What Is Rule 144?
The purpose of Rule 144 is to prevent insider trading and to ensure that those who purchase unregistered securities have access to sufficient information. The rule governs the sale of securities outside public markets, which are subject to their own set of SEC regulations. The goal is to promote transparency and fairness when selling restricted and controll securities in the public market. Control securities are typically owned by company insiders. Rule 144 is a regulation that oversees transactions involving securities held by controlling or majority shareholders.
Rule 144, governed by the U.S. Securities and Exchange Commission (SEC), outlines conditions for trading restricted, unregistered, and control securities. By meeting specific criteria, sellers, including issuers, underwriters, and dealers, gain an exemption from registration requirements when selling securities in the public markets. The rule's primary objectives are to prevent insider trading and ensure buyers have sufficient information when dealing with such securities.
What Is Rule 144?
Rule 144 oversees transactions involving restricted, unregistered, and control securities held by insiders or influential stakeholders of the issuer. These securities are typically obtained through private sales or over-the-counter (OTC) channels and can sometimes represent a controlling interest in the issuing company.
Restricted securities may also be acquired through private placements or employee stock benefit plans. Reselling restricted, unregistered, or control securities is generally prohibited unless they are registered with the SEC before sale or meet specific exemption criteria. To qualify for exemption, five conditions must be fulfilled.
Exceptions to the Rule: If the seller is unrelated to the issuing company and has owned the securities for over a year, the five conditions are waived, enabling unrestricted sale of the security. Additionally, non-affiliated parties may sell covered securities after holding them for more than six months if they meet the current public information requirements.
Rule 144 Resale: Meeting the Five Conditions
To sell or resell restricted, unregistered, and control securities under Rule 144, five essential conditions must be satisfied.
- Holding Period: The holding period requirement varies based on the type of issuer. For public companies, it is six months from the purchase date, while for non-filers with the SEC, it is one year. This primarily applies to restricted securities, while control securities adhere to other Rule 144 requirements.
- Availability of Public Information: Sufficient current public information about the company, including financial statements, officer details, and business descriptions, must be accessible to investors.
- Selling Party Limits: Affiliated sellers cannot resell more than 1% of total outstanding shares in three months. For listed stocks, either 1% of outstanding shares or the average of the previous four-week trading volume can be sold. Over-the-counter stocks only follow the 1% rule.
- Normal Trading Conditions: All regular trading conditions for any transaction must be met. Brokers cannot solicit buy orders and must receive standard commission rates.
- Filing Requirements: Affiliated sellers must submit a proposed sale notice if the sale value exceeds $50,000 in any three-month period or if over 5,000 shares are proposed for sale.
Holding periods under SEC Rule 144 vary based on the issuer type, ranging from one year for most cases to as little as six months for reporting companies and up to two years for non-reporting companies.
Crypto Securities and SEC Rule 144
Involving Unregistered Tokens
SEC Rule 144 governs unregistered securities linked to cryptocurrencies and blockchain-based tokens. While cryptocurrencies like Bitcoin currently escape the securities classification, financial products offering interest, yield, or dividends based on lending or "staking" such crypto tokens might be considered securities.
SEC Investigation and Lawsuits
Recent events have led to the SEC investigating several crypto exchanges, including Kraken, Gemini, and Genesis, especially after FTX's collapse. The focus is on potential illegal offerings of unregistered securities to U.S. customers. Reselling Restricted Securities If a security falls under SEC Rule 144's definition of a restricted security, it can only be resold under specific circumstances, such as complying with time restrictions, filing Form 144, and adhering to quantity limitations.
Genesis and Gemini Lawsuit
The SEC sued crypto exchanges Genesis and Gemini in January 2023 for the unregistered sale of securities through an interest-bearing product. This underscores the increased regulatory scrutiny faced by the crypto industry, with enforcement actions being taken against rule-violating companies, urging them to align with existing regulations.
SEC Rule 144 governs the sale of restricted and control securities in the public market. For affiliates of an issuing company to sell their holdings, they must adhere to a minimum holding period and fulfill reporting requirements and disclosures. This regulation aims to prevent insider trading and safeguard investors by ensuring transparent and accurate information disclosure regarding securities sales.