SEC Rule 144
SEC Rule 144 Team Lead
Former DOJ Trial Attorney
Contact John directlySEC Rule 144 governs how people can transfer or sell their shares of control or restricted stock in a company. If followed to the letter, Rule 144 allows these shareholders to sell or transfer their securities without having to register them or go through the prospectus delivery requirements laid out by U.S. securities laws. This helps these shareholders pursue their financial interests without dealing with some of the other extensive regulations of securities law. If SEC Rule 144 is not strictly followed, shareholders can face the significant penalties that come with a securities violation.
The SEC compliance and securities litigation lawyers at Oberheiden P.C. have guided both shareholders and securities professionals through the requirements laid out by SEC Rule 144, ensuring that they were able to transfer their ownership shares without exposing themselves to legal liability, or protecting them from allegations of wrongdoing if they failed to follow the rule precisely enough for federal law enforcement.
SEC Rule 144: The Basics
SEC Rule 144 is a regulation that was promulgated by the U.S. Securities and Exchange Commission (SEC) in order to better enforce the Securities Act of 1933 (15 U.S.C. § 77a et seq.). While the extent and invasiveness of these SEC Rules is controversial, challenges to the SEC’s authority to enact them without the explicit power to do so by Congress have failed. To make matters worse, many of the SEC’s rules interpret ambiguous provisions within the Securities Act, and those interpretations are treated with great deference by federal courts, effectively solidifying them in U.S. securities law.
Among these rules is SEC Rule 144 (17 C.F.R. § 230.144). This Rule governs how shareholders can transfer or sell their shares if those shares are:
- Restricted securities, or
- Control securities.
Restricted securities include several different types of assets, none of which were issued as a registered offering. Some of the most common types of restricted securities include:
- Securities that were obtained directly from the issuer or an affiliate of the issuer in a transaction, or through a chain of transactions, that did not involve a public offering,
- Securities obtained under SEC Rule 144A,
- Employee stock benefit plans, and
- Securities obtained from the issuer and whose resale is regulated by Rule 502(d) or Rule 701(c).
Control securities are those held by affiliates to the company that issued them. They become restricted securities when they are bought from the affiliate.
Under the Securities Act, in order to transfer these types of shares, first shareholders generally have to either:
- Register them, or
- Comply with the prospectus delivery requirements.
However, SEC Rule 144 gives these shareholders a safe harbor when it comes to these requirements. How they can transfer their control or restricted securities without leaving that safe harbor and exposing themselves to liability will depend on whether they are affiliates or non-affiliates of the issuer, as well as on whether the issuer has to file periodic reports under the Securities Exchange Act of 1934.
Even once the requirements of SEC Rule 144 have been satisfied, shareholders still need to remove the restricted legend from their share certificates, if there is one.
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How Rule 144 Regulates Affiliates
An affiliate under SEC Rule 144(a)(1) is a person that controls, is controlled by, or is under common control of the issuer of the securities. The definition of “control” comes from 17 C.F.R. § 230.405(f), which states that it is contingent on the ability to influence management decisions, whether directly or indirectly. The control can be either direct, indirect, or through an intermediary. Some common affiliates are major shareholders, directors, or executive officers of the corporation that is issuing shares.
When the shareholder is an affiliate or is someone selling securities on the behalf of an affiliate, SEC Rule 144 prohibits transfers of control or restricted securities for:
- 6 months, if the issuer has legal reporting requirements under the 1934 Act, or
- 12 months, if the issuer of the securities does not have those reporting requirements.
This is known as the “holding period.” It generally begins when shareholders first acquire the individual security at issue – acquiring more of the issuer’s securities of the same class does not restart the holding period for previously owned securities.
Under SEC Rule 144, once the applicable holding period has passed, affiliates must:
- Ensure that there is adequate information openly available to the public concerning the issuer (17 C.F.R. § 230.144(c)(1)),
- Abide by the trading volume limitation of 17 C.F.R. § 230.144(e),
- Make the sale as an ordinary business transaction under 17 C.F.R. § 230.144(f)-(g), and
- File Form 144 as a notice of the proposed sale if there is a large enough amount of securities being transferred (17 C.F.R. § 230.144(h)).
