Frequently Asked Questions About Rule 144 And Rule 145
FREQUENTLY ASKED QUESTIONSABOUT RULE 144 AND RULE 145unregistered resales of securities into the publicUnderstanding Rule 144 undermarkets.the Securities Act of 1933What are the basic requirements of Rule 144?What is Rule 144?Rule 144 permits public resales of the following,without having to register the resale with the Securitiesand Exchange Commission (the “SEC”): unregistered securities acquired directly froman issuer, referred to as "restricted" securities,and There are five basic requirements of Rule 144, althoughnot all requirements apply to every sale.Affiliates of the issuer must comply with all fiverequirements. However, sellers who are not affiliates atthe time of the sale, and have not been affiliates for thethree months preceding the sale, must only comply with(1) the holding period requirement and (2) the currentpublicunrestricted securities held by affiliates of theissuer, referred to as "control" securitiesSee "What are restricted securities?" and "What are control therefore may rely on the Section 4(1) exemption for theresale of securities. See "What are the basic requirements ofRule 144?"The SEC amended Rule 144 effective February 15,2008.The amendments reduced the restrictions onisonlyCurrent public information.Specified currentinformation concerning the issuer must bepublicly available. See "Rule 144(c) - Currentsecurities who satisfies all applicable conditions ofof the Securities Act of 1933 (the “Securities Act”), and(whichreporting company). These requirements are as follows:A person selling restricted securities or controlnot to be an "underwriter" as defined in Section 2(a)(11)requirementapplicable to non-affiliate sellers if the issuer is asecurities?"Rule 144 in connection with the transaction is deemedinformationPublic Information Requirement." Holding period. A six-month holding period isrequired for "restricted securities" of an issuerthat has been a reporting company for at least90 days. A one-year holding period is requiredfor "restricted securities" of a non-reportingcompany. See "Rule 144(d) - Holding d
Volume limitation.The amount of kedthat can be sold in any three-month period forsecurities and nonparticipating preferred stock.listed companies is limited to the greater of"Securities Subject to Rule 144."See(i) one percent of the shares or other units ofthat class outstanding, or (ii) the averageweekly trading volume during the fourIs Rule 144 the exclusive means by which restricted orcontrol securities may be sold?calendar weeks preceding the filing of aNo.Form 144, or if no such notice is required, theunder Section 4(a)(1) of the Securities Act for sellingdate of receipt of the order to execute thesecurity holders that seek to resell their restrictedtransaction. The amount of securities that cansecurities or control securities.be sold in any three-month period forrestricted securities and control securities outside thecompanies with over-the-counter, or OTC,safe harbor may be made under other availablesecurities is limited to one percent of the sharesexemptionsor other units of that class outstanding. Seepreliminary note to Rule 144."Rule 144(e) – Volume Limitations." Rule 144Rule 144 provides a non-exclusive safe harborundertheSecuritiesPublic resales ofAct.See theWho is responsible for complying with Rule 144?also has an alternative volume limit of up to10% of the tranche (or class) outstanding forThe seller of "restricted" or "control" securities mustcomply with Rule 144 to obtain the benefit of thedebt securities.exemption from registration provided by Section 4(a)(1) Manner of sale. Equity securities (but not debtsecurities) must be sold in unsolicited "brokers'transactions," directly to "market makers," orin "risklessprincipaltransactions.""Rule 144(f)and-(g)MannerSeeofSaleRequirements." of the Securities Act for resales by persons who are notunderwriters.Rule 144 also provides assurance that the exemptionunder Section 4(a)(4) of the Securities Act is availablefor a broker participating in the resale. A broker shouldseek to ensure that the relevant transactions complyNotice of sale. The seller must file a Form 144with Rule 144 because otherwise, the broker might bewith the SEC at the time the sell order is placeddeemed to be engaged in a distribution requiring awith the broker if the seller is an affiliate andregistration statement rather than in an ordinary tradingintends to sell during any three-month periodtransaction.more than 5,000 shares or securities with avalue in excess of 50,000. See Rule 144(h).Which securities are subject to Rule 144?Issuers also should seek to ensure that the relevanttransactions comply with Rule 144. The SEC expectsissuers to establish reasonable internal procedures toprevent violations of the federal securities laws by theirRestricted securities and control securities are subject toofficers, directors, and employees. See "What happens if aRule 144. For purposes of Rule 144, "securities" includecommon stock, preferred stock, and debt securities, andMorrison & Foerster LLP2
