# Revisions to Rules 144 and 145

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URL: https://www.frixlaw.com/law-library/documents/fr%3A07-6013

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 17, 2007
- **Citation:** 72 FR 71546

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230 and 239
[Release No. 33-8869; File No. S7-11-07]
RIN 3235-AH13
Revisions to Rules 144 and 145

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

Rule 144 under the Securities Act of 1933 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act. We are shortening the holding period requirement under Rule 144 for “restricted securities” of issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 to six months. Restricted securities of issuers that are not subject to the Exchange Act reporting requirements will continue to be subject to a one-year holding period prior to any public resale. The amendments also substantially reduce the restrictions applicable to the resale of securities by non-affiliates. In addition, the amendments simplify the Preliminary Note to Rule 144, amend the manner of sale requirements and eliminate them with respect to debt securities, amend the volume limitations for debt securities, increase the Form 144 filing thresholds, and codify several staff interpretive positions that relate to Rule 144. Finally, we are eliminating the presumptive underwriter provision in Securities Act Rule 145, except for transactions involving a shell company, and revising the resale requirements in Rule 145(d). We believe that the amendments will increase the liquidity of privately sold securities and decrease the cost of capital for all issuers without compromising investor protection.

DATES:

Effective Date:
February 15, 2008. The revised holding periods and other amendments that we are adopting are applicable to securities acquired before or after February 15, 2008.
Comment Date:
Comments regarding the collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 should be received on or before January 16, 2008.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (
http://www.sec.gov/rules/final.shtml
);

• Send an e-mail to
rule-comments@sec.gov.
Please include File No. S7-11-07 on the subject line; or

• Use the Federal Rulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-07. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/final.shtml
). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Katherine Hsu or Raymond A. Be, Special Counsels in the Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to Rule 144,
1

Rule 145,
2

Rule 190,
3

Rule 701,
4

Rule 903,
5

and Form 144
6

under the Securities Act of 1933.
7

1
17 CFR 230.144.

2
17 CFR 230.145.

3
17 CFR 230.190.

4
17 CFR 230.701.

5
17 CFR 230.903.

6
17 CFR 239.144.

7
15 U.S.C. 77a
et seq.

Table of Contents

I. Background

II. Discussion of Final Amendments

A. Simplification of the Preliminary Note and Text of Rule 144

B. Amendments to Holding Periods for Restricted Securities

1. Six-Month Rule 144(d) Holding Period Requirement for Exchange Act Reporting Companies

2. Significant Reduction of Conditions Applicable to Non-Affiliates

3. Tolling Provision

C. Amendments to the Manner of Sale Requirements Applicable to Resales by Affiliates

D. Changes to Rule 144 Conditions Related to Resales of Debt Securities by Affiliates

1. Comments Received on Proposed Amendments Relating to Debt Securities

2. No Manner of Sale Requirements Regarding Resales of Debt Securities

3. Raising Volume Limitations for Debt Securities

E. Increase of the Thresholds that Trigger the Form 144 Filing Requirement for Affiliates

F. Codification of Several Staff Positions

1. Securities Acquired Under Section 4(6) of the Securities Act Are Considered “Restricted Securities'

2. Tacking of Holding Periods When a Company Reorganizes Into a Holding Company Structure

3. Tacking of Holding Periods for Conversions and Exchanges of Securities

4. Cashless Exercise of Options and Warrants

5. Aggregation of Pledged Securities

6. Treatment of Securities Issued by “Reporting and Non-Reporting Shell Companies”

7. Representations Required From Security Holders Relying on Exchange Act Rule 10b5-1(c)

G. Amendments to Rule 145

H. Conforming and Other Amendments

1. Regulation S Distribution Compliance Period for Category Three Issuers

2. Underlying Securities in Asset-Backed Securities Transactions

3. Securities Act Rule 701(g)(3)

III. Paperwork Reduction Act

A. Background

B. Summary of Amendments

C. Revised Burden Estimates

D. Solicitation of Comments

IV. Cost-Benefit Analysis

A. Background

B. Description of Amendments

C. Benefits

D. Costs

V. Promotion of Efficiency, Competition and Capital Formation

VI. Final Regulatory Flexibility Analysis

A. Reasons for, and Objectives of, the Amendments

B. Significant Issues Raised by Comments

C. Small Entities Subject to the Rule

D. Reporting, Recordkeeping and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VII. Statutory Basis and Text of Amendments

I. Background

The Securities Act of 1933 (“Securities Act”) requires registration of all offers and sales of securities in interstate commerce or by use of the U.S. mails, unless an exemption from the registration requirement is available.
8

Section 4(1) of the Securities Act provides such an exemption for transactions by any person other than an issuer, underwriter or dealer.
9

8
See 15 U.S.C. 77e.

9
15 U.S.C. 77d(1).

The definition of the term “underwriter” is key to the operation of the Section 4(1) exemption. Section 2(a)(11) of the Securities Act defines an

underwriter as “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.”
10

The Securities Act does not, however, provide specific criteria for determining when a person purchases securities “with a view to * * * the distribution” of those securities. In 1972, the Commission adopted Rule 144 to provide a safe harbor from this definition of “underwriter” to assist security holders in determining whether the Section 4(1) exemption is available for their resale of securities.
11

10
15 U.S.C. 77b(a)(11). Section 2(a)(11) states that the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer. Therefore, any person who purchased securities from an affiliate of an issuer is an underwriter under Section 2(a)(11) if that person purchased with a view to the distribution of the securities.

11
Release No. 33-5223 (Jan. 11, 1972) [37 FR 591].

Rule 144 regulates the resale of two categories of securities—restricted securities and control securities. Restricted securities are securities acquired pursuant to one of the transactions listed in Rule 144(a)(3).
12

Although it is not a term defined in Rule 144, “control securities” is used commonly to refer to securities held by an affiliate of the issuer,
13

regardless of how the affiliate acquired the securities.
14

Therefore, if an affiliate acquires securities in a transaction that is listed in Rule 144(a)(3), those securities are both restricted securities and control securities. A person selling restricted securities, or a person selling restricted or other securities on behalf of the account of an affiliate, who satisfies all of Rule 144's applicable conditions in connection with the transaction, is deemed not to be an “underwriter,” as defined in Section 2(a)(11) of the Securities Act, and therefore may rely on the Section 4(1) exemption for the resale of the securities.

12
17 CFR 230.144(a)(3).

13
An affiliate of the 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. See 17 CFR 230.144(a)(1).

14
See,
e.g.
, Release No. 33-7391 (Feb. 20, 1997) [62 FR 9246].

Since its adoption, we have reviewed and revised Rule 144 several times. We last made major changes in 1997 (“1997 amendments”).
15

At that time, we shortened the required holding periods for restricted securities.
16

Before the 1997 amendments, security holders could resell restricted securities under Rule 144, subject to limitation, after two years, and persons who were not affiliates and had not been affiliates during the prior three months, could resell restricted securities without limitation after three years. The 1997 amendments changed these two-year and three-year periods to one-year and two-year periods, respectively.

