Rule 144 --
Persons Deemed Not to Be Engaged in a Distribution and Therefore Not
Underwriters
Preliminary Note to Rule 144
Rule 144 is designed to implement the fundamental purposes of the Act, as
expressed in its preamble, "To provide full and fair disclosure of the
character of the securities sold in interstate commerce and through the mails,
and to prevent fraud in the sale thereof . . . " The rule is designed to
prohibit the creation of public markets in securities of issuers concerning
which adequate current information is not available to the public. At the same
time, where adequate current information concerning the issuer is available to
the public, the rule permits the public sale in ordinary transactions of
limited amounts of securities owned by persons controlling, controlled by or
under common control with the issuer and by persons who have acquired
restricted securities of the issuer.
Certain basic principles are essential to an understanding of the requirement
of registration in the Act:
- If any person utilizes the jurisdictional means
to sell any non-exempt security to any other person, the security must be
registered unless a statutory exemption can be found for the transaction.
- In addition to the exemptions found in Section 3, four
exemptions applicable to transactions in securities are contained in Section 4. Three of
these Section 4 exemptions are clearly not available to anyone acting as
an "underwriter" of securities. (The fourth, found in Section 4(4), is
available only to those who act as brokers under certain limited
circumstances.) An understanding of the term "underwriter" is
therefore important to anyone who wishes to determine whether or not an
exemption from registration is available for his sale of securities.
The term underwriter is broadly defined in Section 2(11) of the
Act to mean any person who has purchased from an issuer with a view to, or
offers or sells for an issuer in connection with, the distribution of any
security, or participates or has a direct or indirect participation in any such
undertaking, or participates or has a participation in the direct or indirect
underwriting of any such undertaking. The interpretation of this definition has
traditionally focused on the words "with a view to" in the phrase
"purchased from an issuer with a view to . . . distribution." Thus,
an investment banking firm which arranges with an issuer for the public sale of
its securities is clearly an "underwriter" under that Section.
Individual investors who are not professionals in the securities business may
also be "underwriters" within the meaning of that term as used in the
Act if they act as links in a chain of transactions through which securities
move from an issuer to the public. Since it is difficult to ascertain the
mental state of the purchaser at the time of his acquisition, subsequent acts
and circumstances have been considered to determine whether such person took
with a view to distribution at the time of his acquisition. Emphasis has been
placed on factors such as the length of time the person has held the securities
and whether there has been an unforeseeable change in circumstances of the
holder. Experience has shown, however, that reliance upon such factors as the
above has not assured adequate protection of investors through the maintenance
of informed trading markets and has led to uncertainty in the application of
the registration provisions of the Act.
It should be noted that the statutory language of Section 2(11) is in the
disjunctive. Thus, it isinsufficient to conclude that a person is not an
underwriter solely because he did not purchase securities from an issuer with a
view to their distribution. It must also be established that the person is not
offering or selling for an issuer in connection with the distribution of the
securities, does not participate or have a direct or indirect participation in
any such undertaking, and does not participate or have a participation in the
direct or indirect underwriting of such an undertaking.
In determining when a person is deemed not to be engaged in a distribution
several factors must be considered.
First, the purpose and underlying policy of the Act to protect investors
requires that there be adequate current information concerning the issuer,
whether the resales of securities by persons result in a distribution or are
effected in trading transactions. Accordingly, the availability of the rule is
conditioned on the existence of adequate current public information.
Secondly, a holding period prior to resale is essential, among other reasons,
to assure that those persons who buy under a claim of a Section 4(2) exemption
have assumed the economic risks of investment, and therefore are not acting as
conduits for sale to the public of unregistered securities, directly or
indirectly, on behalf of an issuer. It should be noted, that there is nothing
in Section 2(11)
which places a time limit on a person's status as an underwriter. The public
has the same need for protection afforded by registration whether the
securities are distributed shortly after their purchase or after a considerable
length of time.
A third factor, which must be considered in determining what is deemed not to
constitute a "distribution," is the impact of the particular
transaction or transactions on the trading markets. Section 4(1) was
intended to exempt only routine trading transactions between individual
investors with respect to securities already issued and not to exempt
distributions by issuers or acts of other individuals who engage in steps
necessary to such distributions. Therefore, a person reselling securities under
Section 4(1) of the Act must sell the securities in such limited quantities and
in such a manner as not to disrupt the trading markets. The larger the amount
of securities involved, the more likely it is that such resales may involve
methods of offering and amounts of compensation usually associated with a
distribution rather than routine trading transactions. Thus, solicitation of
buy orders or the payment of extra compensation are not permitted by the rule.