purported Rule 144 transaction does not, or cannot, strictlySecurities Subject to Rule 144comply with Rule 144?"What happens if a purported Rule 144 transaction doesRestricted securities are securities that have beennot, or cannot, strictly comply with Rule 144?A selling security holder that does not comply withRule 144 and does not have an alternative availableexemption from registration requirements may n. Non-compliance could result in rescissionof the transaction, civil liability, or even criminalliability.However, the practical exposure to theconsequences of non-compliance with Rule 144 may berelatively small because of the following potentialOther exemptions may be available. For example,the exemption under Section 4(a)(1) of theSecurities Act, applicable to persons who arenot an issuer, underwriter, or dealer, may beavailable, especially if securities have beenheld for a long period of time. acquired in transactions exempt from the registrationrequirements of Section 5 of the Securities Act.Restricted securities include, among other things, stockissued prior to an issuer's initial public offering; stockissued in private placements by the issuer or issuersecurities acquired privately from affiliates of the issuer;securities issued in Rule 144A transactions or sold in atransaction under the Section 4(a)(7) exemption (enactedin December 2015); and equity securities of domesticissuers acquired from the issuer, a distributor, or any offallback alternatives: What are restricted securities?their respective affiliates in a transaction subject to theconditions of Rule 901 or Rule 903 of Regulation S.However, securities sold in a Regulation A offering arenot restricted securities.What are control securities?Control securities are securities owned by any personThe trade can be broken. However, breaking awho directly or indirectly controls the issuer – eithertrade can be expensive if the price of the stockalone or as a member of a control group. The SEC useshas changed since the trade date. In addition,the term "affiliate" to describe such a control person. Seea seller who is an "insider" under Section 16 of"Who are affiliates?" below.the Securities Exchange Act of 1934 (the“Exchange Act”) and who must break a tradeWho are affiliates?should do so through the broker's errorUnder Rule 405 of the Securities Act, an "affiliate" of oraccount in order to avoid having both a saleperson "affiliated" with a specified person shall mean aandperson that directly, or indirectly through one or morepurchasethatcouldSection 16 consequences.haveadverseintermediaries, controls or is controlled by, or is undercommon control with, the person specified.An individual's status as an affiliate is a fact-specificinquiry which must be determined by considering allrelevant facts in accordance with Rule 405. The ruleMorrison & Foerster LLP3
provides that the term "control" (including the termspreceding the sale (or such shorter period that the"controlling," "controlled by" and "under commoncompany was required to file reports).control with") means the possession, direct or indirect,of the power to direct or cause the direction ofmanagement and the policies of a person, whetherWhat must a non-reporting company do to comply withthe current public information requirement?through the ownership of voting securities, by contract,A non-reporting company satisfies the current publicor otherwise. The SEC has stated that an individual'sinformation requirement by making "publicly available"status as a director, officer, or 10% shareholder is onethe information specified in Rule 15c2-11(a)(5)(i) to (xiv)fact which must be taken into consideration inand (xvi). This information is similar to the informationdetermining affiliate status (see American Standard,required to be included in an annual report toOct. 11, 1972). In addition, under Section 16(a) of theshareholders.Exchange Act, every person who is directly or indirectlythe owner of more than 10 percent of any class of anyWhat must an insurance company do to comply withthe current public information requirement?equity security that is registered under the ExchangeAct, or who is a director or an officer of the issuer ofsuch security, must file statements setting forth theamount of all equity securities of such issuer of whichthe filing person is a beneficial owner.TheseAn insurance company satisfies the current publicinformation requirement if it is regulated by the state inwhich it is domiciled and files the reports described inSection 12(g)(2)(G)(i) of the Securities Act.individuals usually are considered affiliates.Rule 144(d) - Holding Period RequirementAre all control securities subject to Rule 144?Yes. Even securities acquired by an affiliate in the openmarket become subject to Rule 144 as "controlsecurities."When does the holding period requirement apply?Restricted securities cannot be resold