Securities Act
Secondary Market Transactions
Rule 144
•
Coverage
–
–
–
•
Insiders resales (“affiliates”)
Non-insider resales (“restricted shares”)
Brokers facilitating resales
Conditions:
1.
2.
3.
4.
5.
Publicly available info
Holding period (only restricted shares)
“Trickle” into market
Brokers transactions
Notice of sale
(last updated 04 Apr 12)
What is a “Rule 144A offering” ….
Institutional
Investor
Broker
Institutional
Broker
Investor
Institutional
Broker
Investor
Institutional
Investor
Broker
Institutional
Investor
Trading market
Firm-commitment
underwriting
Best-efforts
underwriting
Underwriter
Underwriter
Purchaser
Restricted
securities
Issuer
§ 4 Exempted transactions
The provisions of section 5 shall not
apply to-(1) transactions by any person other than
an issuer, underwriter, or dealer.
(2) transactions by an issuer not
involving any public offering.
§ 2(a)(11) Definitions
The term "underwriter" means any
person who has purchased from an
issuer with a view to, or offers or sells for
an issuer in connection with, the
distribution of any security … As used in
this paragraph the term "issuer"
shall include, in addition to an issuer,
any [control person].
Rule 144A
(b) Sales by persons other than issuers or
dealers.
Any person, other than the issuer or a dealer,
who offers or sells securities in compliance
with the conditions set forth in paragraph (d) of
this section shall be deemed not to be
engaged in a distribution of such securities
and therefore not to be an underwriter of such
securities …
(c) Sales by Dealers.
Any dealer who offers or sells securities in
compliance with the conditions set forth in
paragraph (d) of this section shall be deemed
not to be a participant in a distribution of such
securities within the meaning of section
4(3)(C) of the Act and not to be an underwriter
…, and such securities shall be deemed not to
have been offered to the public within the
meaning of section 4(3)(A) of the Act [statute].
Rule 144A
(d) Conditions to be met.
(1) securities offered/sold only to QIB or
reasonably believed to be QIB
(2) seller (and broker) take reasonable steps
to ensure that purchaser aware relying on
Rule 144A
(3) securities not of same class as securities
listed on US stock exchange or Nasdaq
(4) for non-reporting issuer, exempt foreign
issuer, or foreign government, Rule 144A
holders and prospective purchasers can
obtain from issuer, upon request:
–
“very brief” statement about issuer
and business
–
issuer's most recent balance sheet,
P&L and retained earnings
statements for last 2 fiscal years
Operation of Rule 144 …
Trading market
Broker
Firm-commitment
underwriting
Best-efforts
underwriting
Underwriter
Underwriter
Purchaser
Secondary
distribution
Purchaser
Restricted
securities
Issuer
Insider
Rule 144 – safe harbor
Non-affiliate Non-affiliate
Affiliate
(restricted)
(restricted) (restricted)
Publicly
available
info
X
Holding
period
> 6 mos
X
> 1 yr
Affiliate
(nonrestricted)
X
> 6 mos
“trickle”
into market
X
X
Broker
sales
X
X
Notice of
sale
X
X
§ 4 Exempted transactions
The provisions of section 5 shall not
apply to-(1) transactions by any person other than
an issuer, underwriter, or dealer.
(2) transactions by an issuer not
involving any public offering.
§ 2(a)(11) Definitions
The term "underwriter" means any
person who has purchased from an
issuer with a view to, or offers or sells for
an issuer in connection with, the
distribution of any security … As used in
this paragraph the term "issuer"
shall include, in addition to an issuer,
any [control person].
Non-affiliate (restricted)
• Reporting issuer
• Non-reporting issuer
Non-affiliate (reporting issuer)
Rule 144 (b) Conditions to Be Met. Subject to paragraph (i)
of this section, the following conditions must be met:
Non-Affiliates. If the issuer [is reporting company for at least
90 days before the sale], any non-affiliate [and not
affiliates during the preceding three months], who sells
restricted securities of the issuer for his or her own
account shall be deemed not to be an underwriter of those
securities within the meaning of section 2(a)(11) of the Act
if all of the conditions of paragraphs (c)(1) [current
reporting company] and (d) [holding period of 6 months] of
this section are met.
Non-affiliate (reporting issuer)
Rule 144 (b) Conditions to Be Met. Subject to paragraph (i) of
this section, the following conditions must be met:
Non-Affiliates. If the issuer [is reporting company for at least
90 days before the sale],
any non-affiliate [and not affiliates during the preceding
three months], who sells restricted securities of the issuer
for his or her own account
shall be deemed not to be an underwriter of those securities
within the meaning of section 2(a)(11) of the Act
if all of the conditions of paragraphs (c)(1) [current reporting
company] and (d) [holding period of 6 months] of this
section are met.
