Rule 144 Non-Affiliate Question And Answer

Published: 25th June 2015
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What is Section 5 of the Securities Act of 1933?

Section 5 of the Securities Act states that all offers and sales of securities must be registered under the Securities Act or exempt from the registration requirements.

What is the "safe harbor" of Rule 144?

Rule 144 provides a transactional exemption from the registration requirements of Section 5 of the Securities Act to certain holders of securities, if certain requirements are met. The requirements of Rule 144 vary depending upon whether the holder of the shares is an affiliate or non-affiate of the issuer.

What are the requirements for non-affiliates of the issuer to rely upon the under Rule 144 safe harbor?

The conditions of the Rule 144 safe harbor are: (i) adequate current public information with respect to the issuer, (ii) a holding period for restricted securities, and (iii), in the case of affiliates' sales, certain volume limitations and manner of sale requirements. In addition, there may be a notice requirement if the amount of securities sold exceeds certain amounts.

How does a shareholder comply with the adequate current public information requirement of Rule 144?

For purposes of Rule 144, the informational requirements depend upon whether the issuer is an SEC reporting issuer. A reporting issuer is a company with securities registered under the Securities Act and/or the Securities Exchange Act of 1934 (the "Exchange Act").

For a reporting company to comply with the informational requirements of Rule 144, it must have been subject to the SEC's reporting requirements for at least 90 days prior to the proposed sale and have filed all reports required by the Exchange Act during the 12 months or for such shorter period that the issuer was required to file reports.

For a non-reporting issuer to comply with the reporting requirements of Rule 144, it must provide the information required by Rule 15c2-11 of the Exchange Act.

What is the holding period required by Rule 144?

Shareholders seeking to sell restricted securities of an SEC reporting issuer who has complied with the requirements above, must comply with a holding period requirement of six months. Shareholders seeking to sell securities of non-reporting companies must comply with a 12 month holding period.

When does the holding period of Rule 144 start?

The holding period begins on the date that the securities were purchased from the issuer or an affiliate of the issuer.

When does the holding period begin under Rule 144 or a cashless exercise of options or warrants?

If the options or warrants were acquired from the issuer and have a cashless exercise, the underlying security shall be deemed to have been acquired at the same time as the options or warrants

When does the holding period begin to run for securities purchased by a promissory note or other similar obligation?

A promissory note or similar obligation to pay the purchase price, or entering into an installment purchase agreement with a seller, is deemed full payment only if the promissory note, obligation or contract (1) provides the seller full recourse against the purchaser of the securities, (2) is secured by collateral, other than the purchased securities, with a fair market value at least equal to the purchase price of the purchased securities, and (3) shall have been discharged by payment in full prior to the sale of the securities.

What is tacking for purposes of Rule 144?

Rule 144 allows the holding periods of holders to be added with that of prior non-affiliate holders.

When does the holding period begin to run for securities acquired from the issuer through a dividend or stock split?

Securities that were acquired from an issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to have been acquired at the same time as (i) the securities upon which the dividend was paid, (ii) the securities subject to the split, or (iii) the securities surrendered in the recapitalization.

When does the holding period begin to run for securities acquired from the issuer in a conversion?

If the securities sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms.

What is tacking for purposes of Rule 144?

Rule 144 allows the holding periods of holders to be added with that of prior non-affiliate holders.

What are the informational requirements of Rule 15c2-11 that apply to shareholders of non-reporting companies relying upon Rule 144?

Rule 144 requires that the company have current public information available. For a non-reporting company this means the issuer must have the information required by Rule 15c-211 available. 15c2-11 requires that the broker or dealer have extensive specified information about the issuer in its records and make such information reasonably available to potential investors. Rule 15c-211 requires the following information be disclosed:

(i) The exact name of the issuer and any predecessor;

(ii) The address of the issuer's principal executive offices;

(iii) The state of the issuer's incorporation;

(iv) The exact title and class of the security;

(v) The par or stated value of the security;

(vi) The number of shares outstanding as of the end of the issuer's most recent fiscal year;

(vii) The name and address of the issuer's transfer agent;

(viii) The nature of the issuer's business;

(ix) The nature of the issuer's products or services;

(x) The nature and extent of the issuer's facilities;

(xi) The names of the chief executive officer and members of the board of directors;

(xii) The issuer's most recent balance sheet and profit and loss and retained earnings statements;

(xiii) Similar financial information for that part of the two preceding fiscal years as the issuer or its predecessor, if any, has been in existence;

(xiv) Whether the broker or dealer or any associated person is affiliated, directly or indirectly, with the issuer; and

(xv) Whether the quotation is being submitted or published directly or indirectly on behalf of the issuer or any director, officer or other person, who is directly or indirectly the beneficial owner of more than 10% of the outstanding equity securities of the issuer, and, if so, the identity of such person, and the basis for any exemption under the federal securities laws for any sales of securities on behalf of that person.


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Hamilton & Associates Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South,
Suite 201 South
Boca Raton, Florida 33432
Telephone: (561) 416-8956
http://www.securitieslawyer101.com/

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