12.8. 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 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 6 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 be done only by a transfer agent and 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. 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 if they were not restricted in the affiliate’s hands, and therefore, are subject to holding limits.

Volume 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