SEC Rule 144: Definition, Holding Periods, and Other Rules

What Is Rule 144?

Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission (SEC) that sets the conditions for the sale or resale of restricted, unregistered, and control securities.

Rule 144 provides an exemption from registration requirements for the sale of securities through the 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.

The rule is designed to thwart insider trading and insure that the buyers of such securities receive adequate information.

Key Takeaways

  • Rule 144 was written to thwart insider trading and ensure that buyers of unregistered securities receive adequate information.
  • The rule essentially regulates sales of securities that take place outside the public markets, which are regulated by their own set of SEC rules.
  • It is intended to increase transparency and fairness in the sale of restricted and control securities in the public market. (Control securities are held by company insiders.)
  • Rule 144 also regulates transactions in securities held by controlling or majority shareholders.
  • Rule 144 mandates that five conditions be satisfied for the sale of securities outside the public markets.
  • There are some exceptions to the rule.

The Cryptocurrency Exception

The world of cryptocurrency is currently lightly regulated. A bitcoin is not currently classified as a "security." That could change. The SEC is leading the push to bring cryptocurrency trading within its regulatory authority.

Understanding Rule 144

Rule 144 regulates transactions dealing with restricted, unregistered, and control securities. (Control securities are held by insiders or others with significant influence on the issuer.)

These types of securities are typically acquired over the counter (OTC) or through private sales. In some cases, they constitute a controlling stake in an issuing company.

Restricted securities can also be acquired through private placements or through 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. The exemption requires that five specific conditions be met.

Exceptions to the Rule

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 and the security can be sold without restrictions.

Non-affiliated parties may sell covered securities if they were held for more than six months (rather than a full year, provided the current public information requirements are met.

5 Conditions for Resale of Rule 144 Securities

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

  1. The prescribed holding period must be met. For a public company, the holding period is six months, beginning on the date a holder purchased and paid for the 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 the resale of control securities is subject to the other requirements under Rule 144.
  2. 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. 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. 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. An affiliated seller must file a proposed sale notice if the sale value exceeds $50,000 during any three-month period, or if more than 5,000 shares are proposed for sale.

The holding period requirement under SEC Rule 144 depends on the type of issuer. Generally, the minimum holding period is one year. For reporting companies, the holding period can be as little as six months while for non-reporting companies, it can be up to two years.

Rule 144 and Crypto Securities

SEC Rule 144 applies to unregistered securities based on cryptocurrencies or blockchain-based tokens.

While tokens like Bitcoin are not currently classified as securities and would not be subject to Rule 144, financial products that offer interest, yield, or dividends based on lending or "staking" such crypto tokens may fall under the definition of securities.

The SEC is reportedly investigating several crypto exchanges including Kraken, Gemini, and Genesis, following the spectacular collapse of FTX. In particular, the SEC is looking into whether these and other exchanges broke the rules by illegally offering unregistered securities to U.S. customers.

Are Cryptocurrencies Securities?

If a security is determined to be a restricted security as defined by SEC Rule 144, it can only be resold under specific circumstances, including the passage of time, the filing of Form 144, and compliance with the quantity limitations imposed by the rule.

Crypto exchanges Genesis and Gemini were sued by the SEC in January of 2023 for the unregistered offer and sale of securities to customers through an interest-bearing product.

This highlights the increased scrutiny that the crypto industry is facing from regulators such as the SEC, which has been taking enforcement action against crypto companies that violate rules and has called for them to get into compliance with existing regulations.

What Are Restricted Securities Pursuant to Rule 144?

SEC Rule 144 covers restricted securities. Restricted securities are typically sold in a private placement and cannot be freely traded on stock exchanges.

These shares are subject to resale and transfer restrictions which may include filing a registration statement with the SEC.

What Are Control Securities and Why Are They Subject to Rule 144?

Control securities are owned by corporate insiders or others with significant influence or control over the issuer of the securities.

Such individuals or entities are known as affiliates (or affiliate persons), and their ownership of control securities is subject to additional restrictions and requirements under SEC regulations.

Why Was SEC Rule 144 Created?

The SEC crafted Rule 144 to regulate and provide a clearer framework for the resale and transfer of restricted and control securities.

The rule is intended to prevent market manipulation via insider and unauthorized selling, and to protect investors by requiring that adequate information is disclosed to the public before securities can be sold.

Are Cryptocurrencies Subject to Rule 144?

Cryptocurrencies are not subject to Rule 144. In fact, their sale is lightly regulated by the SEC or any other government body. The SEC takes the position that the top five cryptocurrency exchanges, which are responsible for 99% of crypt trading, "likely are trading securities" and should be required to register with the SEC and comply with its regulations.

Recent turmoil in the industry, including the collapse of FTX, is likely to increase pressure to regulate crypto trading.

The Bottom Line

SEC Rule 144 outlines the conditions under which restricted and control securities can be sold in the public market.

Rule 144 requires affiliates of an issuing company who want to sell their holdings to wait for at least a minimum holding period and comply with various reporting requirements and disclosures.

This regulation is intended to help prevent insider trading and, importantly, to protect investors by ensuring that information about the sale of securities is transparent and accurately disclosed to the market.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Rule 144: Selling Restricted and Control Securities."

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