Rule 144 – A Deep Dive – Part 1
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
Court Strikes Down Recent Changes To Definition Of A Dealer
In a big win for hedge funds and the crypto industry, on November 21, 2024, a Texas federal judge overturned the recent SEC rule that expanded the definition of “dealer” under the Exchange Act. For a review of the final rule see HERE.
The amendments were intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable. The rules amended Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.
In a legal challenge, the Crypto Freedom Alliance of Texas and Blockchain Association sued the SEC claiming that the rule amendments radically expanded the definition of a “dealer” in a way that could encompass digital asset industry participants (and hedge funds) that do not engage in any conduct resembling “dealing” as that term has ever been
SEC Adopts Changes To The Definition Of A “Dealer”
Two years after proposing rule changes (see HERE) the SEC has adopted final new rules amending the definition of a “dealer” under the Exchange Act. Although the rule change comes after years of a continuous stream of litigation against small-cap and penny stock convertible debt lenders, the new rules specifically fail to provide regulatory clarity to this sector of the marketplace.
The amendments are intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable. The rules amend Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act. The enhancement, however, is as to large proprietary traders and government securities dealers, leaving small cap traders to continue with rule making through judicial precedence.
Background
Although the amended rules are not limited to participants in the U.S. Treasury markets,
SEC Proposed Changes To The Definition Of A “Dealer”
Following a continuous stream of litigation against small-cap and penny stock convertible debt lenders, the SEC has proposed some statutory changes to the definition of a “dealer” under the Exchange Act. The SEC’s enforcement attack on convertible debt lenders began in 2017 and has been decried by industry participants as regulation by enforcement which, unfortunately, is not resulting in judicial orders or settlements offering clear guidance (see HERE). Also, unfortunately, the proposed new rules, which were published in March 2022 and are likely to reach final rule stage this year, still do not help small-cap investors navigate the regulatory highway.
The rule is intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable. The proposed rules would amend Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.
Proposed Rules
