Monday, December 28. 2020
Rule 144 of the Securities Act of 1933 creates a non-exclusive safe harbor from the statutory definition of “underwriter”. This safe harbor is intended to assist security holders in determining whether the Section 4(a)(1) exemption from registration is applicable to resales of restricted or control securities. Rule 144 accomplishes this through setting objective criteria upon which security holders seeking to resell such securities may rely to avoid engaging in a distribution and, therefore, acting as an underwriter under Section 2(a)(11) of the Securities Act.
As it currently is written, Rule 144 considers securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange. Holders can therefore convert the market-adjustable securities after the Rule 144 holding period is satisfied and quickly sell the underlying securities on the public market at a higher price than the one at which they were acquired. The amendments would delay the holding period for the underlying securities acquired upon conversion or exchange of “market-adjustable securities” until conversion or exchange. This would mean that a purchaser would be required to hold the underlying securities for the applicable Rule 144 holding period before reselling them under Rule 144.
Specifically, the proposed amendments would alter Rule 144(d)(3)(ii) as to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. This would delay the holding period for the underlying securities (which is either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company) until the conversion or exchange of the market-adjustable securities.
The changes would not impact the use of Rule 144 for most convertible or variable-rate securities transactions. It would apply only to market-adjustable securities transactions in which:
- The newly acquired securities were acquired from an issuer that does not have a class of securities listed, or approved for listing, on a national securities exchange registered pursuant to Section 6 of the Exchange Act; and
- The convertible or exchangeable security contains terms that, prior to conversion or exchange, offset decreases in the market value of the underlying securities. These must be terms other than those that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization.
Additionally, the SEC is suggesting related changes to the Form 144 filing requirements. Form 144 must be filed by an affiliate of an issuer if that affiliate intends to resell more than a specified amount of restricted or control securities of the issuer in reliance on Rule 144. The current rules permit Form 144 to be filed electronically or in paper if the issuer of the securities is subject to Exchange Act reporting requirements. Otherwise, Form 144 must be filed in paper.
The proposed amendments to the filing requirements for Form 144, as well as Forms 4 and 5, will update and simplify filing requirements by:
- mandating the electronic filing of Form 144
- eliminating the Form 144 filing requirement related to the sale of securities of issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
- amending the Form 144 filing deadline so that Form 144 may be filed concurrently with Form 4 by persons subject to both filing requirements
- adding an optional check box to Forms 4 and 4 to indicate that a reported transaction was intended to satisfy Rule 10b5-1(c), which provides an affirmative defense for trading on the basis of material non-public information in insider trading cases
The SEC intends to make Form 144 fillable online to simplify electronic filing and to streamline the electronic filing of Forms 4 and 144 reporting the same sale of an issuer’s securities. The SEC is also investigating the option of requiring that Form 144 be filed in the Inline XBRL format. The proposal includes a six-month transition period to give Form 144 paper filers who would be first-time electronic filers sufficient time to apply for codes to make filings on EDGAR and familiarize themselves with the filing process.
The public comment period for these amendments will begin following publication on SEC.gov and remain open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing email@example.com with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-24-20.