Securities & Corporate Governance - SEC Adopts Wide Ranging Changes to Rule 144
On December 6, 2007, the SEC published the text of wide ranging amendments to Rule 144 under the Securities Act of 1933. The amendments will be effective on February 15, 2008. The SEC stated in its release that the amendments are intended to increase the liquidity of privately sold securities and decrease the cost of capital for all issuers without compromising investor protection.
Rule 144, originally adopted by the SEC in 1972 and most recently amended in 1997, affords holders of “restricted securities” (generally securities issued in a private placement) and affiliates holding so called “control securities” (securities held by affiliates that are not restricted securities, including securities purchased in the market) a safe harbor to resell those securities without registration under the Securities Act of 1933.
The most significant aspect of the amendments is that the SEC generally shortened the holding period requirement for restricted securities under Rule 144. The SEC also relaxed other Rule 144 requirements.
Under the amended Rule 144, non-affiliates of reporting companies will be able to freely resell restricted securities after only a six-month holding period (instead of the current one year period), subject only to the Rule 144(c) public information availability requirement. Non-affiliates will no longer be subject to the volume and other limitations previously imposed for their sale of restricted securities. The amended Rule allows non-affiliates to freely sell restricted securities after one year without any restrictions, even the public information requirement.
Affiliates of reporting companies will, for both restricted securities (after satisfying the reduced to six-month holding period) and control securities, remain subject to the public information availability requirement, volume limitation, manner of sale requirement and Form 144 filing requirement.
The SEC did not amend the holding period requirement for restricted securities of non-reporting issuers. Thus, restricted securities of non-reporting issuers will continue to be subject to a one-year holding period prior to any public resale. However, under the amended Rule 144, non-affiliates of a non-reporting issuer may resell restricted securities after the one-year holding period without any restriction, while affiliates of such issuers will remain subject to the current public information availability requirement, volume limitation, manner of sale requirement and Form 144 filing requirement for both restricted and control securities.
The amended Rule also modifies the manner of sale requirement for equity securities by permitting “riskless principal transactions,” adjusts the definition of “brokers’ transactions,” and eliminates the manner of sale requirement for debt securities and non-participatory preferred stock. In addition, the SEC relaxed the volume limitations for debt securities and non-participatory preferred stock being sold by affiliates to 10% of the principal amount of a debt “tranche” or a preferred class (from the greater of (i) 1% of the units of the class outstanding or (ii) the average weekly reported volume of trading in such securities).
Furthermore, the SEC raised the threshold for requiring a Form 144 filing in connection with affiliates' sales to 5,000 shares or $50,000 (from 500 shares or $10,000).
In addition, the preliminary notes to Rule 144 have been streamlined and a number of SEC Staff interpretations have been codified or modified. The revised Rule codifies the Staff’s interpretations that if securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer, even if the securities surrendered were not by their terms convertible or exchangeable, or if the securities to be sold were acquired from the issuer in a cashless transaction upon the exercise of a previously granted warrant or option (in which the issuer received cash or property, but not services), even if the securities surrendered were not by their terms exercisable in a cashless manner, the new securities will be deemed acquired at the time the original securities were acquired. The payment by the holder of consideration for any modification that adds an exchange, conversion or cashless feature will start a new holding period on the date of modification.
The revised Rule also addresses the resale of restricted or unrestricted securities of a reporting or non-reporting blank check or shell company by modifying the Staff’s letter issued in January 2000 to Ken Worm of the NASD (now FINRA) to provide that Rule 144 will, after the amendments to Rule 144 become effective, be available for the resale of securities of such companies but only if they cease to be shell companies, are subject to the reporting requirements of the Securities Exchange Act of 1934, have filed all reports required to be filed under that Act during in the preceding 12 months and at least one year has elapsed from the time that the shell company files current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.
The SEC decided not to combine Form 4 and Form 144 at this time, but it will continue to consider the issue and may take it up in the future as a separate project. The SEC also did not include the proposed provision that would have tolled (suspended) the Rule 144 holding period for up to six months while a security holder is engaged in hedging transactions.
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