Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission (SEC) that provides guidelines for the sale of restricted and control securities in the public market. The rule outlines the conditions under which these securities can be sold without being registered with the SEC, ensuring that the sale process complies with federal securities laws and prevents market manipulation.
Key Aspects of Rule 144:
- Restricted Securities:
- Restricted securities are typically acquired through private placements, Regulation D offerings, employee stock benefit plans, or other transactions not involving a public offering. These securities are subject to resale restrictions and cannot be sold in the public market immediately after acquisition.
- Control Securities:
- Control securities are held by affiliates of the issuing company, such as executives, directors, or large shareholders who have significant influence over the company. Even if these securities were acquired in a public market transaction, their sale is regulated to prevent potential market manipulation due to the insider status of the holders.
- Holding Period:
- Before restricted securities can be sold under Rule 144, they must be held for a certain period:
- For reporting companies (companies that file periodic reports with the SEC), the holding period is six months.
- For non-reporting companies (companies that do not file periodic reports with the SEC), the holding period is one year.
- After the holding period, the securities may be sold, subject to other conditions of Rule 144.
- Before restricted securities can be sold under Rule 144, they must be held for a certain period:
- Current Public Information:
- Adequate current public information about the issuing company must be available before securities can be sold under Rule 144. This typically means the company must have filed all required reports with the SEC, making financial and operational information publicly accessible.
- Volume Limitations:
- The amount of securities that can be sold by an affiliate within a three-month period is limited. For equity securities, the volume limit is the greater of:
- 1% of the outstanding shares of the same class being sold, or
- The average weekly trading volume of the securities on all national securities exchanges or reported through an automated quotation system during the four weeks preceding the sale.
- The amount of securities that can be sold by an affiliate within a three-month period is limited. For equity securities, the volume limit is the greater of:
- Manner of Sale:
- Sales of securities under Rule 144 must be conducted in a broker’s transaction or directly with a market maker. This provision ensures that the sale is conducted in a manner that prevents market manipulation.
- Filing a Notice of Proposed Sale:
- Affiliates must file a Form 144 with the SEC if they intend to sell more than 5,000 shares or if the aggregate sale price exceeds $50,000 within a three-month period. This notice provides transparency regarding the sale of large blocks of securities by insiders.
- Termination of Affiliate Status:
- Once an individual is no longer an affiliate of the issuing company, they are not subject to the volume limitations or manner of sale requirements, but they must still observe the holding period for restricted securities.
Example:
An executive at a publicly traded company acquires restricted stock as part of their compensation package. Before selling the shares in the public market, the executive must hold the stock for at least six months (if the company is a reporting company). After the holding period, the executive can sell the shares under Rule 144, but they must adhere to volume limitations and other conditions. If the executive plans to sell a large amount of stock, they must also file Form 144 with the SEC.
Importance:
- Facilitates Market Transactions: Rule 144 provides a legal pathway for the sale of restricted and control securities, enabling investors to convert these securities into cash while ensuring compliance with securities laws.
- Protects Investors: By imposing conditions on the sale of restricted and control securities, Rule 144 helps prevent market manipulation and protects the interests of public investors.
- Transparency: The rule ensures transparency in the sale of large blocks of securities by affiliates, providing the market with important information about insider transactions.
Rule 144 is a crucial regulation that governs the sale of restricted and control securities, ensuring that such transactions are conducted in a manner that protects the integrity of the financial markets and complies with federal securities laws.
