Last week, the U.S. Securities and Exchange Commission (SEC) proposed amendments to Rule 144 to revise the holding period by limiting tacking for certain market-adjustable securities and to Form 144 filings.
Rule 144 of the Securities Act of 1933, as amended, is a non-exclusive safe harbor that allows public resales of: 1) unregistered securities that were acquired from the issuing company (referred to as restricted securities) and 2) securities held by affiliates of the issuing company (referred to as control securities), in each case subject to the satisfaction of certain conditions. These conditions include, among others, a holding period for the resale of restricted securities and the filing of a Form 144 with the SEC for affiliates that intend to sell certain specified amounts of the issuing company's shares in any three-month period.
Holding Period. If the issuing company is a "reporting company" (that is, it has been subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (Exchange Act), for at least 90 days prior to resale), then the applicable holding period is six months; otherwise, the applicable holding period is one year. In determining whether the holding period condition is satisfied, Rule 144 allows "tacking" (that is, counting the holding periods of prior owners or different securities) in certain circumstances—for example, under Rule 144(d)(3)(ii), the holding period for securities issued solely in exchange for other securities may be tacked back to the acquisition date of the securities surrendered for conversion or exchange.
Form 144 Filing. In the case of affiliates of the issuing company, if such affiliate intends to sell during any three-month period more than 5,000 shares or securities with a value greater than $50,000, then the affiliate seller must file a Form 144 with the SEC. Generally, a Form 144 must be filed at the time the sell order is placed with the broker or the execution of a sale of the securities directly with a market maker. If the issuing company is a reporting company, then the selling security holder may file the Form 144 electronically via EDGAR or submit it to the SEC in paper form. If the issuing company is not a reporting company, then the selling security holder must submit the Form 144 to the SEC in paper form, although the SEC's Division of Corporation Finance provided limited temporary relief from paper filings in light of the COVID-19 pandemic.1
Holding Period. The SEC is proposing to amend Rule 144(d)(3)(ii) to limit tacking for certain privately placed market-adjustable securities. The proposed amendments would not permit tacking back to the acquisition date of the convertible or exchangeable security where "the convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization." Thus, the holding period for purposes of Rule 144 for holders of these market-adjustable securities would not commence until such holder actually acquired the underlying securities upon conversion or exercise. This limitation on tacking would only apply to market-adjustable securities issued by non-reporting companies.
Form 144 Filing. The SEC is also proposing several changes relating to Form 144 filings, including:
- mandating electronic filing via EDGAR of all Form 144 filings;
- eliminating the requirement to submit one copy of the Form 144 filing to the principal exchange of the issuing company;
- eliminating the Form 144 filing requirement relating to the resale of securities of private companies;
- eliminating the fields on the Form 144 filing requiring the home address of the selling security holder and the IRS identification number of the issuing company; and
- changing the filing deadline for Form 144 filings to the end of the second business day following the day on which the sale of securities has been executed or the deemed date of execution, which would coincide with the deadline for a Form 4 filing, if applicable.
If the foregoing amendments are adopted, then the SEC would: 1) modify EDGAR to provide filers with the option to file a Form 144 and a Form 4 through a single user interface and 2) provide an online fillable Form 144 for use by filers.
Separately, the SEC is also proposing to allow filers to add a check box to Forms 4 and 5 to indicate whether a sale or purchase reported on the form was made pursuant to a 10b5-1 plan. Although not required, some persons subject to Section 16 of the Exchange Act include a note in the "Explanation of Responses" section of the applicable Form 4 or Form 5 filing noting where a purchase or sale was made pursuant to a 10b5-1 plan.
What to Do Now?
The SEC is soliciting comments on the proposed amendments, including on several enumerated questions in the release. The public comment period will remain open for 60 days following publication of the release in the Federal Register.