Rule 144 of the Securities Law is good knowledge for those who work in startups. Suppose you have recently purchased some stock options in your company. And while it’s a generous gesture from the company, it’s not interested in holding on to the shares and wants to sell it.
That sounds pretty easy, right? Well, not so fast. Selling securities, such as stocks, on the public market can be a complicated process.
To get started, you’ll need to understand the requirements of Rule 144 of the Securities Act. To help understand how to sell securities in the public marketwe have what you need to know about Rule 144.
What is rule 144?
Before we get into Rule 144, it’s worth reviewing the Securities Act of 1933 a bit.
He main objectives of the Securities Law are to ensure that investors receive the necessary information about the securities being offered for public sale and to eliminate fraud and deception in the sale of securities. To achieve these goals, the Securities and Exchange Commission (SEC) requires that all securities offered in the US be registered or qualify for an exemption from registration.
That’s where Rule 144 comes in. Rule 144 provides an exemption from the registration requirements and allows for the public resale of “restricted” and “control” securities if specific conditions are met.
Do you want to know more about values? Check out our guide on Howey’s test for more detailed information.
What are constrained and control values?
To fully understand Rule 144, it is essential to know the restricted and control values.
Restricted securities, also known as restricted shares, refer to securities obtained through private, unregistered sales of an issuing company or its affiliate. For example, investors they normally receive restricted values via Regulation D offerings (another type of exemption from SEC filing requirements), compensation for professional service, employee stock benefit plansprivate placement offers, or in exchange for providing start-up capital.
Meanwhile, the controlling securities are held by a subsidiary of the issuing company. According to the SECOND, an affiliate is someone “such as an executive officer, director, or controlling shareholder, in a controlling relationship with the issuer. Control means the power to direct the management and policies of the company in question, whether through ownership of voting securities, by contract or otherwise.”
With restricted values, you will typically receive a certificate stamped with a “restricted” legend. This legend indicates that the securities cannot be sold on the market unless they are registered with the SEC or are exempt from registration requirements. Control value certificates are generally not stamped with a legend.
Why is rule 144 important?
It is quite common for employees, business owners, and investors to own controlled or restricted securities. For example, you may receive these securities as part of an M&A transaction package or a employee benefits package.
what does Rule 144 important is the registration exemption it provides, which allows investors and shareholders to sell their restricted securities for a profit. And that makes the values more valuable than if they were held indefinitely.
Additionally, compliance with Rule 144 protects sellers from being treated as “subscribers.” The Securities Law definition of “subscriber” includes “Those who acquire securities of the issuer with a view to their distribution.” If you are treated as an underwriter and you sell securities on the public market without registering, you will soon find yourself in trouble with the SEC.
What are the conditions of rule 144?
So how can you sell restricted or controlling securities in the public market? As mentioned above, Rule 144 contains specific conditions that must be met in order to sell these securities. However, not all requirements apply to all resales.
Although the rule is not “exclusive means to sell restricted or control securities”, provides a safe harbor exemption. That means sellers will be protected from legal or regulatory liability as long as they meet the required conditions.
The five conditions of Rule 144 are:
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holding period
The first requirement to address is the holding period. To sell restricted securities, you must hold them for a certain period of time. If the company that issued the restricted securities is a “reporting company” (meaning it is subject to the reporting requirements of the Securities Exchange Act of 1934), the minimum holding time is six months. If the issuer is not a reporting company, the holding period is at least one year. The holding period only applies to restricted securities, but control securities are subject to other conditions under Rule 144.
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current public information
Before a sale, there must be enough public information about the issuing company. For reporting companies, this means filing periodic reports as required by the Stock Exchange Act of 1934. Although a non-reporting company does not have such stringent reporting requirements, it still must ensure that certain information, such as details about the nature of your business, the identity of your officers and directors, and financial statements – is publicly available.
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Trading Volume Formula
The third condition gets a bit more complicated and involves limiting the number of securities an affiliate can sell during a specific period of time. Under this condition, an affiliate cannot sell more than 1% of outstanding shares of the same class during any three-month period. Outstanding shares refer to the total shares of a company held by investors, including restricted shares.
If a share class is listed on a stock exchange, only 1% of the outstanding shares or the average trading volume of the previous four weeks, whichever is greater, can be sold. To over the counter stocks (securities traded through a network of stockbrokers rather than on a major exchange), the 1% measure applies.
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Ordinary Brokerage Operations
The fourth condition dictates that standard business practices apply to affiliate sales. In particular, this means that brokers cannot receive a higher than normal commission. In addition, brokers and sellers may not solicit others to purchase the securities.
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notice of proposed sale
Finally, affiliates must file a notice with the SEC if the sale involves more than 5,000 shares or the value is greater than $50,000 in any three-month period.
It is important to note that even if you have met all the requirements of Rule 144, you still cannot sell restricted securities on the public market. until the “restrictive” legend is removed from the certificate. And only a transfer agent can remove a restrictive legend. transfer agents These are usually banks or trust companies, but occasionally a company acts as its own transfer agent.
How can the restrictive legend be removed? It is best to contact the company that issued the securities, or the company’s transfer agent, to inquire about the procedure for removing a legend. Advice: Transfer agents are often identified on company websites under “Investor Relations.”
To whom does Rule 144 of the Securities Law apply?
So how do you know if Rule 144 applies to you?
First, if you are an affiliate of the issuing company, or someone selling on behalf of an affiliate, you will need to meet all the conditions of Rule 144 to sell restricted and control securities.
Things are a bit different for sellers who are not associated with the issuing company (also known as non-affiliates). For example, let’s say you’re not an affiliate and have owned restricted securities for more than a year. In that case, there is no need to meet any of the conditions in Rule 144. Now, if you have held restricted securities for more than six months but less than a year and the issuer of the securities is a “reporting” company, you can sell the securities provided it meets the current public disclosure condition.
Due diligence is key
There is no question that Rule 144 is a useful exemption from the registration requirements. But it’s also a complicated process that can be confusing and daunting.
If you intend to follow Rule 144 to sell securities on the public market, the first step in the process should be to check with your broker. Check to see if your broker accepts restricted or control securities and can address the Rule 144 conditions to allow you to sell. You can also consult with an attorney who specializes in securities law.
A good rule of thumb to follow when it comes to Rule 144 is that due diligence is key to a successful (and legal) securities sale.
