The Securities Act of 1933 (“Securities Act”) Rule 144 sets forth certain requirements for the use of Section 4(a)(1) for the resale of securities. Section 4(a)(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” The terms “Issuer” and “dealer” have pretty straightforward meanings under the Securities Act, but the term “underwriter” does not. Rule 144 provides a safe harbor from the definition of “underwriter.” If all the requirements for Rule 144 are met, the seller will not be deemed an underwriter and the purchaser will receive unrestricted securities.
Rule 144 provides certain conditions that must be met for sales by both affiliates and non-affiliates which conditions vary depending on whether the Issuer of the securities is a reporting or non-reporting Issuer. The following chart summarizes the Rule 144 requirements.
Rule 144 Opinion Letters
The current public information requirement is measured at the time of each sale of securities. That is, the Issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. Many Form 144’s and attorney opinion letters cover a three-month period and a majority of Sellers’ market securities over that three-month period. However, the Seller (or person selling on behalf of the Seller, such as the broker-dealer) is required to make a determination that the current public information is available at the time of each sale.
The holding period is determined as of the date of the proposed sale—provided, however, that Rule 144 makes numerous specific provisions for the calculation of the holding period and enumerates specific instances in which a holding period may be tacked onto the holding period of previously issued securities. For example, in determining the holding period where the securities were paid with a promissory note, installment contract or other obligation to pay in the future, the holding period does not begin until payment has been made in full—that is, unless the promissory note or installment contract provides for full recourse against the purchaser of the securities, is secured by fair value collateral other than the securities purchased, and has been paid in full prior to the proposed Rule 144 sale date.
As another example, securities acquired from the Issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to be acquired at the same time as the securities on which the dividend is paid or the securities surrendered in the recapitalization. If securities were acquired by the Issuer solely in exchange for other securities of the same Issuer, such as in a 3(a)(9) transaction, the newly acquired securities are deemed to be acquired at the same time as the securities surrendered in the exchange or conversion.
When relying on Rule 144 for the resale of over-the-counter traded securities (pinksheets or bulletin board), sellers may only sell 1% of the outstanding securities of the Issuer in every 90-day period. Calculations of volume restrictions based on trading volume are only available for the sale of exchange traded securities.
The manner of sale requirements require that securities sold in reliance on Rule 144 be sold only in broker’s transactions, directly with a market maker or in riskless principal transactions. Moreover, the person selling the securities may not arrange for the solicitation of any sale orders. The posting of a customer limit order is not considered a solicitation for purposes of this rule.
Finally, and importantly, Issuers and sellers must be aware that Rule 144 is not available to shell companies. A shell company is an Issuer with no or nominal operations or no or nominal non-cash assets. The rule is unavailable for the sale of securities initially issued by a shell company or any Issuer that has, at any time, previously been a shell company unless all the requirements of Rule 144(i)(2) are met. These requirements include that the Issuer no longer be a shell company, is subject to the reporting requirements of the Exchange Act for 12 months following the time that it filed Form 10 information indicating it was no longer a shell company, and is current with all Exchange Act reporting requirements.