Outline of Rule 144. Peter J. Romeo. August 2012

Transcription

1 Outline of Rule 144 Peter J. Romeo August 2012 Hogan Lovells 2012

2 TABLE OF CONTENTS Page I. General... 1 II. Obligations and Liability... 2 III. Securities Subject to Rule IV. Persons Subject to Rule V. The Five Requirements of Rule VI. The Current Public Information Requirement VII. The Holding Period Requirement VIII. The Volume Limitation Requirement IX. The Manner of Sale Requirement X. The Notice Requirement XI. Unavailability of Rule 144 for Shell Companies XII. Situations of Special Interest... 36

3 OUTLINE OF RULE 144 By Peter J. Romeo _/ I. GENERAL A. Safe Harbor Rule 144 under the Securities Act of 1933 ( 1933 Act ) provides a safe harbor from the registration (but not the antifraud) provisions of the 1933 Act for resales of restricted and control securities by parties other than the issuer of the securities if all applicable conditions of the rule are met. The rule may be relied upon for resales made in markets outside the United States. Compliance and Disclosure Interpretations, Securities Act Rules ( Compliance and Disclosure Interpretations ), Interp (January 26, 2009). B. Non- Exclusive Rule 144 is not the exclusive means of reselling securities without being deemed an underwriter under Section 2(a)(11) of the 1933 Act, as indicated in the last paragraph of the Preliminary Note of the rule and in the last sentence of Compliance and Disclosure Interpretations, Q (January 26, 2009). C. Other Exemptions Available Resales made under other exemptive provisions, such as the statutory Section 4(a)(1) exemption or private resales under the so-called Section 4(a)(1-1/2) exemption may be a possibility, depending on the facts of each case. (Section 4 of the 1933 Act was amended in 2012 to insert the parenthetical (a) after the 4 and before the pertinent exemptive provisions of Section 4 discussed in this Outline.) D. Non-Restricted Securities A purchaser in a Rule 144 transaction receives securities that have the same status as registered securities. That is, the securities sold under Rule 144 are free of resale restrictions, other than resale restrictions under the rule that apply to a purchaser who is an affiliate of the issuer or has been an affiliate during the preceding three months. See, e.g., the Preliminary Note to Rule 144 and Compliance and Disclosure Interpretations, Interp (January 26, 2009). E. Restrictions on Availability Rule 144 is not available for all types of resales. Among the types of resales that may not be made in reliance on the rule are the following: _/ Partner, Hogan Lovells, Washington, D.C. The author wishes to thank Robert A. Barron, Jesse M. Brill and Richard J. Parrino for reviewing this Outline prior to its publication. 1

4 Short sales, in situations where the intended seller (i) holds only restricted securities, (ii) has held them for less than the requisite Rule 144(d) holding period (i.e., six months for a reporting company and one year for a non-reporting company), and (iii) intends to cover the short sales with the restricted securities. Compliance and Disclosure Interpretations, Interp (January 26, 2009). See also the discussion in XII.B. infra. Securities acquired as underwriting compensation in a registered public offering, although there are circumstances where Rule 144 may be applied constructively to the resale of these securities, as described in XII.C. infra. Compliance and Disclosure Interpretations, Interp (January 26, 2009). F. Availability of Rule 144 for Sales of Security Futures Products Section 3(a)(14) of the 1933 Act states that offers and sales of a security futures product that is (i) traded on a national securities exchange or a national securities association and (ii) cleared by a registered or exempt clearing agency are exempt from registration under the 1933 Act. But the SEC has noted in Release No , II.A.1. (2002), that a transaction in a security futures product also is a transaction in the securities underlying the product that requires a separate exemption apart from Section 3(a)(14). Rule 144 is available to exempt the sale of the securities underlying a security futures product that is deemed to be made when the product is sold if all applicable conditions of the rule are met, as indicated in Release No supra (Q. 2). According to the SEC in Release No supra, reliance upon Rule 144 for the sale of the securities underlying a security futures product is subject to the following considerations: The sale of the underlying security is deemed to occur at the time of sale of the security futures product (Q. 3); and The seller may settle the contract with restricted securities only if the rule was satisfied at the time of sale of the security futures product (Q. 5). The form of settlement of a contract for a security futures product (i.e., physically or with cash) has no effect on the application of Rule 144 (Release No n. 21). II. OBLIGATIONS AND LIABILITY A. Persons Responsible for Complying With the Rule Seller, because the seller is seeking certainty that the exemption from registration provided by Section 4(a)(1) of the 1933 Act for persons who are not underwriters is available for the sale of the seller s securities. Broker, because the rule provides assurance that the Section 4(a)(4) exemption is available for the broker s part of the transaction. Without this exemption, the broker might be deemed to be engaged in a distribution rather than an ordinary trading transaction. See In Re Ira Haupt, 23 SEC 589 (1946). Brokers are the principal enforcers of the rule, partly because they can be disciplined if they don t comply. The SEC acknowledged the role of brokers in Release No (2007) by stating at n. 112: We agree that, as financial intermediaries, brokers serve an important function as gatekeepers for promoting compliance with Rule

