Rule 144 Holding Periods Shorten
Author: Amy Vincent
The SEC (Securities and Exchange Commission) voted unanimously
on November 15, 2007 to cut the required holding period in half
from twelve to six months for selling restricted and control
securities.
This exciting change will go into effect on February 15th,
2008. The change will bring a welcome relief to many smaller
companies, because the shorter holding period is intended to
lower the cost of capital and make it more accessible to those
companies.
While this is exciting news for many and its effects will be
far-reaching, the matter can be a bit confusing. Here is a brief
overview.
What are Restricted or Control Securities?
A restricted security is paper certificate that proves
ownership of a stock that was issued in an unregistered or
private sale from a company or an affiliate of the company.
Restricted securities are usually sold to investors or given as
employee benefits.
Control securities are usually held by affiliates or
shareholders of a company that have the power to direct the
company. When the affiliate sells these control securities, they
become restricted securities for the purchaser.
When a security is restricted, it will usually have a
"restricted" legend stamped on it. This legend must be removed
before the security can be sold to the public. To remove the
legend, the conditions of Rule 144 must be met and the issuer's
approval given before a transfer agent, such as First American
Stock, can legally remove it.
What is Rule 144?
Rule 144 is a Securities and Exchange Commission rule created
under the Securities Act of 1933. This rule defines conditions
that must be met prior to the sell of a restricted security. The
rule stipulates the following five conditions:
1. The required holding period must be met (the reduced holding
period is six months as opposed to one year).
2. There must be adequate current information about the issuing
company, meaning that it is keeping up with its reporting
requirements.
3. The trading volume formula is met. This formula stipulates
that no more than 1% of a company's outstanding shares can be
sold in any 3-month period and that they must be less than 1% of
the of the company's average trading volume over the past month.
4. That routine trading conditions, which apply to all trades,
have been met.
5. That Form 144 is filed with the SEC prior to selling more
than 500 shares or shares worth more than $10,000 within a
three-month period.
Restricted securities can also be sold, freely without the
restrictions of Rule 144 after two years if the seller is not
affiliated with the security issuer.
What difference will the changes to holding periods make?
The short answer is many. The shorter required holding period
on restricted securities was intended to help smaller companies
raise capital and to expand the availability capital, but the
effects will reach beyond the small company spectrum.
According to John W. White, the Director of the SEC's Division
of Corporate finance, "The revisions to Rule 144 should make it
more efficient for companies of all sizes to access private
markets. In the coming months, we expect to recommend that the
Commission finalize additional rules that will further promote
capital formation by smaller companies."
Essentially, the changes to Rule 144 will help an old rule keep
up with the new market.
About The Author: By Amy Vincent, sponsored by First American
Stock Transfer, Inc., registered with the Securities & Exchange
Commission as a Registrar and Stock Transfer Agent -
http://www.firstamericanstock
