Rule 144: reselling restricted and control securities

Rule 144 is a safe harbor under the Securities Act that lets a holder resell restricted or control securities into the public market without registration. It is not automatic. The seller must satisfy the conditions that apply to them, and which conditions apply turns on one question: is the seller an affiliate of the issuer?

Key takeaways

• A safe harbor, not an issuer exemption. It protects a selling holder from being treated as an underwriter. A company selling its own shares cannot use it.
• Affiliate status changes the test. A non-affiliate of a reporting issuer clears two conditions; an affiliate clears five.
• Six months or one year, by the issuer's reporting status, running from the date the purchase price was paid in full.
• Shell history switches the rule off. Rule 144 is unavailable for a shell or former shell company's securities unless the Rule 144(i)(2) conditions are met, and that never expires.
• Availability is not legend removal. A transfer agent needs an opinion of counsel and an issuer instruction first.

What Rule 144 is, and what it is not

Section 5 of the Securities Act requires every offer and sale of a security to be registered unless an exemption applies. Section 4(a)(1) exempts transactions by any person other than an issuer, underwriter, or dealer. The difficulty is the definition of underwriter in Section 2(a)(11), which reaches anyone who buys from an issuer with a view to distribution, and intent is not something a transfer agent can measure.

Rule 144 draws an objective line instead. Its preliminary note is explicit: a seller who meets the applicable conditions is deemed not to be engaged in a distribution, and therefore not an underwriter, so the resale sits inside Section 4(a)(1).

The issuer cannot use it. Rule 144 governs resales by holders. A company selling newly issued shares needs an effective registration statement or its own exemption, typically Regulation D or Regulation S. Rule 144 decides what the investor can do next, which is why it prices every unregistered financing.

And it does not create liquidity by itself. Whether a broker accepts the deposit and whether the position clears through the depository are separate questions, covered on DTC eligibility and share deposits.

Restricted securities and control securities

The two terms attach to different facts, and confusing them is the commonest error in a first resale analysis.

Restricted securities are defined in Rule 144(a)(3): securities acquired directly or indirectly from the issuer, or from an affiliate, in a transaction not involving any public offering. Regulation D placements, conversions of unregistered convertible notes, and Regulation S issuances all fall in. The status attaches to the security and travels with it until it is sold under a registration statement or under Rule 144.

Control securities are not defined in the rule, but the concept is unavoidable: securities held by an affiliate, however acquired. An affiliate who buys in the open market holds unrestricted stock that is still subject to the affiliate conditions on sale. The status attaches to the person, and a single block can be both.

Affiliate or non-affiliate: the question that decides everything

Rule 144(b) splits the rule in two, and everything else follows.

The first column is the commercial heart of every unregistered financing. Where a reporting issuer keeps its filings current, a non-affiliate's position becomes saleable six months after payment, and at twelve months the information condition drops away too, leaving no conditions at all. That is why registering the resale is a commercial choice rather than a necessity, and worth pricing against the alternative on resale registration statement.

The five conditions

1. Current public information, Rule 144(c)

For a reporting issuer, Rule 144(c)(1) requires the company to have been subject to Exchange Act reporting for at least 90 days, to have filed all required reports for the preceding 12 months other than Forms 8-K, and to have submitted the required Interactive Data Files. A late 10-Q closes the window until it is cured; a missed 8-K does not.

For a non-reporting issuer, Rule 144(c)(2) requires the information specified in Rule 15c2-11(b)(5)(i)(A) to (N) and (P) to be publicly available: the alternative-reporting route used by OTC Markets companies.

2. Holding period, Rule 144(d)

Six months where the issuer has been subject to Exchange Act reporting for at least 90 days immediately before the sale, one year where it has not. Rule 144(d)(1)(iii) is the trap: the period does not begin until the full purchase price is paid, so funding a subscription in tranches restarts the clock for each tranche. Rule 144(d)(3) then permits tacking in a defined list of situations, worked through on the Rule 144 holding period and tacking.

3. Volume limitation, Rule 144(e)

Affiliates only. In any three-month period, sales of equity securities are capped at the greatest of 1% of the shares of that class outstanding, the average weekly reported trading volume on national securities exchanges or through a registered securities association's automated quotation system over the four calendar weeks before the Form 144 notice, or the average weekly volume under an effective transaction reporting plan. Sales by persons acting in concert are aggregated.

For a company quoted over the counter rather than listed, the second and third measures generally have nothing to measure against, so the 1% test governs in practice. On a thin small-cap that is a hard ceiling.

