The Securities Act of ’33 requires securitiesRestricted legend sold in the U.S. must be registered with SEC, with limited exceptions for certain types of securities (exempt securities) and certain types of transactions (e.g. Reg D, Reg S, Reg A, and more). One such exempt transaction is a Rule 144 transaction, which allows public resale of restricted and control securities without registration if a number of conditions are met. This post will review: 1) the definitions of restricted and control stock, and 2) the conditions required to sell these securities to the public.

DEFINITIONS IN RULE 144

Restricted Securities:  Restricted securities are unregistered with the SEC.   Investors acquire restricted (i.e. unregistered) securities in a variety of ways include:

  • Private placement offerings,
  • Regulation D offerings,
  • Employee stock benefit plans,
  • As compensation for professional services, or
  • In exchange for providing “seed money” or start-up capital to the company.

Control Securities:  Control securities are those owned by an affiliate (or insider) of the issuing company. Control securities are entirely determined by ownership (not whether the shares are restricted, or have been registered).  An affiliate is defined as:

  • An executive officer (e.g. CEO, CFO, or COO),
  • A director (an individual on the issuer’s board of directors) or
  • Large shareholder (typically defined as owning more than 10% of the issuer’s stock)

CONDITIONS REQUIRED TO SELL UNDER RULE 144

Restricted Stock Control Stock
Holding Period Holding period
1) 6 months for SEC filers
2) 12 months for non-SEC reporting companies
NOTES:
– The holding period begins when the securities are bought and fully paid for.
– Purchases of restricted shares allow you to tack-on (or aggregate) the previous owner’s holding period to your holding period.
Not applicable
Volume
Limitations
Not applicable The quantity of control shares is limited to the greater of:
1) 1% of the outstanding shares, or
2) The average reported weekly trading volume during the four weeks preceding the sale
Current Public Information There must be adequate current information about the issuing company publicly available to sell restricted shares under Rule 144.  This can be satisfied with:
– 10Ks and 10Qs for reporting companies, or
– Information such as a business description, the identity of its officers and directors, and its financial statements for non-reporting issuers.
Not applicable
Notice of Sale
(Filing requirements)
None required Affiliates selling control securities must file Form 144 with the SEC before the sale.  The notice then opens a 90 day window in which the shares can be sold.  There is a filing exception if the sale is for:
1) Fewer than 5,000 shares, or
2) The total dollar amount is less than $50,000

Knopman Notes: If an affiliate (insider) is selling restricted stock (i.e. unregistered shares) the sale must comply with ALL conditions (both restricted and control).

Understanding the various ways securities can be issued and sold is a critical part of preparing for most FINRA  exams.  A firm grasp on the definitions and the application of the rules, and the interplay between the rules, will serve candidates well in demonstrating their knowledge in their regulatory examinations.

Relevant Exams:
Series 7, Series 24, Series 65, Series 66, Series 79

Share:
Written by Dave Meshkov
Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.