5 Issuer, because the SEC staff looks to the issuer of the stock to establish internal procedures that are reasonably designed to prevent violations of the federal securities laws by its officers, directors, and employees. See for example, the controlling person liability provision of the Insider Trading and Securities Fraud Enforcement Act of The issuer, however, is not eligible to rely on the rule to sell its own securities. Compliance and Disclosure Interpretations, Q (January 26, 2009). Consistent with this view, a subsidiary, which is not a bank or trust company, that acts as trustee for its parent s employee benefit plan is not permitted to rely on Rule 144 for sales of its parent s securities. Compliance and Disclosure Interpretations, Interp (January 26, 2009). B. Consequences of Non-Compliance With the Rule Rescission of the transaction may be necessary. Section 12 of the 1933 Act provides the buyer with the right to receive the money paid, plus interest, if there has been a registration violation. Civil liability in the form of an injunctive action by the SEC and monetary penalties by a court may arise under Section 20 of the 1933 Act. Criminal liability also could arise for a willful violation on the basis of Section 24 of the 1933 Act. Maximum criminal penalties per violation are a fine of $10,000 and imprisonment for up to five years. C. Practical Exposure to Adverse Consequences The exposure to adverse consequences is relatively small because of various fallback alternatives and other considerations: Other exemptions may be available. The Section 4(a)(1) exemption applicable to a person who is not an issuer, underwriter, or dealer may be available, particularly where the securities have been held for an extended period of time. Trade may be breakable. The trade can be broken before settlement, if necessary. But the expense of breaking the trade may be considerable where the price of the stock has shifted since the date of the trade. A seller who is an insider under Section 16 of the Securities Exchange Act of 1934 ( 1934 Act ) and must break a trade should do so, where possible, through the broker s error account, in order to avoid having a short-swing transaction (i.e., a sale and purchase within less than six months) that could have adverse consequences under Section 16. SEC enforcement actions rare. The SEC rarely seeks civil or criminal remedies with respect to Rule 144 transactions. Generally, it does so only where there has been a concerted effort to evade registration or to commit securities fraud through abuse of the rule. D. Interpretive Guidance 1. Compliance and Disclosure Interpretations On January 26, 2009, the staff of the SEC s Division of Corporation Finance issued a series of Compliance and Disclosure Interpretations of Rule 144 in a section labeled Securities Act Rules that replaced similar interpretations issued by the Division on April 2, The April 2, 2007 interpretations previously had replaced interpretations contained in the following source materials of the Division: (1) the Manual of Publicly Available Telephone Interpretations (July 1997 edition and March 1999 Supplement), and (2) the Current Issues and Rulemaking Project Outline (November 2000 version). The January 26, 2009 (and subsequent) 3

6 interpretations are in two parts: (i) Questions and Answers of general applicability (the series, identified herein by a Q. followed by a number; and (ii) interpretations relating to particular factual situations (the series, each identified herein as an Interp followed by a number. See 2. Release (1979) Release No is an interpretive release published in 1979 that contains numerous staff interpretations of Rule 144, many of which continue to be relevant. 3. No-Action and Interpretive Letters The SEC staff has issued interpretations of Rule 144 in various no-action and interpretive letters that are cited herein showing the name of the party involved and the date the letter became publicly available. 4. Staff Legal Bulletins The staff from time to time issues Staff Legal Bulletins intended to provide guidance regarding common interpretive issues. See, e.g., the discussion in XI.C. infra of revisions to Staff Legal Bulletin No. 3 relating to the amendments to Rule 144 and Rule 145 that were announced in Release No (2007) and became effective on February 15, III. SECURITIES SUBJECT TO RULE 144 A. Two Types Restricted securities (i.e., securities acquired in non-public transactions), and Securities held by affiliates (known generally as control stock ). B. Restricted Securities 1. Types of Securities Deemed to be Restricted Securities Securities acquired from the issuer or an affiliate in any of the following types of transactions (all of which generally are non-public in nature) are considered restricted securities within the meaning of Rule 144(a): Section 4(a)(2) nonpublic transaction with the issuer; Section 4(a)(1½) private sale by an affiliate; Regulation D (except for Rule 504) transaction; Rule 701 transaction; Rule 144A transaction; 4

7 Regulation CE transaction; Regulation S transaction; Rule 801 transaction; Rule 802 transaction; or Section 4(a)(6) crowdfunding transaction. 2. Situations That Give Rise to Restricted Securities Situations involving nonpublic transactions that result in the acquiror holding restricted securities include the following: Issuances of securities by issuers in private placements exempt under Section 4(a)(2) of the 1933 Act, such as issuances to directors and employees in Section 4(a)(2) private offerings under stock option and other stock-based compensation plans. Compliance and Disclosure Interpretations, Q (January 26, 2009). Corporate reorganizations in which the acquiring company issues securities privately under the Section 4(a)(2) exemption. Issuance by a company in bankruptcy of securities in a private offering that is not exempt under Section 1145(a) of the Bankruptcy Code. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Issuances of bonus stock to employees that do not qualify for an exception of the type described in VII.C. and XII.A.1 infra. Exchanges of restricted securities for other securities of the same issuer in transactions exempt under Section 3(a)(9) of the 1933 Act. Compliance and Disclosure Interpretations, Q (January 26, 2009). Private sales of securities by an affiliate or the affiliate s spouse having the same home as the affiliate. Compliance and Disclosure Interpretations, Q (January 26, 2009). Payments of securities for professional services rendered, such as payment of stock to an underwriter as compensation for managing an exempt industrial development bond offering. Compliance and Disclosure Interpretations, Interp (January 26, 2009). 5

