1.2.5.5.1 Selling Control and Restricted Securities (SEC Rule 144)
Securities purchased in a private placement are “restricted” in the sense that they cannot be resold unless they are registered with the SEC or are sold under a Rule 144 or Rule 144A exemption. Issuers need to make sure all investors are purchasing the securities for their own accounts and that an investor doesn’t have plans to act as an underwriter and resell the securities in the near future. Issuers also must make sure to disclose that the securities are restricted and that each security has a legend stating that it is restricted. Stock purchased in a private placement may be referred to on the exam as restricted stock, legend stock, letter stock, or unregistered stock.
Investors who buy securities in a private placement cannot turn around and immediately sell them. These securities are called restricted securities and must be sold through a Rule 144 exemption.
Holding limits. Rule 144 requires purchasers of restricted securities to hold them for a certain amount of time before they sell them. If the issuer is a company that files reports to the SEC, the holding period is six months. If the issuer is a non-reporting company, the holding period is 12 months. Before selling restricted securities, the investor will need to have the restricted legend removed from the securities. This can be done only by a transfer agent and requires permission from the issuer.
Rule 144 also covers the sale of control securities. Control securities are securities held by an affiliate of the issuer. An affiliate is someone who is controlled by the issuer or controls the issuer. A person “controls” an issuer if the person has power to direct corporate decisions. This includes officers, directors, and major shareholders who own more than 10% of the stock of the company. Affiliates are also called insiders. If a person purchases shares from an affiliate the shares are considered restricted, even