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American Bar Association - Defending Liberty, Pursuing Justice

Fall 2008

Vol. 5, No. 1

Business Law

 

Overview of SEC Amendments to Rules 144 and 145: Limits on Sales of Securities

The Securities and Exchange Commission has amended Rules 144 and 145 of the Securities Act of 1933, effective February 15, 2008. Rules 144 and 145 limit a person’s ability to sell securities acquired (1) from a company with which the person is affiliated and (2) in a private offering or other exempt transaction. By easing the restrictions found in Rules 144 and 145, including the holding period and the amount of securities that may be sold, the SEC has made it easier for affiliates and others to sell securities governed by the rules. It should be noted that the amendments apply to securities acquired before or after the effective date.

Background

As background, the Securities Act requires registration of all offers and sales of securities in interstate commerce or by use of the U.S. mails, unless an exemption from registration is available. The importance of Rule 144 is that it provides a safe harbor from the Securities Act’s registration requirement for sales of restricted securities and control securities held by affiliates, if the rule’s requirements are met. Rule 144 requires that

  • adequate current public information about the issuer be available;
  • the seller of the restricted securities hold the securities for a minimum period of time (the “minimum holding period”);
  • the number of shares sold not exceed certain thresholds (“volume limitations”);
  • the securities be sold in a certain manner, for example, in a transaction using a broker (“manner of sale conditions”); and
  • the seller file a Form 144 when required.


In order to understand the safe harbor, it is important to know the meaning of restricted securities, control securities, and affiliates. First, restricted securities are securities acquired from the issuer or an affiliate in a private offering or another exempt offering described in the rule. Second, control securities generally are securities held by an affiliate of the issuer without regard to how the affiliate acquired the securities. Finally, an affiliate is a person who directly or indirectly controls, or is controlled by, or is under common control with, an issuer and includes persons such as members of a company’s board of directors and senior-level management.

Rule 144 Amendments

With this background in mind, it is easier to understand the impact of the amendments. For affiliates, the Rule 144 changes have the following effects:

  • Shortened Minimum Holding Period. Currently, affiliates must hold restricted securities for one year before selling them in order to satisfy the requirements of Rule 144. However, the amendments permit the sale of securities of reporting companies after six months. Reporting companies are those that file periodic reports under the Securities Exchange Act of 1934, including annual reports on Form 10-K and quarterly reports on Form 10-Q. In contrast, affiliates must still hold restricted securities of nonreporting companies for one year before selling them. Moreover, sales by affiliates remain subject to the manner of sale conditions and volume limitations, as well as the current public information requirements.
  • Expansion of Manner of Sale Conditions. The amendments broaden the manner in which securities may be sold by affiliates by expanding the definition of a broker transaction and adding an additional category of sales called “riskless principal transactions” that the SEC believes are equivalent to agency trades.
  • Increased Threshold for Volume Limitations. The volume limitations, which provide for the sale of up to 1 percent of any outstanding class of securities in any three-month period, have been expanded to allow sales of debt securities as follows. In addition, the amendments add an alternative volume limitation for debt securities that permits up to 10 percent of a tranche of debt or of a class of nonconvertible preferred stock to be sold during a three-month period.
  • Elimination of Manner of Sale Limitations for Certain Securities. The manner of sale limitations have been deleted for debt securities, nonparticipating preferred stock, and asset-backed securities.
  • Revised Trigger for Form 144. Affiliates still must file a Form 144 where the intended sale exceeds 5,000 shares or $50,000 in any three-month period.
  • Elimination of Holding Period for Control Securities. Control securities remain subject to all requirements of Rule 144, other than the holding period requirement.

The amendments benefit both affiliates as described above and nonaffiliates. First, nonaffiliates can sell restricted securities of reporting companies after six months if the current public information requirement is met. Second, nonaffiliates can sell restricted securities of nonreporting companies after one year without satisfying any other requirements of Rule 144. In other words, the manner of sale, volume, and notice of sale provisions no longer apply to nonaffiliates, and the current public information provisions cease to apply after one year.

Although not as significant as the previously described revisions to Rule 144, it is also important to highlight that the SEC wrote amended Rule 144 in plain English and codified several of its interpretations. The codified interpretations include those regarding tacking, or combining, holding periods to meet the minimum holding period requirement; aggregation of securities held by pledges; and the applicability of Rule 144 to shell companies.

Rule 145 Amendments

Rule 144 was not the only rule to receive an overhaul. The SEC also revised Rule 145, which requires the registration of certain securities issued in various types of business transactions. In effect, the revised rule no longer restricts resales of securities received in business combinations by persons who are affiliated with one of the parties to the transaction if they are not affiliates of the surviving company. However, the amendments to Rule 145 will not apply to transactions involving shell companies.

Conclusion

The SEC believes that the amendments will increase the liquidity of securities acquired in private offerings and decrease the cost of capital for all issuers, while continuing to protect investors. The SEC is likely to achieve its stated purposes because affiliates and nonaffiliates can sell securities more quickly and are subject to fewer restrictions on their ability to sell securities.

David Pankey is a partner at the Washington, D.C., office of McGuireWoods LLP. LaTisha Chatman is a partner in the firm at Norfolk, Virginia, and Meredith Sanderlin Thrower is an associate at the firm's Richmond, Virginia, location. Their respective e-mails are , , and .

Note

“Keeping Current: Securities: SEC Amends Rules 144 and 145” by David H. Pankey, LaTisha O. Chatman, and Meridith Sanderlin Thrower, published in  Business Law Today, Volume 17, No. 5, May/June 2008.  Copyright © 2008 by the American Bar Association. Reprinted with permission.

© Copyright 2008, American Bar Association.