How an Affiliate Holding Unregistered Shares Can Sell Under Rule 144

Selling unregistered shares as an affiliate of a company involves strict regulatory requirements to prevent market manipulation and ensure transparency. Rule 144, established by the SEC, provides a structured way for affiliates to sell restricted or control securities legally. Compliance with its conditions is essential to avoid penalties or delays in selling the shares.

Understanding the specific criteria under Rule 144 helps affiliates navigate holding periods, volume restrictions, sale methods, and necessary filings.

Affiliate Status Criteria

Determining affiliate status under Rule 144 is crucial, as it dictates how shares can be sold. The SEC defines an affiliate as someone who controls the issuing company, typically executives, directors, and major shareholders. Control is not solely based on ownership percentage but on the ability to influence management decisions or corporate policies.

A shareholder with 10% or more of a company’s voting securities is often presumed to be an affiliate, though this is not a strict threshold. Those with smaller stakes may still qualify if they have board representation or influence corporate actions. Conversely, a large shareholder with no role in management may not be considered an affiliate. The SEC assesses these factors case by case.

Contractual agreements can also establish affiliate status. An investor with veto rights over major corporate decisions or the ability to appoint executives may be deemed an affiliate, even with a small equity stake. Family ties to company insiders can also lead to an affiliate designation if there is evidence of shared control or coordinated decision-making.

Unregistered Shares vs. Restricted Securities

Unregistered shares and restricted securities are often confused but have distinct regulatory implications. Unregistered shares are those not registered with the SEC, meaning they were issued without a public offering under the Securities Act of 1933. These shares can be acquired through private placements, employee stock compensation plans, or mergers and acquisitions and cannot be freely traded unless an exemption applies.

Restricted securities are a subset of unregistered shares that carry specific transfer limitations. These restrictions arise when shares are acquired under an exemption from SEC registration, such as Regulation D private placements. Restricted securities bear a restrictive legend on stock certificates or electronic records, indicating they cannot be sold without meeting certain conditions.

While all restricted securities are unregistered, not all unregistered shares are restricted. For instance, shares issued under Regulation S to offshore investors are unregistered but may not always have the same resale limitations. Similarly, shares obtained through bankruptcy proceedings or court settlements may be unregistered but could be sold more freely depending on the circumstances.

Minimum Holding Period

The holding period under Rule 144 dictates when restricted securities can be publicly sold. For securities issued by an SEC-reporting company, the period is six months. If the company does not report to the SEC, the period extends to one year. This timeframe begins when the securities are fully paid for and acquired. Any unpaid balances on a purchase agreement can delay the start of the clock.

Tacking can sometimes shorten the holding period if securities were acquired through stock splits, conversions, or gifts, provided no new investment decision was made. For example, if an investor buys restricted stock and later receives additional shares from a stock dividend, the holding period for the new shares typically follows that of the original investment. However, if shares are acquired through an option exercise, the holding period generally starts when the option is exercised.

Changes in an issuer’s reporting status also affect the holding period. If a company was non-reporting when shares were acquired but later becomes an SEC filer, the holding period may be reduced to six months. Conversely, if a company ceases reporting before the sale, the investor must wait the full year.

Volume Limitations for Affiliates

Affiliates selling shares under Rule 144 must follow volume limitations to prevent market disruptions. The maximum amount an affiliate can sell within any rolling three-month period is the greater of 1% of the outstanding shares of the same class or the average weekly trading volume over the previous four weeks on all national exchanges where the stock is listed.

For companies with low trading volume, the 1% threshold is often more restrictive than the average weekly volume calculation. For example, if a company has 100 million shares outstanding but trades only 500,000 shares per week, an affiliate would be limited to selling 1 million shares in a three-month window. Conversely, highly liquid stocks may allow for greater flexibility, as the trading volume metric could result in a higher permissible sale amount.

Manner of Sale Requirements

Affiliates must follow specific sale methods under Rule 144 to prevent manipulative trading. These requirements primarily apply to equity securities. Sales must occur through unsolicited broker transactions, directly to market makers, or in riskless principal transactions. Affiliates cannot solicit buyers directly or coordinate sales with other insiders to influence pricing.

Broker transactions must be executed without creating artificial demand. The broker handling the sale cannot receive more than a standard commission and must conduct the transaction as an ordinary market sale. Affiliates cannot arrange for the purchase of their own shares or use mechanisms like wash sales to create misleading trading activity. If a market maker is involved, it must act independently to ensure that the sale reflects genuine market conditions.

Filing Notice with Regulatory Authorities

When an affiliate plans to sell more than 5,000 shares or securities valued over $50,000 within a three-month period, they must file Form 144 with the SEC. This filing serves as a public notice of the intended sale and helps regulators monitor insider transactions. The form must be submitted when the order is placed with a broker or the securities are sold directly to a market maker.

Form 144 requires details such as the number of shares to be sold, the approximate date of sale, and the method of disposal. While the filing does not require SEC approval, failure to submit it when required can lead to compliance issues. If the planned sale is not completed within the three-month window, a new Form 144 must be filed for any subsequent transactions that meet the threshold. Electronic filing through the SEC’s EDGAR system ensures real-time disclosure to the public and regulators.

Documentation for Legend Removal

Restricted securities typically bear a legend indicating they cannot be sold without meeting Rule 144 conditions. To remove this restriction, affiliates must provide documentation to the transfer agent demonstrating compliance. This ensures shares can be freely traded in the public market without further limitations.

The most common requirement is a legal opinion from a securities attorney confirming that the shares qualify for sale under Rule 144. This opinion letter must outline how the shares meet the holding period, volume limitations, and manner of sale requirements. Brokers may also request a seller’s representation letter affirming that the affiliate is not engaging in manipulative practices. Once the transfer agent receives the necessary documents, they will process the legend removal, allowing the shares to be transferred into unrestricted form.