Key Takeaways
- Allows resale of restricted securities without registration.
- Requires holding periods and volume limits for affiliates.
- Protects investors by preventing immediate resale.
- Form 144 filing needed for large affiliate sales.
What is Rule 144?
Rule 144 is a safe harbor provision under the Securities Act of 1933 that allows the public resale of restricted and control securities without registration, provided specific conditions are met. It facilitates liquidity for holders while protecting the market by preventing immediate resale of privately acquired shares.
This rule applies to securities acquired through private placements or held by affiliates such as executives or major shareholders, ensuring orderly transactions that comply with SEC regulations.
Key Characteristics
Rule 144 imposes distinct requirements depending on the security type and seller status. Key points include:
- Restricted securities: Typically acquired in unregistered private sales; subject to holding periods of six months to one year depending on issuer reporting status.
- Control securities: Held by C-suite executives or affiliates; often exempt from holding periods but bound by volume and manner of sale restrictions.
- Volume limits: Affiliates must adhere to sales caps based on 1% of outstanding shares or average weekly trading volume.
- Public information requirement: Issuers must be current in SEC filings for affiliates to resell shares under Rule 144.
- Form 144 filing: Mandatory for affiliates selling over 5,000 shares or $50,000 worth within three months.
How It Works
To resell securities under Rule 144, you first confirm the applicable holding period has elapsed, which varies based on whether the issuer is SEC-reporting. Affiliates must ensure the issuer maintains up-to-date public information through filings such as Form 10-K or 10-Q.
Next, calculate volume restrictions if you are an affiliate, ensuring sales do not exceed permitted limits. If required, file Form 144 electronically via EDGAR before executing the sale. After removing any restrictive legends with legal proof, you can complete the transaction through ordinary brokerage channels.
Examples and Use Cases
Rule 144 is commonly used by insiders and private investors to legally sell shares in public markets. Examples include:
- Banking sector: Executives at Bank of America follow Rule 144 to sell control shares without violating insider trading rules.
- Investment firms: Shareholders at JPMorgan Chase use this provision to liquidate restricted stock acquired via employee compensation plans.
- Ordinary investors: Non-affiliates holding restricted shares from private placements can sell after the holding period without volume or manner restrictions.
Important Considerations
While Rule 144 provides a clear legal pathway for resale, non-compliance can result in the seller being deemed an underwriter, risking regulatory penalties. Be mindful of the specific holding period variations, especially for non-reporting companies, where it extends up to one year or longer.
Additionally, because broker requirements and transfer agent procedures vary, coordinate closely with legal counsel and your broker to ensure legend removal and filing obligations are satisfied before sale execution.
Final Words
Rule 144 enables the resale of restricted and control securities under clear conditions, balancing investor protection with liquidity. Review your holding period and affiliate status carefully before selling to ensure compliance. Consult a securities professional to confirm you meet all requirements and avoid regulatory pitfalls.
Frequently Asked Questions
Rule 144 is a provision under the Securities Act of 1933 that allows the public resale of restricted and control securities without registration, provided certain conditions are met. It balances investor protection with liquidity by preventing immediate resale while enabling holders to sell shares safely.
Affiliates are individuals or entities like executives, directors, or shareholders owning 10% or more of a company’s stock. They hold control securities and face specific resale requirements such as volume limits and public information disclosure.
Restricted securities are those acquired in unregistered private sales, such as private placements or employee stock plans. They must typically satisfy holding periods before resale to qualify for Rule 144’s safe harbor.
For restricted securities of SEC-reporting companies, the holding period is six months, while for non-reporting companies, it is one year. This period begins from the date of full payment and acquisition of the securities.
Affiliates can sell no more than the greater of 1% of the outstanding shares or the average weekly trading volume over the past four weeks. For OTC stocks, the limit is strictly 1% of outstanding shares.
Form 144 filing is required only if an affiliate sells more than 5,000 shares or securities valued over $50,000 within any three-month period. Non-affiliates do not need to file this form.
Sellers must verify the holding period, ensure current public information is available for affiliates, calculate volume limits, file Form 144 if required, remove restrictive legends from certificates, and execute sales via normal brokerage transactions.
Failure to meet Rule 144 conditions risks being classified as an underwriter, which voids the resale exemption under Section 4(a)(1) of the Securities Act. This can lead to legal and regulatory complications for the seller.
