News
December 18, 2007

Corporate Alert: SEC Eases Restrictions With Significant Changes To Rules 144 And 145

Arnold & Porter Advisory
Restrictions Relaxed For Resales of Restricted Securities and Resales by Affiliates of The Issuer

Earlier this month, the Securities and Exchange Commission (SEC) published changes to Securities Act Rules 144 and 145. These changes relate to resales of certain securities, specifically, all resales of privately issued "restricted" securities, resales of an issuer's securities by its affiliates and resales of certain securities obtained in exchange for an issuer's securities in a merger or similar transaction. In general, the revisions ease some of the resale restrictions, with the stated purpose of increasing the liquidity of privately sold securities and decreasing the cost of capital for all issuers.

The changes to Rule 144 and Rule 145 will become effective on February 15, 2008. Following the effective date, the revised rules will apply regardless of whether securities were acquired before or after the effective date of the revisions.

Why do these changes matter?

We foresee that the biggest practical impact of these changes will be to facilitate earlier liquidity for the following classes of people:

  • shareholders of companies being acquired by public companies in stock for stock or stock for assets transactions,

  • investors in PIPE transactions, and

  • officers and directors of target companies who receive public company stock in acquisitions.

Rule 144 - Resales of Restricted Securities and Resales by Issuer Affiliates

The Securities Act of 1933 generally requires securities to be registered with the SEC unless an exemption exists for the transaction. In addition, under certain circumstances, resales of an issuer's previously registered securities by its affiliate can require an exemption. Rule 144 provides a non-exclusive safe harbor for resales of unregistered securities by any shareholder (including an affiliate) and of previously registered securities by the issuer's affiliates[1]. Moreover, a Rule 144 compliant sale "cleanses" restricted securities such that following the sale, the securities are no longer restricted and the purchaser receives freely transferable securities.

Historically, a Rule 144 sale required compliance with some or all of the following:

  • The availability of sufficient current public information about the issuer, either because the issuer was a reporting company that had filed the required reports during the 12 months preceding the resale or because current information about a non-reporting issuer was publicly available (generally similar to the information required to be filed by a reporting company).

  • Ownership of the securities for a specified holding period.

  • Compliance with resale volume limitations, which applied perpetually for issuer affiliates and for a specified period of time for a non-affiliate's resale of restricted securities.

  • Satisfaction of manner of sale requirements, generally effecting the resale transaction in a brokers' transaction or in a direct transaction with a market maker.

  • Filing of a notice of sale on Form 144 with the SEC, if the amount of securities to be resold in reliance on Rule 144 exceeded a specified sale price or volume.

The recent revisions to Rule 144 affect both issuer affiliates and non-affiliates, albeit to significantly different degrees. For non-affiliates, the two-year holding period previously set forth in Rule 144(k) has been shortened and most other requirements eliminated. More specifically, as revised, Rule 144 permits a non-affiliate to sell restricted securities:

  • Of a reporting company that has filed all specified required reports during the prior 12 months after a six-month holding period.

  • Of a reporting company or a non-reporting company freely after a one-year holding period.

Resales of both restricted and non-restricted (or "control") securities by an affiliate remain subject to all of the historic requirements (current public information, a holding period, volume limitations and manner of resale limitations, and, in some cases, the Form 144 filing requirement), with the following modifications. The revised rule:

  • Reduces the required minimum holding period for restricted securities of a reporting company from one year to six months.

  • Adopts a more generous volume limitation for debt security resales than the prior limit, but the existing limit of one percent of the issuer's outstanding shares or the average weekly trading volume over four weeks will remain applicable to equity securities.

  • Increases the resale threshold that triggers the Form 144 filing requirement to $50,000 or 5,000 shares (from $10,000 or 500 shares, respectively).

A table summarizing the final conditions applicable to restricted security resales under revised Rule 144 is set forth at the end of this alert.

