On November 15, 2007, the Securities and Exchange Commission (the "SEC") voted unanimously to adopt changes to Rules 144 and 145 under the Securities Act of 1933, as amended (the "Securities Act"), including a change to shorten the holding period requirements for restricted securities.  The modifications to Rules 144 and 145 will promote capital formation at lower cost and reduce reporting obligations, which will be of particular benefit to smaller public companies. 

Existing Rule 144


Under the Securities Act, all offers and sales of securities in interstate commerce or by use of the mails must be registered unless an exemption from registration is available.  Section 4(1) of the Securities Act provides such an exemption for transactions by any person other than an issuer, underwriter or dealer.  However, the term "underwriter" is broadly defined under the Securities Act and as a result there is substantial ambiguity as to who may fall within this definition.  The SEC adopted Rule 144 to provide a safe harbor from the definition of "underwriter" in order to enable security holders to resell securities without being considered an "underwriter."

The Rule 144 safe harbor conditions center around the availability of public information with respect to the securities, minimum holding periods, limitations on the amount of securities sold, and the manner of sale of the securities.  The requirements for qualifying for the safe harbor differ depending on whether the securities are restricted securities and whether the seller is an affiliate of the issuer, among other factors.

Revisions To Securities Act Rule 144


The SEC believes that the revisions to Rule 144 will make it more efficient for companies to access public markets, increase liquidity of capital from privately sold securities and decrease the cost of capital to companies, without compromising investor protection. The SEC adopted the modifications to Rule 144 substantially as proposed in SEC Release No. 33-8813 (June 22, 2007) as well as adopting a few additional changes suggested by public commenters.  The highlights of the modifications to Rule 144 are outlined below.

I.  Reporting Companies

Under Rule 144, as modified, affiliates and nonaffiliates are both allowed to publicly resell restricted securities of companies ("reporting companies") that are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act") after a six-month holding period.

A.  Affiliates

After a six-month holding period, affiliates will be able to resell restricted securities in accordance with current Rule 144 restrictions, including requirements relating to current public information, volume limitations, manner of sale and the filing of a Form 144.

B. Non-Affiliates

After a six-month holding period, non-affiliates, who have not been affiliates for at least three months before the sale of the securities, will be able to resell restricted securities, subject only to the requirement that current information regarding the issuer of the securities is publicly available.  Nonaffiliates will be able to resell restricted securities after a one-year holding period without being subject to any Rule 144 restriction, including the current information requirement.

II.  Non-Reporting Companies

The holding period for restricted securities of companies ("non-reporting companies") who are not subject to Exchange Act reporting requirements would be reduced to one year for both affiliates and non-affiliates.  After the one year holding period has elapsed, affiliates could engage in resales that comply with the other requirements of Rule 144; nonaffiliates would be free to resell without regard to the other requirements of Rule 144.

III.  Manner Of Sale & Volume Limitations For Debt Securities

As stated above, the changes to Rule 144 completely eliminate the manner of sale requirements with respect to non-affiliates.  With respect to affiliates, the changes to Rule 144 eliminate the manner of sale requirements in connection with the resale of debt securities, which, for purposes of Rule 144, would also include non-participating preferred stock and asset-backed securities.  The modifications to Rule 144 also relax the current Rule 144(e) volume limitations for debt securities by adding a new alternative test that will permit the resale of up to 10% of a tranche in any three-month period.

IV.  Form 144 Filing Threshold

The current filing thresholds associated with filing a Form 144 have been in place since 1972 and have not been indexed for inflation.  The changes to Rule 144 will increase the Form 144 filing thresholds from trades involving 500 shares or $10,000 within a three-month period to those involving 5,000 shares or $50,000 within a three-month period.  The New Rules also eliminate Form 144 notice requirements for non-affiliates. 

V.  Proposed Tolling Restrictions Not Adopted

The SEC had proposed reintroducing tolling provisions that would suspend the Rule 144 holding period for the length of time that the security holder owning restricted securities of a reporting company engages in hedging activities; however, the modifications to Rule 144 did not include the proposed tolling provision as adopted.  The SEC was persuaded by public commenters that the proposed tolling provisions would be unduly complicated and require security holders and intermediaries to incur significant costs of monitoring hedging activities.  The SEC will monitor the hedging activities and propose new changes if necessary at a later date.

VI.  Codify Interpretive Positions Relating To Rule 144

The New Rules codify certain prior SEC staff interpretations related to Rule 144.  These interpretations include the positions that: 

