TEXAS RULE 144 OPINION LAWYER.    Texas securities lawyer.

Alan Abergel is an attorney licensed by both the State Bar of Texas and the State Bar of California.  

Rule 502(d)(3) requires the issuer to place “a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.”  Although the subparagraph is very explicit about the issuer’s duty at the time it issues a security, it says nothing about the circumstances under which the issuer may properly remove restrictive legends. The usual practice for an issuer faced with this duty is to leave the restrictive legends on certificates or other documents evidencing restricted securities until such time as the owner seeks to transfer them.

A private purchaser acquires restricted securities, i.e., they may not be publicly resold (nor may they be resold privately) if the transaction would constitute the seller an “underwriter” under the 1933 Act.  The aim of Rule 144 is to provide an objective basis for concluding that a person is not an “underwriter” as that term is defined under Section 2(11) of the Securities Act of 1933 when that person sells restricted or control securities which were never the subject of a registration statement.

Restricted securities and control securities can be sold under Rule 144, subject to meeting the rule’s conditions. Per the SEC: “Restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities. Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as an executive officer, a director or large shareholder, in a relationship of control with the issuer. Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. If you buy securities from a controlling person or “affiliate,” you take restricted securities, even if they were not restricted in the affiliate’s hands.”

https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144

In 2007, the SEC adopted a major revision to Rule 144 of the Securities Act of 1933, as amended, (“Securities Act”) governing the resale of “restricted securities” without registration under the Securities Act and to resale of securities in a Form S-4 registered business combination by affiliates (e.g. officers, directors and 10%+ shareholders). Adopted on November 17, 2007 by the Commission and effective as of February 15, 2008, the changes to Rule 144 and Rule 145 are set forth in SEC Release #33-8869.3 SEC Release.

As amended, Rule 144 contains shorter holding periods prior to resale and eliminate many of the restrictions for and on resale, especially for “non-affiliates” (that being, persons who are not officers or directors of the issuer company or owners of more than 10% of the outstanding shares of the issuer securities).

Under new Rule 144 the major provisions are:

  • (1) Issuers who report under the Securities Exchange Act of 1934, as amended, (“Reporting Companies”) have the holding period for restricted securities to six months from one year (Note: private or non-Exchange Act reporting companies are subject to the one year holding period prior to resale rights under Rule 144); and
  • (2) For non-affiliates of a Reporting Company that meet Rule 144(c)4 current information requirement (that is, the Reporting Company has timely filed all Exchange Act (“Exchange Act”) reports (e.g. Form 10-K, Form 10-Q), there are no requirements for resale after the six month holding period (that is, there is no need to file Form 144 before or after sales of securities under Rule 144, and there is no volume or other restriction on amount of securities sold under Rule 144 and resale solely thorough a broker); and
  • (3) For non-affiliates of a Reporting Company, all Rule 144 restrictions on resale of the securities are removed after a one year holding period; and
  • (4) Securities acquired under Section 4(a)(5) and 4(a)(6) are included in the definition of “restricted securities” under Rule 144; and
  • (5) Rule 145 was amended to remove the resale restriction on securities issued in a business combination and registered under an effective Form S-4 registration statement under Securities Act;
  • (6) Shell companies must continue to meet certain requirements to use Rule 144 for resale of restricted securities, including cessation of shell company status, filing “Form 10 information” and reporting under the Exchange Act of one year. Such requirements were deemed necessary by the SEC to guard against rampant securities abuses by or in connection with public shell companies.

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