In addition to the changes noted above, among other things, the amendments to Rule 144 also:

  • Increase the availability of the Rule 144 safe harbor for resales of debt securities, including by increasing the kinds of securities that are considered "debt securities," setting a higher volume limitation than for equity securities and eliminating the manner of sale requirements for debt securities.

  • Clarify that under most circumstances, Rule 144 cannot be relied upon for the resale of reporting or non-reporting shell company[2] securities.

  • Codify several existing SEC staff interpretations of Rule 144, including those concerning the ability to cumulate, or "tack," holding periods under certain circumstances, such as a cashless warrant exercise.

  • Modify certain provisions of Regulation S (which applies to offshore sales of unregistered securities), Securities Act Rule 190 (which relates to asset-backed securities transactions) and Securities Act Rule 701 (a registration exemption for certain compensatory plans) to achieve greater consistency with revised Rule 144.

Rule 145 - Securities Issues in Connection with a Merger, Consolidation or Acquisition of Assets

Rule 145 applies to certain transactions in which shareholders receive securities in exchange for the securities those shareholders already hold - typically, a merger transaction, another company's acquisition of the issuer or a sale of issuer's assets. Among other things, Rule 145 has historically provided potential liability under the securities laws for affiliates of the parties to a share exchange transaction if those affiliates resold the securities acquired in that transaction other than in compliance with Rule 145. Generally, Rule 145 required compliance with certain provisions of Rule 144.

The revisions to Rule 145:

  • Eliminate the requirement to comply with the specified procedures for resales of these securities, unless, and subject to a limited exception, one party to the transaction in which the share exchange occurred is a shell company, and

  • Harmonize the remaining requirements of Rule 145 to revised Rule 144 such that persons subject to Rule 145 may resell the securities of a shell company acquired in a transaction subject to Rule 145 if the issuer has ceased to be a shell company and the person reselling the securities meets certain conditions specified in Rule 144.

The following table, based on a table contained in the SEC release, sets forth the requirements under revised Rule 144 for resales of restricted securities[3]:

 

Affiliate

Non-Affiliate (and Has Not Been An Affiliate During the Prior Three Months)

Restricted Securities of Reporting Issuers

During six-month holding period - no resales under Rule 144 permitted.

After six-month holding period - may resell but only in accordance with all Rule 144 requirements, including:

  • Current public information
  • Volume limitations
  • Manner of sale requirements for equity securities and
  • Filing of Form 144.

During six-month holding period - no resales under Rule 144 permitted.

After six-month holding period but before one year - unlimited public resales under Rule 144 so long as the issuer meets the current public information requirement.

After one-year holding period - unlimited public resales under Rule 144 without any other Rule 144 requirements.

Restricted Securities of Non-Reporting Issuers

During one-year holding period - no resales under Rule 144 permitted.

After one-year holding period - may resell in accordance with all Rule 144 requirements, including:

  • Current public information
  • Volume limitations
  • Manner of sale requirements for equity securities, and
  • Filing of Form 144.

During one-year holding period - no resales under Rule 144 permitted.

After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

The information in this alert is a summary of revised SEC rules that are included and discussed in an SEC release. A copy of the SEC release is available at http://www.sec.gov/rules/final/2007/33-8869.pdf.


[1] Who is deemed to be an affiliate is a factual question of whether the person controls, is controlled by or is under common control with an issuer. In general, however, directors, officers and holders of 10% or more of issuer's shares (and anyone who held one of those positions during the 90 days preceding a resale) are often presumed to be "affiliates" for purposes of Rule 144.

[2] A "shell company" is an issuer that has no or nominal operations and either no or nominal assets or assets consisting of cash, cash equivalents and nominal other assets. See Securities Act Rule 405.

[3] Under Rule 144 (both historically and as revised), there is no holding period for an affiliate's sales of previously-registered securities, but the other requirements - current public information, volume limitations, manner of sale limitations and the Form 144 filing requirements -apply from the time the affiliate first owns the securities.

For More Information Please Contact:

Julia Vax
415 677 6499
jvax@howardrice.com

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