Rule 144 – a Deep Dive – Part 5 – Limitation on Amount of Securities Sold

Conditions for Use of Rule 144

General

Rule 144 provides certain conditions that must be met by selling affiliates and selling non-affiliates which conditions vary depending on whether the Issuer of the securities is a reporting or non-reporting company and whether the Issuer is or ever has been a shell company.  The high-level Rule 144 requirements for non-affiliates include: (i) holding period; (ii) availability of current public information; and (iii) no shell status ineligibility.  The high-level Rule 144 requirements for affiliates (i.e. holders of control securities) include: (i) holding period; (ii) availability of current public information; (iii) manner of sale restrictions; (iv) sale volume limitations; (v) requirement to file a Form 144; and (vi) no shell status ineligibility.

A person who is a non-affiliate and has been a non-affiliate for three months, may begin to sell restricted securities in reliance of Rule 144 after six months as long as (i) the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days; (ii) the issuer has current public information; and (iii) there is no shell status ineligibility.  If the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days, the rule does not require current public information after a one year hold for a non-affiliate (that has been a non-affiliate for three months), however, in practice, no brokerage firms will allow sales if the issuer does not have current public information, and most attorneys will not write an opinion letter.  

A person who is a non-affiliate and has been a non-affiliate for three months, may begin to sell restricted securities in reliance of Rule 144 after a one year holding period if the issuer is not subject to the SEC reporting requirements as long as there is no shell status ineligibility.  Although the rule does not require current public information in this case, in reality, no brokerage firms will allow sales without current public information, and most attorneys will not write an opinion letter.

A person who is an affiliate, has been an affiliate during the preceding 90 days, or a person selling on behalf of an affiliate, may begin to sell restricted securities in reliance of Rule 144 after a six month hold period as long as: (i) the issuer is subject to the SEC reporting requirements and has been so subject for the prior 90 days; (ii) the issuer has current public information; (iii) the number of shares sold is in accordance with the volume limitations set forth in the Rule; (iv) the sales are conducted on the open market through a brokerage account; (iv) the person files a Form 144 with the SEC and (v) there is no shell status ineligibility.

A person who is an affiliate, has been an affiliate during the preceding 90 days, or a person selling on behalf of an affiliate, may begin to sell restricted securities in reliance of Rule 144 after a one year hold period if: (i) the issuer is not subject to the SEC reporting requirements; (ii) the issuer has current public information; (iii) the number of shares sold is in accordance with the volume limitations set forth in the Rule; (iv) the sales are conducted on the open market through a brokerage account; (iv) the person files a Form 144 with the SEC and (v) there is no shell status ineligibility.

All Rule 144 eligibility requirements are assessed immediately prior to the intended sale of securities and must be satisfied at the time of each and every sale.  Accordingly, if securities are purchased from a non-reporting issuer that subsequently becomes subject to the Exchange Act reporting requirements, the holding period would likewise be shortened from one year to six months.  

Volume Limitations – Limitation on the Amount of Securities Sold

As outlined above, a person who is an affiliate, has been an affiliate during the preceding 90 days, or a person selling on behalf of an affiliate, is subject to limitations on the volume of securities that may be sold in reliance on Rule 144.  

The amount of securities that can be sold is determined as follows:

(i) All securities sold by or for the account of an affiliate within the preceding three months shall not exceed the greatest of: (x) 1% of the total outstanding securities of that class as shown by the most recent report or statement published by the company; or (y) the average weekly reported volume of trading in such securities on all U.S. national securities exchanges and/or reported through the automated quotation system (OTC Markets is not considered such an automated quotation system) of a registered securities association during the four calendar weeks preceding the filing of notice required by paragraph (h), or if no such notice is required the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker (excluding shares sold in a registered public offering during that time); or (z) The average weekly volume of trading in such securities reported pursuant to an effective transaction reporting plan or an effective national market system plan during the four-week period specified in this section.
(ii) If the securities sold are debt securities, then the amount of debt securities sold by or for the account of an affiliate are limited to the same calculation as in (i) above, or together with all sales of securities of the same tranche (or class when the securities are non-participatory preferred stock) sold for the account of such person within the preceding three months, ten percent of the principal amount of the tranche (or class when the securities are non-participatory preferred stock) attributable to the securities sold.

Determination of Amount

When determining the amount of securities that can be sold, the following provisions apply:

(i) When both convertible and non-convertible securities are sold, the securities underlying the convertible securities are aggregated with the non-convertible securities, in determining the total amount;
(ii) The amount of securities sold for the account of a pledgee of those securities, or for the account of a purchaser of the pledged securities, during any period of three months within six months (or within one year if the issuer of the securities is not, or has not been for a period of at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act) after a default in the obligation secured by the pledge, and the amount of securities sold during the same three-month period for the account of the pledgor shall not exceed, in the aggregate, the amount specified above.  However, sales by a pledgee do not need to be aggregated with sales of other pledgees from the same borrower.  
(iii) The amount of securities sold for the account of a donee of those securities during any three-month period within six months (or within one year if the issuer of the securities is not, or has not been for a period of at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act) after the donation, and the amount of securities sold during the same three-month period for the account of the donor, shall not exceed, in the aggregate, the amount specified above.
(iv) Where securities were acquired by a trust from the settlor of the trust, the amount of such securities sold for the account of the trust during any three-month period within six months (or within one year if the issuer of the securities is not, or has not been for a period of at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act) after the acquisition of the securities by the trust, and the amount of securities sold during the same three-month period for the account of the settlor, shall not exceed, in the aggregate, the amount specified above.
(v) The amount of securities sold for the account of the estate of a deceased person, or for the account of a beneficiary of such estate, during any three-month period and the amount of securities sold during the same three-month period for the account of the deceased person prior to his death shall not exceed, in the aggregate, the amount specified above.  However, there is no limitation on the amount sold if the beneficiary is not an affiliate of the issuer.  
(vi) When two or more affiliates or other persons agree to act in concert for the purpose of selling securities of an issuer, all securities of the same class sold for the account of all such persons during any three-month period shall be aggregated for the purpose of determining the limitation on the amount of securities sold.
(vii) The following sales do not need to be included in calculating the amount that can be sold: (a) securities sold pursuant to a Securities Act registration statement (including S-8); (b) securities sold pursuant to Regulation A; (c) securities sold in a private transaction not involving any public offering (including securities sold back to the issuer); and (d) securities sold pursuant to Regulation S.  

Also, when calculating amounts following a stock split, an affiliate should give effect to the split or reverse split throughout the whole three-month period, as though it had occurred on the first day of the period, even though the record and effective dates were later. 

Note that although Form S-8 includes limitations on the amount of securities that can be sold by an affiliate in a re-sale S-8, of a company that is not S-3/F-3 eligible which limitation refers to the volume limitations in Rule 144, the sale of securities under S-8 and Rule 144 do not need to be aggregated.  In other words, an affiliate could sell the maximum volume under both Rule 144 and Form S-8 without aggregating the two.

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