When an investor acquires restricted securities, the SEC requires that the securities be registered before the investor can sell them to another party. Restricted securities are typically issued through a private stock placement, Regulation D offering, or through an employee stock benefit plan. Also, if unrestricted securities are sold by a “control” person (one with the ability to either directly or indirectly influence management decisions), the securities become restricted once sold. These securities (except those issued by a control person) bear a restrictive legend, stating that the securities may not be resold unless they are registered with the SEC or exempt from its registration requirements.

Since resale of a security is critical to an investor’s eventual liquidity, registration is an extremely important goal. However, registration can be both an expensive and prolonged task that many public companies avoid. Fortunately for investors, Rule 144 presents a possible exemption from the SEC’s registration requirement. Rule 144 allows for the resale of restricted securities if a number of conditions are met, which primarily involve the passage of time. They are:

1. Holding period. If the securities issuer is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (e.g., issues 10Q, 10K, and other periodic reports), then the securities holder must hold the securities for at least six months. If the securities issuer is not reporting under the Exchange Act, then the holding period is one year.
2. Adequate current information. The securities issuer must be current in its reporting under the Exchange Act.
3. Trading volume formula. If the securities holder is an affiliate of the company (i.e., one who is in a control position), then the number of securities available for sale during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange or the NASDAQ, the greater of 1% of the average reported weekly trading volume during the four weeks preceding the investor’s filing of a notice of sale using a Form 144. If the securities issuer’s stock is only traded over-the-counter, then only the 1% rule applies.
4. Ordinary brokerage transactions. If the securities holder is an affiliate, the securities sale must be handled as a routine trading transaction, where the broker cannot receive more than a normal commission. The seller and broker cannot solicit orders to buy the securities, other than to respond to various types of unsolicited inquiries.
5. File a notice of proposed sale. If the securities holder is an affiliate, the proposed sale must be filed with the SEC on a Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period. The completed form shall be filed concurrently with either the placing with a broker of a sale order or the execution with a market maker of such a sale. The sale must take place within three months of filing the form, or else an amended notice must be filed. If the securities are admitted for trading on a national securities exchange, then one copy of the completed form must also be transmitted to the exchange.

If a securities holder has held the restricted securities for at least one year, and has not been a company affiliate for at least the past three months, then the securities can be resold without regard to the preceding conditions. If the company is fulfilling its reporting requirements under the Exchange Act, then the holding period is reduced to six months.

Once these conditions are met, the securities holder must have the restrictive legend removed before the securities can be sold. Legend removal must be done by the company’s stock transfer agent, which will only do so with the written approval of the issuing company’s counsel. This written approval is in the form of an opinion letter.