In summary, if the sale in question is made in accordance with all of
the provisions of the rule, as set forth below, any person who sells restricted
securities shall be deemed not to be engaged in a distribution of such
securities and therefore not an underwriter thereof. The rule also provides
that any person who sells restricted or other securities on behalf of a person
in a control relationship with the issuer shall be deemed not to be engaged in
a distribution of such securities and therefore not to be an underwriter
thereof, if the sale is made in accordance with all the conditions of
the rule.
- Definitions. The following definitions shall
apply for the purposes of this rule.
- An "affiliate" of an issuer
is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such issuer.
- The term "person" when used
with reference to a person for whose account securities are to be sold in
reliance upon this rule includes, in addition to such person, all of the
following persons:
- Any relative or spouse of such person,
or any relative of such spouse, any one of whom has the same home as
such person;
- Any trust or estate in which such
person or any of the persons specified in paragraph (a)(2)(i) of this
section collectively own ten percent or more of the total beneficial
interest or of which any of such persons serve as trustee, executor or
in any similar capacity; and
- Any corporation or other organization
(other than the issuer) in which such person or any of the persons
specified in paragraph
(a)(2)(i) of this section are the beneficial owners collectively of
ten percent or more of any class of equity securities or ten percent or
more of the equity interest.
- The term restricted securities means:
- Securities acquired directly or
indirectly from the issuer, or from an affiliate of the issuer, in a
transaction or chain of transactions not involving any public offering;
- Securities acquired from the issuer
that are subject to the resale limitations of Rule 502(d)
under Regulation D or Rule 701(c);
- Securities acquired in a transaction
or chain of transactions meeting the requirements of Rule 144A;
- Securities acquired from the issuer in
a transaction subject to the conditions of Regulation CE;
- Equity securities of domestic issuers
acquired in a transaction or chain of transactions subject to the
conditions of Rule
901 or Rule
903 under Regulation
S;
- Securities acquired in a transaction
made under Rule
801 to the same extent and proportion that the securities held by
the security holder of the class with respect to which the rights
offering was made were as of the record date for the rights offering
"restricted securities" within the meaning of this paragraph
(a)(3); and
- Securities acquired in a transaction
made under Rule
802 to the same extent and proportion that the securities that were
tendered or exchanged in the exchange offer or business combination were
"restricted securities" within the meaning of this paragraph
(a)(3).
- Conditions to Be Met. Any affiliate or other
person who sells restricted securities of an issuer for his own account,
or any person who sells restricted or any other securities for the account
of an affiliate of the issuer of such securities, shall be deemed not to
be engaged in a distribution of such securities and therefore not to be an
underwriter thereof within the meaning of Section 2(11) of
the Act if all of the conditions of this rule are met.
- Current Public Information. There shall be
available adequate current public information with respect to the issuer
of the securities. Such information shall be deemed to be available only
if either of the following conditions is met:
- Filing of Reports. The issuer has
securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, has been subject to the reporting
requirements of Section
13 of that Act for a period of at least 90 days immediately preceding
the sale of the securities and has filed all the reports required to be
filed thereunder during the 12 months preceding such sale (or for such
shorter period that the issuer was required to file such reports); or has
securities registered pursuant to the Securities Act of 1933, has been
subject to the reporting requirements of Section 15(d) of
the Securities Exchange Act of 1934 for a period of at least 90 days
immediately preceding the sale of the securities and has filed all the
reports required to be filed thereunder during the 12 months preceding
such sale (or for such shorter period that the issuer was required to
file such reports). The person for whose account the securities are to be
sold shall be entitled to rely upon a statement in whichever is the most
recent report, quarterly or annually, required to be filed and filed by
the issuer that such issuer has filed all reports required to be filed by
Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports)
and has been subject to such filing requirements for the past 90 days,
unless he knows or has reason to believe that the issuer has not complied
with such requirements. Such person shall also be entitled to rely upon a
written statement from the issuer that it has complied with such
reporting requirements unless he knows or has reason to believe that the
issuer has not complied with such requirements.
