Understanding Rule 144: Reselling Restricted and Control Securities

Rule 144 is an important provision under the Securities Act of 1933 that provides a safe harbor for the public resale of restricted and control securities. This rule allows individuals and companies to sell their restricted or control stock without the need to register with the Securities and Exchange Commission (SEC), provided specific conditions are met.

Key Definitions

• Restricted Securities: These are securities acquired through private sales from the issuer that are not registered with the SEC. These shares must be held for a specific period before they can be sold publicly.
  
  
• Control Securities: These are securities held by affiliates of a company, such as executives, directors, or significant shareholders. Control securities are subject to Rule 144 when being sold by affiliates.

What is Rule 144?

Rule 144 is designed to govern the resale of restricted and control securities, typically acquired in private placements or through affiliation with a company. This rule enables those securities to be sold in the public market, provided the sale meets specific conditions set by the SEC.

• Special Considerations for Affiliates: Affiliates are subject to stricter rules under Rule 144. Even after the holding period expires, affiliates must adhere to volume limitations, manner of sale requirements, and report sales to the SEC. These restrictions aim to prevent large, concentrated sales that could negatively impact the stock price or mislead investors.
  
  
• Non-Affiliates and Rule 144: For non-affiliates, Rule 144 is more lenient. Once the holding period has passed and the company is current with its public filings, non-affiliates can sell restricted securities without needing to follow the volume limitations or manner of sale requirements. 

Conditions for Resale Under Rule 144

Rule 144 establishes several key requirements for reselling restricted and control securities:

1. Holding Period:
   
   
• Affiliates and Non-Affiliates: For securities of companies that are subject to SEC reporting requirements, affiliates and non-affiliates must hold restricted securities for at least six months. For companies not subject to SEC reporting requirements, the holding period extends to one year.
  
  
• Affiliates: Even after holding restricted securities for six months, affiliates must comply with additional Rule 144 restrictions before selling, such as volume limitations and the filing of Form 144.
  
  
• Non-Affiliates: Non-affiliates may sell without restrictions after the holding period, provided the company is current in its public filings.
2. Current Public Information:
   
   
• Affiliates and Non-Affiliates: The issuing company must have available and up-to-date public information, including financial statements and disclosures, allowing investors to make informed decisions.
  
  
• For non-reporting companies (private companies), this means making available information about business activities, executives and board members, and financial records.
3. Volume Limitations:
   
   
• Affiliates: Affiliates face limits on how much stock they can sell within any three-month period. These limits restrict affiliates to selling shares totaling either the greater of 1% of the company’s total outstanding shares or the average weekly trading volume over the preceding four weeks before the filing of a notice of sale on Form 144.
  
  
• Non-Affiliates: Non-affiliates are generally not subject to volume limitations if they have held the stock for the required holding periods.
4. Manner of Sale:
   
   
• Affiliates: Sales must typically be made through brokers or market makers. Rule 144 mandates that affiliates use unsolicited broker transactions, meaning they cannot solicit buyers directly, though  wxceptions exist for sales to qualified institutional buyers (QIB) under Rule 144A.
  
  
• Non-Affiliates: Non-affiliates may sell directly to buyers without using brokers or market makers, unlike affiliates.
5. Filing with the SEC:
   
   
• Affiliates: Affiliates selling more than 5,000 shares or $50,000 worth of securities in a three-month period must file Form 144 with the SEC. This form must be filed at the time of or before the sale.

Example of Rule 144 in Action:

Affiliate Selling Restricted Securities

• Scenario: Jane, a company executive at Generic Tech Company Inc., a publicly reporting company, received 20,000 shares of restricted stock six months ago.

Steps to Sell Under Rule 144:

1. Holding Period: Jane has held her shares for the required six-month period as Generic Tech Company Inc. is publicly reporting.
   
   
2. Current Public Information: Generic Tech Company Inc. must be current in its SEC filings with up-to-date financial statements and disclosures.
   
   
3. Volume Limitations: Jane can sell the greater of:
   
   
• 1% of Generic Tech Company Inc.'s total outstanding shares, or
  
  
• The average weekly trading volume over the four weeks preceding her notice of sale.

Example Calculation: If Generic Tech Company Inc. has 1,000,000 shares outstanding, and the average weekly trading volume is 15,000 shares, Jane can sell up to 15,000 shares in a three-month period due to the average trading volume exceeding 1% of the total outstanding shares.

4. Manner of Sale: Jane must use a broker or market maker for the transaction, ensuring it’s an unsolicited broker transaction.
   
   
5. Filing Notice: Jane must file Form 144 with the SEC before her sale, detailing the number of shares to be sold and the method of sale.
   
   
6. Sale Execution:
   
   
• Requesting Legend Removal: Before selling, Jane must have the restrictive legend removed by contacting the transfer agent with proof of consent from Generic Tech Company Inc.
  
  
• Conducting the Sale: With Form 144 filed, Jane can proceed with the sale. 

Filing Form 144

For affiliates, filing Form 144 is essential when selling restricted stock under Rule 144. As of April 2023, this form must be filed electronically through EDGAR, streamlining the process of notifying the SEC about the sale. In most cases, the broker handling the sale prepares and submits the form. For non-reporting companies, the traditional paper-based filing process remains available.