15
See Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242] (“the 1997 Adopting Release”).

16
We shortened the holding period requirements in paragraphs (d) and (k) of Rule 144.

On the same day that we adopted those changes, we also proposed and solicited comment on several possible additional changes to Rule 144, Rule 145 and Form 144, including reducing the holding period further (“1997 Proposing Release” and “1997 proposals”).
17

We received 38 comment letters on those proposed changes. While some commenters supported further shortening the holding periods, others suggested that we monitor the results of the 1997 amendments before making further changes. We did not take further action to adopt the 1997 proposals.

17
See the 1997 Proposing Release. In the 1997 Proposing Release, we proposed to (1) revise the Preliminary Note to Rule 144 to restate the intent and effect of the rule, (2) add a bright-line test to the Rule 144 definition of “affiliate,” (3) eliminate the Rule 144 manner of sale requirements, (4) increase the Form 144 filing thresholds, (5) include in the definition of “restricted securities” securities issued pursuant to the Securities Act Section 4(6) exemption, (6) clarify the holding period determination for securities acquired in certain exchanges with the issuer and in holding company formations, (7) streamline and simplify several Rule 144 provisions, and (8) eliminate the presumptive underwriter provisions of Rule 145. We also solicited comment on (1) further revisions to the Rule 144 holding periods, (2) elimination of the trading volume tests to determine the amount of securities that can be resold under Rule 144, and (3) several possible regulatory approaches with respect to certain hedging activities.

Rule 144 states that a selling security holder shall be deemed not to be engaged in a distribution of securities, and therefore not an underwriter, with respect to such securities, thus making available the Section 4(1) exemption from registration, if the resale satisfies specified conditions. The conditions include the following:

• There must be adequate current public information available about the issuer;
18

18
17 CFR 230.144(c).

• If the securities being sold are restricted securities, the security holder must have held the security for a specified holding period;
19

19
17 CFR 230.144(d).

• The resale must be within specified sales volume limitations;
20

20
17 CFR 230.144(e).

• The resale must comply with the manner of sale requirements;
21

and

21
17 CFR 230.144(f) and (g).

• The selling security holder must file Form 144 if the amount of securities being sold exceeds specified thresholds.
22

22
17 CFR 230.144(h).

Rule 144, as it existed before today's amendments, permitted a non-affiliate to publicly resell restricted securities without being subject to the above limitations if the securities had been held for two years or more, provided that the security holder was not, and, for the three months prior to the sale, had not been, an affiliate of the issuer.
23

23
This provision was previously located in Rule 144(k).

On July 5, 2007, we again proposed to amend several aspects of Rule 144 and Rule 145, including by further shortening the holding periods (the “2007 Proposing Release”).
24

We proposed to shorten the holding period requirement in Rule 144(d) for restricted securities of issuers that are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)
25

to six months. Restricted securities of issuers that are not subject to Exchange Act reporting requirements would continue to be subject to a one-year holding period under Rule 144(d). We also proposed to relieve non-affiliates of reporting issuers from having to comply with all conditions in Rule 144, except the current public information requirement, after a six-month holding period. Non-affiliates of non-reporting issuers would be allowed to resell their securities freely after a one-year holding period. In addition, we proposed to:

• Simplify the Preliminary Note to Rule 144 and text of Rule 144;

24
Release No. 33-8813 (June 22, 2007) [72 FR 36822] (Jul. 5, 2007).

25
15 U.S.C. 78a
et seq.

• Toll the holding period during the time that security holders engage in certain hedging transactions;

• Eliminate the “manner of sale” requirements with respect to the resale of debt securities;

• Increase the thresholds triggering the requirement to file Form 144; and

• Codify several staff positions relating to Rule 144.

We also solicited comment on amending the Form 144 filing deadline to coincide with the deadline for filing a Form 4
26

under Section 16
27

of the Exchange Act and permitting persons who are subject to Section 16 to meet their Form 144 filing requirement by

filing a Form 4.
28

Finally, we proposed to eliminate the presumptive underwriter provision in Securities Act Rule 145, except for transactions involving a shell company, and to harmonize the resale provisions in Rule 145 with the Rule 144 provisions applicable to resales of securities of shell companies.

26
17 CFR 249.104.

27
15 U.S.C. 78p.

28
Section 16 applies to every person who is the beneficial owner of more than 10% of any class of equity securities registered under Section 12 of the Exchange Act, and each officer and director (collectively, “reporting persons” or “insiders”) of the issuer of such security. Section 16(a) of the Exchange Act generally requires reporting persons to report changes in their beneficial ownership of all equity securities of the issuer on Form 4 before the end of the second business day following the day on which the transaction that caused the change in beneficial ownership was executed.

We received 32 comment letters from 30 commenters on the proposals in the 2007 Proposing Release.
29

A majority of the commenters expressed support for the proposals in general.
30

Several of these commenters expressed support for the proposed amendments to shorten the holding period requirement in Rule 144 for both affiliates and non-affiliates of Exchange Act reporting issuers.
31

Two commenters opposed shortening the holding period, as proposed.
32

29
The comment letters on the 2007 Proposing Release are available on the Commission's public Web site at
http://www.sec.gov/comments/s7-11-07/s71107.shtml.

30
See,
e.g.
, comment letters on the 2007 Proposing Release from Jesse Brill (dated Aug. 1, 2007) (“Brill 1”); Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”); Feldman Weinstein and Smith LLP (“Feldman”); Fried, Frank, Harris, Shriver, and Jacobsen LLP (“Fried Frank”); Barry Gleicher (“Gleicher”); Krieger & Prager, LLP (“Krieger”); U.S. Securities Lawyers in London (“London Forum”); Parsons/Burnett LLP (“Parsons”); Pink Sheets, LLC (“Pink Sheets”); Richardson Patel LLP (“Richardson Patel”); Roth Capital Partners (“Roth”); Society of Corporate Secretaries & Governance Professionals (“SCSGP”); Sichenzia Ross Friedman Ference LLP (“Sichenzia”); Sullivan & Cromwell LLP (“Sullivan”); Peter J. Weisman (“Weisman”); and Williams Securities Law (“Williams”); and a joint letter from the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association, Inc. and Management Funds Association (“Financial Associations”).

31
See comment letters on the 2007 Proposing Release from the Committee on Federal Regulation of Securities of the American Bar Association (“ABA”); Feldman; Financial Associations; Fried Frank; London Forum; Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and Williams.

32
See comment letters on the 2007 Proposing Release from the North American Securities Administrators Association, Inc. (“NASAA”) and Marc I. Steinberg (“Steinberg”).

Some commenters expressed opposition to the proposed reintroduction of a provision that would toll, or suspend, for up to six months, the holding period during any period that a security holder engages in hedging activities with respect to any equity securities of the same class as the restricted securities or any securities convertible into that class (or, in the case of nonconvertible debt, with respect to any nonconvertible debt securities).
33

The commenters thought that the tolling provision could have a negative effect on capital raising transactions. These commenters provided several recommendations on how we should modify the tolling provision, if we decide to adopt it. We received general support for the other aspects of the proposed amendments, including the proposals relating to Form 144, the elimination of the manner of sale requirements for debt securities and the codification of several staff interpretations.