- Other Public Information. If the issuer
is not subject to Section 13 or 15(d) of the
Securities Exchange Act of 1934, there is publicly available the
information concerning the issuer specified in paragraphs (a)(5)(i) to
(xiv), inclusive, and paragraph (a)(5)(xvi) of Rule 15c2-11
under that Act or, if the issuer is an insurance company, the information
specified in Section
12(g)(2)(G)(i) of that Act.
- Holding Period for Restricted Securities. If
the securities sold are restricted securities, the following provisions
apply:
- General Rule. A minimum of one year
must elapse between the later of the date of the acquisition of the securities
from the issuer or from an affiliate of the issuer, and any resale of
such securities in reliance on this section for the account of either the
acquiror or any subsequent holder of those securities. If the acquiror
takes the securities by purchase, the one-year period shall not begin
until the full purchase price or other consideration is paid or given by
the person acquiring the securities from the issuer or from an affiliate
of the issuer.
- Promissory Notes, Other Obligations or
Installment Contracts. Giving the issuer or affiliate of the issuer from
whom the securities were purchased a promissory note or other obligation
to pay the purchase price, or entering into an installment purchase
contract with such person, shall not be deemed full payment of the
purchase price unless the promissory note, obligation or contract:
- provides for full recourse against the
purchaser of the securities;
- is secured by collateral, other than
the securities purchased, having a fair market value at least equal to
the purchase price of the securities purchased; and
- shall have been discharged by payment
in full prior to the sale of the securities.
- Determination of Holding Period. The
following provisions shall apply for the purpose of determining the
period securities have been held:
- Stock Dividends, Splits and
Recapitalizations. Securities acquired from the 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 the securities on which
the dividend or, if more than one, the initial dividend was paid, the
securities involved in the split or reverse split, or the securities
surrendered in connection with the recapitalization;
- Conversions. If the securities sold
were acquired from the issuer for a consideration consisting solely of
other securities of the same issuer surrendered for conversion, the
securities so acquired shall be deemed to have been acquired at the same
time as the securities surrendered for conversion;
- Contingent Issuance of Securities.
Securities acquired as a contingent payment of the purchase price of an
equity interest in a business, or the assets of a business, sold to the
issuer or an affiliate of the issuer shall be deemed to have been
acquired at the time of such sale if the issuer or affiliate was then
committed to issue the securities subject only to conditions other than
the payment of further consideration for such securities. An agreement
entered into in connection with any such purchase to remain in the
employment of, or not to compete with, the issuer or affiliate or the
rendering of services pursuant to such agreement shall not be deemed to
be the payment of further consideration for such securities.
- Pledged Securities. Securities which
are bona fide pledged by an affiliate of the issuer when sold by the
pledgee, or by a purchaser, after a default in the obligation secured by
the pledge, shall be deemed to have been acquired when they were
acquired by the pledgor, except that if the securities were pledged
without recourse they shall be deemed to have been acquired by the
pledgee at the time of the pledge or by the purchaser at the time of
purchase.
- Gifts of Securities. Securities
acquired from an affiliate of the issuer by gift shall be deemed to have
been acquired by the donee when they were acquired by the donor;
- Trusts. Where a trust settlor is an
affiliate of the issuer, securities acquired from the settlor by the
trust, or acquired from the trust by the beneficiaries thereof, shall be
deemed to have been acquired when such securities were acquired by the
settlor;
- Estates. Where a
deceased person was an affiliate of the issuer, securities held by the
estate of such person or acquired from such an estate by the
beneficiaries thereof shall be deemed to have been acquired when they
were acquired by the deceased person, except that no holding period is
required if the estate is not an affiliate of the issuer or if the
securities are sold by a beneficiary of the estate who is not such an
affiliate.
Note.
While there is no holding period or amount limitation for estates and
beneficiaries thereof which are not affiliates of the issuer, paragraphs (c), (h) and (i) of the rule apply to
securities sold by such persons in reliance upon the rule.
- Rule 145(a) transactions. The holding
period for securities acquired in a transaction specified in Rule 145(a)
shall be deemed to commence on the date the securities were acquired by
the purchaser in such transaction. This provision shall not apply,
however, to a transaction effected solely for the purpose of forming a
holding company.
