February 14, 2008

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SEC Adopts Significant Revisions to Rules 144 and 145


SEC Adopts Significant Revisions Rules 144 and 145


            Under Section 4(1) of the Securities Act of 1933 (the "Securities Act"), the securities registration requirements are not applicable to transactions by any person other than an issuer, underwriter, or dealer.[1]  The Securities Act defines an "underwriter" as "any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has direct or indirect participation in any such undertaking . . . ."[2]  Rule 144 creates a safe harbor for persons reselling restricted securities and allows them to avoid being considered underwriters if the conditions of the rule are satisfied.  This Securities Law Update highlights some of the major changes to Rule 144.

Summary of Major Changes to Rule 144

  • Shorter Holding Periods
    • Under revised Rule 144, the holding period for the restricted securities of issuers subject to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") is six months.
    • Under revised Rule 144, the holding period for the restricted securities of issuers not subject to Exchange Act reporting is one year.
  • Reduced Conditions on Resale Transaction For Non-Affiliates
    • Under revised Rule 144, non-affiliates reselling restricted securities of an Exchange Act reporting issuer, after the six month holding period, are only subject to the current public information requirement (for an additional six month period).
    • Under revised Rule 144, non-affiliates reselling restricted securities of an Exchange Act reporting issuer or non-reporting issuer, after the one year holding period, are not subject to any conditions on the resale transaction.
    • However, resales by affiliates[3] are subject to the following conditions:
      • current adequate public information;
      • volume limitations;
      • manner of sale requirement for equity securities; and
      • Form 144 filing.
  • Modified Manner of Sale Requirement
    • Resales by affiliates of debt securities are not subject to the manner of sale requirement, which generally requires resales through "brokers' transactions"[4] or directly with a market maker.[5]
    • Resales through riskless principal transactions in which trades are executed at the same price, exclusive of any explicitly disclosed markup or markdown, commission equivalent, or other fee, and the rules of a self-regulatory organization permit the transaction to be reported as riskless are not subject to the manner of sale requirement.
  • Increased Filing Thresholds for Form 144
    • Form 144 must be filed by an affiliate where the intended resale exceeds either 5,000 shares or $50,000 in securities in a three month period.

Amendments to Rule 145

  • The amendments to Rule 145 eliminate the presumptive underwriter status for persons, other than issuers and affiliates, involved in exchanges of shares in reclassifications, mergers, or consolidations, or transfers of assets, except in transactions involving a shell company.

In connection with the revisions to Rules 144 and 145, the SEC also simplified the Preliminary Note to Rule 144, codified a number of staff positions relating to Rule 144, and adopted various conforming amendments.  The final rule release regarding the revisions to Rules 144 and 145 is available at http://www.sec.gov/.

Effective Date: February 15, 2008 

            If you have any questions or to obtain additional information about SEC regulatory developments, please contact James Brophy (jbrophy@rcalaw.com), Tara Pauls (tpauls@rcalaw.com) or Jessica Benford (jbenford@rcalaw.com).

[1] 15 U.S.C. § 77d.

[2] 15 U.S.C. § 77b.

[3] Generally, an affiliate is a large shareholder or director in a control relationship with the issuer.

[4] The definition of brokers' transactions has been revised to address the posting of bid and ask quotations in alternative trading systems.

[5] In connection with the elimination of the manner of sale requirement for debt securities, the revisions also raise the volume limitations for debt securities