33
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Feldman; Financial Associations; Richardson Patel; Sichenzia; and Weisman.

II. Discussion of Final Amendments

A. Simplification of the Preliminary Note and Text of Rule 144

In the 2007 Proposing Release, we noted that the current Preliminary Note is complex and may be confusing to some security holders. We proposed amendments to simplify and clarify the Preliminary Note to Rule 144 and to incorporate plain English principles. The proposed amendments to the Preliminary Note were not intended to alter the substantive operation of the rule. In addition, we proposed changes throughout the rule to make the rule less complex and easier to read.

We received a few comments on the proposed changes to simplify Rule 144 and the Preliminary Note. One commenter believed that the Preliminary Note to Rule 144 is no longer necessary, because the purpose and meaning of the rule are well-understood.
34

Some commenters recommended that we further explain how Rule 144 can be used for the resale of control securities.
35

34
See comment letter on the 2007 Proposing Release from ABA.

35
See comment letters on the 2007 Proposing Release from ABA; Bulldog Investors; and Sutherland Asbill & Brennan LLP (“Sutherland”).

We are adopting the amendments to the Preliminary Note with some modification from the proposed version. The revised Preliminary Note retains an explanation of the relationship among the exemption in Section 4(1) of the Securities Act, the Section 2(a)(11) definition of “underwriter” and the Rule 144 safe harbor. Consistent with the proposal, the revised Preliminary Note also clarifies that any person who sells restricted securities, and any person who sells restricted securities or other securities on behalf of an affiliate, shall be deemed not to be engaged in a distribution of such securities and therefore shall be deemed not to be an underwriter with respect to such securities if the sale in question is made in accordance with all the applicable provisions of the rule. The revised Preliminary Note further states that, although Rule 144 provides a safe harbor for establishing the availability of the Section 4(1) exemption, it is not the exclusive means for reselling restricted and control securities. Therefore, Rule 144 does not eliminate or otherwise affect the availability of any other exemption for resales.
36

Consistent with a statement that was included in the original Rule 144 adopting release,
37

we are adding a statement to the Preliminary Note that the Rule 144 safe harbor is not available with respect to any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.
38

We also are adopting plain English changes throughout the rule text substantially as proposed.

36
We are moving the statements indicating that Rule 144 is a non-exclusive safe harbor from paragraph (j) of the rule, as it existed prior to the amendments, to the Preliminary Note.

37
Release No. 33-5223. In the original release adopting Rule 144, we stated:

In view of the objectives and policies underlying the Act, the rule shall not be available to any individual or entity with respect to any transaction which, although in technical compliance with the provisions of the rule, is part of a plan by such individual or entity to distribute or redistribute securities to the public. In such case, registration is required.

38
Similar language can also be found in other rules such as in the Preliminary Note to Securities Act Rule 144A [17 CFR 230.144A].

B. Amendments to Holding Periods for Restricted Securities

1. Six-Month Rule 144(d) Holding Period Requirement for Exchange Act Reporting Companies

As stated above, in 1997, we reduced the Rule 144 holding periods for restricted securities for both affiliates and non-affiliates.
39

Before the 1997 amendments, security holders could sell limited amounts of restricted securities after holding those securities for two years if they satisfied all other conditions imposed by Rule 144.
40

Under Rule 144(k), non-affiliates could sell restricted securities without being subject to any of the conditions in Rule 144 after holding their securities for three years. The 1997 amendments to

Rule 144 reduced the two-year Rule 144(d) holding period to one year and amended the three-year Rule 144(k) holding period to two years.

39
See the 1997 Adopting Release.

40
These other conditions included the availability of current public information, the volume of sale limitations, the manner of sale requirements, and the filing of Form 144. See 17 CFR 230.144(c), (e), (f) and (h).

In the 1997 Proposing Release, we solicited comment on whether the Rule 144(d) holding period should be further reduced for both affiliates and non-affiliates, and whether restrictions applicable to sales by non-affiliates also should be reduced. We received numerous comments on this issue. Twelve commenters recommended that we further reduce the holding period to six months.
41

Two other commenters thought that we should maintain the holding periods that we had just recently adopted.
42

Eight commenters recommended that we gain more experience with the new holding periods before proposing further amendments to those holding periods.
43

41
See comment letters on the 1997 Proposing Release from American Society of Corporate Secretaries (“ASCS”); Association for Investment Management & Research (“AIMR”); Association of the City Bar of New York (“NY City Bar”); Baltimore Gas & Electric (“BG&E”); Investment Company Institute (“ICI”); Charles Lilienthal (“Lilienthal”); Loeb &Loeb LLP; New York State Bar Association (“NY Bar”); Schwartz Investments, LLC (“Schwartz Investments”); Sullivan; Testa, Hurwitz & Thibeault, LLP (“Testa Hurwitz”); and Willkie, Farr & Gallagher LLP (“Willkie Farr”). The comment letters on the 1997 Proposing Release are available on the Commission's Web site at
http://www.sec.gov/rules/proposed/s7797.shtml
or in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549. Interested persons should refer to File No. S7-07-97.

42
See comment letters on the 1997 Proposing Release from Argent Securities, Inc. (“Argent”) and The Corporate Counsel (“Corporate Counsel”).

43
See comment letters on the 1997 Proposing Release from ABA; joint letter from Goldman Sachs & Co., JP Morgan Securities, Inc., Morgan Stanley & Co., Inc., and Salomon Brothers Inc. (“Four Brokers”); Lehman Brothers Inc. (“Lehman Brothers”); Merrill Lynch & Co., Inc. (“Merrill Lynch”); Morgan Stanley & Co., Inc. (“Morgan Stanley”); Regional Investment Bankers Association (“Regional Bankers”); Securities Industry Association (“SIA”); and Smith Barney Inc. (“Smith Barney”).

In the 2007 Proposing Release, we again proposed to shorten the Rule 144(d) holding period for restricted securities held by affiliates and non-affiliates.
44

The proposal would have permitted both affiliates and non-affiliates to publicly sell restricted securities of Exchange Act reporting issuers
45

after holding the securities for six months, subject to any other applicable condition of Rule 144, if they had not engaged in hedging transactions with respect to the securities. Because of our concern that the market does not have sufficient information and safeguards with respect to non-reporting issuers, we proposed to retain the one-year holding period for restricted securities of issuers that are not subject to Exchange Act Section 13(a) or Section 15(d) reporting obligations for both affiliates and non-affiliates.

44
See the 2007 Proposing Release at Section II.B.2.a.

45
Under the 2007 proposals, the six-month holding period would apply to securities of an issuer that is, and has been for at least 90 days before the sale, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.

