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Rule 144 - sale of unregistered securities



Selling restricted or control shares is not an easy task. Securities and Exchange Commission has enforced Rule 144 that set conditions under which restricted, unregistered and control shares can be sold or resold. This type of sale is very close to interest of the issuing company so SEC demands that those type of securities be registered. Under Securities Act of 1933 all securities must either be registered with SEC or be exempt from registration requirements. Rule 144 provides exemption that allows the resale of unregistered securities in public stock market if a number of conditions are met. Even if you meet requirements transfer agents needs to remove the restrictive  legend so the sale will be possible.

Investor usually acquire those types of shares through private placement or stock benefit plans offered by their employee. Restricted stock are nontransferable shares of ownership in a corporation, usually issued as a compensation, stock benefits plan, in exchange for providing startup capital or private placement offering. Control shares are held by an affiliate of the company that issued securities. Affiliates are directors, executive officers or large shareholders in relationship of control with the issuer, meaning that person has power over management and corporate policies. If an investor buys control shares from affiliate those shares become restricted even though they weren't previously when they were owned by affiliate. This shares come with a certificate with restrictive legend indicating that they can't be resold on the market unless they are registered with SEC.

For unregistered restricted and control shares to be resold five conditions must be met under Rule 144. First requirement is holding period, or how long you have to hold securities. If issuing company is reporting holding period is six months and if it is not reporting holding period is one year. Holding period begins holder purchased and fully paid for securities. This rule is only applied to restricted securities while resale of control securities is subject to other requirements under Rule 144.

Second condition is current public information.This means that adequate and current information about the company must be publicly available before the sale can be made. This means that reporting companies have to meet periodic reporting requirements with SEC. For non reporting companies that means they need to make certain information like nature of the business, identity of officers and directors, financial statements public.

Third, if you are an affiliate of the company you cannot sell more than 1% of total outstanding shares in a three month period. If the securities are listed on a stock exchange than maximum you can sell is greater than 1% or the average reported weekly trading volume during four weeks proceeding the sale. Securities on over-the-counter board can be sold using the 1% measurement. 

All the normal trading conditions must be met if you are an affiliate selling securities. This means that you broker can't receive more than a normal commission. Also, seller and broker can't solicit orders to buy securities. Final rule requires that affiliate seller must file notice with the SEC if the sale involves more than 5,000 shares or $50,000 worth of securities in any three month period. 

If seller is not associated with the issuing company and has held securities more than a year he or she can sell securities without any restriction.


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Location: West Palm Beach, FL, USA

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