SEC Rule 144: Definition and impacts
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Rule 144 is an SEC regulation that determines how and when restricted and control securities may be sold in a public marketplace. Understanding Rule 144 is critical for investors who are interested in buying and selling certain securities, as it outlines the resale conditions that must be met in order to be compliant and avoid potential penalties.
Here’s what you need to know about Rule 144, including holding period requirements and resale conditions.
What is Rule 144?
Rule 144 provides a safe harbor for the public resale of restricted and control securities. Restricted securities are issued in a non-public transaction. Control securities are securities held by an affiliate, such as an executive, or large shareholder who has the power to direct management of the company issuing shares. Restricted securities typically are marked as “restrictive,” while control securities generally do not have any such marking.
Section 5 of the Securities Act of 1933 states that it is illegal to offer or sell any security without a registration statement or an exemption from registration. Rule 144 sets conditions for the duration of holding the securities, the manner of sale and the maximum amount that can be sold at once.
Adhering to the conditions of Rule 144 ensures that the individual is not considered an underwriter or involved in the distribution of the securities. Other exemptions under the Act can still be claimed if the conditions of Rule 144 are not fully met.
The purpose of Rule 144 is to prevent market manipulation and protect investors by requiring the disclosure of relevant information before the sale of securities. The term “security” encompasses various financial instruments such as stocks, bonds, options and investment contracts.
The general expectation of the investing public is that securities laws, as well as the provisions against fraud, apply to their investments. Rule 144 is enforced by the SEC and applies to the sale or resale of restricted, unregistered or control securities. Its purpose is to prevent insider trading and ensure access to information.
Rule 144 conditions to meet
The following is a list of resale conditions to sell or resell restricted and control securities to the public. The list is not exhaustive; investors should verify the conditions with the latest information from the SEC.
- Holding period rules
- Restricted securities must be held for a specific period of time. For public companies, the holding period is six months; for companies that are not required or are not subject to SEC reporting requirements, the holding period is at least one year. The holding period starts from the date of purchase and full payment for the securities. If the issuer has been subject to reporting requirements for at least 90 days, a minimum of six months must pass before the securities can be resold.
- Information requirements
- Information must be publicly available for potential investors. Publicly traded companies (known as “reporting” companies) must be in compliance with SEC periodic reporting requirements. For unregistered companies, financial statements, information about the nature of the business and a listing of staff, such as officers and directors, need to be available to the public.
- Trading volume
- During any three-month period, affiliates cannot sell equity securities in excess of 1 percent of the outstanding shares of the same class being sold. For stocks listed on a stock exchange, affiliates are not allowed to sell more than the greater of 1 percent or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.
- Broker restrictions
- Brokers and sellers are not allowed to solicit orders to buy securities. Additionally, brokers can’t receive commissions above a normal rate.
- Document requirements
- When affiliates sell securities under Rule 144, Form 144 must be completed and filed if the sale is more than 5,000 shares or the dollar amount exceeds $50,000 in any three-month period.
What is the impact of Rule 144?
Rule 144 guidelines aim to prevent insider trading and protect investors. Additionally, they help to protect investors by providing transparency by ensuring that purchasers have access to sufficient information about the issuer. It helps make buying and selling easier, which can help promote liquidity in the securities market, leading to more efficient ways to raise capital. If the rule didn’t exist, holders of restricted and control securities would likely have difficulty selling their shares.
Rule 144 and cryptocurrency
At the moment, there doesn’t seem to be specific language from the SEC regarding Rule 144 and cryptocurrency. However, in the last few years, the SEC has charged a number of crypto exchanges with unlawful selling and offering of unregistered securities, especially those with crypto staking programs. The SEC has issued a number of warnings for investors to be cautious with crypto asset securities. Not only are these types of securities volatile and speculative, the issuers often are not complying with federal regulations.
Bottom line
Rule 144 is an important SEC regulation that outlines the conditions for selling restricted and control securities. It’s important for investors to understand the various conditions and holding periods associated with the rule in order to ensure compliance and avoid significant penalties.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