Several commenters supported the proposal to shorten the holding period to six months for securities of reporting issuers.
46

These commenters noted that the shortened holding period would increase liquidity for issuers, make capital investment more attractive, and decrease costs of capital for smaller companies without sacrificing investor protection.
47

In this regard, one commenter noted that today's markets now function at an accelerated pace, and technology, particularly the Internet, has caused the markets to become more efficient.
48

Two commenters advocated an even shorter holding period requirement than the proposed six-month period, with one commenter advocating a four-month holding period and the other a three-month holding period.
49

Two commenters opposed shortening the holding period requirement under Rule 144, as proposed.
50

46
See comment letters on the 2007 Proposing Release from ABA; Feldman; Financial Associations; Fried Frank; London Forum; Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and Williams.

47
See comment letters on the 2007 Proposing Release from Financial Associations; Pink Sheets; Richardson Patel; and Roth.

48
See comment letter on the 2007 Proposing Release from ABA. See also letter to John W. White, Director, SEC Division of Corporation Finance, from Keith F. Higgins, Chair, Committee on Federal Regulation of Securities, ABA Section of Business Law (Mar. 22, 2007) (“the March 2007 ABA Letter”), available at
http://www.sec.gov/comments/s7-11-07/s71107.shtml
.

49
See comment letters on the 2007 Proposing Release from Feldman and Weisman.

50
See comment letters on the 2007 Proposing Release from NASAA and Steinberg.

The purpose of Rule 144 is to provide objective criteria for determining that the person selling securities to the public has not acquired the securities from the issuer for distribution. A holding period is one criterion established to demonstrate that the selling security holder did not acquire the securities to be sold under Rule 144 with distributive intent. We do not want the holding period to be longer than necessary or impose any unnecessary costs or restrictions on capital formation. After observing the operation of Rule 144 since the 1997 amendments, we believe that a six-month holding period for securities of reporting issuers provides a reasonable indication that an investor has assumed the economic risk of investment in the securities to be resold under Rule 144. Therefore, we are adopting a six-month holding period for reporting companies, as proposed.
51

Most commenters agreed that shortening the holding period to six months for restricted securities of reporting issuers will increase the liquidity of privately sold securities and decrease the cost of capital for reporting issuers, while still being consistent with investor protection.
52

By reducing the holding period for restricted securities, these amendments are intended to help companies to raise capital more easily and less expensively. For example, by making private offerings more attractive, the amendments may allow some companies to avoid certain types of costly financing structures involving the issuance of extremely dilutive convertible securities. Many commenters supported the proposal to maintain the existing one-year holding period for restricted securities of non-reporting issuers.
53

51
See amendments to Rule 144(d). The amendments do not change the Rule 144(d) requirement that, if the acquiror takes the securities by purchase, the holding period will not commence until the full purchase price is paid.

52
See Section VI. of this release.

53
See comment letters on the 2007 Proposing Release from ABA; Brill 1; Financial Associations; Gleicher; Weisman; and Williams.

Under the amendments that we are adopting, the six-month holding period requirement will apply to the securities of an issuer that has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days before the Rule 144 sale.
54

Restricted securities of a “non-reporting issuer” will continue to be subject to a one-year holding period requirement.
55

A non-reporting issuer is one that is not, or has not been for a period of at least 90 days before the Rule 144 sale, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.
56

54
See new Rule 144(d)(1)(i). We also are making conforming amendments to paragraphs (e)(3)(ii), (e)(3)(iii) and (e)(3)(iv) of Rule 144.

55
However, non-affiliates of non-reporting companies will no longer be subject to any other resale restrictions after meeting the one-year holding period. See Section II.B.3 below.

56
See new Rule 144(d)(1)(ii).

We believe that different holding periods for reporting and non-reporting issuers are appropriate given that reporting issuers have an obligation to file periodic reports with updated financial information (including audited financial information in annual filings) that are publicly available on EDGAR, the Commission's electronic filing system. Although non-reporting issuers

must make some information publicly available before resales can be made under Rule 144, this information typically is much more limited in scope than information included in Exchange Act reports, is not required to include audited financial information, and is not publicly available via EDGAR.
57

For these reasons, we believe that continuing to require security holders of non-reporting issuers to hold their securities for one year is not unduly burdensome and is consistent with investor protection.

57
See 17 CFR 240.15c2-11.

2. Significant Reduction of Conditions Applicable to Non-Affiliates

Before adoption of these amendments, both non-affiliates and affiliates were subject to all other applicable conditions of Rule 144, in addition to the Rule 144(d) holding period requirement, including the condition that current information about the issuer of the securities be publicly available, the limitations on the amount of securities that may be sold in any three-month period, the manner of sale requirements and the Form 144 notice requirement. However, pursuant to paragraph (k) of Rule 144 as it existed prior to the amendments that we are adopting, a non-affiliate of the issuer at the time of the Rule 144 sale who had not been an affiliate during the three months prior to the sale, could sell the securities after holding them for two years without complying with these other conditions.

In the 2007 Proposing Release, we proposed to permit non-affiliates to resell their restricted securities freely after meeting the applicable holding period requirement (i.e., six months with respect to a reporting issuer and one year with respect to a non-reporting issuer), except that non-affiliates of reporting issuers still would be subject to the current public information requirement in Rule 144(c) for an additional six months after the end of the initial six-month holding period.

In general, commenters supported the proposal to reduce substantially the requirements for the resale of restricted securities by non-affiliates under Rule 144.
58

Noting the importance of the current public information condition, two commenters expressed support for the proposed retention of that requirement for the resales of restricted securities by non-affiliates occurring between six months and one year after acquisition of the securities.
59

Some commenters expressed support for removal of the manner of sale requirements and the Form 144 notice requirement,
60

while a few objected to removal of those requirements.
61

The commenters objecting to the removal of those requirements expressed concern about the transparency of Rule 144 transactions and the potential increase in violations of the holding period requirement if the manner of sale requirements and the Form 144 notice requirement were eliminated.
62

The two commenters that opposed shortening the Rule 144(d) holding period also opposed the proposals to permit non-affiliates to resell without being subject to any other condition (except the public information requirement, with respect to resales of securities of reporting companies) after they meet the holding period.
63

58
See,
e.g.
, comment letters on the 2007 Proposing Release from Brill 1; Cleary Gottlieb; Pink Sheets; and Weisman.

59
See comment letters on the 2007 Proposing Release from ABA and Weisman.

60
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA; BAIS; Cleary Gottlieb; Fried Frank; and SCSGP.

61
See comment letters on the 2007 Proposing Release from Argus Vickers Stock Research Corp. (“Argus”); Brill 1; and The Washington Service on the Form 144 requirement (“WS 2”).

