10.10. Restricted and Control Securities: Rules 144 and 144A

Investors who buy securities in a private placement cannot turn around and immediately sell them. These securities are called restricted securities, and they must be sold through a Rule 144 or Rule 144A exemption. Unlike the other rules we’ve discussed, the main focus of these rules is the secondary market.

Rule 144 requires purchasers of restricted securities to hold them for a certain amount of time before they sell them. This is called the holding limit. 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 get the restricted legend removed from the securities. This can only be done by a transfer agent, and it requires permission from the issuer.

Note: If restricted shares are subject to a stock split, or a stock dividend is issued, the new shares have the same holding period as the original shares. So if restricted shares with one month left in their holding period are split, the new shares are also restricted with one month left in their holding period.

Rule 144 also covers the sale of control securities. Control securities are securities held by an affiliate of the issuer (also called insiders or control persons). If a person purchases shares from an affiliate, the shares are considered restricted, even if they were not restricted in the affiliate’s hands, and therefore are subject to holding limits.

When an affiliate wants to sell control securities that were purchased on the open market and therefore are not restricted securities, they are subject to trading volume limits. Over a 90-day period, the affiliate may sell no more than the greater of:

• 1% of the issuer’s outstanding shares

or

• The company’s average weekly trading volume of the securities during the four weeks preceding the sal