It has been ten years since I summarized Rule 144 (see HERE), and at that time it was a very high level overview, not a deep dive into the numerous intricacies of the rules application. Rule 144 is likely the most oft used rule by founders, private investors, early investors, affiliates and insiders, and merger/reverse merger participants, and as such deserves some focus.
I will start this blog series with a high-level overview of Rule 144 and then unpack the numerous individual requirements in the following editions.
Rule 144 – Basic Overview
As I repeat again and again, every offer or sale of securities must either be registered or have an available exemption from registration. Rule 144 promulgated under the Securities Act of 1933 (“Securities Act”) sets forth certain requirements for the use of Section 4(a)(1) for the sale of restricted or control securities by an existing shareholder. Control securities are those securities held by an affiliate of the issuing company, and restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the company.
Section 4(a)(1) of the Securities Act provides a registration exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” The terms “Issuer” and “dealer” have pretty straightforward meanings under the Securities Act, but the term “underwriter” does not. The term “underwriter” is broadly defined in Section 2(a)(11) of the Securities Act 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.
It may be obvious that an investment banker is acting as an underwriter in an IPO or follow on offering, but much less so when talking about individual investors or affiliates. Rule 144 provides a safe harbor from the definition of “underwriter.” If all the requirements for Rule 144 are met, the seller will not be deemed to be an underwriter, and the purchaser will receive unrestricted securities.
Rule 144 is used to sell securities, either in the open market if the sale is by an affiliate, or either privately or in the open market if the seller is not an affiliate, whereby the buyer receives unrestricted securities. Rule 144 is not applicable for sales of securities by an issuing company, or securities that are neither restricted nor control – such as securities that had been purchased in the open market, or that were/are registered.
Rule 144 provides certain conditions that must be met by selling affiliates and selling non-affiliates which conditions vary depending on whether the Issuer of the securities is a reporting or non-reporting company and whether the Issuer or ever has been a shell company. The high-level Rule 144 requirements for non-affiliates include: (i) holding period; (ii) availability of current public information; and (iii) no shell status ineligibility. The high-level Rule 144 requirements for affiliates (i.e. holders of control securities) include: (i) holding period; (ii) availability of current public information; (iii) manner of sale restrictions; (iv) sale volume limitations; (v) requirement to file a Form 144; and (vi) no shell status ineligibility.
The following chart summarizes Rule 144 requirements assuming the Issuer is not currently a shell and if it has previously been a shell, it has satisfied the pre-conditions for the use of Rule 144 as discussed below:
| Affiliate or Person Selling on Behalf of an Affiliate | Non-Affiliate (and has not been an affiliate during the prior three months) | |
| Restricted Securities of Reporting Issuers | During six-month holding period – no resales under Rule 144 permitted
After six-month holding period – may resell in accordance with all Rule 144 requirements, including: – Current public information – Volume limitations – Manner of sale requirements – Filing of Form 144 |
During six-month holding period – no resales under Rule 144 permitted
After six-month holding period but before one year – unlimited public resales under Rule 144, except that the current public information requirement still applies
After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements |
| Restricted Securities of Non-Reporting Issuers | During one-year holding period – no resales under Rule 144 permitted
After one-year holding period – may resell in accordance with all Rule 144 requirements, including: – Current public information – Volume limitations – Manner of sale requirements – Filing of Form 144
|
During one-year holding period – no resales under Rule 144 permitted
After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements |
The shorter six-month holding period is only available for the shareholders of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). A voluntary filer is not subject to the Exchange Act reporting requirements, and the longer one-year holding period is applicable. For more on determining whether a company is subject to the Exchange Act reporting requirements see HERE
All of the Rule 144 pre-condition requirements are determined as of the time of the sale. Accordingly, circumstances can change impacting the use of the Rule. For example, a company voluntarily reporting to the SEC may file a registration statement that changes its status to become “subject to the Exchange Act” reporting requirements. Likewise, a company that has current information may miss a filing. Affiliates may become non-affiliates and vice versa, etc.
As a result of the need to complete an analysis at the time of an intended sale, all transfer agents and Issuers, along with most clearing and brokerage firms, require an opinion of counsel as to the application of Rule 144 prior to removing the restrictive legend from securities and allowing their sale. The opinion letter must detail facts about the company, particular stock and selling shareholder that support the use of Rule 144.
Finally, and importantly, Rule 144 is not available to shareholders of shell companies, or companies that have been a shell company until certain conditions have been met. In particular the company must: (i) have ceased to an a shell company; (ii) has filed Form 10 information reflecting its status as no longer a shell company; (iii) be subject to the reporting requirements of the Exchange Act (not a voluntary filer); (iv) has filed all its Exchange Act reports for 12 months; and (v) one year has elapsed since the filing of the Form 10 information.
A shell company is defined as one with (i) no or nominal operations; and either (a) no or nominal assets; (b) assets consisting solely of cash and cash equivalents; or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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