62
See comment letters on the 2007 Proposing Release from Brill 1 and WS 2.

63
See comment letters on the 2007 Proposing Release from NASAA and Steinberg.

We are adopting the amendments for the sale of restricted securities by non-affiliates after the holding period, as proposed.
64

Under the amendments, after the applicable holding period requirement is met, the resale of restricted securities by a non-affiliate under Rule 144 will no longer be subject to any other conditions of Rule 144 except that, with regard to the resale of securities of a reporting issuer, the current public information requirement in Rule 144(c) will apply for an additional six months after the six-month holding period requirement is met.
65

Therefore, a non-affiliate will no longer be subject to the Rule 144 conditions relating to volume limitations, manner of sale requirements, and filing Form 144.
66

64
Under the amendments, paragraph (k) of Rule 144 has been removed. The conditions that non-affiliates are required to meet for the sale of their securities under Rule 144 are now contained in paragraph (b)(1) of the rule.

65
Some commenters requested us to state that the Commission would not object if the restricted securities legend were removed from securities held by a non-affiliate, after all the applicable Rule 144 conditions to resale have been met. See comment letters on the 2007 Proposing Release from Cleary Gottlieb; Financial Associations; and Weisman. In the past, the staff in the Division of Corporation Finance has expressed the view that “it is not inappropriate for issuers to remove restrictive legends from securities that may be resold in reliance on Rule 144(k).” See,
e.g., Toth Aluminum Corporation
(Oct. 31, 1988). Under the amendments that we are adopting, we do not object if issuers remove restrictive legends from securities held by non-affiliates after all of the applicable conditions in Rule 144 are satisfied. However, the removal of a legend is a matter solely in the discretion of the issuer of the securities. Disputes about the removal of legends are governed by state law or contractual agreements, rather than federal law.

66
Although the Rule 144(e) volume limitations will no longer apply to resales of restricted securities by non-affiliates as a result of the amendments, an affiliate pledgor, donor, or trust settlor will be required to aggregate the amount of securities sold for the account of a pledgee, donee or trust, as applicable, even when there is no concerted action, in accordance with Rule 144(e)(3)(ii), (iii), and (iv) in order to determine the amount of securities that is permitted to be sold under Rule 144.

We believe that the complexity of resale restrictions may inhibit sales by, and imposes costs on, non-affiliates. Because Rule 144 is relied upon by many individuals to resell their restricted securities, we believe that it is particularly helpful to streamline and reduce the complexity of the rule as much as possible while retaining its integrity. We continue to believe that retaining the current public information requirement with regard to resales of restricted securities of reporting issuers for up to one year after the acquisition of the securities is important to help provide the market with adequate information regarding the issuer of the securities. In addition, we generally believe that most abuses in sales of unregistered securities involve affiliates of issuers
67

and securities of shell companies. As discussed below, we are codifying the staff's current interpretive position that Rule 144 cannot be relied upon for the resale of the securities of reporting and non-reporting shell companies.
68

67
Pink Sheets also noted in its letter that most of the abuses in transactions involving unregistered securities involve sales and purchases by affiliates of the issuers.

68
See Section II.E.6 of this release.

The final conditions applicable to the resale under Rule 144 of restricted securities held by affiliates and non-affiliates of the issuer can be summarized as follows:

Affiliate or person selling on behalf of an affiliate
Non-affiliate (and has not been an affiliate during the prior three months)

Restricted Securities of Reporting Issuers

During six-month holding period
—no resales under Rule 144 permitted

During six-month holding period
—no resales under Rule 144 permitted.

After six-month holding period
—may resell in accordance with all Rule 144 requirements including:
• Current public information,
• Volume limitations,
• Manner of sale requirements for equity securities, and
• Filing of Form 144

After six-month holding period but before one year
—unlimited public resales under Rule 144 except that the current public information requirement still applies.

After one-year holding period
—unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

Restricted Securities of Non-Reporting Issuers

During one-year holding period
—no resales under Rule 144 permitted

During one-year holding period
—no resales under Rule 144 permitted.

After one-year holding period
—may resell in accordance with all Rule 144 requirements including:
• Current public information,
• Volume limitations,
• Manner of sale requirements for equity securities, and
• Filing of Form 144

After one-year holding period
—unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

3. Tolling Provision

In 1990, we eliminated a Rule 144 provision that tolled, or suspended, the holding period of a security holder maintaining a short position in, or any put or other option to dispose of, securities equivalent to the restricted securities owned by the security holder.
69

We eliminated this provision in conjunction with an amendment to broaden a security holder's ability to tack the holding periods of prior owners to the security holder's own holding period.
70

69
See Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933].

70
“Tacking” the holding period is the ability of the security holder to include, under certain circumstances, the period that securities were held by a previous owner as part of his or her own holding period for the purposes of meeting the holding period requirement in Rule 144(d). Further discussion about tacking appears in Section II.E.2 of this release.

We previously have expressed concern regarding the effect of hedging activities designed to shift the economic risk of investment away from the security holder with respect to restricted securities.
71

In the 1997 Proposing Release, we solicited comment on several alternatives designed to address these concerns.
72

Seven commenters recommended that we adopt measures to eliminate or restrict hedging activities during the holding period.
73

Six commenters recommended maintaining the status quo.
74

Six other commenters suggested that we adopt a safe harbor for certain hedging activities that would be deemed permissible under Rule 144.
75

71
For a discussion on hedging arrangements in prior releases, see Section IV.B of the 1997 Proposing Release and Section II.A of Release No. 33-7187 (June 27, 1995) [60 FR 35645].

72
See the 1997 Proposing Release. In that release, we proposed five different alternatives: (1) make the Rule 144 safe harbor unavailable to persons who hedge during the restricted period; (2) independently of Rule 144, promulgate a rule that would define a sale for purposes of Section 5 to include specified hedging transactions; (3) adopt a shorter holding period during which hedging could not occur without losing the safe harbor; (4) reintroduce a tolling provision in Rule 144 similar to the provision that was included prior to 1990; or (5) maintain the status quo with no specific prohibition against hedging.

73
See comment letters on the 1997 Proposing Release from ABA; AIMR; Argent; ASCS; Constantine Katsoris; Corporate Counsel; and Schwartz Investments.

74
See comment letters on the 1997 Proposing Release from Bear, Stearns & Co., Inc.; BG&E; Intel Corporation (“Intel”); PaineWebber Incorporated; Wilkie Farr; and XXI Securities.

75
See comment letters on the 1997 Proposing Release from Four Brokers; NY Bar; SIA; Merrill Lynch; Citibank; and Lehman Brothers.

In the 2007 Proposing Release, we acknowledged a concern about the effect of hedging activities in connection with the adoption of a six-month holding period for securities of reporting issuers. We noted that, when we eliminated the tolling provision in 1990, the Rule 144 holding periods were longer.
76

We also expressed the view that the proposal to shorten the holding period to six months could make the entry into such hedging arrangements significantly easier and less costly because these arrangements would cover a much shorter period.
77

We therefore proposed to reintroduce a Rule 144 tolling provision that would have suspended the holding period for restricted securities of Exchange Act reporting issuers while a security holder engaged in certain hedging transactions.
78

However, we proposed that any suspension due to hedging would not have caused, under any circumstances, the holding period to extend beyond one year.

76
At that time, Rule 144 provided for a two-year holding period before a security holder could sell limited amounts of restricted securities, and a three-year period before a non-affiliate security holder could sell an unlimited amount of the securities.