8 Arrangements designed to evade designation of purchased securities as restricted securities (e.g., an issuer arranges a sale by an existing shareholder to a new investor who desires unrestricted securities of shares eligible to be sold under Rule 144, and the issuer then sells at about the same time to the existing shareholder an equivalent number of shares). Compliance and Disclosure Interpretations, Interp (January 26, 2009). 3. Situations That Do Not Give Rise to Restricted Securities Situations that do not result in the acquiror receiving restricted securities include the following: Transfer by an affiliate of securities acquired in the open market to the person s nonaffiliate spouse pursuant to, and on or subsequent to the date of, a court-approved divorce settlement agreement. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities distributed under Section 1145(a) of the Bankruptcy Code because the distribution in bankruptcy is a public offering under Section 1145(c) of the Code. Compliance and Disclosure Interpretations, Q (January 26, 2009). Securities acquired from the issuer in a block by institutional investors in a shelfregistered offering. Compliance and Disclosure Interpretations, Q (January 26, 2009). Securities acquired in a private transaction by an affiliate from a non-affiliate who had acquired the securities in the open market. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired by innocent purchasers from the issuer in offerings that either were not properly registered or were not exempt from registration, on the theory that the purchasers in such situations should not be penalized for the issuer s missteps. Compliance and Disclosure Interpretations, Interp (January 26, 2009) (securities acquired by company s employees pursuant to a stale Form S-8 registration statement). Securities acquired in a spin-off that is not required to be registered under the 1933 Act because, as indicated in Q. 7 of Staff Legal Bulletin No. 4 (September 16, 1997), the spin-off meets the conditions for non-registration specified in Q.4 of that Staff Legal Bulletin. Securities acquired in an offering by the issuer made in reliance on an exemption from registration under Section 3(b)(2) of the 1933 Act to be promulgated by the SEC pursuant to Section 401(a) of the Jumpstart Our Business Startups Act ( JOBS Act ) for offerings of up to $50 million in any 12-month period. Section 3(b)(2)(C) of the 1933 Act. 4. Methods of Recognizing Restricted Stock There are various red flags suggesting the possibility that a broker or other person who is being asked to sell stock of a customer publicly may be dealing with restricted securities. If any of the following is present, the person should make further inquiry: 6

9 The stock to be sold was not purchased in the open market; The seller is an officer, director, or 10 percent owner, or a relative of such an insider; The seller received the stock (by gift, pledge, or otherwise) from an officer, director, or other control person; The stock was received as other compensation; The stock is included in a prospectus (e.g., for a secondary offering); The stock certificate has a legend on it (although the absence of a legend does not necessarily mean the stock is free of restrictions); A large amount of stock is involved; The seller is not known and wishes to sell questionable securities; or The broker has suspicions about the proposed transaction. C. Control Stock 1. Control Stock Is Based on Affiliate Status Stock owned by any person who is an affiliate of the issuer of the stock is considered control stock. An affiliate is any person who directly or indirectly controls the issuer, either personally or as a member of a group such as the board of directors. Generally, directors, key executive officers, and major stockholders who can wield power over the issuer individually or with others are considered control persons. 2. Applicability of Rule 144 to Control Stock Stock held by an affiliate, or which is acquired by an affiliate, is subject to Rule 144. Even if the stock is acquired by an affiliate in the open market, it becomes tainted by having passed through the affiliate s hands. 3. Considerations Relevant to Determination of Affiliate Status The determination of affiliate status is a question of fact, and the SEC generally will provide no help in deciding such questions. See, e.g., First General Resources Co. (Aug. 23, 1988). Typically, such determinations are made by the issuer, in consultation with its securities law counsel. In Release No (1997), the SEC proposed to adopt a bright line test for determining who is an affiliate based on the standards used to determine whether a person is an officer, director, or 10 percent owner subject to Section 16 of the 1934 Act. The SEC did not incorporate this approach into Rule 144 when it substantially revised the rule in Release No (2007), and apparently has abandoned it. 7

