4.5.8.1. Resales of Restricted and Control Securities—Rule 144
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 with the SEC, the holding period is six months. If the issuer is a non-reporting company, the holding period is 12 months. These are often referred to as holding limits. 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.
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 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. 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 sale
If the sale is more than 5,000 shares or $50,000, the affiliate must file a notice of proposed sale with the SEC on For