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SEC Liberalizes Rule 144

Winter 2008Cole Schotz DocketAttorneys: Jennifer L. Horowitz and Marc P. Press

The Securities and Exchange Commission (SEC) recently amended Rule 144 under the Securities Act of 1933 (Securities Act) to substantially reduce the requirements for the resale of unregistered securities under Rule 144.  The amendments take effect on February 15, 2008 and relate to securities acquired before or after February 15, 2008.

Background

Rule 144 is the principal means for investors to resell securities acquired in specified transactions not involving a public offering (restricted securities) and for affiliates of an issuer (generally controlling shareholders, directors and executive officers) to resell securities of such issuer, regardless of how the affiliate acquired the securities.  It is a safe harbor from the registration requirements of the Securities Act that provides a selling security holder who complies with the applicable conditions of Rule 144 an exemption from registration under the Securities Act.  The conditions of Rule 144 include the availability of specified current public information about the issuer, limitations on the number of securities that could be sold in any three-month period, restrictions on the manner of sale of the securities, minimum periods that the securities were required to be held by the purchaser before any resale pursuant to Rule 144 (a holding period) and the filing of a Form 144 (collectively, the “Rule 144 Requirements”).

Amendments

The amendments shorten the required holding period for restricted securities from one year to six months for securities of an issuer that has been subject to the reporting requirements under the Securities Exchange Act of 1934 (i.e. the statutory requirements to file annual, quarterly and other reports with the SEC) for at least 90 days before the Rule 144 sale.  The holding period for restricted securities of a “non-reporting” issuer will continue to be one year.  After the applicable holding period requirement is met, the resale of restricted securities by non-affiliates under Rule 144 will not be subject to any other Rule 144 requirements, except that, with regard to the resale of securities of a reporting issuer, the current public information requirement will apply for an additional six months after the six-month holding period.  Under the amended Rule 144, affiliates may resell securities of a reporting issuer that have been held for more than six months and of a non-reporting issuer that have been held for more than one year, in each case, in accordance with the other applicable amended Rule 144 Requirements.  The following table is a summary of the amended requirements for the resale of securities under Rule 144:  

 

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 for equity securities, and
  • 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 for equity securities, and
  • 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 SEC also amended other specific provisions of Rule 144, including eliminating the manner of sale requirements for debt securities (and non-participatory  preferred stock and asset-backed securities) and, where applicable, broadening the manner of sale permitted, revising the volume calculation for debt securities, and increasing the thresholds that trigger the Form 144 filing.

Likely Effects of Amendments

The amendments will result in significantly fewer conditions to resell securities under Rule 144.  Furthermore, the amendments will allow restricted securities to enter the public markets more quickly and, in some circumstances, with little or no further restrictions.  For instance, securities of a reporting issuer may be issued in a private placement or as consideration in certain types of acquisitions and become freely transferrable (by persons other than affiliates) six months after the initial issuance of the securities (subject only to the limitation that current information be available).  This will create increased liquidity of privately sold or issued securities and potentially decrease the cost of capital for reporting issuers.  By making private offerings more attractive, the amendments may permit some companies to avoid certain types of costly financing structures.  In fact, it is likely that the historic marketplace demand for issuers to provide registration rights in private offerings will be softened, if not eliminated in certain circumstances.

 

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