under Rule 144until the security holder has satisfied the applicableholding period.Rule 144(c) -See "What are restricted securities?"There is no holding period for unrestricted securities.Current Public Information RequirementWhat is the holding period for securities of a reportingWhat must a reporting company do to comply with thecurrent public information requirement?A reporting company satisfies the public informationrequirement if it has been subject to the reportingcompany?Rule 144 requires a selling security holder to hold sharesof a reporting company for six months after thesecurities are fully paid for.requirements of Section 13 or Section 15(d) of theExchange Act for a period of at least 90 days and hasfiled all reports required during the 12 monthsMorrison & Foerster LLP4
What is the holding period for securities of a non-securities in order to satisfy the holder's applicablereporting company?holding period requirement. A selling security holderRule 144 requires a selling security holder to hold sharesmay tack, or include as part of its own holding period,of a non-reporting company for one year after thethe holding period of a prior holder unless the securitiessecurities are fully paid for.were purchased from an affiliate, in which case theholding period starts over.When does the holding period commence?In addition, tacking based on prior holdings ofGenerally, the holding period commences once thedifferent securities is allowed when the new securitiessecurities are fully paid for.simply continue the holder's existing investment inIf securities are financed through the issuer, theanother form. For example, in calculating the holdingholding period commences immediately upon purchaseperiod of restricted shares of common stock, a securityof the securities if the loan:holder may tack (or include prior holding periods) for: providesforfullrecourseagainstthe purchaser; stockdividends,stocksplits,andrecapitalizations;is fully collateralized by assets other than the conversions or exchanges;purchased securities having a fair market change of domicile by the issuer; contingent issuances; acquisitions pursuant to anti-dilution rights;value at least equal to the purchase price of thesecurities purchased; and is discharged by payment in full prior to theandsale of securities.For securities financed through an independent thirdparty, the securities are considered fully paid at the timeof purchase from the issuer if the loan is made on a fullrecourse basis. However, if the issuer collateralized the cashless exercises of options and tions when: thenewlyformedholdingcompany'sloan from the third party, the securities are notsecurities were issued solely in exchange forconsidered fully paid.the securities of the predecessor company aspart of the reorganization of the predecessorWhat is "tacking" of holding periods and when iscompany into the holding company structure;tacking permitted?Tacking can be a complicated analysis and must bereviewed in light of all of the facts and circumstances.Generally, the "tacking" concept of Rule 144 permits aholder of restricted securities to aggregate the separateholding periods of prior owners of the restrictedMorrison & Foerster LLP the security holders received securities of thesame class evidencing the same proportionalinterest in the holding company as they held inthe predecessor, and the same rights andinterests as the securities exchanged; and5
the holding company was newly formed, andIs tacking permitted for a REIT’s common stockimmediately following the transaction has noacquired upon redemption of operating partnershipsignificant(“OP”) units in an “UPREIT” structure?assetsexceptthepredecessorsecurities, and substantially the same assetsYes.and liabilities on a consolidated basis as theperiod for shares of the real estate investment trustpredecessor(“REIT”) common stock acquired upon redemption ofcompanyhadbeforethetransaction.A change in legal form of an enterprise normally willrestart the holding period for restricted securities of thatIn a traditional UPREIT structure, the holdingOP units commences on the date that the underlying OPunits were issuer. However, under the SEC’s guidance, a holder ofstructure, the REIT serves as (or controls) the generalrestricted securities may tack the holding period for thepartner of an OP subsidiary that owns the real estatetwo entities if the following conditions are satisfied:assets through which the REIT conducts its business. the controlling agreement entered into at theThe REIT’s only material assets are partnership units intime of the formation of the predecessor entityits OP (“OP units”). The OP issues OP units to sellers inspecifically contemplated the change in legalprivate unregistered offerings as consideration for theirform;contribution of real estate. (By contributing real estatethe partners or members seeking to tack hadno veto or voting right over the reorganization;to the OP in exchange for OP units, sellers of real