On Feb. 15, 2008, newly adopted amendments to Securities Act Rule 144, which governs private resales of restricted securities between qualified institutional buyers, will go into effect, allowing institutional shareholders of both public and private companies to resell shares without registration. The amendments to Rule 144 were adopted in order to simplify compliance with the rule and to further facilitate resales, in order to promote efficiency of the capital markets. The amendments apply both to affiliate and non-affiliate shareholders, albeit in slightly different ways. Following are the most important aspects of the amendments.
Sales made by “non-affiliates”
For sales of equity securities by non-affiliates, meaning persons other than directors, executive officers and controlling stockholders of the issuer, the following rules apply:
- Shares of a “public company” can be resold after six months following the acquisition from the issuer. A public company for this purpose, is a company for which, as of the date of the exempt resale, the issuer has had a class of securities registered under the Securities Exchange Act for at least 90 days.
- As with the prior terms of Rule 144, shares of a non-public company will retain a one-year holding period.
- Sales are not subject to the volume limitations formerly imposed by Rule 144(e), or to other conditions of Rule 144, except that during the first six months after the holding period expires, sales remain subject to the “current public information” requirement of Rule 144(c), which conditions the use of the rule on timely filings by the issuer of all filings required under the Exchange Act.
- The SEC expressly stated that shares held by non-affiliates need not retain a restrictive legend after the first anniversary of the non-affiliate's purchase (in the absence of contractual restrictions or other limitations determined by the issuer in its discretion).
Sales made by “affiliates”
For sales of equity securities by affiliates, including directors, executive officers and controlling stockholders of the issuer, the following rules apply:
- Shares of a public company can be resold after six months following the acquisition from the issuer, but remain subject to the volume limitations as well as the “current public information” requirement. As with prior versions of the rule, the volume limitations limit sales by the affiliate in any three-month period to a maximum of one percent of the outstanding shares of the class, or the average weekly trading volume during the preceding four calendar weeks, whichever yields a greater number.
- Rule 144 sales of equity securities must be conducted through certain types of brokerage transactions, although these limitations were relaxed to expand the types of brokerage sales permitted. Finally, if the trades during any three-month period involve more than 5,000 shares or $50,000 in value, such sales require the seller to file a Form 144.
- Shares of a non-public company retain a one-year holding period and remain subject to the public information requirement, volume limitations, brokered sale, and Form 144 requirements.
Computation of holding periods
The amendments also make two important clarifications regarding the computation of the holding periods described above, both of which are relevant to warrant and stock option exercises. As many readers recognize, there is a “tacking” rule that provides that for purposes of the Rule 144 holding period, shares issued on exercise of an option through a cashless exercise provision are deemed to have been acquired as of the date the option was acquired. The amendment clarifies the following:
- Unlike options and warrants issued for cash or property, for stock options that do not involve a financial stake by the optionee at the time of the grant, such as employee stock options, the holding period begins to run as of the date of exercise.
- In the event an option issued without a cashless exercise provision is amended to include such a provision, the holding period begins to run at the earlier of the date of exercise or, if the option was amended upon the payment of consideration other than an exchange of securities of the issuer, the date of the amendment to the option.
Rules affecting debt securities
Debt securities, including non-participating preferred stock and asset-backed securities, are subject to the following rules:
- Non-affiliates may resell the securities after six months without reference to the volume limits, brokered-sale requirements, and current public information requirements as with equity securities described above.
- Affiliates may resell debt securities after six months (subject to the current information requirement) or one year (without reference to the information requirement) in amounts up to 10 percent of the tranche (or 10 percent of the class in the case of non-participating preferred stock). There is no brokered-sale requirement for debt securities, and the Form 144 requirements apply only to sales of securities in amounts greater than $50,000 in any three-month period.
These amendments are the culmination of more than 10 years of consideration by the SEC and debate among securities practitioners. As revised, Rule 144 is expected to significantly increase liquidity for non-affiliates holding restricted securities, and for all affiliates.
We recognize that while substantially simplified, these rules may not be completely intuitive, and we encourage readers to consult with DWT or your own securities counsel for clarifications or for questions not directly addressed by this bulletin.