Rule 144 of the Securities Act of 1933 allows investors who purchased restricted stock to sell that stock into the open market, subject to certain conditions. The purpose of this article is to summarize Rule 144, and to provide a practical outline for you to sell restricted stock that you may hold.
History of Rule 144
The Securities Act of 1933 (the “Securities Act”) requires all offers and sales of securities in interstate commerce to be either registered or have a valid exemption from registration. Rule 144 under the Securities Act creates a safe harbor for the sale of securities under the exemption provided for in Section 4(1) of the Securities Act. Section 4(1) provides an exemption for transactions by any person other than an issuer (the company), underwriter or dealer. Historically, Rule 144 has treated shares held by affiliates and non-affiliates different in terms of the amount of time each must hold the shares prior to qualifying to use Rule 144, whether the issuer was a reporting or non-reporting company (one year for reporting companies and two years for non-reporting companies) and certain volume limitations.
Rule 144 Amendments
Effective February 15, 2008, the SEC amended Rule 144. These amendments have been discussed in detail over the past year; but in a nutshell, affiliate shareholders are subject to the following in order to utilize Rule 144: (i) six month holding period if the shares are held in an Exchange Act reporting company, one year for a non-reporting company, (ii) the company must have current public information, (iii) volume limitations, and (iv) filing of a Form 144. For non-affiliate shareholders, they are subject to the following in order the utilize Rule 144 as a resale exemption: (i) six month holding period if the shares are held in an Exchange Act reporting company, one year for a non-reporting company, and (ii) if the shares are shares of an Exchange Act reporting company and the shareholder is attempting to sell after six months and less than one year, then the company must have current public information.
Rule 144 and Shell Companies
Additionally, under the amendments to Rule 144, the Rule is not available for the resale of securities initially issued by “(i) An issuer …. that has “(A) no or nominal operations; and (B) Either: (1) no or nominal operations; (2) assets consisting solely of cash and cash equivalents; or (3) assets consisting of any amount of cash and cash equivalents and nominal other assets; or (ii) an issuer that has been at any time previously an issuer described [above].” See Rule 144(i)(1).
However, an issuer can “cure” its shell status by meeting the following requirements if the company:
(1) is no longer a shell company as defined in Rule 144(i)(1);
(2) has filed all reports (other than Form 8-K reports) required under the Exchange Act for the preceding 12 months (or for a shorter period that the issuer was required to file such reports and materials); and
(3) has filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer an issuer described in Rule 144(i)(1), and at least one year has elapsed since the issuer filed that information with the Commission.
See Rule 144(i)(2).
The SEC has provided a summary of Rule 144 on its website.
Practical Steps to Selling Under Rule 144
Once you determine that you have satisfied the applicable holding period, and you decide that you want to prepare to sell your stock, here are the steps to follow. Note that it will take between 1 and 3 weeks for this to be processed before you will be able to sell your stock, so plan accordingly.
Step 1 – Identify and document your acquisition date. You will be asked to represent, and confirm with paperwork, the date you acquired the stock. For most purchasers, this can be done with a fully signed securities purchase agreement, and a copy of the check or wire instructions you used to pay for the shares. Note that the date of the agreement, together with the date of your payment, can be used even if the issuer took a period of time to issue your stock certificate.
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