Rule 144: How the Sale of Restricted Securities Works
If you want to sell restricted or control securities, you’ll need to be mindful of Rule 144 requirements.
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Depending on your role within a company, you may have acquired shares of a private company. If you no longer want some or all of them, don’t worry, they’re not impossible to offload. However, you’ll need to follow Rule 144 requirements.
What is Rule 144?
Rule 144 is an exemption to federal laws that require companies to complete an extensive disclosure and registration process with the Securities and Exchange Commission before they can sell shares to the public. Private companies that meet the conditions of Rule 144 may be able to offer shares to the public without completing that process.
Securities Act of 1933
The purpose of the Securities Act of 1933 is to ensure that investors receive the necessary information to make informed decisions when purchasing securities and to eliminate fraud during the sale of securities, which is why it’s known as the “truth in securities” law.
In order to achieve these objectives, the law requires companies to register their securities with the Securities and Exchange Commission before being sold. However, not all securities must be registered, which is where Rule 144 comes into play for restricted and control securities.
Restricted securities
Restricted securities are securities that investors obtain from an issuing company or its affiliate through unregistered or private sales, such as:
Private placements. When securities are sold privately to a limited group of investors, rather than through the open, public markets.
Regulation D offerings. Regulation D offers various exemptions that allow some companies to offer securities without registration.
Equity compensation. Equity- or stock-based compensation benefits can result in employees having restricted securities.
Startup financing. Budding startup companies often offer shares in exchange for seed money from angel investors. These shares can be considered restricted securities.
Control securities
Control securities refer to securities held by an affiliate, also known as a control person. This is someone with the ability to influence or control an issuing company such as a director, executive or large shareholder.
Rule 144 conditions
Companies must meet five primary conditions in order to get the exemption under Rule 144 (a “safe-harbor” exemption).
1. Holding period requirement
Before selling any restricted securities, you must hold them for a certain time period. The time frame depends on whether the issuing company is subject to reporting requirements under the Securities Exchange Act of 1934. For those considered a “reporting company” for at least 90 days, securities must be held for a minimum of six months. Those considered a “non-reporting company” for at least 90 days must be held for more than one year.
Note that this holding period requirement isn't applicable to control securities, although they may be subject to other restrictions under Rule 144.
2. Current public information requirement
To sell unregistered securities, issuer information that is current and sufficient must be available to the public. For instance, a “reporting company” must file all periodic reports required by the Exchange Act for the year prior to the sale. A “non-reporting company” has less stringent reporting requirements but still must have adequate information publicly available, such as its financial statements along with information surrounding the nature of its business and the identities of its directors and officers.
3. Notice of proposed sale requirement
All affiliates are required to file a Form 144, notifying the SEC if the sale of securities within any three-month period exceeds either 5,000 shares or a total dollar amount of $50,000.
4. Volume restriction requirement
When an affiliate sells the issuer’s equity securities, whether restricted or not, there are limitations on the number of securities sold within any three-month time frame. Securities sales cannot exceed the greater of the following:
1% of the shares outstanding of the same share class as the ones being sold (according to the most recent report of the issuer).
The average weekly reported trade volume of the security during the four calendar weeks preceding the sales notice (either reported by the automated quotation system of a registered securities association or on all national securities exchanges).
5. Trading requirements
Affiliate sales must be conducted as normal, routine trading transactions. This means that neither the broker nor the affiliate (seller) can solicit others to purchase the securities, and brokers cannot be paid more than a typical brokerage commission.
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