Definition
Rule 144 is a regulation implemented by the U.S. Securities and Exchange Commission (SEC) that establishes the conditions under which certain privately held securities can be sold publicly. It provides a public resale exemption and includes requirements for holding periods, adequate public information, and the manner of sale. Rule 144 is primarily applicable to holders of stock in non-reporting companies that want to sell their shares publicly.
Phonetic
The phonetics of the keywords “Rule 144” are: Rule: R-oo-l144: W-u-n F-o-r F-o-r
Key Takeaways
- Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission that sets the conditions under which restricted, unregistered and control securities can be sold or resold. It provides an exemption under certain conditions which allows for public selling without registration.
- The rule includes restrictions such as a mandatory holding period for the securities before they can be sold. For most securities, the holding period is six months. For non-reporting companies, the holding period is one year.
- Under rule 144, there are also limitations on the volume of securities that can be sold. The amount cannot exceed 1% of the shares outstanding or the average weekly trading volume during the four weeks prior to the sale. Affiliates of the issuer must also report the sale to the SEC.
Importance
Rule 144 is a crucial regulation in business and finance set by the Securities and Exchange Commission (SEC), which sets guidelines for the sale of control and restricted securities. These securities are acquired through private sales from public companies or in an offering exempt from the SEC’s registration requirements. The purpose of Rule 144 is to prevent insider trading or the illegal sale of unregistered securities, by dictating a holding period for these securities, and requiring public information, trading volume formulas, and filing proposals for orders to sell. Not only does it guide investors, but it also provides a framework that ensures market transparency, protects shareholders, and maintains fairness in financial activities.
Explanation
Rule 144 serves a crucial function in the realm of finance and business. It serves as a regulation by the U.S. Securities and Exchange Commission (SEC) that sets the specific criteria under which the sale of securities through private transactions can be deemed public. The primary purpose behind Rule 144 is to support the SEC’s mission of providing protection to investors. This regulation manifests by imposing restrictions on the selling of securities which have been acquired in unregistered, private sales, or from an affiliate of the issuer.By using Rule 144, the SEC ensures that the market isn’t overwhelmed by unregulated or lower-quality securities. It prevents “pump and dump” schemes where the initiator promotes a stock they hold and then sells it off when the price rises due to the hype generated. Also, it provides an exit strategy for holders of restricted securities or control securities, as these securities previously had difficulties in selling due to a lack of public market. Hence, Rule 144 helps maintain the integrity and stability of the financial markets by preventing fraudulent acts, while supporting holders of restricted or control securities.
Examples
Rule 144 is a regulation set up by the Securities and Exchange Commission (SEC) that sets the guidelines under which restricted, unregistered and control securities can be sold. Here are three real-world examples illustrating its application:1. **Start-up Founders or Employees**: A founder of a start-up, or an employee who has received company shares as part of their compensation, often receives restricted stocks. These equities are issued with a letter indicating that they may not be sold until the holder has satisfied the conditions of Rule 144. They must typically hold the equities for a certain period (usually six months for reporting companies, and a year for non-reporting ones), which is set to prevent the dumping of shares.2. **Venture Capitalists**: A venture capitalist or an angel investor often buy sizable stakes in a private start-up company. If the start-up becomes successful and goes public, this investor then holds a significant amount of restricted stock. To sell those stocks, they will have to comply with the limitations set out by Rule 144, including the holding period and manner of sale.3. **Mergers & Acquisitions**: In a situation where one publicly traded company acquires another, shares might be used as part of the payment for the acquisition. The shares given to the shareholders of the company being bought out would typically be restricted securities. As such, the selling shareholders would need to comply with the provisions and conditions of Rule 144 to liquidate their shares.
Frequently Asked Questions(FAQ)
What is Rule 144?
Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission (SEC) that sets the conditions under which restricted, unregistered and control securities can be sold or resold.
What is the purpose of Rule 144?
The purpose of Rule 144 is to prevent market manipulation of equity securities through certain types of insider trading, and to ensure the securities sold are not part of an ongoing distribution.
Who is subject to Rule 144?
The rule applies to any person who owns securities that fall under the categories of restricted, unregistered, or control. This includes corporate insiders like officers, directors, or substantial shareholders.
How does Rule 144 work?
Under this rule, certain conditions must be met for the sale of these types of securities. These include a six-month or one-year holding period, adequate current public information, ordinary brokerage transactions, and filing a Form 144 with the SEC in cases where the sale involves over 5,000 shares or the shares are worth more than $50,000 over a three-month period.
How frequently should Form 144 be filed?
Form 144 should be filed at the time of placing an order to sell with the broker, if the sales conducted in a three-month period exceed 5,000 shares or if the aggregate sales price exceeds $50,000.
What is the holding period required under Rule 144?
The holding period from Rule 144 varies. For securities of reporting companies under the Securities Exchange Act, the period is six months. For non-reporting companies, the period is one year.
How is Rule 144 beneficial to small businesses and startups?
Startup companies often compensate employees with equity, but these shares are often restricted, unregistered, or control securities. Rule 144 provides a compliant way for employees to monetize their equity compensation once the requisite criteria are met.
Does Rule 144 apply to non-affiliates?
Yes, non-affiliate investors who have acquired restricted securities, such as through private placements, are also required to comply with Rule 144. However, they are not subject to the volume limitations, manner of sale requirements, or public information requirements after they’ve held the shares for one year.
What happens if Rule 144 conditions are not met?
If a security holder does not comply with each and every condition of Rule 144, the SEC takes the position that the Rule 144 safe harbor is not available for the securities sale. The security holder can be liable for selling unregistered securities.
Related Finance Terms
- Securities and Exchange Commission (SEC)
- Restricted Securities
- Control Securities
- Minimum Holding Period
- Public Information Requirement
Sources for More Information