10 The SEC staff is on record as stating that there is a rebuttable presumption that all directors, policy-making executive officers, and 10 percent stockholders are control persons or part of the group that controls the issuer. American Standard (October 11, 1972). The 10 percent ownership trigger is handled somewhat differently in Rule 10A-3(b)(ii)(B) under the 1934 Act, which provides that a member of the audit committee of a listed issuer may not be an affiliated person of the issuer or any subsidiary thereof. Rule 10A-3(e)(1) defines the term "affiliate" to mean a person that directly or indirectly controls, or is controlled by, or is under common control with, the person specified. Pursuant to paragraph (e)(1)(ii), a person will be deemed not to be in control of the issuer for these purposes if the person is not the beneficial owner, directly or indirectly, of more than 10 percent of any class of voting equity securities of the issuer. This provision creates a safe harbor position that a person does not control the issuer. Rule 10A-3 notes that the existence of the safe harbor does not create a presumption that a person exceeding the 10 percent threshold controls or is otherwise an affiliate of the issuer. For a discussion of the issues that should be considered in making control judgments, see A.A. Sommer s article, Who s In Control?, in The Business Lawyer, April Position of Selling Broker Most brokerage firms presume that a director, policy-making executive officer, or major shareholder is an affiliate, and generally require such persons to sell their securities under Rule 144. The SEC has said that brokers may not rely on self-serving client statements or unjustified legal opinions when determining the rule s availability. Release No (1971). Brokers should conduct an appropriate inquiry when asked to sell a large block of a relatively unknown stock. See Release Nos (1991) and (1999), and FINRA Regulatory Notice (2009). 5. Role of the Issuer Issuers generally should exercise caution of the type required of brokers when faced with transfer requests under Rule 144. Some companies place restrictive legends (or stop transfer restrictions) on stock certificates held by control persons, regardless of whether the shares are restricted. See XII.E. infra for information about the circumstances under which restrictive legends may be removed from stock certificates representing restricted stock. 6. Issuer Response to Presumed Affiliates Who Deny Affiliate Status Investigate. The parties should investigate to determine whether the presumption as to control can be rebutted in the individual s case. Sometimes the presumption can be rebutted, as in the unusual case in the 1970s of Gulf & Western Industries, a 25 percent shareholder of General Tire deemed not to be a control person of that company. Explain situation to seller. If there would be difficulty in rebutting the presumption, advise the insider as follows: The issue would not have been raised if the exposure were not real. 8

11 The burden of rebutting the SEC s presumption of control is on the insider, not the SEC. While the chances of an adverse consequence of a violation may be remote, invariably the only time a question is raised is when you would least want it to occur. The current environment under which transactions by corporate insiders are increasingly subject to scrutiny makes it unwise for an insider to take an aggressive legal position when selling stock. Compliance with Rule 144 is a relatively simple matter and avoids potential embarrassment and the risk of a lawsuit (particularly where the price of the stock declines after the sale). The insider, if desired, may disclaim affiliate status in the Remarks section of Form 144 (if the form is required to be filed in connection with the sale). IV. PERSONS SUBJECT TO RULE 144 A. Sellers of Restricted or Control Securities See III. above regarding the application of Rule 144 to these persons. As previously indicated in II.A. supra, the issuer of the securities is not eligible to use the rule to sell its own securities, nor is a subsidiary that is not a bank or trust company that wishes to sell as trustee of the issuer s employee benefit plan. Whether parties are affiliates, or deemed a single person required to aggregate their sales under the volume limitations of Rule 144, are questions of fact to be determined under the applicable standards of the rule. See, e.g., Compliance and Disclosure Interpretations, Interp (January 26, 2009). B. Other Persons Deemed by Rule 144(a)(2) to be the Same Person as Seller The following persons are deemed under Rule 144(a)(2) to be the same person as the seller and therefore must aggregate their sales under the rule with the seller: Any relative or spouse of the seller who lives in the seller s household; Any trust or estate in which the seller or a member of the seller s family sharing the seller s household is a trustee, executor, or 10% beneficiary; Any corporation, partnership and/or other entity in which the seller or the seller s family owns a 10% interest; 9

12 V. THE FIVE REQUIREMENTS OF RULE 144 A. Summary of the Requirements Current Public Information. Rule 144(c) requires that the issuer make available to the public specified current information regarding itself. Holding Period. Rule 144(d) requires (1) a six-month holding period for restricted securities issued by a 1934 Act reporting company that has been a reporting company for at least 90 days and is current in its 1934 Act reports; and (2) a one-year holding period for similar securities of a non-reporting company. Amount Limitation. Rule 144(e) requires affiliates and persons who were affiliates during the preceding 90 days to limit their sales under the rule during any three-month period to the greatest of (1) one percent of the outstanding securities of the class being sold, or (2) the average weekly trading volume during the four calendar weeks preceding (i) the filing of the notice of sale (if required by paragraph (h) of the rule), (ii) the date of receipt by the seller s broker of the order to execute the transaction (if the notice under paragraph (h) is not required), or (iii) the date of execution of the sale directly with a market maker; or (3) the average weekly trading volume of the class reported pursuant to an effective transaction reporting system or an effective national market system plan. The trading volume prongs of Rule 144(e) are not available with respect to sales of securities not traded on a national securities exchange or reported pursuant to a qualifying transaction reporting system. Manner of Sale. Rule 144(f) and (g) require securities held by affiliates and persons who were affiliates during the preceding 90 days to be sold either in (i) unsolicited brokers transactions, (ii) directly to a market maker, or (iii) in riskless principal transactions. Notice of Sale. Rule 144(h) requires affiliates and persons who were affiliates during the preceding 90 days to file a Form 144 with the SEC if the securities to be sold during a three-month period will (i) exceed 5,000 shares or other units, or (ii) have an aggregate sale price in excess of $50,000. B. Significant Amendments to Rule 144 and Rule 145 On December 6, 2007, the SEC issued Release No , which described significant amendments to Rule 144 adopted by the SEC that became effective on February 15, C. Application of the Amended Provisions 1. Affiliates Rule 144, as amended in 2008, applies in its entirety to affiliates and persons who were affiliates during the preceding 90 days. 2. Non-Affiliates Rule 144(b)(1) states that a seller who is not an affiliate, and has not been an affiliate during the preceding 90 days, need comply only with the holding period requirement of Rule 144 (i.e., six months for a reporting company and 12 months for a non-reporting company) when selling 10

