SEC Rule 144: Definition And Impacts

Rule 144 is an SEC regulation that determines how and when restricted and control securities may be sold in a public marketplace. Understanding Rule 144 is critical for investors who are interested in buying and selling certain securities, as it outlines the resale conditions that must be met in order to be compliant and avoid potential penalties.

Here’s what you need to know about Rule 144, including holding period requirements and resale conditions.

What is Rule 144?

Rule 144 provides a safe harbor for the public resale of restricted and control securities. 

• Restricted securities are issued in a non-public transaction. Restricted securities typically are marked as “restrictive,” while control securities generally do not have any such designation.
• Control securities are securities held by an affiliate, such as an executive or large shareholder who has the power to direct management of the company issuing shares. 

Section 5 of the Securities Act of 1933 states that it is illegal to offer or sell any security without a registration statement or an exemption from registration. Rule 144 sets conditions for the duration of holding the securities, the manner of sale and the maximum amount that can be sold at once.

Adhering to the conditions of Rule 144 ensures that the individual is not considered an underwriter or involved in the distribution of the securities. Other exemptions under the Act can still be claimed if the conditions of Rule 144 are not fully met.

Why was Rule 144 enacted?

The purpose of Rule 144 is to prevent market manipulation and protect investors by requiring the disclosure of relevant information before the sale of securities. “Security” encompasses various financial instruments such as stocks, bonds, options and investment contracts. The general expectation of the investing public is that securities laws and the provisions against fraud apply to their investments. 

Who enforces Rule 144?

The SEC enforces Rule 144, which applies to the sale or resale of restricted, unregistered or control securities. Its purpose is to prevent insider trading and ensure access to information.

Multiple parties, including sellers, underwriters, and dealers, must abide by Rule 144. If the conditions of Rule 144 are not fully met, other exemptions under the Act may still apply.

Rule 144 conditions to meet

The following is a list of resale conditions to sell or resell restricted and control securities to the public. The list is not exhaustive; investors should verify the conditions with the latest information from the SEC.

• Holding period: Public companies must hold securities for six months, while companies not subject to SEC reporting requirements must hold them for at least one year.
• Public information: Information must be publicly available for potential investors. Publicly traded companies (known as “reporting” companies) must be in compliance with SEC periodic reporting requirements. For unregistered companies, financial statements, information about the nature of the business and a listing of staff, such as officers and directors, need to be available to the public.
• Trading volume: During any three-month period, affiliates cannot sell equity securities above 1 percent of the outstanding shares of the same class being sold. For stocks listed on a stock exchange, affiliates may not sell more than the greater of 1 percent or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale.
• Broker restrictions: Brokers and sellers cannot solicit orders to buy securities. Additionally, brokers can’t receive commissions above a standard rate.
• Document requirements: When affiliates sell securities under Rule 144, Form 144 must be completed and filed if the sale is more than 5,000 shares or the dollar amount exceeds $50,000 in any three-month period.

What is the impact of Rule 144?

Rule 144 guidelines aim to prevent insider trading and protect investors. Additionally, they help to protect investors by providing transparency by ensuring that purchasers have access to sufficient information about the issuer. It helps make buying and selling easier, which can help promote liquidity in the securities market, leading to more efficient ways to raise capital. If the rule didn’t exist, holders of restricted and control securities would likely have difficulty selling their shares.

Bottom line

Rule 144 is an important SEC regulation that outlines the conditions for selling restricted and control securities. It’s important for investors to understand the various conditions and holding periods associated with the rule in order to ensure compliance and avoid significant penalties.

FAQs

• Does Rule 144 apply to cryptocurrency?
  

  At the moment, there doesn’t seem to be specific language from the SEC regarding Rule 144 and cryptocurrency. However, in the last few years, the SEC has charged a number of crypto exchanges with unlawful selling and offering of unregistered securities, especially those with crypto staking programs. The SEC has issued a number of warnings for investors to be cautious with crypto asset securities. Not only are these types of securities volatile and speculative, the issuers often are not complying with federal regulations.

• Who is considered an affiliate under Rule 144?
  

  Under Rule 144, affiliates are those who can direct the company’s management in issuing shares, such as executives or large shareholders.

• When must Form 144 be filed?
  

  Form 144 must be filed when an affiliate intends to sell restricted or control securities. Affiliates are often corporate insiders, but can also include other entities, such as trusts or estates with more than a 10 percent controlling interest.

— Bob Haegele contributed to an update of this article.

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