Sec Rule 144

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21 Aug, 2024

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SEC Rule 144 is a regulation created by the Securities and Exchange Commission (SEC) that sets forth certain conditions under which restricted, unregistered, or controlled securities can be sold or resold in the public market. It provides a framework for the sale of restricted or controlled securities while protecting the interests of investors by ensuring that they receive adequate disclosure and preventing insider trading.

It helps to promote liquidity in the securities markets. This can benefit investors and issuers by making buying and selling securities easier and providing a more efficient way to raise capital. In addition, it protects investors by ensuring they have access to adequate information about the issuer and the securities available for sale before making an investment decision.

What Is SEC Rule 144?

Rule 144 provides a framework for selling restricted and controlled securities in the public market.
The rule applies to reporting and non-reporting companies and allows for the sale of securities to accredited and non-accredited investors.
There are different SEC rule 144 requirements for selling restricted and controlled securities, including holding periods, volume limitations, and information requirements. In addition, rule 144A exempts selling specific securities to qualified institutional buyers (QIBs).

SEC Rule 144 Explained

SEC Rule 144 provides a framework for selling restricted and controlled securities, which allows holders to sell them in the public market under confined conditions. Without this rule, holders of restricted and controlled securities would have limited options for selling their shares, which could lead to decreased liquidity and potentially lower valuations.

Second, it protects the interests of investors by ensuring that they receive adequate disclosure about the securities being sold. For example, a holder of restricted securities must provide information about the issuer, the terms of the securities, and the holder's relationship with the issuer, among other things. This information helps investors decide whether to buy or sell these securities.

Third, it helps prevent insider trading by restricting the ability of affiliates of the issuer to sell securities in the market. For example, an officer or director of a company who holds control securities can only sell those securities once certain conditions are met, such as having the stakes for a certain period and filing a notice of sale with the SEC. This helps prevent insiders from using their knowledge of the company's operations to sell their securities at an unfair advantage.

Finally, it helps promote the integrity and transparency of the securities markets by ensuring that all sales of restricted and controlled securities comply with SEC regulations. This helps prevent fraud and other illegal activities that could harm investors and undermine market confidence.

Amendment

SEC Rule 144 has been amended several times since its original adoption in 1972. The most significant amendments are summarized below:

The 1990 Amendment: This amendment shortened the holding period for securities from two years to one year. It also increased the volume limitations for sales of restricted securities and made other changes to the rule.
The 2007 Amendment: This revised Rule 144 to apply to securities issued by both reporting and non-reporting companies. It also eliminated the requirement for holders of restricted securities to provide certain information to the SEC when reselling their securities.
The 2008 Amendment: This amendment revised Rule 144 to allow holders of restricted securities to "tack on" the holding period of prior holders when calculating their holding period. This change made it easier for holders of restricted securities to satisfy the holding period requirement and sell their stakes in the public market.
The 2020 Amendment: This changed Rule 144 to modernize and simplify the rule. It eliminated the volume limitations for sales of securities by non-affiliates of reporting companies, increased the volume limitations for sales of restricted securities by affiliates of reporting companies, and made other changes to the rule.

Examples

Let us understand it in the following ways.

Example #1

Suppose a start-up founder holds many restricted shares in their company. The founder has been unable to sell these shares due to the holding period requirement under Rule 144, and the lack of liquidity has caused financial strain on the founder. However, once the holding period has expired, the founder can sell the shares and realize a significant financial gain.

Example #2

SEC Rule 144 in the news in recent years is the case of Facebook's initial public offering (IPO) in 2012. Following the IPO, many early investors in Facebook could not sell their shares due to the holding period requirement under Rule 144. As a result, the market for Facebook shares became illiquid, and the price of the shares declined. This situation caused frustration among many early investors, and some even filed lawsuits against Facebook and its underwriters for allegedly misleading investors about the company's financial prospects. Ultimately, as the holding period expired, early investors could sell their shares, and the market for Facebook shares became more liquid.

Holding period

The holding period under SEC Rule 144 filing is when a holder of restricted securities must hold their securities before they can be sold in the public market. The holding period ensures that investors can access adequate information about the issuer and the securities sold before making an investment decision.

The length of the holding period varies depending on the type of securities and the circumstances of the sale. Generally, the holding period for securities is six months, but it can be longer for specific securities or under certain conditions. For example, the holding period for securities acquired in a private placement or through a Regulation A offering is generally one year.

It's important to note that the holding period applies only to the original holder of the restricted securities. If the stakes are transferred to another holder, the new holder must also satisfy the holding period requirement before selling the securities in the public market.

The holding period is an essential requirement under SEC Rule 144 as it helps to prevent market manipulation. By requiring holders of restricted securities to hold them for a certain period, the rule ensures that the stakes are sold in the public market only after sufficient information about the issuer and the securities has been made available to investors. This helps protect the securities markets' integrity and promote investor confidence.

Rule 144 vs Rule 144A

SEC Rule 144 and Rule 144A are related to the sale of restricted and controlled securities. Yet there are some critical differences between the two rules. Here are some points of comparison:

Applicability: SEC Rule 144 form applies to the sale of restricted and controlled securities by reporting and non-reporting companies. In contrast, Rule 144A applies to sell specific securities by reporting companies.
Types of securities: Rule 144 applies to selling all restricted and controlled securities. In contrast, Rule 144A applies only to certain types of securities, including debt securities and preferred stock.
Type of investors: Rule 144 allows the sale of restricted and controlled securities to accredited investors and non-accredited investors. At the same time, Rule 144A qualified institutional buyers apply only to sales to QIBs with at least $100 million in assets under management.
Holding period: The holding period under Rule 144 is generally six months for securities. In comparison, there is no holding period requirement under Rule 144A.
Resale restrictions: Under Rule 144, resales of restricted securities depend on certain volume limitations and other regulations. In contrast, there are fewer restrictions on the resale of it under Rule 144A.
Information requirements: Under SEC Rule 144 instructions, holders of restricted securities must provide certain information to the SEC. Especially when reselling their securities, there are no such requirements under Rule 144A.

Frequently Asked Questions (FAQs)

1. To whom does sec rule 144 apply?

It applies to holders of "restricted securities" and "controlled securities" who wish to sell them in the public market. In addition, it applies to reporting and non-reporting companies and allows the sale of securities to accredited and non-accredited investors.

2. When does rule 144 apply?

The rule sets forth specific requirements that must be met before the securities can be sold, including the time they must be held before they can be sold, the volume limitations on sales, and the filing of specific reports with the SEC.

3. What is the purpose of rule 144?

The purpose of Rule 144 is to facilitate the sale of restricted and controlled securities in a way that promotes liquidity, protects investors, and maintains the integrity of the securities markets.