Securities/Investment Management/
Hedge Funds Alert
December 2007
Authors:
Cary J. Meer
+1.202.778.9107
cary.meer@klgates.com
www.klgates.com
SEC Adopts Revisions to Rules 144
and 145 to Shorten Holding Period for
Affiliates and Non-Affiliates
Deborah A. Linn
+1.202.778.9874
deborah.linn@klgates.com
Peter C. Farrand
+1.202.778.9484
peter.farrand@klgates.com
K&L Gates comprises approximately
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North America, Europe and Asia, and
represents capital markets participants,
entrepreneurs, growth and middle market
companies, leading FORTUNE 100 and
FTSE 100 global corporations and public
sector entities. For more information,
please visit www.klgates.com.
Introduction
On December 6, 2007, the Securities and Exchange Commission (the “SEC”) issued final
rules with respect to revisions to Rules 144 and 145 under the Securities Act of 1933, as
amended (the “Securities Act”), that were first proposed at an open meeting of the SEC held
on May 23, 2007. These revisions are intended to ease the burden and cost of complying
with Rules 144 and 145 for issuers and securities holders, increase the value and liquidity
of restricted securities, and limit the regulatory restrictions governing the resale of restricted
securities.
The full text of the SEC’s detailed release (Release No. 33-8869) of the final amendments
to Rules 144 and 145 is available on the SEC website at http://www.sec.gov/rules/final.
shtml (the “Final Release”).1 Comments received by the SEC regarding these amendments
prior to their adoption are also available online at http://www.sec.gov/comments/s7-11-07/
s71107.shtml. The amendments to Rules 144 and 145 under the Securities Act will become
effective on February 15, 2008.
Rules 144 and 145 under the Securities Act
Section 5 of the Securities Act requires any offer to sell or sale of securities to be registered
with the SEC unless such offer to sell or sale is exempt from registration. Rule 144 under
the Securities Act creates a safe harbor for the sale of securities under the exemption from
registration set forth in Section 4(1) of the Securities Act.
Rule 145 regulates offers to sell and sales of certain securities acquired pursuant to a
transaction involving a reclassification of securities, merger, consolidation or transfer of
assets of the issuer of the securities, where such transaction was subject to the consent
of the holders of the underlying securities (“Rule 145 Transactions”). Pursuant to Rule
145(c), persons (other than the issuer) or such persons’ affiliates who are parties to a Rule
145 Transaction are presumed to be underwriters with respect to the acquired securities and
are restricted in their ability to resell such securities. Rule 145(d) contains a safe harbor
provision for the resale of restricted securities by those presumed underwriters.
Revisions to Rule 144
Establishment of Six-Month Holding Period for Exchange Act Reporting
Companies. Rule 144(d) generally requires that a minimum “holding period” of one year
must pass between the later of the date restricted securities were acquired from the issuer
(or its affiliate) and any resale of such securities in reliance on Rule 144 for the account
1
On June 22, 2007, the SEC first posted a detailed release (the “Proposing Release”) summarizing its proposed
revisions to Rules 144 and 145 on the SEC website. The full text of the Proposing Release is available at http://
www.sec.gov/rules/proposed.shtml.
Securities/Investment Management/
Hedge Funds Alert
of either the acquiror or any subsequent holder of
the securities. The amendments to Rule 144 shorten
the holding period under Rule 144(d) to six months
for the sale of restricted securities of issuers who are
subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”), for at least 90 days prior to the sale. As a result,
both affiliates and non-affiliates will be permitted to
resell restricted securities of Exchange Act reporting
companies (“Reporting Companies”) publicly after
holding the securities for six months, subject to the
other resale requirements2 of Rule 144. It should be
noted that a one-year holding period will continue to
apply to restricted securities of companies that are not
Reporting Companies.
The reduction in the holding period for restricted
securities of Reporting Companies benefits holders
of such securities by increasing the liquidity of those
securities.
Reduction of Rule 144 Requirements
Applicable to Non-Affiliates. As discussed
above, Rule 144(d) generally requires non-affiliates to
hold their restricted securities for a minimum of one
year before they may resell those securities. Once the
minimum holding period has been met, a non-affiliate
may resell his or her restricted securities publicly,
provided that he or she complies with the resale
requirements of Rule 144. Generally, a non-affiliate
may resell his or her restricted securities without
limitation if he or she has held the securities for at
least two years.
The amendments to Rule 144, as adopted, reduce or
eliminate the Rule 144 holding periods and resale
restrictions applicable to non-affiliates. A non-affiliate
who holds restricted securities of a Reporting Company
will be able to freely resell the securities after the sixmonth holding period has been met, provided that
any such resale will be subject to Rule 144(c) for an
additional six months after the six-month holding
period is met.3 A non-affiliate will be able to resell
2
A sale of restricted securities made in reliance on Rule 144 must
comply with Rule 144’s resale requirements, which also include
a requirement that current public information with respect to the
issuer of the securities is available at the time of the resale, volume
of sale limitations, manner of sale limitations and a notice of sale
requirement.
