Rule 144 regulates the sale of restricted or control securities, which are stocks that cannot be sold due to the United States Securities Act of 1933. The rule sets out five conditions to ensure fair transactions and requires the removal of restricted stock certificates.
Rule 144 regulates the sale of restricted or control securities—stocks that could not otherwise be sold due to the United States Securities Act of 1933. The Securities Act was the first federal government regulation of the securities market in United States and was enacted in the aftermath of the stock market crash of 1929. Among the goals of the law were to help level the playing field between the average investor and “experts” who might have an unfair advantage due to their position in a regulated company.
Restricted securities are those that have not previously registered with the United States Securities and Exchange Commission (SEC), which oversees stocks. Publicly issued shares are registered as part of the initial offering process, but some other shares escape this scrutiny. Small, localized offerings are often exempt, as are shares paid as part of an employee benefit plan or as compensation for professional services. Restricted stock certificates are typically stamped with a notice of their restricted status.
Control securities are owned by “insiders,” directors, or large shareholders of a company who are in a position to potentially control its policies or management. These insiders or affiliates are presumed to have access to information that is not available to members of the investing public. This combination of inside knowledge and ownership of large blocks of stock provides an unfair advantage and increases the potential for fraud. Rule 144 provides a balancing remedy for this advantage when affiliates wish to liquidate their holdings.
Rule 144 sets out five basic conditions to help ensure that transactions are fair:
1. Holding Period: Restricted securities of a company subject to the reporting requirements of the Securities Exchange Act of 1934 must be held for at least six months. For those who are not required to report, the waiting period is one year.
2. Adequate current information: Before a sale can be made, the issuing company must have complied with the information requirements of the Exchange Act
3. Trading Volume Formula: Volume sold by an affiliate during any three-month period is limited to 1 percent of shares outstanding or 1 percent of weekly trading volume for the four weeks preceding the sale, whichever is greater.
4. Ordinary Brokerage Transactions: Affiliate sales must be handled as normal transactions at normal commission rates, with no purchase orders requested.
5. Filing a Notice of Proposed Sale: The SEC must be notified if total sales exceed 5,000 shares or $50,000 US dollars in any three-month period, and if the entire sale is not completed.
Finally, Rule 144 requires the removal of the seal certificates that designate the stock as restricted. This can only be removed by the stock transfer agent. The concurrence of the issuing company’s lawyer is also required.
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