What Is Rule 144?

Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission (SEC) that sets the conditions under which restricted, unregistered, and control securities can be sold or resold. Rule 144 provides an exemption from registration requirements to sell the securities through public markets if a number of specific conditions are met. The regulation applies to all types of sellers, in addition to issuers of securities, underwriters, and dealers.

Key Takeaways

  • Rule 144 is a set of SEC guidelines outlining the sale of restricted or unregistered securities.
  • Rule 144 also regulates transactions in securities held by controlling or majority shareholders
  • In order to be freely transacted, Rule 144 mandates that 5 conditions must be satisfied, including a minimum holding period, quantity restrictions, and disclosure of the transaction.

Understanding Rule 144

Rule 144 regulates transactions dealing with restricted, unregistered, and control securities. These type of securities are typically acquired over-the-counter (OTC), through private sales, or constitute a controlling stake in an issuing company. Investors may acquire restricted securities through private placements or other stock benefit plans offered to a company's employees. The SEC prohibits the resale of restricted, unregistered and control securities, unless they are registered with the SEC prior to their sale, or they are exempt from the registration requirements when five specific conditions are met.

Five Conditions for Resale of Rule 144 Securities

Five conditions must be met for restricted, unregistered and control securities to be sold or resold.

  1. First, the prescribed holding period must be met. For a public company, the holding period is six months, and it begins from the date a holder purchased and fully paid for securities. For a company that does not have to make filings with the SEC, the holding period is one year. The holding period requirements apply primarily to restricted securities, while resale of control securities is subject to the other requirements under Rule 144.
  2. Second, there must be adequate current public information available to investors about a company, including historical financial statements, information about officers and directors, and a business description.
  3. Third, if a selling party is an affiliate of a company, he cannot resell more than 1% of the total outstanding shares during any three-month period. If a company's stock is listed on a stock exchange, only the greater of 1% of total outstanding shares, or the average of the previous four-week trading volume can be sold. For over-the-counter stocks, only the 1% rule applies.
  4. Fourth, all of the normal trading conditions that apply to any trade must be met. In particular, brokers cannot solicit buy orders, and they are not allowed to receive commissions in excess of their normal rates.
  5. Finally, the SEC requires an affiliated seller to file a proposed sale notice, if the sale value exceeds $50,000 during any three-month period, or if there are more than 5,000 shares proposed for sale.

Other Considerations

If the seller is not associated with the company that issued the shares and has owned the securities for more than one year, the seller does not have to meet any of the five conditions and can sell the securities without restrictions. Also, non-affiliated parties may sell their securities, if they held them for less than a year, but greater than six months, provided the current public information requirement is met.