3
Rule 144(c) requires that current public information of the issuer
be available.
his or her restricted securities (regardless of whether
the issuer of the securities is a Reporting Company)
without limitation if he or she has held the securities
for at least one year.
Revisions to Manner of Sale Requirements
Applicable to Resales of Restricted
Securities by Affiliates. 4 Rule 144(f)
establishes the “manner of sale” requirements for the
resale of restricted securities during a period when
the requirements of Rule 144 still apply. Generally,
a person selling restricted securities may not solicit
orders to purchase the securities or make any payment
in connection with the offer or sale of the securities
to any person other than the broker who executes
the order to sell the securities. The amendments to
Rule 144, as adopted, modify Rule 144(f) to allow
the resale of restricted securities through “riskless
principal transactions”5 in which trades involving such
securities 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. A broker or dealer conducting a
“riskless principal transaction” will be required to meet
all the conditions of a “brokers’ transaction,” as defined
in Rule 144(g) (except the condition that the broker
does no more than execute the order or orders to sell
the securities as agent for the person for whose account
the securities are sold), in order for such transaction to
be considered permissible under Rule 144.
Rule 144(g), which, as noted above, defines “brokers’
transactions” for purposes of Rule 144’s manner of sale
requirements, is also being amended. Subject to certain
exceptions, a transaction involving the sale of restricted
securities does not qualify as a brokers’ transaction
for purposes of Rule 144(g) if a broker solicits, or
arranges for the solicitation of, customers’ orders to
buy such securities in anticipation of or in connection
with the transaction. As a result of the amendment to
4
The amendments to Rules 144(f) and (g) described in this
subsection were not included among the proposals contained in the
Proposing Release, but are in response to comments received by the
SEC from public commenters.
5
Under new Rule 144(f)(1)(iii), a “riskless principal transaction”
is defined as “a principal transaction where, after having received
from a customer an order to buy, a broker or dealer purchases the
security as principal in the market to satisfy the order to buy or, after
having received from a customer an order to sell, sells the security
as principal to the market to satisfy the order to sell.”
December 2007 | 2
Securities/Investment Management/
Hedge Funds Alert
Rule 144(g), it will not be considered a solicitation if
a broker inserts bid and ask quotations for a restricted
security in an alternative trading system, as defined in
Rule 300 of Regulation ATS (applicable to alternative
trading systems), so long as the broker has published
bona fide bid and ask quotations for the security in the
applicable alternative trading system on each of the
previous twelve business days.
Codification of Certain SEC Interpretive
Positions Regarding Rule 144. The SEC’s
amendments to Rule 144 codify several of its
interpretive positions relating to Rule 144. Although
these codifications do not substantively change
Rule 144, they will provide additional guidance and
clarification with respect to specific provisions of Rule
144. These revisions include:
Sale of Debt Securities by Affiliates. The
amendments to Rule 144 eliminate Rule 144(f)’s
“manner of sale” requirements with respect to the
sale by affiliates of debt securities (e.g., fixed income
securities). Rule 144(f)’s definition of “debt securities,”
as revised, includes securities that have “debt-like”
characteristics, such as asset-backed securities and
non-participating preferred stock. Rule 144(e), which
establishes volume limitations on the amount of
securities that may be sold in reliance on Rule 144,
is also being amended as it applies to debt securities.
Pursuant to this amendment, the volume limitations
under Rule 144(e), as applicable to debt securities, are
being relaxed by creating a new alternative test under
Rule 144(e) that allows the resale of debt securities in
an amount not to exceed 10% of a tranche (or class
when the securities are non-participatory preferred
stock) of such debt securities in any three-month
period.6 The ten percent threshold will be determined
by aggregating all sales of the relevant debt securities
within the relevant three-month period.
„
Amending the definition of “restricted securities”
under Rule 144(a)(3) to include securities acquired
from an issuer pursuant to an exemption from
registration under Section 4(6)7 of the Securities
Act.
„
Amending Rule 144(d) to permit holders of
restricted securities, subject to certain conditions,8
to “tack” the Rule 144 holding period in connection
with transactions made solely to form a holding
company.
„
Amending Rule 144(d) to permit the “tacking” of
the Rule 144 holding period in connection with
conversions or exchanges of securities where the
holder acquired securities from the issuer solely in
exchange for other securities of the same issuer.9
The amendments to Rule 144 allow holders of debt
securities greater flexibility in the resale of such
securities, including the option to privately negotiate
the resale of the securities.