13 restricted securities under the rule. According to the SEC staff, it should not be assumed that an affiliate who resigns from a company instantly ceases to be an affiliate, because the cessation of affiliate status is a facts-and-circumstances determination. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Persons who qualify as non-affiliates under Rule 144(b)(1) may sell unlimited amounts of restricted securities of 1934 Act reporting companies after holding the securities for six months if the issuer is current in its 1934 Act filings at the time of sale. After one year, no restrictions of any sort apply to sales of restricted securities by these persons, regardless of whether the issuer is a non-reporting company, or a reporting company that at the time of sale is not in compliance with the current public information requirement. D. Relevant Considerations Entry into sales contract during three-month waiting period. A person who enters into a binding contract for the sale of restricted securities within three months after ceasing to be an affiliate may not utilize Rule 144(b)(1), even though the delivery of the securities will take place more than three months after the person loses affiliate status. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Impact of investment letter. The fact that a non-affiliate who acquired securities in a private transaction under Rule 144(b)(1) executed an investment letter for the securities will not preclude the non-affiliate from reselling the securities without any restrictions under Rule 144. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Trusts. Where the settlor of a trust is an affiliate and the trust holds restricted securities, but the independent trustee and the beneficiaries are not affiliates and have not been affiliates during the preceding three months, the trustee may sell the restricted securities under Rule 144(b)(1). Compliance and Disclosure Interpretations, Interp (January 26, 2009). VI. THE CURRENT PUBLIC INFORMATION REQUIREMENT A. General Requirement The issuer is required by Rule 144(c) to make available to the public current information about itself: Reporting companies. These companies must have been subject to Section 13 or 15(d) of the 1934 Act for a period of at least 90 days and have filed all reports required during the preceding 12 months or such shorter period that they were required to file. See Rule 144(c)(1). Non-reporting companies. These companies must make available to the public the information specified in clauses (i) (xiv) and (xvi) of Rule l5c2-11(a)(5) under the 1934 Act. See Rule 144(c)(2). Insurance companies. These companies are regulated by the state in which they are domiciled and the reports filed by them with the insurance regulator of that state constitute compliance with the current public information requirement. See Rule 144(c)(2) and Section 12(g)(2)(G)(i) of the 1934 Act. 11

14 B. Reason for Requirement Because the 1933 Act is a disclosure statute, fostering the availability of full information is consistent with the purpose of the Act. Nothing in the definition of underwriter in Section 2(a)(11) of the 1933 Act, however, indicates that the availability of current public information is a factor in determining underwriter status. But because Rule 144 is a safe harbor from the underwriter definition and not the exclusive means of avoiding application of the definition, the SEC can impose conditions not required by the statute that are consistent with its purpose. C. Compliance Considerations Timing of compliance. When applicable, the current public information requirement must be complied with at the time of each sale under the rule. Compliance and Disclosure Interpretations, Q (January 26, 2009). Care must be exercised when seeking to sell under Rule 144 during the period following the filing of a Form 12b-25 extension of time for filing a required report (which is five days for Form 10-Q and 15 days for Form 10-K), due to the risk that a failure by the issuer to file the report during the extended period may cause the issuer to be deemed not current until the report is filed. Compliance and Disclosure Interpretations, Q (January 26, 2009). Reliance on issuer representations. Rule 144(c)(1) allows a seller to rely on either (i) a check mark by the issuer in the box on the front of the issuer s latest periodic report filed under the 1934 Act testifying to the issuer s compliance with the reporting requirements, or (ii) a written statement from the issuer. The issuer may check the box if all reports have been filed, even if they were filed late. Inability to rely on SEC staff representations. A seller under Rule 144 may not rely on an oral representation by an SEC staff member as to the current reporting status of an issuer. Generally, staff members will decline to answer inquiries on such matters. Compliance and Disclosure Interpretations, Interp (January 26, 2009). D. Reporting Companies Waiting period. A 90-day waiting period is required after first-time registration under the 1934 Act. The waiting period commences on the date of effectiveness (not filing) of the issuer s registration statement under Section 12 of the 1934 Act. Thus, day 1 is the date of effectiveness and day 91 is the first day on which sales may be made. Where an effective S-1 registration statement under the 1933 Act precedes effectiveness of a Section 12 registration statement, the 90-day waiting period will commence on the effective date of the S-1. Compliance and Disclosure Interpretations, Q (January 26, 2009). Prior reporting history. A newly formed holding company may take into account the reporting history of the Section 12 registrant that became its wholly owned subsidiary in a reorganization in which the holding company became the sole owner of the equity securities of the Section 12 registrant. See, e.g., Johnson Controls, Inc. (January 28, 2005). Amendments of periodic reports. A request by the SEC staff that a report be materially amended does not render the rule unavailable, if the seller had no knowledge of the request. (But affiliates are presumed to have knowledge and may not sell when such a request is outstanding.) Delinquent issuers. If a company is delinquent in its reports, it may not assert that it has satisfied the current public information requirement because of the availability of Rule l5c2-11 information. Only non-reporting companies may rely on the provision relating to such information. 12

