What Is Rule 144 Stock? Selling Restricted Securities

Rule 144 provides a pathway for investors to sell unregistered securities and shares held by company insiders into the public market. This regulation allows shareholders to achieve liquidity without a full public registration process, which can be complex and costly. Understanding Rule 144 is important for investors who acquire stock outside typical public market purchases, as it governs the conditions under which such shares can be legally sold. It helps balance market liquidity with investor protection through proper disclosure.

What Rule 144 Is

SEC Rule 144 is a federal regulation under the Securities Act of 1933 that establishes specific conditions for the public resale of restricted and control securities without requiring registration. The rule ensures adequate current information about the issuing company is publicly available when these securities are sold. This protects investors by providing transparency and preventing market manipulation.

The regulation functions as a “safe harbor” provision: if a seller meets all specified conditions, they are deemed not to be an “underwriter” and can avoid the Securities Act’s registration requirements. This framework allows for an orderly and regulated market for securities not initially offered to the public. The Securities and Exchange Commission (SEC) enforces Rule 144, applying it to various financial instruments, including stocks, bonds, and options.

Restricted and Control Securities

Rule 144 addresses two primary categories of securities: restricted securities and control securities. Understanding these distinctions is fundamental to navigating the rule’s requirements, as they dictate how and when shares can be sold in the public market.

Restricted securities are acquired in transactions that do not involve a public offering, meaning they were not registered with the SEC for public sale. Common ways to acquire restricted securities include private placements, Regulation D offerings, and employee stock benefit plans. These shares usually bear a “restrictive legend” on the certificate, indicating they cannot be resold publicly unless registered or a Rule 144 exemption applies.

Control securities refer to shares held by an “affiliate” of the issuing company. An affiliate is a person who, directly or indirectly, controls or is controlled by, or is under common control with, the issuer. This includes officers, directors, or beneficial owners of 10% or more of a company’s voting securities. Control securities are subject to Rule 144 when sold by an affiliate, regardless of how they were initially acquired.

The key difference lies in their origin and the nature of the restriction. Restricted securities are “restricted” because they were acquired in an unregistered private sale, while control securities are defined by the status of the person holding them. Even if an affiliate acquires shares in the open market, those shares become control securities when that affiliate seeks to sell them, triggering the Rule 144 conditions.

Requirements for Selling Under Rule 144

Selling stock under Rule 144 requires adherence to several specific conditions, which vary depending on whether the seller is an affiliate and the type of security involved. Meeting these requirements allows for the public resale of shares without full SEC registration.

Holding Period

A holding period is mandated for restricted securities before they can be sold. For securities issued by SEC reporting companies, a minimum holding period of six months is required. For non-reporting companies, the holding period is one year. The holding period begins when the securities are fully paid for.

Control securities, if acquired in the open market, do not have a separate holding period; however, their resale by an affiliate is subject to other Rule 144 conditions. In certain situations, such as gifts or pledges, a prior owner’s holding period may be “tacked” onto the current owner’s.

Current Public Information

The current public information requirement dictates that adequate current information about the issuing company must be publicly available. For reporting companies, this means they must be current in their periodic reporting requirements under the Securities Exchange Act of 1934. For non-reporting companies, specific information must be made publicly available, including the nature of the business, the identity of officers and directors, and financial statements. This condition must be satisfied at the time of each sale.

Volume Limitations

Volume limitations apply to affiliates selling securities under Rule 144 to prevent large sales from disrupting the market. During any three-month period, an affiliate cannot sell more than the greater of 1% of the outstanding shares of the same class or the average reported weekly trading volume during the four calendar weeks preceding the filing of a notice of sale on Form 144. For over-the-counter stocks, only the 1% measurement applies. Non-affiliates are exempt from volume limitations once they have satisfied their respective holding periods.

Manner of Sale

The manner of sale rules specifies how the securities must be sold. Sales by affiliates must be executed in “broker’s transactions” or directly with a market maker. The broker can only execute the order as an agent and cannot solicit buy orders for the securities. Brokers cannot receive commissions exceeding their normal rates. These restrictions ensure sales resemble routine trading transactions and avoid any appearance of a new public offering.

Notice of Proposed Sale (Form 144)

A Notice of Proposed Sale, known as Form 144, must be filed with the SEC by affiliates if the sale involves more than 5,000 shares or has an aggregate sales price greater than $50,000 within any three-month period. This form must be filed electronically with the SEC via the EDGAR system at or before the time the sell order is placed with a broker. Form 144 requires specific information, including the seller’s name, their relationship to the issuer, the number and class of shares proposed for sale, and the intended method of sale. A Form 144 filing is valid for 90 days.

Selling Your Stock Under Rule 144

Once a seller confirms compliance with all applicable Rule 144 conditions, the practical process of selling the stock can begin. This procedural phase involves several key steps that facilitate the legal transfer of securities into the public market. The process relies heavily on a knowledgeable brokerage firm.

Engage a Broker

The first step is to engage a broker experienced with Rule 144 transactions. The broker verifies that all conditions, such as the holding period and current public information requirements, have been met. They also ensure the sale adheres to volume and manner of sale rules. Your broker will likely coordinate with the issuer’s general counsel to confirm compliance and obtain consent for the sale.

Submit Form 144

If the sale meets the threshold requirements, the next step involves the submission of Form 144. The seller provides the necessary information to their broker, who then handles the electronic filing of the form with the SEC through the EDGAR system. This filing must occur at or before the time the sell order is placed with the broker. The form serves as a notice to the SEC of the proposed sale, ensuring transparency.

Execute Sale

After Form 144 (if required) is filed and all conditions are confirmed, the broker will proceed with executing the sale. The broker ensures the trade is conducted in compliance with the manner of sale rules, such as not soliciting buy orders and not receiving excessive commissions. The shares are then sold into the public market, providing liquidity to the seller.

Remove Restrictive Legend

A final step in selling restricted securities is the removal of the restrictive legend from the stock certificates or electronic shares. This legend explicitly states that the securities are not registered and cannot be freely transferred. The transfer agent, acting on instructions from the broker and often with consent or a legal opinion from the issuer’s counsel, will remove this legend. This action formally allows the shares to be freely traded in the public market after the Rule 144 sale is complete.