SEC Reduces Rule 144 and Rule 145 Holding Periods
More than 18 months after proposing the rule changes, the SEC has reduced the minimum holding period before securi-ties can be sold to the public under Rule 144 from two years to one year and the minimum holding period before securi-ties can be freely sold under Rule 144(k) from three years to two years. Similar changes were made to the three- and two-year periods in Rule 145(d). Begin-ning on April 29, 1997, any securities held for one year may be sold under Rule 144 and any securities held by non-affiliates for two years may be sold under Rule 144(k).
The SEC adopted the rule change to improve the capital-raising process by reducing the illiquidity discount that in-vestors would need to demand of com-panies selling unregistered stock. The rule change has a number of implica-tions:
For Issuers:
- Newly public companies may see in-creased sales by existing shareholders, as stock that had been subject to Rule 144's volume restrictions becomes freely tradeable and stock that had not been saleable to the public at all can now be sold under Rule 144.
- Private companies may need to think harder about contractual restrictions on transfer, since federal securities law re-strictions (except for affiliates) will now lapse only two years after sale.
- Pricing for mezzanine financing may improve as the prospect of immediate liquidity following the end of the under-writers, lock-up is enhanced.
For Venture Capitalists:
- Decisions need to be made concern-ing the distribution of stock that will become freely tradeable or tradeable subject to volume limitations on April 29th.
SEC Proposes Additional Changes to Rules 144, 145 and Regulation S
At the same time as it changed the hold-ing period requirements under Rule 144, the SEC proposed significant new changes to both Rule 144 and Rule 145 and proposed a completely revamped approach to unregistered sales made to non-U.S. investors under Regulation S.
Rule 144. The SEC proposed a number of additional changes to Rule 144, most of which would simplify compliance with the Rule:
- Elimination of the Manner of Sale Requirement. Rule 144 currently re-quires sales to be made in ordinary bro-kerage transactions or directly to market makers, in each case without special selling efforts. This requirement would be dropped, thereby permitting private Rule 144 sales, including sales involving solicitation of buyers.
- New Bright Line Test for Affiliates. Holders who were not officers, directors or 10% stockholders (all as defined un-der the SEC's Section 16 rules) would be excluded from the definition of affiliate.
- Form 144 Threshold. The maximum aggregate sales for which a Form 144 would not be required would be in-creased from the lesser of 500 shares or $10,000 to the lesser of 1,000 shares or $40,000.
Further comment was also sought on (i) further revising the holding period requirements, (ii) eliminating the trading volume alternative in calculating permit-ted sale restrictions, leaving only the 1% of outstanding securities test and (iii) various restrictions that might be used to, among other things, limit "hedging" of restricted stock before the end of the holding period.
Rule 145. The SEC has proposed to eliminate Rules 145(c) and 145(d), which would mean that all shareholders of a company acquired in a stock-for-stock transaction involving registered common stock of a public company would receive freely tradeable stock (as opposed to the current situation where shares held by affiliates of the acquired company are subject to volume and manner of sale restrictions).
Regulation S. Finally, the SEC has pro-posed extensive amendments to Regula-tion S, which relates to sales of equity securities by U.S. issuers (or foreign issuers whose principal market is in the U.S.) outside of the U.S. to non-U.S. persons. The proposed rule changes would, among other things, make such securities "restricted securities," require that they be legended and, prohibit hedg-ing transactions and sale of the equity for notes. It would also impose a two-year holding period on such shares before they could be resold into the U.S. (sub-ject to resale into the U.S. by means of Rule 144 after one year).