- Limitation on amount of securities sold. Except
as hereinafter provided, the amount of securities which may be sold in
reliance upon this rule shall be determined as follows:
- Sales by affiliates. If restricted or
other securities sold for the account of an affiliate of the issuer, the
amount of securities sold, together with all sales of restricted and
other securities of the same class for the account of such person within
the preceding three months, shall not exceed the greater of
- one percent of the shares or other
units of the class outstanding as shown by the most recent report or
statement published by the issuer, or
- the average weekly reported volume of
trading in such securities on all national securities exchanges and/or
reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the
filing of notice required by paragraph (h), or if no
such notice is required the date of receipt of the order to execute the
transaction by the broker or the date of execution of the transaction
directly with a market maker, or
- the average weekly volume of trading
in such securities reported through the consolidated transaction
reporting system contemplated by Rule 11Aa3-1
under the Securities Exchange Act of 1934 during the four-week period
specified in subdivision (ii) of this paragraph.
- Sales by persons other than affiliates.
The amount of restricted securities sold for the account of any person
other than an affiliate of the issuer, together with all other sales of
restricted securities of the same class for the account of such person
within the preceding three months, shall not exceed the amount specified
in paragraphs (e)(1)(i), (1)(ii) or (1)(iii) of this section, whichever
is applicable, unless the conditions in paragraph (k) of this
rule are satisfied.
- Determination of Amount. For the
purpose of determining the amount of securities specified in paragraphs
(e)(1) and (2) of this rule, the following provisions shall apply:
- Where both convertible securities and
securities of the class into which they are convertible are sold, the
amount of convertible securities sold shall be deemed to be the amount
of securities of the class into which they are convertible for the
purpose of determining the aggregate amount of securities of both
classes sold;
- The amount of securities sold for the
account of a pledgee thereof, or for the account of a purchaser of the
pledged securities, during any period of three months within one year
after a default in the obligation secured by the pledge, and the amount
of securities sold during the same three-month period for the account of
the pledgor shall not exceed, in the aggregate, the amount specified in
paragraph (e)(1)
or (2) of this
section, whichever is applicable.
- The amount of securities sold for the
account of a donee thereof during any period of three months within one
year after the donation, and the amount of securities sold during the
same three-month period for the account of the donor, shall not exceed,
in the aggregate, the amount specified in paragraph (e)(1) or (2) of this section,
whichever is applicable;
- Where securities were acquired by a
trust from the settlor of the trust, the amount of such securities sold
for the account of the trust during any period of three months within
one year after the acquisition of the securities by the trust, and the
amount of securities sold during the same three-month period for the
account of the settlor, shall not exceed, in the aggregate, the amount
specified in paragraph (e)(1) or (2) of this
paragraph, whichever is applicable;
- The amount of securities sold for the
account of the estate of a deceased person, or for the account of a
beneficiary of such estate, during any period of three months and the
amount of securities sold during the same period for the account of the
deceased person prior to his death shall not exceed, in the aggregate,
the amount specified in subparagraph (1) or (2) of this
paragraph, whichever is applicable; Provided, That no limitation
on amount shall apply if the estate or beneficiary thereof is not an
affiliate of the issuer;
- When two or more affiliates or other
persons agree to act in concert for the purpose of selling securities of
an issuer, all securities of the same class sold for the account of all
such persons during any period of three months shall be aggregated for
the purpose of determining the limitation on the amount of securities
sold;
- The following sales of securities need
not be included in determining the amount of securities sold in reliance
upon this section: securities sold pursuant to an effective registration
statement under the Act; securities sold pursuant to an exemption
provided by Regulation
A under the Act; securities sold in a transaction exempt pursuant to
Section 4 of the
Act and not involving any public offering; and securities sold offshore
pursuant to Regulation
S under the Act.
- Manner of sale. The securities shall be sold in
"brokers' transactions" within the meaning of section 4(4) of the
Act or in transactions directly with a "market maker," as that
term is defined in section
3(a)(38) of the Securities Exchange Act of 1934, and the person
selling the securities shall not
- solicit or arrange for the solicitation
of orders to buy the securities in anticipation of or in connection with
such transaction, or
- make any payment in connection with the
offer or sale of the securities to any person other than the broker who
executes the order to sell the securities. The requirements of this
paragraph, however, shall not apply to securities sold for the account of
the estate of a deceased person or for the account of a beneficiary of
such estate provided the estate or beneficiary thereof is not an
affiliate of the issuer; nor shall they apply to securities sold for the
account of any person other than an affiliate of the issuer, provided the
conditions of paragraph
(k) of this rule are satisfied.
