Rule 144b: Selling Restricted Securities

SEC Rule 144(b) provides an exemption under the Securities Act of 1933, allowing the public resale of restricted securities without meeting the full registration requirements of the U.S. Securities and Exchange Commission (SEC). Restricted securities are acquired in private transactions, such as private placements or as compensation, rather than on the open market. The rule enhances market liquidity by creating a defined pathway for investors to sell these shares.

This framework balances investor protection with the need for capital to flow efficiently. It allows individuals holding shares that were not part of a public offering to sell them into the public market, provided specific criteria are met. This ensures such sales do not disrupt the market while giving investors a method to realize the value of their holdings.

Understanding Rule 144 and Affiliate Status

Rule 144 establishes the conditions under which restricted and control securities can be sold to the public. Restricted securities are shares acquired in non-public transactions from the issuer or an affiliate. These stock certificates carry a “restrictive legend” indicating they cannot be freely resold without meeting exemption requirements.

Control securities are shares held by an individual classified as an “affiliate” of the issuing company. An affiliate is a person in a position of control, such as an executive officer, a director, or a shareholder who owns 10% or more of the company’s voting securities. A non-affiliate is any investor who does not meet this definition. It is possible for securities to be both restricted and control securities at the same time.

Conditions for Unrestricted Resale

The requirements for selling restricted securities under Rule 144(b) differ based on the seller’s relationship with the company and the company’s reporting status. For investors who are not affiliates, the path to an unrestricted sale is primarily determined by a holding period. This period ensures the purchase was made with investment intent, not for immediate public distribution.

For non-affiliates of a company subject to the reporting requirements of the Securities Exchange Act of 1934, the conditions are more lenient. These “reporting issuers” file regular reports with the SEC, ensuring public information is available. A non-affiliate holding restricted securities of a reporting issuer can sell them without restriction after a holding period of at least six months.

The rules are more stringent for non-affiliates holding securities of “non-reporting issuers,” which are companies not obligated to file regular SEC reports. To sell restricted securities of a non-reporting issuer, a non-affiliate must hold them for a minimum of one year. After this period, the shares can be sold without being subject to other Rule 144 conditions.

A separate category exists for former affiliates. These individuals can sell their restricted securities without restriction if they have not been an affiliate for at least three months and have held the securities for at least one year. Meeting these requirements provides a “safe harbor,” meaning other Rule 144 conditions, like volume limits and the need to file Form 144, do not apply.

Required Documentation and Information

Before selling restricted securities under Rule 144(b), a set of documents must be presented to the issuer’s transfer agent. This package serves as evidence that all conditions have been met, authorizing the removal of the restrictive legend from the shares. The primary documents required include:

• Seller’s Representation Letter: A formal statement signed by the seller confirming the date the securities were acquired, that the holding period has been met, and their status as a non-affiliate or former affiliate.
• Broker’s Representation Letter: If a brokerage firm is handling the sale, this letter confirms the transaction is routine and that the broker has not solicited buy orders for the securities.
• Legal Opinion Letter: Prepared by a qualified securities attorney, this letter is addressed to the transfer agent and states that the proposed sale complies with Rule 144(b). The seller or their broker must request this from the issuing company.

The Process of Removing the Restrictive Legend

Once an investor has confirmed their eligibility and gathered the necessary documentation, the process of removing the restrictive legend begins. This involves coordination between the seller, their broker, the issuing company, and the company’s transfer agent to transform the securities into freely tradable shares.

The first step is submitting the complete documentation package to the issuer’s transfer agent. Upon receipt, the transfer agent reviews the materials to verify compliance with Rule 144(b). The agent checks that the holding periods align with the issuer’s reporting status and that the seller’s non-affiliate status is properly attested.

After the transfer agent approves the documentation, the final step is the removal of the restrictive legend. If the investor holds a physical stock certificate, the agent will cancel the old certificate and issue a new, “clean” one. More commonly, the shares are held in book-entry form, and the transfer agent electronically deposits the unrestricted shares into the seller’s brokerage account, making them available for public sale.