77
See the 2007 Proposing Release at Section II.B.2.b.

78
We proposed to exclude from the holding period any period in which the security holder had a short position or had entered into a “put equivalent position,” as defined by Exchange Act Rule 16a-1(h) [17 CFR 240.16a-1(h)], with respect to the same class of securities (or, in the case of nonconvertible debt, with respect to any nonconvertible debt securities of the same issuer).

Because the proposed tolling provision also would have worked in conjunction with the Rule 144 provisions that permit tacking of holding periods, a selling security holder would have been required to determine whether a previous owner of the securities had engaged in hedging activities with respect to the securities, if the selling security holder wished to tack the previous owner's holding period to the holding period of the selling security holder. The proposed provision would have tolled the holding period during any period in which the previous owner held a short position or put equivalent position with respect to the securities, however, there would have been no tolling of the previous owner's holding period if the security holder for whose account the securities were to be sold reasonably believed that no such short or put equivalent position was held by the previous owner.

In connection with the proposed tolling provision, we also proposed other related changes to Rule 144. First, we proposed to require that information be provided in Form 144 regarding any short or put equivalent position held with respect to the securities prior to the resale of the securities. The second proposal related to the manner of sale requirements in paragraphs (f) and (g) of Rule 144.
79

79
We proposed to amend Note (ii) to Rule 144(g)(3) [17 CFR 230.144(g)(3)] to supplement the

reasonable inquiry requirement by requiring a broker to inquire into the existence and character of any short position or put equivalent position with regard to the securities held by the person for whose account the securities are to be sold, if the securities have been held for less than one year, whether such person has made inquiries into the existence and character of any short position or put equivalent position held by the previous owner of the securities, and the results of such person's inquiries.

Several commenters objected to the proposed reintroduction of the tolling provision and suggested modifications to the proposed provision, if the Commission chose to adopt it.
80

Commenters objecting to the proposed tolling provision provided the following reasons, among others, why the Commission should not adopt the proposed tolling provision:

80
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Feldman; Financial Associations; Richardson Patel; Sichenzia; and Weisman.

• Hedging transactions involve costs and risks for the security holder and do not entirely transfer risk of the economic investment of the securities;
81

81
See,
e.g.
, comment letters on the 2007 Proposing Release from Feldman; Financial Associations; and Richardson Patel.

• Any concern that the Commission has about hedging activities immediately after the acquisition is outweighed by the belief that hedging activities can enhance private placements as a means of capital formation and should be allowed to continue because they do not raise substantial concerns about unregistered distributions;
82

82
See comment letter on the 2007 Proposing Release from ABA.

• In the current environment, a security holder may hold long and short positions across multiple trading desks and complex financial institutions and positions may change daily or even intra-day. The task of tracing and processing such positions would necessitate the development of costly custom software and hardware systems. Consequently, security holders might ultimately choose to hold the securities for the default one-year period rather than implement these costly systems, thereby frustrating the intent of the Commission in adopting the six-month holding period;
83

83
See,
e.g.
, comment letter on the 2007 Proposing Release from Financial Associations.

• There is a natural ceiling on the amount of hedging activity in restricted securities because the supply of unrestricted securities is limited;
84

84
See comment letter on the 2007 Proposing Release from ABA.

• The Commission has adequate enforcement tools to address abuses in hedging with respect to restricted securities;
85

and

85
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA and Financial Associations.

• The Commission's reasoning for eliminating the tolling provision in 1990 was that a single holding period running from the date of purchase from the issuer, or an affiliate of the issuer, is sufficient to prevent unregistered distributions to the public.
86

This reasoning still applies, even if the holding period is reduced to six months for securities of reporting issuers.
87

86
See Release No. 33-6862.

87
See comment letter on the 2007 Proposing Release from Financial Associations.

Some commenters reasoned that if the Commission detects an increase in abuse after implementation of the revised holding period, as proposed, the Commission could modify its treatment of hedging activities.
88

This would be consistent with the approaches taken by the Commission when it first adopted Rule 144, and in 1997 when commenters recommended that the Commission gain more experience with the shortened holding periods before making additional revisions.
89

88
See,
e.g.
, comment letters on the 2007 Proposing Release from Cleary Gottlieb; Financial Associations; and Sichenzia.

89
See Release No. 33-5223 and Section I of this release.

After considering the comments, we are not adopting the proposed tolling provision and related amendments. We note, in particular, the comments asserting that, in the current environment, the tolling provision would unduly complicate Rule 144 and could require security holders or brokers to incur significant costs to monitor hedging positions for purposes of determining whether they have met the holding period requirement. This would frustrate our primary objectives to streamline Rule 144 and reduce the costs of capital for issuers. We will revisit the issue if we observe abuse relating to the hedging activities of holders of restricted securities.
90

90
The Commission's staff has previously stated that, with respect to short sales in reliance on the safe harbor of Rule 144 where the borrower closes out using the restricted securities, all the conditions of Rule 144 must be met at the time of the short sale. See Questions 80 through 82 of Release No. 33-6099 (Aug. 2, 1979) [44 FR 46752, 46765]. In the Commission's view, the term “sale” under the Securities Act includes contract of sale. See Release No. 33-8591 (July 19, 2005) [70 FR 44722, 44765] and Release No. 34-56206 (August 6, 2007) [72 FR 45094]. The Commission has previously indicated that, in a short sale, the sale of securities occurs at the time the short position is established, rather than when shares are delivered to close out that short position, for purposes of Section 5 of the Securities Act. See,
e.g.
, Questions 3 and 5 of Release No. 33-8107 (June 21, 2002) [67 FR 43234] and Release No. 34-56206 n. 46 (Aug. 6, 2007) [72 FR 45094, 45096].

C. Amendments to the Manner of Sale Requirements Applicable to Resales by Affiliates

Before today's amendments, the manner of sale requirements in Rule 144(f) required securities to be sold in “brokers' transactions”
91

or in transactions directly with a “market maker,” as that term is defined in Section 3(a)(38) of the Exchange Act.
92

Additionally, the rule prohibits a selling security holder from: (1) Soliciting or arranging for the solicitation of orders to buy the securities in anticipation of, or in connection with, the Rule 144 transaction; or (2) making 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.

91
Rule 144(g) defines the term for purposes of Rule 144.

92
15 U.S.C. 78c(a)(38).

In the 1997 Proposing Release, we proposed to eliminate the manner of sale requirements for the sale of both equity and debt securities alike, reasoning that the manner of sale requirements are not necessary to satisfy the purposes of Rule 144 and limit the liquidity of the security.
93

Some commenters opposed this proposal, asserting that brokers help ensure that selling security holders are complying with the applicable Rule 144 conditions to resale.
94

As discussed below, although we proposed to eliminate the manner of sale requirements only for debt securities and not equity securities in the 2007 Proposing Release, we requested comment on whether it would be appropriate to eliminate the manner of sale requirements for the sale of equity securities as well.

