Rule 144 Checklist l Securities Lawyer 101
by
Brenda Hamilton on Aug. 29, 2014
Business Corporate Business Business Securities
Summary: The Securities Act of 1933, as amended (the “Securities Act”) requires the sale of a security to be registered under the Securities Act, unless the security or transaction qualifies for an exemption from registration.
Rule 144 also applies to the public sale of any securities held by directors, executive officers and other "affiliates" of the issuer.
Most often shareholders rely on Rule 144 in going public transactions when holding shares that are not subject to an effective registration statement such as on Form S-1.Rule 144 is potentially available for the resale of two types of securities: "restricted” and “control” securities.
A security can be both a restricted and a control security. Rule 144 imposes a holding period only on restricted securities. Restricted securities are securities acquired from an issuer, or an affiliate of an issuer, in a transaction or chain of transactions that does not involve a public offering.
Shareholders of issuers who go public direct and undertake direct public offerings and those who pursue reverse mergers with public shells often purchase shares in Regulation D offerings that are subject to Rule 144.
Control securities are owned by a person who qualifies as an "affiliate" of the issuer. An "affiliate" is a person that controls, is controlled by or is under common control with the issuer. Although the SEC has not set a standard for determining whether a person is an "affiliate," "affiliates" generally include directors, executive officers and major shareholders that can exercise influence over the company individually or by acting with others.
Rule 144 is not available for the resale of securities that were initially issued by either reporting or non-reporting shell companies (other than a business combination related shell company) or an issuer that has at any time previously been a reporting or non-reporting shell company, unless the issuer meets specified conditions. A security holder may resell securities pursuant to Rule 144’s safe harbor only if the following conditions are met:
a) The issuer of securities that was formerly a reporting or non-reporting shell company has ceased to be a shell;
b) The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
c) The issuer of the securities has filed all reports and material required to be filed under Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for a such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and
d) At least one year has elapsed from the time the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.