SEC Rule 144 — Limitations on the Resale of Restricted Stock and Control Stock
Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing start-up capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities. Restricted stock will usually have the restrictive legend, "restricted", on the certificates to serve as notice that their resale is restricted.
Control stock is stock owned by a control person (aka insider, affiliate), who is a corporate director or officer, or a stockholder with more than 10% of the voting stock, or the spouses of the aforementioned.
SEC Rule 144 places limitations on any resale of restricted securities. Control stock is also restricted; however, control stock certificates usually do not have the restrictive legend. Although these restrictions can be removed by fully registering the security, the time and expense of a full registration is usually prohibitive. However, control persons can sell normally restricted stock without restrictions if sold as part of a registered primary offering by the issuer. No restricted stock can be sold unless the issuer is current in filing all required financial statements to the SEC.
Before restricted stock can be resold:
The seller must have had the fully paid stock for 1 year.
The issuer has complied with the periodic reporting requirements of the Securities Exchange Act of 1934.
If the quantity of the stock exceeds 500 shares or $10,000 in value, then he must also file a Form 144, Notice of Proposed Sale, with the SEC with the details of the sale and compliance with Rule 144. The sale must take place within a 90-day period; otherwise another Form 144 must be filed that will cover another 90 days.
The total value of an exchange-traded stock cannot exceed the greater of 1% of the issuer’s outstanding stock, or the average weekly volume for the preceding 4 weeks. If the stock is only traded over the counter, then the sale cannot exceed 1% of the issuer's outstanding stock.
The stock must be sold as an ordinary brokerage transaction with the regular commission charged. Neither the seller nor the broker can solicit orders to buy the securities.
Exceptions to the 144 requirement include the resale by a member firm in an agency capacity, or if a market maker in the security purchases the issue as a principal for his own account.
Note that even if the above conditions are satisfied, restricted stock cannot be sold to the public unless the restrictive legend is removed from the certificate. Only the transfer agent can do this, with the consent of the issuer.
There is no minimum holding period for selling control stock if it was acquired in the open market. Also, if a non-affiliate has held restricted stock for at least 2 years, then there is no filing requirements and no selling restrictions.
Any issuer, underwriter, or investor who violates the Securities Act of 1933 is known as a statutory underwriter, which is an underwriter defined by law, whether they actually are underwriters or not, and often involves someone selling restricted stock in violation of the statute. If they satisfy the legal definition of an underwriter, then they are subject to the laws regulating underwriters.
Rules 144A and 145 under the Securities Act of 1933
Securities Act (SEA) Rule 144A permits the sale of unregistered securities to qualified institutional buyers (QIB), which are institutions—banks, insurance companies, etc.—that invest at least $100 million in securities from issuers not affiliated with the QIB. This is how most unregistered foreign securities are sold in the United States.
SEA Rule 145 applies Rule 144 protections if the securities were acquired because of a recapitalization: merger, consolidation, transfer of assets, or a reclassification that was not a result of a stock split or reverse split.