15 Investment companies. Reports filed by investment companies under Section 30(a) of the Investment Company Act of 1940 are deemed to satisfy the current public information requirement of Rule 144(c)(1). Compliance and Disclosure Interpretations, Q (January 26, 2009). E. Non-Reporting Companies Rule 15c2-11. A non-reporting issuer may satisfy the current public information requirement of Rule 144(c) by making available to the public pursuant to Rule 144(c)(2) information of the type specified in Rule 15c2-11(a)(5)(i) - (xiv) and (xvi) under the 1934 Act. The requisite information is typical of that included in an annual report to shareholders. Voluntary reporting with SEC. An issuer that is not required to register under Section 12 of the 1934 Act but reports to the SEC on a voluntary basis is deemed not to be subject to the reporting requirements of Section 13 or 15(d) of the Act. Accordingly, the Rule 144(c)(2) provisions applicable to non-reporting issuers govern the issuer s compliance with the current public information requirement. Compliance and Disclosure Interpretations, Q (January 26, 2009). Where, however, the issuer has been voluntarily reporting on a continuous basis for several years and recently filed a registration statement for a public offering under the 1933 Act, holders of the issuer s restricted securities need not wait 90 days from the effective date of the registration statement to sell the securities under Rule 144, assuming the issuer is current in its voluntary reporting. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Non-reporting subsidiaries of reporting companies. A non-reporting wholly owned subsidiary whose parent (i) is a reporting company, (ii) has guaranteed the outstanding debt securities of the subsidiary, and (iii) provides summarized disclosure regarding the subsidiary in its 1934 Act reports in accordance with Rule 3-10 of Regulation S-X, will be deemed to satisfy the public information requirement of Rule 144(c)(1) with respect to the guaranteed debt securities so long as the parent is current in its reporting and continues to provide summarized disclosure regarding the subsidiary. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Foreign private issuers. Foreign private issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act because they are exempt from Section 12(g) registration pursuant to Rule 12g3-2(b) under the 1934 Act may satisfy the current public information requirement by complying with the Rule 15c2-11 requirements referred to above. According to Release No n.34 (2008), a broker can satisfy its obligations under Rule 15c2-11 in such situations in part, by reviewing the information furnished to the SEC under the exemption. Applicable requirements The information must be current. Compliance and Disclosure Interpretations, Q (January 26, 2009). The information must be widely disseminated on an ongoing and continuous basis. Giving the information only to the broker is not sufficient. The information must be furnished to shareholders, market makers, brokers, financial services and other interested persons. 13

16 Advantages of Rule 15c2-11 A 90-day waiting period is not required in order to sell securities. The issuer s financial statements do not have to be audited or comply with Regulation S-X. See Rule l5c2-11(a)(5)(xii) and (xiii). Compliance and Disclosure Interpretations, Q (January 26, 2009). Disadvantages It sometimes is difficult to find buyers for Rule 15c2-11 stock. Many brokerage firms insist upon a legal opinion from issuer s counsel that Rule 144(c)(2) has been complied with by the issuer, but in many instances, counsel is unable or unwilling to provide the requested opinion. VII. THE HOLDING PERIOD REQUIREMENT A. Nature of Requirement Rule 144(d) requires that restricted securities be held for at least six months in the case of a 1934 Act reporting company, and for at least one year in the case of a non-reporting company, after being fully paid for. (Non-restricted securities, such as those acquired in the open market or in a registered public offering, are not subject to the holding period requirement.) When Rule 144 was adopted in Release No (1972), a two-year holding period was required for restricted securities. In Release No (1997), the SEC reduced the holding period to one year. And, in Release No (2007), the SEC further reduced the holding period for current reporting companies to six months, while retaining a one-year holding period for non-reporting companies. B. Reason for Requirement The holding period requirement is intended to ensure that the holder of restricted securities has assumed the full economic risk of ownership of the securities for a period long enough to demonstrate that the holder is not acting as a mere conduit for the issuer in a distribution. In announcing its proposal in 2007 to reduce the holding period requirement for reporting companies to six months, the SEC said in Release No , at n. 56 (2007) that holding securities for six months is a reasonable indication that an investor has assumed the economic risk of investment in those securities. In Release No (2007), the SEC stated that it was retaining the one-year holding period requirement for restricted securities of issuers that are not subject to 1934 Act reporting obligations under Section 13(a) or 15(d) [b]ecause of our concern that the market does not have sufficient information and safeguards with respect to non-reporting issuers. 14