4. Manner of sale, Rule 144(f) and (g)

Affiliates only, and equity securities only. The sale must be a broker's transaction within Section 4(a)(4), a transaction directly with a market maker, or a qualifying riskless principal transaction. Rule 144(g) then constrains the broker: act as agent, take only the usual and customary commission, do not solicit buy orders outside the narrow carve-outs, and after reasonable inquiry not be aware of circumstances indicating that the seller is an underwriter.

5. Form 144 notice, Rule 144(h)

Affiliates only. If the amount to be sold under the rule in any three-month period exceeds 5,000 shares or an aggregate sale price of US$50,000, a notice on Form 144 must be filed concurrently with placing the order. For securities of Exchange Act reporting issuers it is filed electronically on EDGAR.

When Rule 144 is not available at all

Rule 144(i). The rule is unavailable for securities initially issued by a shell company, or by any issuer that has at any time previously been a shell company, unless the Rule 144(i)(2) conditions are satisfied: Exchange Act reporting status, the required reports filed for the preceding 12 months, and Form 10 information reflecting the end of shell status filed at least one year earlier. There is no grandfathering and no expiry. Any issuer that went public through a reverse merger into a shell should assume it applies, and the detail is on Rule 144(i) and former shell companies.

The anti-evasion note. The preliminary note withdraws the safe harbor from transactions that comply technically but form part of a plan or scheme to evade registration.

What actually happens: getting the legend off

This is where deals lose weeks. Rule 144 becoming available is a legal conclusion; removing a restrictive legend is an administrative process in which three parties each need their own comfort.

1. The holder assembles the file

   Subscription agreement, the certificate or book-entry position, and hard evidence of when the purchase price cleared: wire confirmations, not a recital. Where tacking is claimed, the instrument tacked from as well.

2. The holder gives representations

   A seller letter covering affiliate status now and in the preceding three months, how and when the securities were acquired, and that no hedge has shortened the economic holding period.

3. Counsel opines and the issuer instructs

   An opinion to the transfer agent, from counsel the agent will accept. Most agents also want an instruction from the company, so the issuer holds a practical veto and should be engaged early.

4. The position is redeposited and cleared

   Unlegended shares still have to be accepted by a broker and cleared through the depository. A deposit review, a chill, or a global lock can stop a legally available resale.

The issuer is inside this process whether it wants to be or not, so the resale mechanics belong in the transaction documents, not in a conversation six months later. If you want the resale path agreed before signing, tell us about the raise.

Primary sources

• eCFR — 17 CFR 230.144 (Rule 144), current text
• Cornell LII — 17 CFR 230.144
• SEC — Revisions to Rules 144 and 145
• Investor.gov — Securities Act Rule 144
• SEC — EDGAR filing requirements and Form 144

Related reading

• S-3 shelf registration
• Convertible notes for listed issuers
• Private placements by public companies
• Dilution and conversion mechanics
• Financing US-listed issuers
• Glossary

Rule 144: frequently asked questions

What is Rule 144 in plain terms?

Rule 144 is a safe harbor under the Securities Act of 1933. A holder who resells stock bought from an issuer risks being treated as an underwriter. Meeting the conditions in Rule 144 means the seller is deemed not to be one, so the resale is exempt from registration.

Does Rule 144 apply to the company itself?

No. Rule 144 is a resale safe harbor for security holders. A company selling its own newly issued shares needs an effective registration statement or its own exemption, such as Regulation D. Rule 144 governs what the investor can do afterwards.

How long do you have to hold restricted stock under Rule 144?

Six months if the issuer has been subject to Exchange Act reporting for at least 90 days before the sale, and one year if it has not. The clock does not start until the full purchase price has been paid.

Which Rule 144 conditions apply to a non-affiliate?

Fewer than most people expect. A non-affiliate selling restricted securities of a reporting issuer must satisfy the holding period and the current public information condition, and at one year that information condition falls away too. Volume, manner of sale and Form 144 apply only to affiliates.

How much can an affiliate sell under Rule 144?

In any three month period, the greatest of 1% of the outstanding shares of that class, the average weekly reported trading volume over the four calendar weeks before the Form 144 notice, or the average weekly volume under an effective transaction reporting plan. For a security quoted over the counter, the volume tests generally have nothing to measure, so the 1% test governs.

Why will the transfer agent not remove my restrictive legend?

Because a transfer agent will not make that judgement itself. Removal normally needs an opinion of counsel the agent will accept, the purchase documents, proof of when the price was paid in full, and a representation letter on affiliate status. The issuer then instructs the agent.