Rule 144 compliance: Overview, definition, and example
What is Rule 144 compliance?
Rule 144 compliance refers to the set of requirements under U.S. federal securities law that govern the resale of restricted or control securities. Restricted securities are typically acquired through private placements, unregistered offerings, or other means that do not involve a public offering. Control securities are those held by affiliates of the issuing company, such as executives or major shareholders.
Rule 144, established by the U.S. Securities and Exchange Commission (SEC), provides a safe harbor for the sale of these securities, allowing them to be resold to the public under certain conditions. Compliance with Rule 144 ensures that the resale of these securities is legal, transparent, and does not violate securities laws. The rule is designed to protect investors by ensuring that the securities are sold in a way that is not manipulative or unfair.
Why is Rule 144 compliance important?
Rule 144 compliance is important because it helps regulate the resale of securities that were not registered with the SEC at the time of the original sale. Without proper compliance, the resale of such securities could lead to violations of securities laws, including potential penalties and legal risks. Ensuring that the resale complies with Rule 144 helps protect both the issuer and the investor.
For companies, Rule 144 compliance ensures that they are following the law when their affiliates or other shareholders attempt to sell shares that are restricted or controlled. For investors, compliance provides confidence that they are purchasing securities in a legitimate and transparent transaction, with proper disclosures and conditions.
Understanding Rule 144 compliance through an example
Imagine a shareholder, Alice, who purchased 10,000 shares of XYZ Corp. through a private offering. These shares are considered "restricted" because they were not part of a public offering and are subject to certain resale limitations. Alice decides to sell some of her shares after holding them for several months.
To comply with Rule 144, Alice must meet the following conditions:
- Holding period: Alice must hold the restricted securities for a certain period of time, typically six months for companies that are subject to the reporting requirements of the SEC (public companies).
- Volume limitations: Alice can only sell a limited amount of shares during a three-month period. The volume is typically limited to 1% of the outstanding shares of the company or the average weekly trading volume over the past four weeks, whichever is greater.
- Adequate public information: XYZ Corp. must be a reporting company under the SEC’s rules, meaning it regularly provides public information such as annual reports and financial statements.
- Manner of sale: The sale must be conducted in a way that does not manipulate the market or artificially inflate the price of the shares.
- Filing requirements: Alice may need to file a notice with the SEC, indicating her intention to sell the restricted securities under Rule 144.
If Alice meets these conditions, her sale of XYZ Corp. shares is compliant with Rule 144, and she can legally resell them to the public.
Example of Rule 144 compliance clause
Here’s how a Rule 144 compliance clause might appear in a shareholder agreement or securities offering document:
“The Holder acknowledges that the securities purchased pursuant to this Agreement are restricted securities under U.S. federal securities laws and may not be resold or transferred unless in compliance with Rule 144 of the Securities Act of 1933. The Holder agrees to comply with all applicable requirements of Rule 144, including holding periods, volume limitations, and filing requirements, before selling any such securities.”
Conclusion
Rule 144 compliance ensures that the resale of restricted or control securities is done legally and transparently, in accordance with U.S. federal securities laws. By meeting the conditions outlined in Rule 144, shareholders can resell their securities without violating securities regulations, providing both legal protection and market transparency.
For companies, ensuring compliance with Rule 144 when their shareholders seek to resell restricted securities helps prevent legal issues and maintains the integrity of the securities market. For investors, understanding Rule 144 compliance guarantees that the securities they purchase are subject to appropriate legal controls, fostering confidence in the market.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.