Rule 144A

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What is the 'Rule 144A'

Rule 144(a) is a Securities and Exchange Commission (SEC) rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves. This has substantially increased the liquidity of the securities affected because institutions can trade these securities among themselves, sidestepping limitations imposed to protect the public.

BREAKING DOWN 'Rule 144A'

The purpose of Rule 144(a) is to provide a mechanism for the sale of privately placed securities that do not have, and are not required to have, an SEC registration in place, creating a more efficient market for the sale of said securities. To sell restricted or controlled securities under Rule 144(a), certain conditions must be met.

Rule 144(a) Holding Requirements

While a two-year holding period is not required, a minimum six-month holding period applies to a reporting company, and a minimum one-year holding period applies to issuers not required to meet reporting requirements. This holding period begins on the day the securities in question were bought and considered paid in full.

Public Information Requirement

A minimum level of public-accessible information is required of the selling party. For reporting companies, this issue is addressed as long as they are in compliance with their regular reporting minimums. For nonreporting companies, basic information regarding the company, such as company name and the nature of its business, must be publicly available.

Trading Volume Formula

For affiliates, there is a limit on the number of transactions, referred to as the volume, that cannot be exceeded. This must amount to no more than 1% of the outstanding shares in a class over three months or the average weekly reported volume during the four-week period preceding the notice of sale on Form 144.

Brokerage Transactions

The sale must also be handled by the brokerage in a manner deemed routine for affiliate sales. This requires no more than a normal commission be issued, and neither the broker nor the seller can be involved in the solicitation of the sale of those securities.

Notice Filings

To meet filing requirements, any affiliate sale of over 5,000 shares or over $50,000 during the course of a three-month span must be reported to the SEC on Form 144. Affiliate sales under both of these levels are not required to be filed with the SEC.

Other Requirements

Even when those aforementioned requirements are met, the legend needs to be removed from the certificate before it can be sold. This can only be handled by a transfer agent.

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