93
See Section III.C of the 1997 Proposing Release.

94
See comment letters on the 1997 Proposing Release from Corporate Counsel; Matthew Crain; Katsoris; Merrill Lynch; Regional Bankers; SIA; and Smith Barney.

The comments were mixed on this point. One commenter strongly discouraged the elimination of the manner of sale requirements for equity securities,
95

while another supported such a change.
96

One commenter did not object to retaining the manner of sale requirements for resales of equity securities of affiliates, on the grounds that affiliates generally find the assistance of a broker useful in navigating compliance with Rule 144 and thus brokers serve a useful function

that is not unduly burdensome.
97

Instead of completely eliminating the manner of sale requirements, some commenters requested that we consider expanding the methods to sell the securities permitted by the manner of sale requirements.
98

For example, two commenters discussed amending the requirement to permit sales through alternative trading systems such as electronic venues where the broker's identity is anonymous prior to trade execution.
99

95
See comment letter on the 2007 Proposing Release from Barron.

96
See comment letter on the 2007 Proposing Release from Sullivan.

97
See comment letter on the 2007 Proposing Release from ABA.

98
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; and Sullivan.

99
See comment letters on the 2007 Proposing Release from ABA and Sullivan.

In response to comments, we are adopting amendments to the manner of sale requirements that apply to resales of equity securities of affiliates.
100

We last made substantive amendments to the manner of sale requirements in 1978.
101

Since then, the growth of technological and other developments directed at meeting the investment needs of the public and reducing the cost of capital for companies have led us to refine the rules governing the trading of securities.
102

We believe that it is appropriate now to adopt two amendments to the manner of sale requirements so that the restrictions better reflect current trading practices and venues.

100
Only affiliates are required to comply with the manner of sale requirements under the amendments that we are adopting.

101
See Release No. 33-5979 (Sept. 19, 1978) [43 FR 43709] (Sept. 27, 1978) (the Commission amended Rule 144(f) to permit sales under the rule to be made directly to a market maker in lieu of selling through a broker).

102
For example, in the second quarter of 2007, alternative trading systems handled approximately $1.3 trillion in volume of matched orders. (These amounts do not include orders that flow through a system, but are ultimately executed elsewhere). We obtained this data from information provided in Form ATS-R Quarterly Reports.

First, we are adopting a change to Rule 144(f) to permit the resale of securities through riskless principal transactions in which trades are executed at the same price, exclusive of any explicitly disclosed markup or markdown, commission equivalent, or other fee, and the rules of a self-regulatory organization permit the transaction to be reported as riskless.
103

We believe that these riskless principal transactions are equivalent to agency trades.
104

As with agency trades, in order to qualify as a permissible manner of sale under the revised rule, the broker or dealer conducting the riskless principal transaction must meet all the requirements of a brokers' transaction, as defined by Rule 144(g), except the requirement that the 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. The broker or dealer must neither solicit nor arrange for the solicitation of customers' orders to buy the securities in anticipation of or, in connection with, the transaction, must receive no more than the usual and customary markup or markdown, commission equivalent, or other fee, and must conduct a reasonable inquiry regarding the underwriter status of the person for whose account the securities are to be sold.

103
See new Rule 144(f)(1)(iii). A “riskless principal transaction” is defined as a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell. See new Note to Rule 144(f)(1).

104
See also,
e.g.
,
SEC Interpretation: Commission Guidance on the Scope of Section 28(e) of the Exchange Act
, Interpretive Release No. 34-45194 (Dec. 27, 2001) [67 FR 6]. This treatment is also consistent with NASD Rules 4632(d)(3)(B), 4642(d)(3)(B), and 6420(d)(3)(B).

Second, we are amending Rule 144(g) which defines “brokers' transactions' for purposes of the manner of sale requirements. Under the definition of brokers' transactions, a broker must neither solicit nor arrange for the solicitation of customers' orders to buy the securities in anticipation of, or in connection with, the transaction. However, certain activities specified in three subparagraphs of Rule 144(g)(2) are deemed not to be a solicitation.
105

We are adding another subparagraph covering the posting of bid and ask quotations in alternative trading systems that will also be deemed not to be a solicitation. This new provision permits a broker to insert bid and ask quotations for the security in an alternative trading system, as defined in Rule 300 of Regulation ATS,
106

provided that the broker has published bona fide bid and ask quotations for the security in the alternative trading system on each of the last 12 business days.
107

105
See Release No. 34-5452 (Feb. 1, 1974; amended Feb. 21, 1974). These subparagraphs, as amended, are contained in paragraphs (g)(3)(i), (g)(3)(ii), and (g)(3)(iii) of Rule 144. Under the amendments, the previous paragraph (g)(2) has been redesignated as paragraph (g)(3), and the previous paragraph (g)(3) has been redesignated as paragraph (g)(4).

106
17 CFR 242.300.

107
See new Rule 144(g)(3)(iv).

D. Changes to Rule 144 Conditions Related to Resales of Debt Securities by Affiliates

1. Comments Received on Proposed Amendments Relating to Debt Securities

In the 2007 Proposing Release, we proposed to eliminate the manner of sale requirements in Rule 144 with regard to sales of debt securities by affiliates.
108

We also requested comment on whether there were any other conditions in Rule 144, such as the volume limitations, to which debt securities should not be subject. In the 2007 Proposing Release, we included preferred stock and asset-backed securities in the “debt securities” category for purposes of the proposed elimination of the manner of sale requirements.

108
As noted in Section II.B.3 above, under the amendments that we are adopting in this release, the manner of sale requirements do not apply to the resale of securities of a non-affiliate under Rule 144. The manner of sale requirements also do 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 that the estate or beneficiary is not an affiliate of the issuer.

Four commenters expressly supported the proposal to eliminate the manner of sale requirements for resales of debt securities,
109

and we did not receive any comments objecting to the proposal. We also did not receive any comments objecting to the proposed inclusion of preferred stock and asset-backed securities in the definition of debt securities. We received a few comments that we should expand the definition of debt securities for the purposes of proposed changes to the manner of sale requirements.
110

109
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Financial Associations; and Sullivan.

110
See comment letter on the 2007 Proposing Release from ABA stating that the definition of debt should exclude any requirement that the preferred stock have a liquidation preference in excess of par.

2. No Manner of Sale Requirements Regarding Resales of Debt Securities

We are adopting the amendments to eliminate the manner of sale requirements for resales of debt securities held by affiliates, as proposed.
111

We agree that, as financial intermediaries, brokers serve an important function as gatekeepers for promoting compliance with Rule 144,
112

and we are concerned that eliminating the manner of sale requirements for

equity securities would lead to abuse. However, we do not believe that the fixed income securities market raises the same concerns about abuse,
113

and are persuaded that the manner of sale requirements may place an unnecessary burden on the resale of fixed income securities.
114

Combined with the changes that we are making to the Rule 144(e) volume limitations, these amendments will permit holders of debt securities to rely on the Rule 144 to resell their debt securities in a way and amount that was not possible previously.

