What is Rule 144?
The Securities Act of 1933, as amended (the “Securities Act”) requires all offers and sales of securities to be registered unless there is an applicable exemption. One such exemption exists under Section 4(a)(1) of the Securities Act for “transactions by any person other than an issuer, underwriter, or dealer.” Rule 144, promulgated by the U.S. Securities and Exchange Commission (the “SEC”), is titled “Persons deemed not to be engaged in a distribution and therefore not underwriters.” As the title suggests, Rule 144 creates a safe harbor from the definition of “underwriter” by deeming certain persons who meet the requirements therein not to be engaged in a distribution of the securities at issue. Rule 144 applies to (i) securities held by “affiliates,” which is a complex determination but commonly understood to include an issuer’s directors, officers and security holders beneficially owning greater than 10% of the issuer’s outstanding securities or voting control, and (ii) “restricted securities,” which primarily consist of “securities acquired directly or indirectly from [an] issuer, or from an affiliate of [an] issuer, in a transaction or chain of transactions not involving any public offering.” In short, if a person acquires securities from an issuer in a transaction other than a public offering, such person’s resale of such restricted securities pursuant to Rule 144 would avoid the cumbersome and costly process of securities registration.
Below is a brief overview of the steps generally taken to ensure availability of the Rule 144 safe harbor:
Step 1: Determine affiliate or non-affiliate status of seller.
Rule 144 requirements vary based on whether the seller is an affiliate or non-affiliate. Affiliate status generally depends on whether the seller of securities has control over the issuer. As stated above, this can be a complex determination, and it is important to discuss such determination with all parties involved in the transaction. However, among other considerations, directors, officers and security holders beneficially owning greater than 10% of the issuer’s outstanding securities or voting control are commonly understood to meet the definition of an “affiliate.” As a general rule, a “non-affiliate” under Rule 144 is a seller that is not at the time of sale or was not for the three months prior to the sale, an “affiliate” of the issuer of the securities.
Step 2: Determine reporting or non-reporting status of issuer.
Rule 144 requirements also vary based on whether the issuer of the subject securities is a reporting or non-reporting issuer. An issuer is a “reporting issuer” if the issuer is, or has been for a period of at least 90 days immediately prior to the sale, subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). An issuer is a “non-reporting issuer” if the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Put simply, determine whether the issuer is or has been filing stock ownership information pursuant to Section 13 or the ongoing periodic reports such as the Annual Report on Form 10-K, Annual Report on Form 10-Q, etc. pursuant to Section 15(d) with the SEC.
Step 3: Ensure compliance with the Current Public Information condition of Rule 144(c).
Rule 144(c) states that adequate current public information with respect to the issuer must be available. Whether this condition is satisfied depends on the reporting or non-reporting status of the issuer.
- Reporting Issuers: must have filed all required reports under Section 13 or 15(d) of the Exchange Act, as applicable, during the 12 months preceding such sale, other than Current Reports on Form 8-K. This 12-month period is reduced if the issuer was not required to comply with such reporting for the full 12-months (e.g., a newly reporting company in the past year).
- Non-Reporting Issuers: must make the information outlined in Rule 15c2-11 publicly available, with certain caveats for insurance companies.
Step 4: Ensure compliance with the Holding Period condition of Rule 144(d).
Rule 144(d) requires a holder of restricted securities to hold such securities for certain minimum amounts of time depending on the reporting or non-reporting status of the issuer.
- Reporting Issuers: restricted securities must be held for at least six months between the date of acquisition and the date of resale.
- Non-Reporting Issuers: restricted securities must be held for at least one year between the date of acquisition and the date of resale.
Rule 144(d) also includes specific provisions for certain types of securities such as promissory notes and installment contracts as well as tacking of holding periods for certain previous transactions.
Step 5 (Affiliates Only): Ensure compliance with the Volume Limitation condition of Rule 144(e).
Rule 144(e) limits the amount of securities that may be sold by or for the account of an affiliate over any three-month period to the greater of (i) 1% of the outstanding securities of the same class as the securities being sold or (ii) the average weekly trading volume, during the four calendar weeks preceding the filing of Form 144 (explained below) of securities of the same class as the securities being sold. Rule 144(e) also includes specific provisions for certain types of securities and certain aggregation rules.
Step 6 (Affiliates Only): Ensure compliance with the Manner of Sale condition of Rule 144(f).
Rule 144(f) requires affiliates to resell securities only in “broker’s transactions,” directly with a “market maker” or in “riskless principal transactions.” These terms are defined in Rule 144(f), with references to other applicable law, and it is important to coordinate between the seller, the broker and counsel to ensure proper manner of sale.
Step 7 (Affiliates Only): Ensure compliance with the Notice condition of Rule 144(h).
Rule 144(h) requires affiliates to provide public notice via filing Form 144 with the SEC if the amount of securities to be sold in reliance on Rule 144 in any three-month period exceeds 5,000 units or has an aggregate sale price in excess of $50,000. A Form 144 involving securities of a reporting issuer must be filed electronically via the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database, while a Form 144 involving securities of a non-reporting issuer must include three physical copies mailed to the SEC. The Form 144 is to be filed concurrently with placing an order with a broker to execute a sale of securities in reliance on Rule 144 or the direct execution of a such sale with a market maker. The affiliate seller must also have a bona fide intention to sell the securities referred to in the Form 144 within a reasonable time after filing.
Final Thoughts
While this hopefully provides an introductory overview and roadmap to Rule 144 and its intricacies, it is important to emphasize the importance of coordination among parties involved in a Rule 144 resale transaction, including the seller, issuer, broker, transfer agent, counsel, etc. to ensure proper compliance and execution. Customarily, a restricted reseller will need a legal opinion from counsel noting compliance with Rule 144 in order to remove restrictive legends prior to resale. Experienced legal counsel can provide guidance relating to Rule 144 compliance and assist in the drafting of documentation associated therewith.
Contact:
Tanner Brennan I 214.745.5836 I [email protected]
Tanner Brennan is a member of Winstead’s Corporate, Securities/M&A Practice Group. Tanner represents public and private companies in connection with public offerings and private placements of debt and equity securities, mergers, acquisitions, reverse takeovers, divestitures, private equity and venture capital transactions, joint ventures, entity structure and formation, corporate governance, securities law compliance (including public reporting and disclosure obligations under the Securities Act of 1933 and the Securities Exchange Act of 1934), securities exchange listing requirements and general commercial transactions.
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Sources:
The Business Lawyer; Vol. 81, Winter 2026