Sales of Affiliate Stock Under Rule 144

What Are the Conditions for Selling Stock Under Rule 144?

One possible way to sell restricted stock to the public, is to meet the criteria of Rule 144.  While Rule 144 is not the only exemption used by non-affiliate shareholders of restricted stock to sell their securities, Rule 144 offers a “safe harbor” exemption to Affiliates when the requirements are met.

Five Criteria For Using Rule 144 To Clear Restricted Stock

  1. Holding Period Under Rule 144

    If the public company that issued the Affiliate’s restricted stock is a “fully reporting company” that is technically “subject to” the reporting requirements of the Securities Exchange Act of 1934 (a/k/a Exchange Act or 34 Act), then the minimum holding period is six months. If the public company that issued your restricted stock is not subject to the reporting requirements of the 34 Act, then you must hold the stock for at least one year. Please note that the calculation for the holding period does not begin until the stock is “fully paid for.”

  2. Current Public Information Requirement of Rule 144

    The public company’s filings must show “adequate current information” about the company, that is publicly available, before the sale can be made. For SEC filers subject to the Exchange Act this generally means that the the company has filed all of its 10-Q, 10-K, 8-K reports and links to such reports are available on its website. For non-reporting companies, whether they are voluntary filers under the 33 Act or just Pink Sheets filing disclosures on OTCMarkets.com, the SEC states that “certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements” must be publicly available.

  3. Trading Volume Formula for Affiliates Under Rule 144

    For Affiliates of the public company only, there is a trading volume limitation placed on their ability to sell stock.  The SEC allows such an Affiliate (an owner of greater than 9.99% of the outstanding securities of any class, an officer, director, control person, or their spouses…or those living in the same household as the foregoing…)  to sell during any three-month period a maximum of 1% of the outstanding shares of the same class being sold (if an OTC Markets stock), or if the class is listed on a stock exchange, such as NASDAQ or NYSE, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.  OTC stocks, including those previously quoted on the old OTC Bulletin Board and those now quoted on the OTC Markets Pink Sheets, must be sold by Affiliates using the 1% maximum.

  4. Ordinary Brokerage Transactions Under Rule 144

    For Affiliates of publicly traded companies, their restricted stock sales must be handled in all respects as “routine trading transactions, and brokers may not receive more than a normal commission” according to the SEC.  That means neither the seller nor the broker “can solicit orders to buy the securities.”

  5. Filing a Notice of Proposed Sale With the SEC

    Affiliates must also file 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.  Most brokerages will require an Affiliate of the public company to fill out Form 144 for every sale, which will list the current issued and outstanding shares of common stock, and state the proposed maximum (1%) that the Affiliate intends to sell.  Affiliates must update their Form 144 periodically and brokers often require updated Rule 144 legal opinions to be issued in order for the Affiliate to continue selling.

It is important to note that Rule 144 cannot be used by Shareholders of non reporting Pink Sheets to clear restricted stock if the public company is a current shell or a former shell.    Shareholders of SEC filers which are subject to the reporting requirements of the Exchange Act may use Rule 144 only if the requirements of the Evergreen Rule are met.  (In these cases, if Rule 144 is unavailable as an exemption, it may be possible for non-affiliate stockholders to use Section 4(a)(1) instead.)

Shareholders of OTC Markets public companies, or those trading on the NASDAQ or NYSE needing Rule 144 legal opinions to deposit restricted stock can reach an experienced securities attorney by calling (410) 429-7076 any time.  There is never a cost to review certificates and supporting documents, and if a legal opinion can be issued, a reasonable flat fee will be quoted.