In this fourth installment of my series on Rule 144, I will continue discussing the various conditions for the use of the Rule, including the meaty holding period requirements. In the first installment, I provided a high-level review of Rule 144 – see HERE; in the second, I discussed definitions including the impactful “affiliate” definition – see HERE; and in the third I reviewed the current public information requirements – see HERE.
Conditions for Use of Rule 144
General
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 is 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.
A person who is a non-affiliate and has been a non-affiliate for three months, may begin to sell restricted securities in reliance of Rule 144 after six months as long as (i) the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days; (ii) the issuer has current public information; and (iii) there is no shell status ineligibility. If the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days, the rule does not require current public information after a one year hold for a non-affiliate (that has been a non-affiliate for three months), however, in practice, no brokerage firms will allow sales if the issuer does not have current public information, and most attorneys will not write an opinion letter.
A person who is a non-affiliate and has been a non-affiliate for three months, may begin to sell restricted securities in reliance of Rule 144 after a one year holding period if the issuer is not subject to the SEC reporting requirements as long as there is no shell status ineligibility. Although the rule does not require current public information in this case, in reality, no brokerage firms will allow sales without current public information, and most attorneys will not write an opinion letter.
A person who is an affiliate, has been an affiliate during the preceding 90 days, or a person selling on behalf of an affiliate, may begin to sell restricted securities in reliance of Rule 144 after a six month hold period as long as: (i) the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days; (ii) the issuer has current public information; (iii) the number of shares sold is in accordance with the volume limitations set forth in the Rule; (iv) the sales are conducted on the open market through a brokerage account; (iv) the person files a Form 144 with the SEC and (v) there is no shell status ineligibility.
A person who is an affiliate, has been an affiliate during the preceding 90 days, or a person selling on behalf of an affiliate, may begin to sell restricted securities in reliance of Rule 144 after a one year hold period if: (i) the issuer is not subject to the SEC reporting requirements; (ii) the issuer has current public information; (iii) the number of shares sold is in accordance with the volume limitations set forth in the Rule; (iv) the sales are conducted on the open market through a brokerage account; (iv) the person files a Form 144 with the SEC and (v) there is no shell status ineligibility.
All Rule 144 eligibility requirements are assessed immediately prior to the intended sale of securities and must be satisfied at the time of each and every sale. Accordingly, if securities are purchased from a non-reporting issuer that subsequently becomes subject to the Exchange Act reporting requirements, the holding period would likewise be shortened from one year to six months.
Holding Period
As set out in the general section above, if the issuer of the securities is, and has been for a period of 90 days, subject to the Exchange Act reporting requirements, a minimum of six months must elapse from the date of the acquisition of the securities and any sale in reliance on Rule 144. If the issuer of the securities is not and has not been for a period of 90 days, subject to the Exchange Act reporting requirements, a minimum of one-year elapse from the date of the acquisition of the securities and any sale in reliance on Rule 144. A voluntary filer is not “subject to the Exchange Act reporting requirements” and as such its shareholders will need to satisfy the longer one year holding period. For more on determining voluntary filer status, see HERE.
In any event a holding period does not begin until the full purchase price or consideration has been paid by the person acquiring the securities. Moreover, as long as the full purchase price is paid and a company has countersigned a subscription agreement, the holding period begins on the date the company counter-signed the subscription agreement regardless of the actual date of issuance (i.e. a subscriber is not penalized because a company delays the administrative function of actually issuing the securities).
Rule 144 provides several sections on the calculation of a holding period in particular circumstances.
Promissory Notes, Other Obligations or Installment Contracts
Paying for securities using a promissory note, installment contract or other obligation, is not considered payment of the full purchase price, and thus the clock for the Rule 144 holding period would not begin to tick, unless the note, installment contract or other obligation:
- Provides for full recourse against the purchaser of the securities;
- Is secured by collateral other than the purchased securities, having a fair market value at least equal to the purchase price of the securities; and
- Shall have been paid in full prior to a sale of the securities in reliance on Rule 144.
Stock Dividends, Splits and Recapitalizations
Securities acquired from an issuing company as a result of a dividend, forward split, reverse split or other recapitalization, are deemed to have been acquired at the same time as the underlying securities entitling the recipient to the dividend, split, or recapitalization. That is, the holding period “tacks” onto the original holding period.
Conversions and Exchanges
If securities are acquired solely in exchange for other securities of the same issuer, the newly acquired securities tack onto the holding period of the exchanged securities. The Rule 144 conversion/exchange concept mirrors that of the Section 3(a)(9) registration exemption. The main elements are: (i) same Issuer – the issuer of the old securities being surrendered must be the same as the issuer of the new securities; (ii) no additional consideration from the security holder; and (iii) no commission or compensation may be paid for soliciting the exchange.
There is one exemption from the “same issuer” requirement. That is if Company A sells notes that mandatorily convert into Company B shares at the occurrence of some event or at the sole option of Company A, and the investor has no control or additional investment decision, then the holding period can tack to the date of the original issuance of the note.
If the original securities did not provide for cashless exercise or conversion features, you can still rely on this provision provided however that no additional consideration is paid or provided by the security holder for allowing the exchange/conversion.
