Rule 144 Restricted Stock: SEC Rules and Exemptions Explained

Rule 144 Restricted Stock is governed by the SEC, which sets strict guidelines for resale.

To qualify for Rule 144, a stock must have been held by the seller for at least six months.

The SEC requires a Form 144 be filed before selling restricted stock.

This filing notifies the SEC of the planned sale.

Rule 144 is a regulation that covers the resale of restricted securities. It requires investors to hold these securities for at least 6 months before selling them.

Restricted securities, such as those obtained through private placements, are subject to resale and transfer restrictions. This means that investors cannot freely trade these securities on stock exchanges.

The SEC prevents free trading of restricted stock because it lacks disclosure on the security and issuer. This is why investors must hold restricted stock for 6 months before selling it.

Rule 144 is designed to protect investors by ensuring that they have access to information about the security and issuer before buying and selling it.

Form 144 is a document that must be filed with the SEC when selling a company's stock exceeds 5,000 shares or units or has an aggregate sales price greater than $50,000 in any three-month period.

The party filing Form 144 must have a bona fide intention to sell the securities within a reasonable time frame after filing.

There are five conditions that must be met for restricted, unregistered, and control securities to be sold or resold: the prescribed holding period, adequate current public information, restricted sales limits, normal trading conditions, and proposed sale notice requirements.

The holding period requirement under SEC Rule 144 depends on the type of issuer: generally one year, six months for reporting companies, and up to two years for non-reporting companies.

Here's a summary of the restricted sales limits:

Control securities are owned by corporate insiders or others with significant influence or control over the issuer of the securities. This can include officers, directors, and 10% shareholders.

Affiliates, or those with significant influence, are subject to additional restrictions and requirements under SEC regulations. These restrictions are in place to prevent insiders from selling significant amounts of their shares quickly.

Insiders, being the largest shareholders of their companies, are subject to sales limitations to prevent a sudden drop in the stock price. They are allowed to sell the greater of 1% of the outstanding shares or the four-week trading average, four times a year.

This rule prevents affiliates from selling significant amounts of shares in short periods of time, similar to a manufacturer dropping off a large quantity of products at a local store and asking for them to be sold immediately.

Restricted securities are typically sold in a private placement and cannot be freely traded on stock exchanges. They are subject to resale and transfer restrictions, which may include filing a registration statement with the SEC.

Restricted stock is not registered with the SEC and lacks disclosure on the security and issuer, making it ineligible for trading in public markets. This is why the SEC prevents free trading of restricted stock.

To be eligible for resale, restricted securities must meet specific conditions under SEC Rule 144. These conditions include a prescribed holding period, adequate current public information, and restrictions on the amount that can be sold.

The holding period for restricted securities is typically six months, but it can be as little as six months for reporting companies or up to two years for non-reporting companies. This means that investors must hold onto the securities for a certain period before they can be resold.

Here are the key facts about restricted securities:

Restricted securities are an important concept in the world of finance, and understanding them can help investors make informed decisions about their investments.

Regulators aim to create a transparent environment in the securities markets by requiring public filings of transaction reports related to Rule 144.

Form 144 must be filed when an investor (affiliate or non-affiliate) intends to trade control or restricted stock at any point in the next 90 days, and this form is typically filed electronically on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

All that's required for Form 144 to be filed is an intention to trade a control or restricted stock; there is no requirement for a transaction to actually occur.

Here are the specific requirements for filing Form 144:

The SEC was created to regulate the securities industry and protect investors.

Its primary goal is to ensure fair and transparent markets, which is crucial for investors to make informed decisions.

The SEC was established by Congress in 1934 as a response to the stock market crash of 1929, which led to a loss of millions of dollars for many investors.

The SEC's creation was a significant step towards regulating the securities industry and preventing similar market crashes in the future.

SEC Rule 144 was created to regulate the resale and transfer of restricted and control securities, and to prevent market manipulation via insider and unauthorized selling.

This rule requires that adequate information is disclosed to the public before securities can be sold, which helps protect investors from being misled.

Filings are an essential part of the SEC's regulatory framework, providing transparency and accountability in the securities markets. Regulators aim to create a transparent environment by requiring public filings of transaction reports related to Rule 144.

Form 144 must be filed when an investor (affiliate or non-affiliate) intends to trade control or restricted stock at any point in the next 90 days, typically through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

The SEC allows investors performing small control or restricted stock transactions to avoid filing requirements, but Form 144 must be filed if an investor plans to sell more than 5,000 shares or $50,000 of total stock.

Form 4 must be filed when an affiliate actually trades control stock, within two business days of the transaction. This form reports beneficial changes in ownership for insiders, and many financial media outlets pay close attention to these filings.

EDGAR is the system used to file these forms, and it's also used to store and maintain the filings for public access. QIBs (Qualified Institutional Buyers) are not subject to Rule 144, and they avoid holding periods and volume limitations.

Here are the key differences between Form 144 and Form 4:

Form 144 must be filed electronically on EDGAR, but it's not required to be sent electronically; some filers choose to do so, while others may file in print form.

If you're looking to sell restricted stock, there are conditions and exceptions to be aware of. To start, you'll need to meet the five conditions outlined in Rule 144, which include holding the security for a prescribed period of time, having adequate current public information available, and not exceeding certain sale limits.

There are two notable exceptions to these rules. If the seller of a covered security is not associated with the company that issued the shares and has owned the securities for more than one year, the five conditions of the rule are waived. Alternatively, non-affiliated parties may sell covered securities if they were held for more than six months.

The holding period requirement under SEC Rule 144 depends on the type of issuer, with a minimum of one year for non-reporting companies and six months for reporting companies. Restricted stock, in particular, must be held for six months before resale.

The sale limits are also worth noting. For affiliated sellers, the sale limit is 1% of the total outstanding shares during any three-month period, or the greater of 1% or the average of the previous four-week trading volume for listed stocks.

Control stock is held by corporate insiders or others with significant influence or control over the issuer of the securities. This includes officers, directors, and 10% shareholders.

These individuals are known as affiliates, and their ownership of control securities is subject to additional restrictions and requirements under SEC regulations.

Affiliates are subject to sales limitations to prevent the sudden sale of significant amounts of shares, which could affect the price.

They are allowed to sell the greater of 1% of the outstanding shares or the four-week trading average, four times a year.

This rule prevents affiliates from selling significant amounts of shares in short periods of time, referred to as volume limitations.

If an affiliate owns unregistered stock, both restricted and control stock rules apply simultaneously.

Exceptions to the Rule can be a bit tricky, but I'll break it down for you. Non-affiliated parties may sell covered securities if they've held them for more than six months, provided the current public information requirements are met.

The rule is waived for sellers who aren't associated with the company that issued the shares, and they've owned the securities for more than one year. This means they can sell the security without restrictions.

Here are the exceptions to the rule for non-affiliated parties:

Keep in mind that these exceptions only apply to non-affiliated parties, not to affiliated parties. If you're an affiliate, you'll need to follow the regular rules for selling covered securities.