New SEC Rules May Make It Easier to Sell Your Securities

Posted by Rebecca Brommel in February 2008 on 2/1/2008

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If you have purchased securities in a private equity offering, you likely hold “restricted securities.”  For many of you, this means you are currently prohibited from selling your securities to someone else.  This is because securities laws restrict resales of securities that were originally issued in offerings not registered with the SEC.  To resell your securities, you must register the resale with the SEC or the resale must qualify for an exemption from registration.  Rule 144 is a safe harbor you may use to comply with this requirement. 

The SEC has amended Rule 144 to eliminate some of the conditions for using the safe harbor.  This may make it easier for you to resell securities that you purchased in a private offering.  The effective date of the amendments is February 15, 2008, and the new rules apply to securities bought before or after that date.  This article provides a brief overview of the new rules. 

Before getting too excited about the SEC’s generosity, you should determine whether you are an affiliate of the company whose securities you own.  Stricter requirements for using the safe harbor apply to affiliates.  These rules apply even if affiliates bought their securities in a public offering.  Affiliates generally include officers and directors of the issuer, as well as persons who own a 10% or greater interest.  

Sale of Restricted Securities by Nonaffiliates  

To use Rule 144, you must first own the securities for the required holding period.  The holding period typically begins on the date you bought securities in an offering or from an affiliate of the issuer. There are rules for calculating holding periods for some specific transactions, such as those involving promissory notes, estates and gifts, as well as new rules for reorganizations.  

The SEC has reduced the holding period to one year for securities of non-reporting issuers and six months for securities of issuers that have been subject to SEC reporting requirements for at least 90 days before the sale.  For resales of securities of reporting companies, there also must be adequate current public information about the issuer.  This additional requirement applies for six months after the six month holding period is met.  After the one year holding period, resales by nonaffiliates of reporting and nonreporting companies are not subject to any other requirements. 

Affiliates Subject to Stricter Rules 

Affiliates have the same holding period restrictions as nonaffiliates.  However, for the most part, the new rules did not change the requirements that apply to affiliates.  Once they satisfy the holding period, affiliates must meet additional requirements.  These include the availability of public information; limitations on the amount of securities an affiliate may sell; a manner of sale requirement; and a notice filing requirement if securities sold in reliance upon Rule 144 during any three month period exceed 5,000 shares or $50,000.  Under the new rules, the manner of sale requirement does not apply to debt securities.  

Affiliates of small private issuers may have difficulty satisfying the public information and manner of sale requirements.  As a result, they may need to register public resales or use an alternative exemption.  Even though the new rules probably will not help such affiliates sell their own securities, directors and managers of small private companies may still appreciate the prospect of increased flexibility to approve transfer requests and keep their stockholders and members happy. 

Other Rules Still Apply 

Remember there are other sources of restrictions that may impact transfers of your securities, such as tax rules and the issuer’s governing documents.  However, the changes to Rule 144 may help you satisfy the securities law requirements for selling your restricted securities. 

Britney Schnathorst is an associate of the firm and is a member of the firm’s Corporate Transactions, Agricultural Law, Renewable Fuels and Environmental Law Practice Groups.  Britney is also a member of the American Bar Association.  She can be reached at (515) 242-2487 or bls@brownwinick.com.