In December 2022, the SEC proposed highly controversial changes to Rule 144 to disallow a tacking period where securities are converted into new securities based on a market adjustable rate (i.e. such as a discount to market price) and the issuing company does not trade on a national exchange (such as Nasdaq or NYSE). For more on the proposal, see HERE. The responsive comments have been overwhelmingly opposed to the change. I wholly oppose the rule change and hope the SEC does not move forward, which unfortunately remained on the proposed rule list for the last regulatory agenda.
Contingent Issuance of Securities
Securities acquired as a contingent payment for the purchase of assets or equity in a business, such as a result of meeting earn out thresholds or other milestones, entering into employment agreements or non-complete agreements, will be deemed to be acquired at the same time or the original business asset or equity purchase as long as the conditions for the receipt of those securities do not include the payment of additional consideration. For clarification, the SEC notes that agreements that require services over a period of time will not be considered “additional consideration” as long as the agreement is entered into at the time of the original asset or business purchase.
Similarly, where securities are issued pursuant to an existing anti-dilution provision, the holding period tacks onto the original issuance of the securities.
Pledged Securities
Securities which are bona fide pledged by an affiliate to a lender or purchaser, will tack onto the holding period of the affiliate pledgor, following a bona fide default in the obligation and so long as the debt is full recourse (i.e. the securities are not the only recourse).
Gifts of Securities
Securities given as a bona fide gift by an affiliate will tack onto that affiliate’s holding period.
Trusts
When a trust settlor is an affiliate, the trust or beneficiaries of the trust, can tack onto the holding period of the affiliate settlor.
Estates
Where a deceased person was an affiliate of the issuer, securities held by the estate of such person or acquired from such estate by the estate beneficiaries shall be deemed to have been acquired when they were acquired by the deceased person (i.e. tacking is allowed). Furthermore, if the estate itself, or the beneficiaries, are not affiliates, that no holding period is required. That is, even if the affiliate held for less than six months or one year as required by the Rule, a non-affiliate estate or beneficiary, could sell right away. This provision only applies to securities actually held by the decedent and as such would not apply to securities the estate receives through exercise of stock options or by other means.
Although there is no holding period requirement in this circumstance, the issuer/company must still have current public information and the seller would still need to file a Form 144.
Rule 145(a) Transactions
Holding periods do not tack in Rule 145(a) transactions. A Rule 145(a) transaction involves the reclassification, merger, consolidation or asset transfer of a business, in an exempt (i.e. not registered) transaction involving shareholder approval. In this case, the purchaser of the securities would start a new holding period regardless of whether the securities were received from affiliates or non-affiliates. As noted, this section only applies in exempt transactions – where securities are registered in a Form S-4 registration statement, they would not be “restricted” securities for purposes of Rule 144.
Holding Company Formations
Securities acquired from a company in a transaction effected solely for the purpose of forming a new holding company, will tack onto the original issuance date of the underlying securities as long as: (i) the newly formed holding company’s securities were issued solely in exchange of the predecessor company securities as part of the holding company restructuring; (ii) holders receive securities of the same class, with the same rights and interests, in the same proportional interest of the holding company as they held in the predecessor company; and (iii) immediately following the transaction, the holding company has no significant assets other than the predecessor, now subsidiary company, including having the same assets and liabilities on a consolidated basis.
Cashless Exercise of Options and Warrants
Securities that are acquired solely upon the cashless exercise of an option or warrant (i.e. zero cash can be paid), will tack onto the holding period of the original underlying securities, even if the original option or warrant did not have a cashless exercise provision. Like promissory notes, this is the same concept as in a Section 3(a)(9) exchange. If any additional consideration is provided in connection with the exercise of the option or warrant, or for an amendment to add a cashless exercise provision, tacking will not be allowed.
If the options or warrants are not purchased for cash or property and do not create any investment risk to the holder, as in the case of employee stock options, the newly acquired securities shall be deemed to have been acquired at the time the options or warrants are exercised, so long as the full purchase price or other consideration for the newly acquired securities has been paid or given by the person acquiring the securities from the issuer or from an affiliate of the issuer at the time of exercise. Put another way, 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.
Distributions by an Entity Shareholder
Where an entity shareholder distributes securities to its equity holders, solely on a pro rata basis, without consideration for the distribution, the new holders may tack onto the entity’s holding period, even if the entity was an affiliate of the issuer.
Transfers Without Beneficial Ownership Change
Where a security holder transfers securities without changing the beneficial owner, such as transferring to a retirement account, or into or out of an wholly owned entity, the holding period will tack onto the original issuance of the securities.
Change in Legal Form of Entity
A change in the legal form of an entity 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: (i) the controlling agreement entered into at the time of the partnership or limited liability company’s formation specifically contemplated the change of form; (ii) the partners or members seeking to tack had no veto or voting rights over the reorganization; (iii) the reorganization does not result in a change in the business or operations of the surviving entity; (iv) the proportionate equity interests in the successor are the same as the interests in the predecessor entity; and (v) the equity holders provide no additional consideration for the securities they receive in exchange for their equity interests in the predecessor entity.
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.
Contact Anthony, Linder & Cacomanolis, PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony, Linder & Cacomanolis, PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Anthony, Linder & Cacomanolis, PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
© Anthony, Linder & Cacomanolis, PLLC
