Rule 144: Overview, definition, and example
What is Rule 144?
Rule 144 is a regulation under the U.S. Securities Act of 1933 that provides a safe harbor for the sale of restricted and control securities without requiring registration with the Securities and Exchange Commission (SEC). It establishes the conditions under which holders of restricted securities, such as those acquired in private offerings, and control securities, such as those held by insiders or affiliates of a company, can resell their securities to the public. The rule is designed to ensure that such sales comply with securities laws while allowing for liquidity in the market.
For example, if an employee holds shares of a company they acquired through an employee stock option plan, Rule 144 may allow them to sell those shares after meeting certain conditions without the need for the company to register the shares with the SEC.
Why is Rule 144 important?
Rule 144 is important because it provides a legal mechanism for reselling restricted or control securities in the secondary market, offering an avenue for liquidity to investors who may otherwise be unable to sell their securities. By meeting specific requirements, including holding periods, volume limitations, and filing requirements, Rule 144 helps ensure that these transactions are fair and transparent while protecting the investing public.
For businesses, Rule 144 helps prevent the illegal resale of securities, ensuring that insiders and restricted shareholders can exit their investments in a compliant manner.
Understanding Rule 144 through an example
Imagine a private investor who holds shares in a privately-held company. These shares are restricted, meaning they cannot be sold in the open market unless registered with the SEC. After holding the shares for a sufficient period (typically 6 months for reporting companies or 1 year for non-reporting companies), the investor can use Rule 144 to sell their shares to the public, as long as they meet other conditions like adhering to volume restrictions and providing appropriate notice to the SEC.
In another example, a company executive (an insider) who owns shares of their company may use Rule 144 to sell some of those shares to the public, provided they comply with the holding period and volume limitations established under the rule. This provides a way for insiders to liquidate their holdings without violating securities laws.
An example of a Rule 144 clause
Here’s how a Rule 144 clause might look in a contract:
“The Seller agrees that any sale or transfer of the Securities shall be subject to Rule 144 of the Securities Act of 1933, as amended, and the Seller shall comply with all applicable requirements, including the holding period, volume restrictions, and filing obligations, to ensure that the sale is made in compliance with the Rule.”
Conclusion
Rule 144 provides a safe harbor for the sale of restricted and control securities, ensuring that insiders and other holders of these securities can sell them legally without having to register the securities with the SEC. The rule balances the need for liquidity with the protection of public investors, providing guidelines that ensure compliance with securities laws.
For businesses and investors, understanding and adhering to the requirements of Rule 144 is crucial for ensuring legal resale of securities, preventing violations of securities laws, and promoting transparency 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.