Rule 144 requirements: Overview, definition, and example
What are Rule 144 requirements?
Rule 144 requirements refer to the conditions set by the U.S. Securities and Exchange Commission (SEC) under Rule 144 of the Securities Act of 1933, which governs the sale of restricted and control securities. These requirements outline the steps that must be followed for an investor to sell securities that are not registered with the SEC, such as those acquired in private placements or from insiders (such as company executives or major shareholders). The purpose of Rule 144 is to ensure that the sale of such securities is conducted transparently and fairly, while protecting investors from potential risks.
The rule provides a safe harbor for these types of transactions, allowing them to occur without needing to register the securities, as long as certain conditions are met, including holding periods, volume limits, and public information requirements.
Why are Rule 144 requirements important?
Rule 144 requirements are important because they regulate how unregistered securities can be sold, ensuring that they are not traded unfairly or without adequate disclosure to the public. These regulations protect investors from the risks associated with illiquid, unregistered securities and ensure that transactions are transparent and comply with SEC rules.
For businesses, understanding Rule 144 is essential to maintain compliance when issuing or trading restricted securities. For investors, it is crucial to know the requirements of Rule 144 to ensure that they can legally sell their restricted securities without violating securities laws.
Understanding Rule 144 requirements through an example
Imagine an investor who purchased shares in a private company through a private placement. After holding the shares for the required period (usually six months or one year, depending on whether the company is subject to SEC reporting requirements), the investor wants to sell the shares in the public market. Under Rule 144, the investor can sell the shares, but must comply with certain conditions, such as:
- Holding the shares for the required period.
- Selling only a certain volume of shares within a given time frame (generally no more than 1% of the company’s outstanding shares every three months).
- Ensuring that the company is current in its SEC filings, if applicable.
If the investor meets these conditions, they can legally sell the shares without needing to register the securities with the SEC.
In another example, a company’s executive (an insider) wishes to sell some of their shares in the company. Under Rule 144, the executive must comply with certain requirements, such as holding the shares for a specified period, selling no more than a designated amount in a given timeframe, and ensuring that the company’s financial reports are publicly available.
An example of a Rule 144 requirements clause
Here’s how a Rule 144 requirements clause might appear in a securities agreement:
"The Holder acknowledges that any resale of the securities under this Agreement must comply with the requirements of Rule 144 of the Securities Act of 1933. The Holder agrees to hold the securities for the applicable holding period, limit the volume of securities sold in accordance with Rule 144, and ensure that the company has provided the necessary public information, as required by Rule 144, to facilitate the resale."
Conclusion
Rule 144 requirements help regulate the sale of restricted securities to ensure transparency and protect investors from risks associated with unregistered securities. For businesses and individuals involved in trading or issuing securities, understanding these requirements is essential for complying with SEC regulations and ensuring that sales are conducted legally and fairly. By meeting the conditions of Rule 144, investors can sell their restricted securities without needing to go through the complex registration process.
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.