17 C. Sellers Who Are Not Subject to Holding Period Requirement Control persons holding the following securities Registered securities (e.g., securities issued under a Form S-8 registration statement in connection with the exercise of employee stock options); Securities purchased in the open market; and Securities acquired privately under a bonus plan (but not under an option or other stock purchase plan) that meets the three requirements described in Release No , III.B (1980) (i.e., reporting company, actively traded securities, and small amount distributed annually by plan). Non-affiliate estates, with respect to securities owned by the decedent (even if the decedent was an affiliate). Rule 144(d)(3)(vii), Compliance and Disclosure Interpretations, Interp (January 26, 2009). But the holding period requirement will apply to securities acquired by the estate after death occurred (e.g., pursuant to the exercise of stock options). Compliance and Disclosure Interpretations, Q (January 26, 2009). Non-affiliate beneficiaries of estates. Rule 144(d)(3(vii). D. Computation of Holding Period Determination of applicable period. The applicable holding period (i.e., six months or one year) is determined as of the time of the proposed sale under the rule. Compliance and Disclosure Interpretations, Q (January 26, 2009). Days included in period. The SEC staff indicated in Compliance and Disclosure Interpretations, Q (January 26, 2009), that the minimum six-month holding period for restricted securities covers the six months immediately preceding the date of sale under the rule. This statement suggests the possibility that if the holding period is interrupted, the computation must begin again from zero in order to cover the six months immediately preceding the sale. This reading would be contrary to the generally accepted view that all periods during which securities were fully paid are counted when computing the holding period, regardless of any interruption due to a failure to meet the full payment requirement (e.g., in an installment sale or promissory note situation). Commencement date of period. Rule 144(d)(1)(iii) indicates that the holding period for restricted securities acquired in a purchase transaction will not begin until the full purchase price or other consideration is paid or given by the purchaser. The full purchase price will be deemed not to have been paid where an employee purchases securities from the issuer pursuant to a private arrangement under which the employee (i) borrows the entire purchase price from a non-affiliate bank, (ii) issues a promissory note guaranteed by the issuer, and (iii) places the securities in escrow subject to the issuer s right to repurchase the securities at book value if the issuer has to repay the note to the bank. Compliance and Disclosure Interpretations, Interp (January 26, 2009). 15

18 Completion date of period. Where the holding period is uninterrupted from the date of purchase, the period is deemed to have been completed on the date of the month which is six months or one year in the future that corresponds to the date on which the restricted securities were acquired. Compliance and Disclosure Interpretations, Q (January 26, 2009). For example, restricted securities of a reporting company acquired on May 15 could be sold on November 15, if all other conditions for the use of the rule have been satisfied. Id. Tacking of holding periods permitted in some circumstances. A holder of restricted securities may tack the holding period of other parties or related securities to the holding period of newly acquired securities in the situations described in VII.F. below. Compliance and Disclosure Interpretations, Q (January 26, 2009). Tracing of ownership certificates. Tracing of stock certificates and other evidences of ownership will eliminate any doubt as to which securities are being sold under the rule. Fungibility doctrine inapplicable. The adoption of Rule 144 in 1972 caused the SEC to cease application of the fungibility doctrine, under which all securities of the same class held by a person were considered to be fungible, resulting in restricted securities being deemed to have been acquired on the most recent date on which the person acquired securities of the class. See, e.g., Compliance and Disclosure Interpretations, Interp (last four sentences) (January 26, 2009). E. Special Situations Promissory note, other obligation or installment contract. Rule 144(d)(2) indicates that the holding period in situations in which the purchaser from an issuer or an affiliate gives a promissory note or other obligation to pay the purchase price, or enters into an installment purchase contract with such a seller, commences on the date of purchase only if the loan financing the purchase (i) provides for full recourse against the purchaser, (ii) is fully collateralized by assets other than the purchased securities, and (iii) is fully paid prior to the sale of the securities. Where a note fails to meet these requirements but half of the note is later paid, the holding period for half of the shares will commence upon the payment. Compliance and Disclosure Interpretations, Interp (January 26, 2009). The collateralization requirement can be met by paying cash to the issuer for securities and then using those securities as collateral for a promissory note for the purchase of an equal number of securities from the issuer. Compliance and Disclosure Interpretations, Interp (January 26, 2009). The collateralization requirement also can be met by securing a promissory note for the purchase of securities with the securities purchased and with other property having an independent fair market value at least equal to the purchase price. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired through subscription agreement. The holding period will commence when the subscription agreement is accepted by the issuer (rather than the date the purchaser signed the agreement or the date the securities were issued). Compliance and Disclosure Interpretations, Q (January 26, 2009). Securities purchases involving pledges. Where an affiliate pledges stock acquired in the open market as collateral for a loan and the affiliate later defaults on the loan, the lender-pledgee may sell the stock without regard to the holding period requirement of Rule 144(d) because the open market acquisition of the securities rendered them unrestricted. Compliance and Disclosure Interpretations, 16

