Securities Act Rule 144 - A Useful Safe Harbor Regulation
- Introduction - General Information
Securities Act Rule 144 is a regulation set by the US Securities and Exchange Commission (SEC) under the Securities Act of 1933. It provides a safe harbor for selling restricted and control securities, subject to certain conditions and limitations, without having to register the sale with the SEC. By meeting these conditions and limitations, the seller is protected from SEC enforcement action for the sale of unregistered securities. This is referred to as a "safe harbor" because the seller is not necessarily guaranteed immunity from liability, but the risk of enforcement action is reduced. Rule 144 is intended to allow the resale of such securities while balancing the protection of the public with the needs of issuers and security holders.
Restricted Securities / Control Securities
Restricted securities are securities that have been acquired in a private placement or otherwise in a transaction not involving a public offering and that are subject to restrictions on resale. These restrictions are designed to ensure that the sale of the securities complies with federal securities laws and to protect the public from potential fraud or other dangers associated with the sale of unregistered securities.
The restrictions on restricted securities may include limitations on the manner of sale, the holding period, and the number of securities that can be sold at one time. In addition, the securities may bear a restrictive legend indicating that they cannot be sold unless they are registered with the SEC or an exemption from registration is available.
Restricted securities are often subject to resale restrictions to protect the public and to ensure that the securities are sold in compliance with federal securities laws. However, once the restrictions have been met, the securities can often be sold in a public market. The SEC has established Securities Act Rule 144 to provide a safe harbor for the sale of restricted securities in certain circumstances.
Control securities are securities that are owned by or affiliated with an individual or entity that has significant influence or control over the issuer of the securities, such as an officer, director, or substantial shareholder. Control securities may be considered restricted securities because they may not be eligible for sale in the public market unless they are registered with the SEC or an exemption from registration is available.
Control securities are often subject to greater restrictions on resale than other types of restricted securities because the individual or entity that owns the securities has the ability to influence the issuer of the securities, and therefore the sale of the securities may have a greater impact on the market. For example, an insider who owns a large number of control securities in a company may be able to influence the company's financial reporting or business decisions, which could affect the value of the securities.
Securities Act Rule 144 provides a safe harbor for the sale of control securities, subject to certain conditions and limitations. The conditions and limitations for selling control securities under Rule 144 may be more stringent than those for selling other restricted securities, in order to provide additional protection for investors and the public.
- Conditions and Limitations
The conditions and limitations necessary to invoke Securities Act Rule 144 are:
Holding period: The securities must be held for a certain period of time, which is generally one year for securities of reporting companies and two years for securities of non-reporting companies.
Manner of sale: The securities must be sold in a broker-dealer transaction and not through an direct offering or a general solicitation.
Volume limitations: There are limits on the number of securities that can be sold in any three-month period, based on the average weekly trading volume of the class of securities being sold.
Current information: If the issuer of the securities is a reporting company, it must be current in its reporting obligations under the Securities Exchange Act of 1934.
Legend requirements: The securities must bear a restrictive legend and be sold in compliance with applicable state securities laws.
Disclosures: The seller must make certain disclosures to the buyer regarding the restricted nature of the securities and the limitations on resale.
These conditions and limitations are intended to balance the needs of issuers and security holders with the protection of the public and ensure that resales are made in a manner that is transparent and consistent with the goals of the federal securities laws.
- The Interplay of Securities Act Rule 144 and the Seminal 'Howey' Test
Securities Act Rule 144 and the "Howey" test are related but distinct concepts in US securities law. Rule 144 is a regulation under the Securities Act of 1933 that provides a safe harbor for selling restricted and control securities. The "Howey" test is a legal standard used to determine whether a particular investment is a security subject to regulation under federal securities laws.
The 'Howey' test is named after the Supreme Court case SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and defines a security as an investment of money in a common enterprise with the expectation of profits, primarily from the efforts of others. If an investment meets this definition, it is considered a security and subject to federal securities laws, including the requirement to register the sale with the SEC.