Revisions to Form 144. The thresholds that
trigger the Form 144 filing requirement set forth in
Rule 144(h) are being increased from 500 shares (or
other units of interest) and an aggregate sale price of
$10,000 or more to 5,000 shares (or other units of
interest) and an aggregate sale price of $50,000 or
more, respectively. Furthermore, non-affiliates will no
longer be required to file a Form 144 in connection with
their sales of restricted securities. Affiliates, however,
will continue to be required to file a Form 144 in
connection with their sales of restricted securities.
6
This amendment to Rule 144(e) was not included among the
proposals contained in the Proposing Release.
7
Section 4(6) of the Securities Act provides an exemption from
registration for an offering made only to accredited investors that
does not exceed $5 million, does not involve any advertising or
public solicitation by the issuer or anyone acting on the issuer’s
behalf, and for which a Form D has been filed with the SEC.
8
These conditions are: (i) the newly formed holding company’s
securities must be issued solely in exchange for the securities of the
predecessor company as part of a reorganization of the predecessor
company into a holding company structure; (ii) security holders must
receive securities of the same class evidencing the same proportional
interest in the holding company as they held in the predecessor
company, and the rights and interests of the holders of such securities
must be substantially the same as those they possessed as holders of
the predecessor company’s securities; and (iii) immediately following
the transaction, the holding company must have no significant assets
other than securities of the predecessor and its existing subsidiaries
and must have substantially the same assets and liabilities on a
consolidated basis as the predecessor had before the transaction.
9 In connection with this amendment, an interpretive note is being
added to Rule 144(d)(3)(ii) to clarify that, if the securities were
not originally convertible or exchangeable, the newly acquired
securities shall be deemed to have been acquired at the same time
as the amendment to the surrendered securities (i.e., to allow for
the conversion or exchange of such securities), so long as, in the
conversion or exchange, the securities to be sold were acquired
from the issuer solely in exchange for other securities of the same
issuer.
December 2007 | 3
Securities/Investment Management/
Hedge Funds Alert
„
Amending Rule 144(d) to provide that, upon a
cashless exercise of options or warrants, the newly
acquired underlying securities are deemed to have
been acquired when the corresponding options
or warrants were acquired, even if the options or
warrants originally did not provide for cashless
exercise by their terms.10
„
Adding an interpretive note to Rule 144(e)(2)(ii)
permitting a pledgee to sell pledged securities
without having to aggregate the sale with sales
by other pledgees of the same securities from the
same pledgor as long as there is no concerted
action by those pledgees.
„
Amending Rule 144 to expressly state that it is
not available for the resale of securities issued
by issuers, other than asset-backed issuers and
business combination related shell companies,11 that
are reporting or non-reporting “shell companies”12
10
In connection with this amendment, two interpretive notes are
being added to Rule 144(d). The first interpretive note clarifies that, if
the original options and warrants do not provide for cashless exercise
by their terms, and the holder subsequently provides consideration,
other than solely securities of the same issuer, in connection with the
amendment of the options or warrants to allow for cashless exercise,
then the amended options or warrants will be deemed to have been
acquired on the date that the original options or warrants were so
amended. The second interpretive note clarifies that the grant of
certain options (e.g., options granted under an employee benefit
plan) or warrants that are not purchased for cash or property does
not create an investment risk in a manner that justifies tacking the
holding period for the options or warrants to the holding period for
the securities received upon exercise of the options or warrants. In
such instances, the securities holder would not be allowed to tack
the holding period of the option or warrant and would be deemed
to have acquired the underlying securities on the date the option or
warrant was exercised (assuming the conditions of Rule 144(d)(1)
and Rule 144(d)(2) are met and assuming that the exercise itself was
cashless).
11
A “business combination related shell company” is a shell
company (as defined in Rule 405 under the Securities Act) that is
(i) formed by an entity that is not a shell company solely for the
purpose of changing the corporate domicile of that entity solely
within the United States; or (ii) formed by an entity that is not a
shell company solely for the purpose of completing a business
combination transaction (as defined in Rule 165(f)) among one or
more entities other than the shell company, none of which is a shell
company.
12
A “shell company” is a registrant, other than an “asset-backed
issuer,” that has: (i) no nominal operations; and (ii) either (1) no
or nominal assets; (2) assets consisting solely of cash and cash
equivalents; or (3) assets consisting of any amount of cash and cash
equivalents and nominal other assets.
including “blank check” companies.13 Once the
shell company has ceased to be such, is subject
to the Exchange Act’s reporting requirements and
has filed all required reports during the preceding
12 months, and at least one year has passed since
the filing of “Form 10 information”14 with the SEC
indicating that the shell company is no longer a
shell company, Rule 144 will be available for the
resale of the company’s securities.