19 Interp (January 26, 2009). A pledge of restricted stock as collateral for a loan will be deemed to have been made with full recourse, thereby enabling the pledgee to tack the pledgor s holding period to its own holding period when selling under Rule 144, where the lender-pledgee is required to exhaust the collateral before proceeding against the pledgor. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired from employer. The holding period for an acquisition under an employee benefit plan of restricted securities that will not vest until a specified period of employment has elapsed will commence when the securities are allocated to the account of the plan participant, even if the allocation occurs before vesting. Release No , Q. 22 (1979). Where, however, the securities are acquired in connection with an individually negotiated employment agreement, the holding period will not begin until the date of vesting of the securities. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired by employee under plan that does not require full payment until securities are sold. Rule 144 is not available for a sale of these securities because the employee can never commence the requisite holding period, due to the fact that full payment will not occur until the time of sale. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired upon exercise of employee stock option. The holding period will begin upon the exercise of the option and full payment to the issuer of the exercise price. The date of grant is not used because the optionee does not assume investment risk until the date of exercise. Compliance and Disclosure Interpretations, Q (January 26, 2009). Securities subject to issuer repurchase option. Securities sold by the issuer that can be repurchased by it for a nominal amount (e.g., one cent per share) if a non-compete provision is violated are deemed not to be fully paid for until all terms of the agreement for their acquisition (including compliance with the non-compete provision) are satisfied. Oncogene Science, Inc. (April 27, 1989). Securities acquired in stock-for-stock acquisition. The holding period will begin on the date of closing of the acquisition where the recipients of the acquiring company s securities will not be at economic risk until that date due to a closing condition available to the acquiring corporation permitting it to refuse to close if the condition is not met. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities acquired from issuer in mini-max private offering. The holding period will commence when the investor pays for the securities and the payment is deposited in the escrow account from which payments will be returned to investors if the minimum number of securities is not sold. Compliance and Disclosure Interpretations, Interp (January 26, 2009). Securities issued by an entity that voluntarily files reports under 1934 Act. Because a voluntary filer is not subject to Section 13 or 15(d) of the 1934, the one-year holding period required by Rule 144(d)(1(ii) for restricted securities issued by an entity not so subject is applicable. Compliance and Disclosure Interpretations, Q (January 26, 2009). 17

20 F. Tacking of Holding Periods There are a number of circumstances under which a holder of restricted securities may tack to his or her holding period the holding period of the previous holder or of other related securities. 1. Situations in Which Tacking Is Permitted Non-affiliate prior holder. Rule 144(d)(1)(i) and (ii) indicate generally that the holding period for restricted securities acquired from a non-affiliate may be tacked to the acquiror s holding period, but the same is not true for securities purchased from an affiliate. Other tacking situations mentioned in rule. Rule 144(d)(3) indicates that tacking is permitted in the following situations: Stock dividends, stock splits, and recapitalizations. Securities acquired from the issuer as a dividend or pursuant to a stock split, reverse split or recapitalization are deemed under Rule 144(d)(3)(i) to have been acquired at the same time as (i) the securities on which the dividend was paid (or, if more than one dividend, the initial dividend); (ii) the securities involved in the split or reverse split; or (iii) the securities surrendered in the recapitalization. Conversions or exchanges of securities for other securities of same issuer. The holding period of securities received in a conversion or exchange may be tacked in most circumstances to that of the securities surrendered under Rule 144(d)(3)(ii). See, e.g., the following Compliance and Disclosure Interpretations: Q (June 4, 2010) (holding period of securities acquired from issuer in exchange for other securities of issuer in private transaction exempt under Section 4(a)(2) of 1933 Act may be tacked to holding period of securities surrendered in the exchange); Q (March 4, 2011) (holding period of a fixed number of shares received from issuer in exchange for mandatorily exchangeable notes previously acquired from issuer in a private transaction exempt under Section 4(a)(2): (i) may be tacked to holding period of the notes where the exchange does not involve an investment decision by the note holder, as in the case where the exchange occurs at the issuer s option or automatically upon the occurrence of events outside the investor s control); and (ii) may not be tacked to the holding period of the notes where the exchange occurs at the investor s option); Q (January 26, 2009) (securities acquired in an exchange transaction exempt under Section 3(a)(9) of 1933 Act assume the character and holding period of the exchanged securities, as in the case of an exchange of restricted securities in which the new securities are deemed restricted and tacking of the holding period of the former securities is permitted); 18