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SECURITIES LAW: Recent Changes in Rule 144
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The Securities and Exchange Commission (the "SEC") recently announced changes in the Rule 144 holding periods. The changes are effective April 29, 1997 and apply to all restricted securities, whether purchased before or after such effective date. The changes are:
the two-year period for which restricted securities must be held before being sold in the public market has been reduced to a one-year period; and
the three-year period after which non-affiliates of an issuer may sell restricted securities in the public market in unlimited amounts has been reduced to a two-year period.
The SEC also announced changes in the equivalent holding periods under Rule 145, pertaining to the sale of securities acquired in connection with reclassifications, mergers, consolidations and asset transfers.
Background of Rule 144 provides a "safe harbor"for resales of restricted securities without registration under the Securities Act of 1933 (the "Securities Act"). Among the conditions for such resales, the Rule provides minimum holding periods, commencing on the date securities are acquired from the issuer or an affiliate in a private offering or other transaction not registered under the Securities Act. The holding periods are intended to ensure that the Rule 144 exemption from is not used by issuers and others as an indirect method of distributing unregistered securities to the public.
Summary of Changes Rule 144 continues to prohibit all sales of restricted securities for the period of one year after they are first acquired.
During the second year after acquisition, sales of such securities may be made in the open market if (i) the issuer has complied with the reporting and public information requirements of the Securities and Exchange Act of 1934, (ii) such sales do not exceed the volume limitations contained in the Rule, based on the total number of issued and outstanding securities of the same class and the average weekly sales of such securities during the four weeks preceding a proposed sale, (iii) such sales are effected through brokers or market-makers, and (iv) the seller files the required notifications with the SEC on Form 144.
After the second year, these requirements terminate as to sales by non-affiliates. Affiliates of an issuer, however, will be required to comply with these conditions in connection with (a) sales of restricted securities made when permitted after the one-year holding period, and (b) sales of unrestricted securities made at any time.
Reasons for Changes Securities issued in private placements, whether before or after the issuer becomes a public company, are deemed "restricted" under Rule 144. Many issuers have discovered that private placements are made at a 20-50% discount from market price, due to the illiquidity of the purchaser's investment under Rule 144. This is a particular problem for small companies wishing to raise additional capital from time to time without incurring public offering expenses. As a result, the SEC Government Business Forum On Small Business Capital Formation recently recommended that the Rule 144 holding periods be shortened in order to reduce the illiquidity discount imposed by the Rule, and thus reduce issuers' cost of capital.
Shortening the mandatory period during which restricted securities must be held, before a (non-affiliated) purchaser may freely make public sales, will permit purchasers to recoup their investment in and realize any capital appreciation on the securities sooner than was previously possible. Non-affiliated purchasers will have a reduced period during which they must file Rule 144reports with the SEC. The SEC believes that the changes to Rule 144 will (a) benefit issuers of all sizes by reducing their cost of capital, and (b) benefit purchasers by shortening their holding periods and reducing their costs of compliance with the reporting requirements of Rule 144. It is expected that the changes in Rule 144 will result in increased private placement activity.
For more information, please contact Robert Mclaughlin or Clem Wood at Eaton & VanWinkle, (212) 779-9910, if you have any questions about the changes in Rules 144 and 145, or you need any assistance in complying with these rules.
The firm concentrates on selected practice areas, within which it provides a wide range of services to domestic and foreign clients. The firm's areas of practice include banking, commercial law, creditor's rights, corporate finance and acquisitions, derivatives, estate planning, general corporate law, international law, labor and employment law, litigation, mediation, real estate, securities, trade finance, taxation and trust and estate administration.
This newsletter is solely to alert readers to issues of general interest, and should not be construed as legal advice. For such advice about particular facts and
April 1997
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