„
Amending Form 144 to reconcile the security
holder’s representation in Form 144 with Rule
10b5-1(c)’s affirmative defense language—that a
person’s sale of restricted securities was not on the
basis of material nonpublic information.
Modifications to Preliminary Note to
Rule 144. The SEC also adopted revisions to the
Preliminary Note to Rule 144 using plain English
principles. These revisions are intended to clarify the
purpose, but do not alter the substantive operation, of
Rule 144. Although the SEC solicited comments on
the issue in its Proposing Release, it did not adopt a
proposal to coordinate the Form 144 filing requirements
with the Form 4 filing requirements under Section 16
of the Exchange Act in the Final Release.15
Revisions to Rule 145
The revisions to Rule 145, as adopted, eliminate
the presumed underwriter and resale provisions in
Rules 145(c) and (d), except with regard to Rule 145
Transactions involving shell companies (other than
business combination related shell companies). Thus,
only parties to a Rule 145 Transaction that involved
a shell company (other than a business combination
related shell company) will be deemed presumed
underwriters of the transaction. These revisions also
13
A “blank check” company is a company that: (i) is in the
development stage; (ii) has no specific business plan or purpose, or
has indicated that its business plan is to merge with or acquire an
unidentified third party; and (iii) issues penny stock.
14
“Form 10 information” is equivalent to information the issuer
would be required to file if it were registering a class of securities
on Form 10 or Form 20-F under the Exchange Act.
15
The SEC indicated that it expects to issue a separate release in
the future to provide affiliates that are subject to both Form 4 and
Form 144 filing requirements with greater flexibility in satisfying
these requirements.
December 2007 | 4
Securities/Investment Management/
Hedge Funds Alert
harmonize the resale restrictions of Rule 145(d) with
the revisions to Rule 144 that apply to the resale of
securities of shell companies (discussed above).
Conforming Amendments
In its Final Release, the SEC also adopted amendments
to other federal securities regulations and rules in order
to make them consistent with the amendments to Rule
144. These amendments include:
„
Amending Regulation S under the Securities Act
to conform the distribution compliance period
in Rule 903(b)(3)(iii) for Category 3 reporting
issuers to the amendments to the Rule 144 holding
period, thereby subjecting U.S. reporting issuers
to a distribution compliance period of six months
under Regulation S.
„
Amending Securities Act Rule 190, which clarifies
when registration of the sale of underlying securities
in asset-backed securities transactions is required,
to provide that, if the underlying securities are
restricted securities, Rule 144 is available for the
sale of the securities in a “resecuritization,” if at
least two years have elapsed since the later of the
date the securities were acquired from the issuer
of the underlying securities or from an affiliate of
the issuer of the underlying securities.
„
Amending Securities Act Rule 701(g)(3), which
outlines the resale limitations for securities issued
under Rule 701,16 including resale limitations
applicable to non-affiliates, to remove the
references to Rule 144(e) and Rule 144(h) from
Rule 701, which, under the amendments to Rule
144 discussed above, no longer apply to resales by
non-affiliates.
SEC Declines to Adopt Proposed
Tolling Provision
In its Proposing Release, the SEC proposed to
reintroduce a tolling provision to Rule 144 that would
suspend the minimum holding period (i.e., six months)
applicable to restricted securities of a Reporting
Company while the holder of the securities (or the
previous owner of the securities) engaged in certain
hedging transactions involving the securities. The
proposed tolling provision was the only proposed
revision to Rule 144 in the Proposing Release whose
purpose was not to make it easier to sell. However,
the SEC was persuaded by the arguments of public
commenters opposed to the proposed tolling provision
that such provision would adversely affect capital
raising transactions and did not adopt this amendment
to Rule 144 in the Final Release.
Solicitation of Comments
Because the amendments to Rule 144 summarized
above contain “collection of information” requirements
within the meaning of the Paperwork Reduction Act of
1995, the SEC is soliciting comments to (1) evaluate
whether the proposed collection of information is
necessary for the proper performance of the functions
of the SEC, including whether the information would
have practical utility; (2) evaluate the accuracy of the
SEC’s estimate of the burden of the proposed collection
of information; (3) determine whether there are other
ways to enhance the quality, utility and clarity of the
information to be collected; and (4) evaluate whether
there are ways to minimize the burden of the collection
of information on those who are to respond, including
through the use of automated collection techniques or
other forms of information technology. Comments
should be submitted to the SEC on or before January
10, 2008.
16
Rule 701 exempts the offer and sale of securities issued under
certain compensatory benefit plans and compensatory contracts from
the registration requirements of the Securities Act.
December 2007 | 5
Securities/Investment Management/
Hedge Funds Alert
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