144 calculates those holding periods as follows:
For a non-affiliate of the issuer:
- If the issuer of the restricted securities is a reporting company,
then the minimum required holding period is:- six months, if the issuer is current in its SEC filings; or
- one year, if the issuer is not current in its SEC filings.
- If the issuer of the restricted securities is not a reporting company, then the minimum required holding period is one year.
For an affiliate of the issuer:
- If the issuer of the restricted securities is a reporting company, then the minimum required holding period is six months and the additional requirements described below apply.
- If the issuer of the restricted securities is not a reporting company, then the minimum required holding period is one year and the additional requirements described below apply.
The recent Rule 144 amendments significantly reduced these holding period requirements from two years in many instances to one year generally and, in certain circumstances, to six months. These reductions should significantly increase the marketability and liquidity of restricted securities issued by a reporting company.
Additional Requirements. In addition to the holding period restrictions described above, Rule 144 includes a number of other requirements that apply to Rule 144 sales made by affiliates. These requirements include limitations on the amount of securities that can be sold in a specific period of time, the manner of the sale, and the filing of a notice of the proposed sale.
Insurance companies have retained their special status as it relates to the disclosure obligations under these additional conditions. Affiliates of companies that are not SEC reporting companies traditionally have had a difficult time selling securities pursuant to Rule 144 because the Rule requires that there must be current public information available at the time of the sale. For a company that is not filing SEC reports, this requirement can be very difficult to meet. For insurance companies, however, there is a special provision in the Rule that states that the current public information requirement can be satisfied by a state regulated insurance company that files periodic reports with the insurance regulator in that state. Therefore, affiliates of insurance companies that do not file periodic reports with the SEC can still sell under Rule 144 if the sale meets the other requirements described above (volume limitations, Form 144 filing obligations, manner of sale requirements and, if the securities are restricted, holding period requirements).
While holders of securities subject to Rule 144 resale restrictions will enjoy the enhanced liquidity arising from the new amendments, issuers of these securities need to be aware of the new holding periods and the shorter delays before securities they issue may enter the public markets. In issuing restricted securities through private offerings, companies may want to consider imposing additional contractual restrictions on transfers if they want to prevent the securities from rapidly hitting the open market.
Ward S. Bondurant is a partner in the firm’s corporate practice group. Mr. Bondurant has counseled businesses in general corporate and corporate finance matters for over 20 years, with his primary focus on representing middle market companies. Mr. Bondurant received his bachelor’s degree from University of North Carolina and his law degree from University of Georgia.