Note that these additional requirements for the sale or transfer of control or restricted securities under Rule 144 continues indefinitely for affiliates. This means the trading volume limitation can prove especially onerous. This limitation keeps affiliates from selling more than the greater of the following in any three-month period:
- One percent of the outstanding shares of the particular class being sold, according to the most recent issuer’s report, or
- If the class of shares is listed on a stock exchange, the average weekly trading volume of the last four weeks.
Rule 144 and Non-Affiliates
Non-affiliates are people who both:
- Do not fall within the definition of an affiliate, and
- Who have not fallen within the definition of an affiliate in the last three months.
Non-affiliates are not as closely regulated as affiliates are by SEC Rule 144. Non-affiliates only have to comply with a holding period and, in some cases, disclose information about the issuer.
For non-affiliates with securities in a corporation that is an issuer with an obligated to file reports under the 1934 Act:
- During the first six months – the restricted securities cannot be sold or transferred,
- Between six months and one year – there is no limitation on the amount of securities that can be sold or transferred, so long as the non-affiliate ensures that adequate information about the issuer is known to the public, and
- After one year has passed – the non-affiliate can sell or transfer the shares unregulated by Rule 144.
If the securities are from an issuer that does not fall under the 1934 Act:
- The non-affiliate cannot sell or transfer the shares for a one-year holding period, and
- Once the year has passed, the shares can be sold unregulated by Rule 144.
Frequently Asked Questions About SEC Rule 144 and Oberheiden P.C.’s Legal Representation
What Information About the Issuer Must Be Public Under Rule 144?
In order to sell or transfer control or restricted shares during the holding period, affiliates and many non-affiliates of the issuer must ensure that adequate information about the issuer is publicly available. Details about that information are codified at 17 C.F.R. § 230.144(c) (SEC Rule 144(c)).
If the issuer is subject to the reporting requirements of the Securities Exchange Act of 1934, then this requirement is satisfied so long as these reports are both accurate and current.
If the issuer is not subject these reporting requirements, then the issuer has to make publicly available most of the information mentioned at SEC Rule 15c2-11(b)(5)(i) (17 C.F.R. § 240.15c2-11(b)(5)(i)). Importantly, the listing of this required information was changed in October, 2020 (85 Fed. Reg. 68205), so even experienced securities professionals should review Rule 144 before acting on their prior understanding of it.
Can I Sell Securities That Have a Restrictive Legend on the Certificate?
Many restricted securities have a legend on their certificate that labels the security as a restricted one. If your certificate has such a legend on it, you need to have it removed before you can legally sell it to the public, even if you have gone through all of the other requirements under SEC Rule 144. Having it removed requires the consent of the issuer – often from someone in the company’s legal department. Providing that consent is solely within the discretion of the issuer, and only with that consent can a transfer agent remove the legend from the certificate for the sale.
Why Doesn’t Oberheiden P.C. Call Itself the Best SEC Defense Firm in the Country?
Because we think that claims like these are best made by our clients. Oberheiden P.C. provides a unique type of legal representation, where all of the work done by our firm comes from senior-level lawyers with a high level of experience within the field of securities law and SEC defense. Unlike with other law firms in the practice, your legal representation is done entirely by the lawyers that you had in mind when you hired our firm – not by some junior associates under the supervision of those lawyers.
Lots of our clients have found this type of legal representation to be exceptional, and have left numerous testimonials about Oberheiden P.C. expressing that feeling.
Securities Litigation Lawyers at Oberheiden P.C.
Maneuvering through the requirements of SEC Rule 144 is not the only way to sell restricted or control securities. However, for many shareholders it is the easiest way to do so. Unfortunately, failing to follow the requirements of SEC Rule 144 can lead to the serious consequences of selling unregistered securities.
The SEC compliance attorneys at the national law firm Oberheiden P.C. have guided countless regulated securities professionals through the maze of regulations that is SEC Rule 144, and have defended numerous others who have been accused of wrongdoing by the SEC.
Contact them online or call their law office at (888) 680-1745 for legal help today.