4.2.10. Rule 144—Resales of Restricted and Control Securities
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 exemption.
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, investors will need to get the restricted legend removed from the securities. This can only be done by a transfer agent, and it requires the permission of 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. An affiliate is someone who is controlled by the issuer, or one who 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.
When an affiliate wants to sell control securities that were purchased on the open market, and therefore are not restricted securities, the affiliate is subject to trading volume limits. Over a 90-day period, the affiliate may sell no more than the greater of the following:
• 1% of the issuer’s outstanding shares
• The company’s average weekly trading volume of the securities during the four weeks preceding the sale
If the sale is more than