Examination of Rule 144 and Potential Interpretations

by Laura Anthony, Esq. on October 06, 2009 in Rule 144, Securities Attorneys, Uncategorized

The SEC revised Rule 144, effective February 15, 2008. Section 144 rules are used to ascertain if a company falls into an exemption from registration, because of non-underwriter status. But if securities, or the transaction, are registered as required, 144 doesn’t apply. The revisions aimed to reduce previous limits on resale of restricted securities by reporting companies. Unfortunately, a certain amount of ambiguity has also crept in.

The Rule had clearly required a one-year holding period. But included in the new Rule 144(i) is the following: (paraphrased) “if a company has ever been a shell company[1], past or present, then the company must be current on its periodic SEC filings for twelve months following the time it ceases to be a shell, before 144 is available.”

For non-affiliates of non-reporting companies, the one year holding period requirement remains.

Rule 144 thus allows non-affiliates of a reporting company to resell restricted securities after a six-month holding period, without volume limitations or manner-of-sale limitations.

If non-affiliates have held the stock for two years or more, however, they would be allowed to sell under the prior rule without volume limits or manner of sale requirements. For affiliates wanting to qualify as a “reporting” company, the securities issuer must have been subject to reporting requirements of §§13 or 15(d) of the Securities Act of 1934 for at least the ninety days prior to sale.

Rule 144 is also retroactive. This rule even applies to companies as seminal as NYSE or Berkshire. Notably, companies that are late with their filings but do manage to ‘catch up’ to become current may still attempt to use 144.

Conclusions: The New Rule 144

No matter how clear the revised 144 SEC regulations may eventually become, there are also competing security rules and case laws about when it is possible to “tack” the current holding period onto the previous owner’s time of holding the securities.

Rule 144 is used only for public, not private, sales. If the owner of a controlling block of stock in a public company negotiates a private sale of an entire block with a buyer, the Rule doesn’t apply.

Finally, Rule 144 remains technically a “safe harbor,” so that under some circumstances, re-sales may be exempt from registration even though they do not comply with the requirements of the Rule.

Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

[1] The SEC defines a shell company as “with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets.”


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