Non-affiliate (non-reporting issuer)
Rule 144 (b) Conditions to Be Met. Subject to paragraph (i)
of this section, the following conditions must be met:
Non-Affiliates.
The requirements of paragraph (c)(1) of this section [current
reporting company] shall not apply to restricted securities
sold for the account of a person who is not an affiliate of
the issuer at the time of the sale and has not been an
affiliate during the preceding three months, provided a
period of one year has elapsed since the later of the date
the securities were acquired from the issuer or from an
affiliate of the issuer.
If the issuer [is not a reporting company], any non-affiliate …
who sells restricted securities of the issuer for his or her
own account shall be deemed not to be an underwriter of
those securities within the meaning of section 2(a)(11) of
the Act if the condition of paragraph (d) [12 month holding
period] of this section is met.
Affiliate
• Restricted securities
• Non-restricted securities
Affiliate (restricted / non-restricted)
Rule 144 (b) Conditions to Be Met. Subject to
paragraph (i) of this section, the following conditions
must be met:
Affiliates or persons selling on behalf of affiliates.
Any affiliate of the issuer, or any person who was an
affiliate at any time during the 90 days immediately
before the sale, who sells restricted securities, or
any person who sells restricted or any other
securities for the account of an affiliate of the issuer
of such securities, or any person who sells restricted
or any other securities for the account of a person
who was an affiliate at any time during the 90 days
immediately before the sale, shall be deemed not to
be an underwriter of those securities within the
meaning of section 2(a)(11) of the Act if all of the
conditions of this section are met.
Affiliate (restricted / non-restricted)
Rule 144 (b) Conditions to Be Met. Subject to paragraph (i)
of this section, the following conditions must be met:
Affiliates or persons selling on behalf of affiliates.
Any affiliate of the issuer [who sells restricted securities], or
any person who was an affiliate at any time during the 90
days immediately before the sale, who sells restricted
securities, or
any person who sells restricted or any other securities for the
account of an affiliate of the issuer of such securities,
any person who sells restricted or any other securities for the
account of a person who was an affiliate at any time during
the 90 days immediately before the sale,
shall be deemed not to be an underwriter of those securities
within the meaning of section 2(a)(11) of the Act if all of the
conditions of this section are met.
Conditions:
(c)
(d)
(e)
(f)
(h)
(i)
Current public information
Holding period for restricted securities
Trickle into market
Broker's transactions [defined in (g)]
Notice to SEC
Must engage in bona-fide sale
Some hypotheticals …
(12 hypotheticals)
Hypothetical #1-6
Island Tours is a reporting
company. Four months ago
Island Tours sold $2 million in
common stock in a Reg D
private placement. Skipper (the
company’s CEO) purchased
100,000 shares at $10/share.
Mary Ann, an unaffiliated outside
investor, purchased another
100,000 shares.
Hypothetical #1
Mary Ann wants to sell her holdings
on Nasdaq, just 3 months after
she bought in the Reg D offering.
Can she under Rule 144?
A. No. She must wait at least 6
months, maybe 12 months.
B. No. Reg D offerings require
investment intent.
C. Yes. She is not a control person.
D. Yes. Mary Ann always gets her
way.
Dawn Wells
Actress, Author, Journalist,
Motivational Speaker,
Businesswoman, Entreprenuer
Hypothetical #2
Mary Ann wants to sell her holdings
on Nasdaq, now nine months
after she bought in the Reg D
offering. Assume Island Tours is
late in its latest 10-K.
Nasdaq
sell
Can she under Rule 144?
A. No. She must wait 12 months,
given IT not current.
B. No. Reg D offerings require 12month holding.
C. Yes. Non-affiliates of public
companies must wait 6 mos.
D. Yes. Reg D offerings have no
holding periods.
Not current
-- ’34 Act
filings
Mary
Ann
Reg D
Island Tours
Hypothetical #3
Mary Ann wants to sell her holdings
on Nasdaq, now 13 months after
she bought in the Reg D offering.
Assume Island Tours is still late
in filing its 10Qs and 10-Ks.
Nasdaq
sell
Can she under Rule 144?
A. No. She must wait until IT
becomes current.
B. No. Reg D offerings require 24month holding.
C. Yes. Non-affiliates must wait 12
mos.
D. Yes. Reg D offerings have no
holding periods.
Not current
-- ’34 Act
filings
Mary
Ann
Reg D
Island Tours
Hypothetical #4
Mary Ann bought in the Reg D
private placement nine months
ago. Five months after the
purchase she pledged her
shares to Howell Bank. Mary
Ann defaults and Howell Bank
wants to sell the pledged shares
on Nasdaq. Assume Island
Tours is current in all its
Exchange Act filings.