In order to take advantage of the safe harbor provided by Rule 144, the securities being sold must be eligible securities, meaning that they are not considered securities under the "Howey" test. If the securities being sold do meet the definition of a security under the "Howey" test, they cannot be sold under Rule 144 and the sale must be registered with the SEC.
So the interplay between Rule 144 and the "Howey" test is that the "Howey" test determines whether a particular investment is a security subject to regulation under the federal securities laws, and if it is, Rule 144 provides a safe harbor for selling the security, subject to certain conditions and limitations.
- Regulation D in the Context of Rule 144
Regulation D is a set of rules under the Securities Act of 1933 that provides an exemption from the registration requirements for certain types of securities offerings. Regulation D offerings are often used by small and start-up companies as a means of raising capital without having to register the offering with the SEC.
Compliance with Regulation D of the Securities Act of 1933 requires meeting certain conditions, including:
The issuer must file a Form D with the SEC within 15 days of the first sale of securities in the offering.
The offering must not involve general solicitation or advertising, unless the offering is made only to accredited investors.
The issuer must comply with the restrictions on resale of the securities, including the holding period requirement and any contractual restrictions.
The issuer must comply with the investor verification requirements, including obtaining written representations from each investor that they are an accredited investor, if applicable.
The issuer must provide disclosure to investors that is sufficient to allow them to make an informed investment decision. This may include financial statements, business plans, and other information about the issuer and the offering.
The issuer must comply with the antifraud provisions of the securities laws and the SEC rules relating to the use of proceeds from the sale of securities.
Regulation D can be used in conjunction with Rule 144 to allow for the resale of restricted and control securities that have been issued in a private placement or other transaction not involving a public offering. For example, a company may issue restricted securities in a private placement that complies with Regulation D, and the investors in the private placement may later sell their securities in the public market under the safe harbor provided by Rule 144, subject to the conditions and limitations set forth in the rule.
In this sense, Regulation D and Rule 144 complement each other in allowing for the sale of restricted and control securities in compliance with federal securities laws, while providing greater flexibility for companies and market participants in the capital raising and resale processes.
- Section 4(a)(1 1/2) in the Context of Rule 144
Section 4(a)(1 1/2) of the Securities Act of 1933 is a judicial interpretation of an exemption from the registration requirements for certain types of securities offerings. Section 4(a)(1 1/2) is often referred to as the "broker-dealer exemption" because it is often used by broker-dealers to sell securities without having to register the offering with the SEC.
Compliance with Section 4(a)(1 1/2) of the Securities Act of 1933 requires meeting certain conditions, including:
The seller must be a broker-dealer registered with the SEC.
The securities being sold must be restricted securities, which are securities acquired in a transaction not involving a public offering.
The broker-dealer must sell the securities in the ordinary course of business and not as a part of a plan or scheme to evade the registration requirements of the Securities Act.
The broker-dealer must have a reasonable belief that the buyer is purchasing the securities for investment and not with a view to distribute the securities to the public.
The broker-dealer must deliver to the buyer a prospectus or other offering materials that comply with the requirements of the Securities Act, unless the buyer is an accredited investor or otherwise exempt from the prospectus delivery requirement.
The broker-dealer must comply with other applicable requirements under the Securities Act, such as the antifraud provisions and the rules relating to the use of proceeds from the sale of securities.
Section 4(a)(1 1/2) can be used in conjunction with Rule 144 to allow for the resale of restricted and control securities that have been issued in a private placement or other transaction not involving a public offering. For example, a broker-dealer may sell restricted and control securities in a private placement that complies with Section 4(a)(1 1/2), and the investors in the private placement may later sell their securities in the public market under the safe harbor provided by Rule 144, subject to the conditions and limitations set forth in the rule.
In this sense, Section 4(a)(1 1/2) and Rule 144 complement each other in allowing for the sale of restricted and control securities in compliance with federal securities laws, while providing greater flexibility for broker-dealers and market participants in the capital raising and resale processes.
- Conclusion
Overall, Rule 144 is an important tool for companies, market participants, and individuals to use in the sale of restricted and control securities, and it is utilized often in practice.
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