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Publication

January 25, 2008Client Alert

Securities and Exchange Commission to Enact Revisions to Rule 144 to Shorten Holding Periods and Other Requirements for Affiliate and Non-affiliate Security Holders in Connection with Resales of Unregistered Securities

Effective February 15, 2008, revisions to Rule 144 under the Securities Act of 1933 (the “Securities Act”) adopted by the Securities and Exchange Commission (“SEC”) will, among other things, shorten in many cases the period of time that security holders are required to hold their non-registered securities before they are allowed to resell them. The 2008 revisions also eliminates in certain circumstances various requirements previously applicable to resales under Rule 144.

The Securities Act requires registration with the SEC of all offers and sales of securities in interstate commerce or by use of the U.S. mail, including resales of securities, unless an exemption from the registration requirement 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.” Rule 144 provides a safe harbor from the definition of "underwriter" such that if a selling security holder satisfies all of Rule 144's conditions in connection with the resale of his or her securities, he or she is deemed not to be an "underwriter" and the Section 4(1) exemption would generally apply, thereby permitting the resale of his or her securities without registration.

In general, the 2008 revisions will make the conditions for Rule 144’s applicability less burdensome. Previously, Rule 144 required that all security holders must hold their securities for at least one year and, thereafter, may only sell subject to various requirements, such as that there be sufficient public information about the issuer, that the volume of securities sold be within certain limits, and that the securities be sold in “brokers’ transactions” or in transactions directly with a “market maker” (this last requirement is commonly referred to as the “manner of sale” requirement). In addition, security holders were required to file a Form 144 with the SEC if the securities sold were in excess of 500 shares or were sold at an aggregate purchase price in excess of $10,000. The requirements of Rule 144 applied equally to both “affiliates” (essentially, security holders who participate, directly or indirectly, in the control the issuer) and “non-affiliates” (all other security holders), except that non-affiliates became no longer subject to these requirements after holding their securities for two years.

The most notable modifications to Rule 144 made by the 2008 revision concern the required holding periods and applicability of the volume, “manner of sale” and other requirements described above. Under the revised Rule 144:

  • Non-affiliates who hold non-registered securities of reporting companies (issuers that are required to file periodic reports under the Exchange Act of 1934) may now resell those securities freely (i.e. without being subject to the volume, “manner of sale” and other requirements described above) after holding those securities for six months, provided that sufficient public information about the issuer (such as through the continued filing of periodic reports) exists during the six months following the end of the security holder’s six month holding period, and provided further that the security holder has not engaged in certain hedging transactions.
  • Non-affiliates who hold non-registered securities in non-reporting companies may now resell those securities freely after holding their securities for one year.
  • Affiliates who hold non-registered securities of reporting companies may now resell those securities after holding those securities for six months, provided that the security holder has not engaged in certain hedging transactions, subject, however, to the volume, “manner of sale” and other requirements described above.
  • Affiliates who hold non-registered securities in non-reporting companies may now resell those securities after holding those securities for one year, subject, however, to the volume, “manner of sale” and other requirements described above.

    

 Affliate 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 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 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 requirments.

     

    Other changes made by the 2008 revision include eliminating the "manner of sale" limitations with respect to resales of all debt securities; eliminating in all instances the requirement that non-affiliates file Forms 144 in connection with resales under Rule 144; and increasing the thresholds that would trigger a Form 144 filing requirement to 1,000 units or $50,000 in aggregate purchase price.

    Lastly, the 2008 revision codifies the SEC’s positions concerning a variety of other matters, such as: the effect that the creation of a holding company structure has on a security holder's holding period; the calculation of holding periods in connection with cashless exercises of options and warrants; the aggregation of a pledgee's resales with resales by other pledgees of the same security; the extent to which securities issued by "reporting and non-reporting shell companies" are eligible for resale under Rule 144; and the representations required from security holders relying on Rule 10b5 - 1(c).

    For more information regarding the impact of the 2008 revision to Rule 144, please contact Gregory J. Lynch at 608.283.2240, or gjlynch@michaelbest.com, or Geoffrey R. Morgan at 414.225.2752, or grmorgan@michaelbest.com.

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