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Relaxed Resale Restrictions on Restricted Stock Go Into Effect

On February 15, 2008, revised Rule 144 under the Securities Act of 1933 (Securities Act) will go into effect. Rule 144 is a safe harbor rule permitting resales of restricted securities and securities held by an issuer’s affiliates. The revisions are intended to make it easier to raise capital by permitting earlier sales and reducing the reporting requirements.

BACKGROUND
The Securities Act requires all offers and sales (including resales) of securities to be registered with the Securities and Exchange Commission (SEC), unless an exemption from the registration requirement is available. When a person holds unregistered securities received from an issuer or an affiliate, subsequent resales may make the person an “underwriter” under the Securities Act. Rule 144 was adopted to provide a safe harbor exemption from the definition of “underwriter.” Selling security holders who satisfy the conditions of Rule 144 are deemed not to be an underwriter and, thus, may resell their restricted securities.

THE 2008 REVISIONS
The 2008 revisions to Rule 144 are the most significant amendments to that rule in ten years. With these amendments, the new Rule 144 will:

  • shorten the required holding period for restricted securities from one year to six months for reporting companies;[1] for non-reporting companies, the holding period will remain one year;
  • eliminate all restrictions other than the “current public information” requirement for restricted securities held by non-affiliates of reporting companies after six months;
  • eliminate all restrictions for restricted securities held by non-affiliates of all companies after one year;
  • eliminate the manner of sale requirements for debt securities and provide an alternative volume limitation equal to 10% of a particular tranche in any three-month period;
  • revise the manner of sale requirements for resales of equity securities by affiliates to permit resales through “riskless principal transactions”;[2]
  • eliminate the Form 144 notice requirement for sales by non-affiliates;
  • raise the Form 144 filing thresholds for affiliates to the lesser of 5,000 shares sold or shares having a value of at least $50,000 (compared to the previous trigger of 500 shares and $10,000 minimum value); and 
  • codify specific technical SEC staff interpretations under Rule 144, including to permit tacking holding periods upon the cashless exercise of a warrant or upon conversion or exchange of securities by the issuer, and to permit removal of a restrictive legend even if the stock is not sold.

The table at the end of this Bulletin summarizes the permitted resales of restricted securities under revised Rule 144.

RULE 145
Rule 145 imposes restrictions on affiliates of either the acquiror or the target company selling publicly the securities they received in a business combination, even where the securities issued in the business combination were registered under the Securities Act. 
Rule 145 was revised to eliminate the presumptive underwriter provision in connection with business combinations (except for transactions involving shell companies) and to modify the resale restrictions. Under revised Rule 145, affiliates of a target company who receive registered shares in a Rule 145 business combination transaction, and who do not become affiliates of the acquiror, will be able to immediately resell the securities received by them into the public markets without registration (except for affiliates of a shell company). However, affiliates of the acquiror, and those who become affiliates of the acquiror after the acquisition, will still be subject to the Rule 144 resale conditions generally applicable to affiliates. 
Securities issued in a business combination transaction as a private placement will continue to be “restricted securities” that must be resold in accordance with the applicable Rule 144 restrictions.
ACTION ITEMS
If you are holding restricted stock, check to see if you have held the stock for the requisite period and that you are eligible to sell the stock. In some cases, you must still comply with some of the requirements of Rule 144.

If you have held the restricted securities for the requisite period, you may have the legend removed even if you have no intention of presently selling the shares. This is important so that when you decide to sell the stock, there is no delay or time lapse that may interfere with the sale.

* * *
If you have any questions about any of these changes, please call or e-mail your regular Gordon Feinblatt attorney or contact a member of the Firm's Securities Law Practice Group:

Abba David Poliakoff

Michele L. Bresnick

Andrew D. Bulgin 

410-576-4067

410-576-4216

410-576-4280 

apoliakoff@gfrlaw.com

mbresnick@gfrlaw.com

abulgin@gfrlaw.com

 

This bulletin is designed to inform you of current legal developments and should not be construed as legal advice or opinion concerning specific factual situations.

[1] A “reporting company” is an issuer that is, and has been for at least ninety days, subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

[2] Revised Rule 144 defines a “riskless principal transaction” as a transaction where, after having received an order from a customer, a broker or dealer purchases or sells the security in the market as a principal to satisfy the order.

 

Table – Permitted Resales of Restricted Securities under Revised Rule 144

During six-month holding period: no resales under Rule 144.

After six-month holding period but before one year: unlimited public resales, but must have current public information.

After one-year holding period: unlimited public resales permitted; no compliance with Rule 144 required.

 

During one-year holding period: no resales under Rule 144.

After one-year holding period: unlimited public resales permitted; no compliance with 144 required.

AFFILIATE OR PERSON SELLING ON BEHALF OF AN AFFILIATE

NON-AFFILIATE (and has not been an affiliate during the prior three months)

REPORTING ISSUERS

During six-month holding period: no resales under Rule 144.

After six-month holding period: may resell provided complies with all Rule 144 requirements, including:

  • Current public information;
  • Volume limitations;
  • Manner of sale requirements for equity securities; and
  • Filing of Form 144

NON-REPORTING ISSUERS

During one-year holding period: no resales under Rule 144.

After one-year holding period: may resell in conformity with all Rule 144 requirements, including:

  • Current public information;
  • Volume limitations;
  • Manner of sale requirements for equity securities; and
  • Filing of Form 144