When selling restricted securities under Rule 144 the selling customer must notify the SEC?

Depending on your role within a company, you may have acquired restricted or control securities. If you no longer want some or all of them, don’t worry, they’re not impossible to offload. However, you’ll need to follow Rule 144 requirements.

What is Rule 144?

Rule 144 provides an exemption to the Securities Act of 1933 registration requirements, permitting the sale of restricted or control securities in the public market when certain conditions are met.

Securities Act of 1933

The purpose of the Securities Act of 1933 is to ensure that investors receive the necessary information to make informed decisions when purchasing securities and to eliminate fraud during the sale of securities, which is why it’s known as the “truth in securities” law.

In order to achieve these objectives, the law requires that securities are registered with the Securities and Exchange Commission before being sold. However, not all securities must be registered, which is where Rule 144 comes into play for restricted and control securities.

Restricted securities

Restricted securities refer to securities obtained from an issuing company or its affiliate through unregistered or private sales, such as:

• Private placements. When securities are sold privately to a limited group of investors, rather than through the open, public markets.

• Regulation D offerings. Regulation D offers various exemptions that allow some companies to offer securities without registration.

• Startup financing. Budding startup companies often offer shares in exchange for seed money from angel investors. These shares can be considered restricted securities.

Control Securities

Control securities refer to securities held by an affiliate, also known as a control person. This is someone with the ability to influence or control an issuing company such as a director, executive or large shareholder.

Rule 144 Conditions

There are several conditions to meet when you sell unregistered, restricted or control securities under Rule 144 in order to attain a “safe-harbor” exemption, meaning that you’ll be protected from penalty or liability so long as specific guidelines are followed.

Holding period requirement

Before selling any restricted securities, you must hold them for a certain time period. The time frame depends on whether the issuing company is subject to reporting requirements under the Securities Exchange Act of 1934. For those considered a “reporting company” for at least 90 days, securities must be held for a minimum of six months. Those considered a “non-reporting company” for at least 90 days must be held for more than one year.

Note that this holding period requirement isn't applicable to control securities, although they may be subject to other restrictions under Rule 144.

Current public information requirement

To sell unregistered securities, issuer information that is current and sufficient must be available to the public. For instance, a “reporting company” must file all periodic reports required by the Exchange Act for the year prior to the sale. A “non-reporting company” has less stringent reporting requirements but still must have adequate information publicly available, such as its financial statements along with information surrounding the nature of its business and the identities of its directors and officers.

Notice of proposed sale requirement

All affiliates are required to file a Form 144, notifying the SEC if the sale of securities within any three-month period exceeds either 5,000 shares or a total dollar amount of $50,000.

Volume restriction requirement

When an affiliate sells the issuer’s equity securities, whether restricted or not, there are limitations on the number of securities sold within any three-month time frame. Securities sales cannot exceed the greater of the following:

•  1% of the shares outstanding of the same share class as the ones being sold (according to the most recent report of the issuer).

• The average weekly reported trade volume of the security during the four calendar weeks preceding the sales notice (either reported by the automated quotation system of a registered securities association or on all national securities exchanges).

Trading requirements

Affiliate sales must be conducted as normal, routine trading transactions. This means that neither the broker nor the affiliate (seller) can solicit others to purchase the securities, and brokers cannot be paid more than a typical brokerage commission.

Are you subject to Rule 144?

If you must follow Rule 144, a good rule of thumb is to check with your broker to ensure that they accept restricted and/or control securities and can handle the Rule 144 requirements should you wish to sell. To do so, your broker will likely need to coordinate with the issuer’s general counsel to verify compliance with any trading windows and provide consent to remove the restrictive legend (a stamp or statement on a stock certificate that securities are unregistered or restricted) from your securities, if applicable. Your restricted securities cannot be sold until the restrictive legend is removed. Your broker may also be able to guide you on completing and submitting your Form 144 when completing your sale transaction.

How do you sell restricted security?

When can restricted securities be sold?

What is Rule 144 of the Securities Act?

Who can sell under Rule 144?