What Is SEC Rule 144 and How Does It Work?

SEC Rule 144 serves as a foundational provision under the Securities Act of 1933, offering a “safe harbor” for the public resale of specific types of securities without requiring registration. This rule is designed to balance investor protection with the market’s need for liquidity. It provides a structured pathway for holders of restricted and control securities to sell their holdings in public markets, ensuring transparency and order. The rule’s framework prevents unregistered distributions that could harm investors by ensuring adequate information is available about the securities and their issuer.

Defining Restricted and Control Securities

Understanding the types of securities that fall under Rule 144 is important for appreciating its scope. “Restricted securities” are those acquired in unregistered, private sales from an issuing company or its affiliate. These often include shares obtained through private placement offerings, employee stock benefit plans, as compensation for services, or in exchange for providing initial capital to a company. A distinguishing feature of restricted securities is a “restrictive legend” stamped on the certificate, which clearly indicates they cannot be resold publicly unless registered with the SEC or an exemption applies.

“Control securities,” by contrast, are shares held by an “affiliate” of the issuing company. An affiliate is generally defined as a person who, directly or indirectly, controls, is controlled by, or is under common control with the issuer, such as executive officers, directors, or large shareholders who can direct company management and policies. Securities become “control securities” when an affiliate holds them, regardless of how they were acquired, even if purchased in the open market. Thus, while all restricted securities are subject to Rule 144, control securities are also subject to the rule when sold by an affiliate, even if they are not restricted.

Conditions for Public Sale Under Rule 144

For securities to be publicly resold under Rule 144, several conditions must generally be satisfied. These conditions aim to ensure transparency and orderly transactions in the market. Each condition plays a distinct role in facilitating the “safe harbor” exemption.

A primary condition is the holding period, which prevents immediate resale of privately acquired securities into the public market. For securities issued by companies subject to SEC reporting requirements (reporting companies), a minimum holding period of six months is required. If the issuing company is not subject to reporting requirements (non-reporting companies), the holding period extends to at least one year. The holding period begins when the securities are fully paid for.

Another condition requires that adequate current public information about the issuing company be available. For reporting companies, this means they must have complied with the periodic reporting requirements of the Securities Exchange Act of 1934. For non-reporting companies, certain company information, such as the nature of its business, the identity of its officers and directors, and its financial statements, must be publicly available. This ensures that investors have sufficient information to make informed decisions.

Volume limitations are also imposed to prevent large sales from destabilizing the market or the security’s price. An affiliate cannot sell more than the greater of 1% of the outstanding shares of the same class being sold, or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144. For over-the-counter stocks, only the 1% measurement applies. This limitation applies to sales within any three-month period.

Finally, a notice of sale may be required through Form 144. If an affiliate’s proposed sale involves more than 5,000 shares or an aggregate dollar amount greater than $50,000 within any three-month period, Form 144 must be filed with the SEC. This form serves as a notification to the SEC of the intent to sell and must be filed at the time the sell order is placed with the broker-dealer. All applicable conditions must be met for the transaction to qualify for the Rule 144 safe harbor.

Understanding Affiliate Versus Non-Affiliate Sales

The application of Rule 144 varies significantly depending on whether the seller is an “affiliate” or a “non-affiliate” of the issuer. When an affiliate sells any of their securities, whether restricted or not, they are subject to several ongoing conditions under Rule 144, including the requirement for current public information, volume limitations, and filing Form 144 if applicable. Sales by affiliates must be executed through routine brokerage transactions, and neither the seller nor the broker can solicit buy orders.

For non-affiliates, individuals who are not control persons of the issuer, the conditions for selling securities under Rule 144 are generally more relaxed. Once a non-affiliate has held restricted securities for a specific holding period, they may be able to sell them with fewer restrictions. If the issuer is a reporting company and the non-affiliate has held the securities for at least six months, they can sell the securities as long as the current public information condition is met. After a one-year holding period, if the non-affiliate has not been an affiliate for at least three months, they can sell their restricted securities without meeting the current public information, volume limitation, or notice of sale requirements. This distinction highlights that the seller’s relationship with the issuer profoundly influences the specific compliance requirements under Rule 144.