Can she under Rule 144?
A. No. No tacking allowed.
B. Yes. Tacking allowed always.
C. Yes. Tacking allowed if bona fide
and pledged w/ recourse.
Nasdaq
sell
Howell
Bank
Current
-- ’34 Act
filings
pledge
Mary
Ann
Reg D
Island Tours
Hypothetical #5
Skipper (Island Tour’s CEO) wants
to sell 16 months after the Reg D
offering. He will use Sparrow
Securities. Island Tours has not
filed its latest Form 10-K.
Can he under Rule 144?
A. No. He must wait 12 months,
given IT not current.
B. No. Affiliates are subject to
current-filings condition.
C. Yes. Affiliates, like non-affiliates,
must wait 12 months.
D. Yes. Reg D offerings have no
holding periods.
Hypothetical #6
Skipper wants to sell some of his
Island Tour stock that he bought
on Nasdaq last week. Assume
Island Tours is still late in filing
its 10Qs and 10-Ks.
Can he under Rule 144?
A. No. He must wait 12 months,
given IT not current.
B. No. He must wait until IT is
current.
C. Yes. Affiliates selling nonrestricted need not wait.
D. Yes. Affiliates can always sell
non-restricted shares.
Nasdaq
Sell
(one
week
later)
buy
Not current
-- ’34 Act
filings
Skipper
Reg D
Island Tours
Hypothetical #7-10
Island Tours went public 3 years ago
and has 10 million shares
outstanding – some from its recent
Reg D offering.
The average weekly trading volume of
Island Tours has been around
125,000 shares – at about
$10/share.
Hypothetical #7
Eight months after the Red D offering,
Mary Ann decides to sell the
250,000 shares she purchased in
the private placement. This is more
than 1% outstanding shares and
the weekly trading volume.
Can she under Rule 144?
A. No. She is subject to trickle
condition.
B. No. She is subject to 12-month
holding condition.
C. Yes. Non-affiliates of public
companies must wait 6 mos.
D. Yes. Non-affiliates can sell 1%
every month.
Dawn Wells - Actress,
Author, Journalist,
Motivational Speaker,
Businesswoman, Entreprenuer
Hypothetical #8
Eight months after the Red D offering,
Mary Ann decides to sell her
250,000 shares that she purchased
in the private placement. At the
same time, two other unaffiliated
investors in the Reg D offering
(professor and Mrs. Howell) also
decide to sell 100,000 shares each.
Can they under Rule 144?
A. No. The trickle condition is
cumulative.
B. Yes. The trickle condition is not
cumulative.
C. Yes. Assuming Mrs. Howell is not
an affiliate through Mr. Howell.
Hypothetical #9
Skipper holds 200,000 shares –
100,000 he received in the Reg D
private placement and another
100,000 that he bought on the open
market. He wants to sell all
200,000 shares.
Can he under Rule 144?
A. No. All his shares are subject to
trickle condition.
B. Yes. Only his restricted shares are
subject to trickle.
C. Yes. Restricted are less than 1%;
open-market are w/in weekly avg.
Hypothetical #10
This time Skipper decides to resell
only his 100,000 restricted shares
through unsolicited brokers’
transactions on the Nasdaq. At
about the same time, he resells the
100,000 unrestricted shares to Mr.
Howell, a highly sophisticated
investor. The sale of the
unrestricted shares is negotiated
and solicited, with the assistance of
Sparrow Securities.
Can he under Rule 144?
A. No. Resales are cumulated; and
trickle not met.
B. Yes. The sale to Mr. Howell is
exempt under 4(1-1/2).
Hypothetical #11-12
You are a broker working for Sparrow
Securities. You receive a large
flow of orders from many different
investors.
You receive an order from Skipper,
the CEO of Island Tours, to sell
unregistered securities previously
sold through Island Tours’ private
placement of thirteen months ago.
The securities all bear a Rule
502(d) legend indicating their
restricted status.
Hypothetical #11
As the broker, how do you go about
making the various inquiries as
required by Rule 144(g)? See Form
144 –
www.sec.gov/about/forms/secforms
.htm#1933forms [click here]
Which inquiry is not necessary?
A. Whether the seller is using nonpublic information.
B. Whether the seller acquired the
securities more than 6 mos ago.
C. What other sales the seller has
made in the last 3 mos.
D. Whether the seller is related has
family members who are selling.
Hypothetical #12
Sparrow Securities maintains a list of
customers that have recently
indicated a desire to purchase the
stock of “high growth-high risk
startup companies.” As the broker
receiving the sale order from
Skipper, can you contact the
customers on the list and sell them
the Island Tours restricted
securities?
Can they under Rule 144?
A. No. Only if asked about IT in last 10
days.
B. Yes. This is not a general
solicitation.
The end