estateassets are able to defer taxes payable on the gains fromthe sale of the real estate assets until the OP units are the reorganization does not result in a changesold or are redeemed by the REIT for cash or REITin the business or operations of the survivingcommon stock.)entity; In the traditional UPREIT structure, each OP unit isthe proportionate equity interests in thethe economic equivalent of one share of REIT commonsuccessor are the same as the interests in thestock. Generally, after a one-year holding period, OPpredecessor; andunits may, at the holder’s option, be tendered to the OPthe equity holders provide no additionalconsideration for the securities they receive inexchange for their equity interests in thepredecessor entity.for redemption for cash or, at the REIT’s option, forshares of the REIT’s common stock on a 1-to-1 basis (ora different fixed ratio).The OP units are typicallydeemed “restricted securities” under Rule 144.The Staff of the SEC (the “Staff”) has determined thatWhen is tacking not permitted?in a typical UPREIT structure, each OP unit representsTacking is not permitted for, among other things,the same proportionate right to the assets of an OP as aexercises by an estate of a decedent's stock options, orshare of REIT common stock. Therefore, a holder ofpurchases of restricted securities in private transactionsREIT common stock received upon the redemption offrom an affiliate.OP units should be able to “tack” its holding period toMorrison & Foerster LLP6
the date that the OP units were acquired; in this case,holders paid the full purchase price for the OP units atthe holder retains the same amount of economic riskthe time they were acquired from the umbrella OP;and the same proportionate share of the underlying real(ii) the up-C governing documents contemplate andestate assets before and after the redemption. The Staffprovide the terms for the exchange of OP units for theagreed that, in a typical UPREIT structure, the Rule 144corporation’s shares, such that the OP unit holder hasholding period for REIT common stock acquired uponthe same economic risk as if it were a holder of thethe redemption of OP units commences on the date thecorporation’s shares during the entire period it holdsOP units were initially acquired, and not on the date ofthe OP units; and (iii) no additional consideration isthe redemption.paid by the OP unit holders for the corporation’sIn making this determination, theStaff’s analysis depended on the facts that (a) the holdershares.2pays the full purchase price for the OP unit at the timethe OP unit is acquired from the OP, (b) each OP unit isRule 144(e) - Volume Limitationsthe economic equivalent of one share of REIT commonstock, representing the same right to the sameproportional interest in the same assets, (c) the issuanceof REIT common stock upon redemption of an OP unitis at the discretion of the REIT and (d) no additionalWhat is the volume limitation?The amount of securities that can be sold in anythree-month period for listed companies is limited tothe greater of:consideration is paid by the holder for the REIT’s common stock.1one percent of the shares or other units of thatclass outstanding, orIs tacking permitted for a parent corporation’s common stock acquired upon exchange of partnership interests infour calendar weeks preceding the filing of thean umbrella operating partnership in an “up-C”Form 144, or if no such notice is required, thestructure?date of receipt of the order to execute theIn an “up-C” structure, a holder exchanges partnershiptransaction.interests in an umbrella operating partnership (OPunits) into shares of its parent corporation. The Staffhas clarified that for purposes of Rule 144(d)(1), theholding period for the corporation’s shares issued inup-Ctransactionsthe average weekly trading volume during thecommencesupontheThe amount of securities that can be sold in anythree-month period for companies with OTC securitiesis limited to one percent of the shares or other units ofthat class outstanding.earlierThe three-month period is a rolling period thatacquisition of the OP units. The Staff’s conclusion isbased on the following conditions: (i) the OP unitincludes only the three months immediately precedingthe date of sale. The four-week period includes only theBank of America, N.A., Merrill Lynch, Pierce, Fenner & SmithIncorporated, SEC Staff Letter (March 14, 2016) is available tm.1Morrison & Foerster LLPSEC Staff Letter (November 1, 2016) is available on/2016/up-c110116-144.htm.27
four calendar weeks (not the 20 business days)Are sales outside of Rule 144 included in the vo
FREQUENTLY ASKED QUESTIONS ABOUT RULE 144 AND RULE 145 Understanding Rule 144 under the Securities Act of 1933 What is Rule 144? Rule 144 permits public resales of the following, without having to register the resale with the Securities and Exchange Commission (the SEC): unregistered securities acquired directly from
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