- Brokers' Transactions. The term "brokers'
transactions" in Section
4(4) of the Act shall for the purposes of this rule be deemed to
include transactions by a broker in which such broker--
- does no more than execute the order or
orders to sell the securities as agent for the person for whose account
the securities are sold; and receives no more than the usual and
customary broker's commission;
- neither solicits nor arranges for the
solicitation of customers' orders to buy the securities in anticipation
of or in connection with the transaction; provided, that the foregoing
shall not preclude
- inquiries by the broker of other
brokers or dealers who have indicated an interest in the securities
within the preceding 60 days,
- inquiries by the broker of his
customers who have indicated an unsolicited bona fide interest in the
securities within the preceding 10 business days; or
- the publication by
the broker of bid and ask quotations for the security in an inter-dealer
quotation system provided that such quotations are incident to the
maintenance of a bona fide inter-dealer market for the security for the
broker's own account and that the broker has published bona fide bid and
ask quotations for the security in an inter-dealer quotation system on
each of at least twelve days within the preceding thirty calendar days
with no more than four business days in succession without such two-way
quotations;
Note
to Subparagraph g(2)(ii): The broker should obtain and retain in his files
written evidence of indications of bona fide unsolicited interest by his
customers in the securities at the time such indications are received.
- after reasonable
inquiry is not aware of circumstances indicating that the person for
whose account the securities are sold is an underwriter with respect to
the securities or that the transaction is a part of a distribution of
securities of the issuer. Without limiting the foregoing, the broker
shall be deemed to be aware of any facts or statements contained in the
notice required by paragraph
(h) below.
Notes
- The broker, for his own protection,
should obtain and retain in his files a copy of the notice required by paragraph (h).
- The reasonable inquiry required by paragraph (g)(3) of
this section should include, but not necessarily be limited to, inquiry
as to the following matters:
- The length of time the securities
have been held by the person for whose account they are to be sold. If
practicable, the inquiry should include physical inspection of the
securities;
- The nature of the transaction in
which the securities were acquired by such person;
- The amount of securities of the same
class sold during the past three months by all persons whose sales are
required to be taken into consideration pursuant to paragraph (e) of this
section;
- Whether such person intends to sell
additional securities of the same class through any other means;
- Whether such person has solicited or
made any arrangement for the solicitation of buy orders in connection
with the proposed sale of securities;
- Whether such person has made any
payment to any other person in connection with the proposed sale of the
securities; and
- The number of shares
or other units of the class outstanding, or the relevant trading volume
- Notice of proposed sale. If the amount of
securities to be sold in reliance upon the rule during any period of three
months exceeds 500 shares or other units or has an aggregate sale price in
excess of $10,000, three copies of a notice on Form 144 shall
be filed with the Commission at its principal office in Washington, D. C.;
and if such securities are admitted to trading on any national securities
exchange, one copy of such notice shall also be transmitted to the
principal exchange on which such securities are so admitted. The Form 144 shall
be signed by the person for whose account the securities are to be sold
and shall be transmitted for filing concurrently with either the placing
with a broker of an order to execute a sale of securities in reliance upon
this rule or the execution directly with a market maker of such a sale.
Neither the filing of such notice nor the failure of the Commission to
comment thereon shall be deemed to preclude the Commission from taking any
action it deems necessary or appropriate with respect to the sale of the
securities referred to in such notice. The requirements of this paragraph,
however, shall not apply to securities sold for the account of any person
other than an affiliate of the issuer, provided the conditions of paragraph (k) of this
rule are satisfied.
- Bona Fide Intention to Sell. The person filing
the notice required by paragraph (h) shall have a bona fide intention to
sell the securities referred to therein within a reasonable time after the
filing of such notice.
- Non-exclusive rule. Although this rule provides
a means for reselling restricted securities and securities held by
affiliates without registration, it is not the exclusive means for
reselling such securities in that manner. Therefore, it does not eliminate
or otherwise affect the availability of any exemption for resales under
Securities Act that a person or entity may be able to rely upon.
- Termination of certain restrictions on sales of
restricted securities by persons other than affiliates. The requirements
of paragraphs (c), (e), (f) and (h) of this rule shall
not apply to restricted securities sold for the account of a person who is
not an affiliate of the issuer at the time of the sale and has not been an
affiliate during the preceding three months, provided a period of at least
two years has elapsed since the later of the date the securities were
acquired from the issuer or from an affiliate of the issuer. The two-year
period shall be calculated as described in paragraph (d) of this
section.