SEC Rule 144

SEC Rule 144 is a rule that is put in place that requires those holding restricted securities to take additional steps when trying to sell them. An individual must seek out an exception from the SEC in order to lift the restriction of selling the restricted securities within the marketplace.

The rule is necessary to avoid any rogue trading from occurring on the market. Even when securities are traded in a private manner, they have to be regulated, just as those that are traded in public are. The rules are necessary for the protection of those involved.

Restricted and Control Securities

The whole reason behind SEC Rule 144 is restricted and control securities that are within a person's possession.

Rule 144 will allow the public sale of restricted and control securities only if a certain number of criteria are met. As for what restricted and control securities are, restricted securities are private sales that are performed by the issuer of the security through what are called "private placement offerings." These can be employee stock option benefits that many employees receive on their jobs, Regulation D Offerings, as payment for professional services that have been provided.

Control securities are those securities that are held by an issuing company affiliate and not by the issuing company itself. The affiliate, however, is in a relationship of control with the issuer, so they have the power to issue these securities.

When you take control securities, you are getting your hands on restricted securities. They suddenly change to restricted when you have them in your possession. This means that they may not be restricted when in the hands of the control person.

When you receive restricted securities, you can count on there being a certificate given to you with the word "restricted" stamped across it. This means it has a restricted legend and what this means is that the security cannot be resold unless registered with the SEC or meet a certain set of requirements in order to be exempt.


Of the requirements is this: You must hold the security for a specific amount of time. The period is typically six months, but can be as long as a year, depending upon whether or not the issuer is required to report. If they are, then you hold for six months. If they aren't, then you hold for a year. The holding period begins on the purchase date.

The issuer must also make sure that all of their information is current. If the issuer is an affiliate, the number of sales cannot exceed more than one percent of outstanding shares within the same class. Also, brokerages are to not receive more than their usually commission. Additional commission cannot be charged in this case. A broker nor a seller can solicit orders to purchase the securities.

And lastly, an affiliate must file what is called a "proposed sale" with the SEC. This is done on SEC Form 144 and is filed when the sale exceeds 5,000 shares or the dollar amount is over $50,000 in any quarter. If the shares have not been sold within that three month period, then an amended notice must be filed.

SEC Rule 144 may seem rather extensive, but that is because it is. It is for the protection of the investor and everyone involved. No one wants to obtain securities that they cannot make a profit from. Basically, an individual can end up with securities that they can't move at all and this could result in a lot of money lost. Fortunately, Rule 144 can make this happen as long as the rules set forth are met.

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