  1. securities acquired under Section 4(6)1 of the Securities Act are considered "restricted securities" under Rule 144(a)(3);
  2. security holders may count ("tack") the period during which they held the restricted securities of the predecessor company before the predecessor reorganized into a holding company structure when calculating the holding period of the restricted securities of the holding company received in the reorganization, when specified conditions are met;
  3. if securities sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities will be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms;
  4. upon a cashless exercise of options or warrants (excluding options or warrants not purchased for cash or other property, such as employee stock options), the newly acquired underlying securities are deemed to have been acquired when the corresponding options or warrants were acquired, even if the options or warrants did not originally provide for cashless exercise by their terms;
  5. as long as pledgees of securities are not the same "person" under Rule 144(a)(2), a pledgee of securities may sell the pledged securities without having to aggregate the sale with sales by other pledgees of the same securities from the same pledgor, as long as there is no concerted action by those pledgees;
  6. a selling security holder who satisfies Rule 10b5-1(c), by adopting a written plan for trading securities, may modify the Form 144 representation having to do with knowledge of material adverse information regarding the issuer to indicate that he or she had no knowledge of material adverse information about the issuer as of the date on which the holder adopted a written trading plan or gave the trading instructions in compliance with Rule 10b5-1(c).
  7. Rule 144 is not available for the resale of securities initially issued by either reporting or non-reporting shell companies (other than a business combination related shell company) or an issuer that has been at any time previously a reporting or non-reporting shell company, unless the issuer is a former shell company that meets specified conditions.
Worm/Wulff Codified And Modified


  On January 21, 2000, the Division of Corporation Finance concluded in a letter to NASD Regulation, Inc. that Rule 144 was not available for the resale of securities initially issued by companies that are, or previously were, blank check companies.3  As outlined in item 7 above, despite the general prohibition against reliance on Rule 144 with respect to securities acquired by shell companies or former shell companies, a security holder may resell securities subject to the Rule 144 if the following conditions are met:

  1. The issuer of securities that was formerly a reporting or non-reporting shell company has ceased to be a shell;

  2. The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;

  3. The issuer of the securities has filed all reports and material required to be filed under Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to filed such reports and materials), other than Form 8-K reports; and

  4. At least one year has elapsed from the time the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.

Form 10 information is the "prospectus type" information that a company would be required to file if it were registering a class of securities on Form 10 or Form 20-F under the Exchange Act.  In a typical reverse merger transaction, this information is provided in the current report on Form 8-K for the shell company that is filed within four business days of the closing of the reverse merger transaction.  If the shell in the reverse merger transaction is a foreign private issuer, then the Form 10 information is filed in a "shell company report" under the cover of Form 20-F and such filing is also done within four business days of the closing of the reverse merger transaction.  Form 10 information will be deemed filed when the initial filing is made with the SEC, rather than when the staff of the Division of Corporation Finance has completed its review of the filing or an amendment is made in response to staff comments, for purposes of the amendments.

Both restricted and unrestricted securities are subject to the same one-year waiting period.  Thus under the revised rules, Rule 144 is available for the resale of restricted or unrestricted securities that were initially issued by a reporting or non-reporting shell company or an issuer that has been at any time previously a reporting or non-reporting shell company subject to the conditions above.

Revisions To Securities Act Rule 145


Rule 145 currently provides, among other things, that exchanges of securities in connection with business combination transactions are deemed "sales" of those securities.  Rule 145(c) deems persons who were parties to such transactions or their affiliates, but not the issuer, to be underwriters.  As a result, under Rule 145(d), these persons have historically been subject to Rule 144 resale limitations. 

The modifications to Rule 145 eliminate the "presumptive underwriter" provision in Rule 145, except with regard to transactions involving shell companies.  Under Rule 145 as recently modified, only a party to a Rule 145(a) transaction involving shell companies, other than business combination related shell companies, or an affiliate of the party, will be deemed a presumed underwriter of the transaction. 

Those deemed underwriters will be permitted to resell their securities subject to paragraphs (c), (e), (f), and (g) of Rule 144 after 90 days have elapsed since the securities were acquired in the transaction.  After six months have elapsed since the securities were acquired in the Rule 145(a) transaction, the persons and parties will be permitted to resell their securities, subject only to the Rule 144(c) current public information requirement, provided that the sellers are not affiliates of the issuer at the time of sale and have not been affiliates during the three months before the sale.  After one year has elapsed since the securities were acquired in the transaction, the persons and parties will be permitted to resell their securities without any limitation under Rule 145(d), provided that they are non-affiliates at the time of sale and have not been affiliates during the three months before the sale.

Effective Date

The changes to Rule 144 and 145 will become effective on February 15, 2008.  The revised holding periods and other amendments that were adopted are "retroactive," meaning that they are applicable to securities acquired before or after February 15, 2008.

Footnotes

1. Section 4(6) provides an exemption from registration for an offering that does not exceed $5,000,000, is made only to accredited investors, does not involve any advertising or solicitation by the issuer or its agents, and for which a Form D has been filed.

2. Volume limitations in Rule 144(e) would apply only to affiliates.

3. See Division of Corporation Finance's letter to Ken Worm, NASD Regulation, Inc. (Jan. 21, 2000).  In that letter, the Division stated that "transactions in blank check company securities by their promoter or affiliates . . . are not the kind of ordinary trading transactions between individual investors of securities already issued that Section 4(1) [of the Securities Act] was designed to exempt."  The Division stated in its view that "both before and after the business combination or transaction with an operating entity or other person, the promoters or affiliates of blank check companies, as well as their transferees, are 'underwriters' of the securities issued . . .  Rule 144 would not be available for resale transactions in this situation, regardless of technical compliance with that rule, because these transactions appear to be designed to distribute or redistribute securities to the public without reliance with the registration requirements of the Securities Act."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.