111
See 17 CFR 230.144(f). As discussed above, we also are eliminating the manner of sale requirements for resales of equity and debt securities by non-affiliates.

112
Brokers also must comply with the criteria set forth in Rule 144(g) in order to claim the “brokers” transactions' exemption under Section 4(4) of the Securities Act.

113
We distinguish between debt and equity in the same way we distinguished debt and equity markets when we last amended Regulation S. There, we did not believe that the procedures and restrictions applicable to offerings of equity securities under Regulation S should be applicable to offerings of nonconvertible debt securities, reasoning that the nature of the trading markets for debt securities appears not to have facilitated similar abusive practices as the markets for equity securities. See
Offshore Offers and Sales
, Release No. 33-7505 (Feb. 17, 1998) [63 FR 9631].

114
The March 2007 ABA Letter noted that debt securities generally are traded in dealer transactions in which the dealer seeks buyers for securities to fill sell orders instead of through the means prescribed in Rule 144(f).

As proposed, our definition of debt securities in Rule 144 includes non-participatory preferred stock (which has debt-like characteristics)
115

and asset-backed securities (where the predominant purchasers are institutional investors including financial institutions, pension funds, insurance companies, mutual funds and money managers)
116

in addition to other types of nonconvertible debt securities. This definition of debt securities is consistent with the treatment of such securities under Regulation S.
117

115
The definition of debt securities appears in amended Rule 144(a). “Non-participatory preferred stock” is defined as non-convertible capital stock, the holders of which are entitled to a preference in payment of dividends and in distribution of assets on liquidation, dissolution, or winding up of the issuer, but are not entitled to participate in residual earnings or assets of the issuer.

116
See Release No. 33-8518 (Dec. 22, 2004) [70 FR 1506].

117
See 17 CFR 230.901 through 230.905 and Release No. 33-7505.

3. Raising Volume Limitations for Debt Securities

We also are adopting amendments to raise the Rule 144(e) volume limitations for debt securities. Before the amendments that we are adopting, under Rule 144(e), the amount of securities sold in a three-month period could not exceed the greater of: (1) 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 (2) the average weekly volume of trading in such securities, as calculated pursuant to provisions in the rule.
118

In response to our request for comment regarding whether we should eliminate or revise any other conditions in Rule 144 with regard to debt securities, three commenters noted that the Rule 144(e) volume limitations effectively precluded resales of debt securities by affiliates.
119

118
See 17 CFR 230.144(e)(1)(i), (ii), and (iii).

119
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; and Sullivan.

Debt securities generally are issued in tranches.
120

We agree that, prior to our amendments, the volume limitations in Rule 144 constrained the ability of debt holders to rely on Rule 144 for the resales of their securities. For the same reasons that we are eliminating the manner of sale requirements for debt securities, we believe that it is appropriate to adopt an alternative volume limitation that is specifically applicable to the resale of debt securities. We are amending Rule 144(e) to permit the resale of debt securities in an amount that does not exceed ten percent of a tranche (or class when the securities are non-participatory preferred stock), together with all sales of securities of the same tranche sold for the account of the selling security holder within a three-month period.
121

We believe that this new ten percent limitation provision will permit a more reasonable amount of trading in debt securities than the one percent limitation has permitted.
122

These revised volume limitations also apply to resales of non-participatory preferred stock or asset-backed securities, which are defined as debt securities for purposes of Rule 144.

120
The term “tranche” is also used in the definition of “distribution compliance period” in Rule 902(f) of Regulation S. 17 CFR 230.902(f).

121
See newly revised Rule 144(e)(2).

122
Generally, because of the absence of an active trading market in debt securities, debt holders do not rely on the average daily trading volume test to sell their securities under Rule 144.

E. Increase of the Thresholds That Trigger the Form 144 Filing Requirement for Affiliates

Before today's amendments, Rule 144(h) required a selling security holder to file a notice on Form 144 if the security holder's intended sale exceeded either 500 shares or $10,000 within a three-month period.
123

These filing thresholds had not been modified since 1972.
124

In the 1997 Proposing Release, we proposed to increase the filing thresholds to 1,000 shares or $40,000. Thirteen commenters supported raising the filing threshold and no commenters opposed the idea.
125

Some commenters suggested that we eliminate Form 144 altogether.
126

One commenter suggested raising the threshold to $100,000.
127

Another commenter suggested raising it to $250,000.
128

123
17 CFR 230.144(h).

124
We note, however, that in 1978, the Commission shortened the relevant time period in Rule 144(e) for calculating the amount of securities to be sold under Rule 144 from six months to three months and made conforming changes to the Form 144 filing requirement. Release No. 33-5995 (Nov. 8, 1978) [43 FR 54229].

125
See comment letters on the 1997 Proposing Release from ABA; ASCS; AT&T Corp. (“AT&T”); BG&E; Corporate Counsel; Merrill Lynch; Morgan Stanley; NY Bar; NY City Bar; Regional Bankers; SIA; Smith Barney; and Sullivan.

126
See comment letters on the 1997 Proposing Release from ABA; Benesch, Friedlander, Coplan & Aronoff, LLP; NY Bar; NY City Bar; and Sullivan.

127
See comment letter on the 1997 Proposing Release from ABA.

128
See comment letter on the 1997 Proposing Release from NY Bar.

In the 2007 Proposing Release, we proposed to increase the Form 144 filing thresholds to cover sales of 1,000 shares or $50,000 within a three-month period.
129

Some commenters specifically expressed support for raising the Form 144 filing thresholds.
130

One of these commenters recommended filing thresholds of 10,000 shares or $100,000, if the Commission chose to retain a Form 144 filing requirement for affiliates.
131

129
Only affiliates of the issuer are required to file a notice of proposed sale on Form 144 when relying on Rule 144 under the amendments that we are adopting.

130
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA; Financial Associations; and SCSGP.

131
See comment letter on the 2007 Proposing Release from ABA. ABA supported elimination of Form 144 but recommended these filing thresholds, if the Commission chose to retain it.

We are adopting the increased Form 144 filing thresholds with some modification. As proposed, we are raising the dollar threshold to $50,000 to adjust for inflation since 1972.
132

After considering the comments, we are raising the share threshold to 5,000 shares, rather than the proposed 1,000 shares. We believe that the 5,000 share threshold is an appropriate alternate threshold for trades in amounts that may not reach the $50,000 dollar threshold, but that merit notice to the market.

132
The adjustment would be approximately $42,000 if based on the Personal Consumption Expenditures Chain-Type Price Index, as published by the Department of Commerce. In addition, if based on the Consumer Price Index, the adjustment would be approximately $50,000. To achieve a round number, we proposed to raise the filing threshold to $50,000.

In the 2007 Proposing Release, we also solicited comment on whether we should coordinate the Form 144 filing requirements with Form 4 filing

requirements. Many commenters supported a combination of the two forms.
133

Although we are not adopting those changes today, we expect to issue a separate release in the future to provide affiliates that are subject to both the Form 4 and Form 144 filing requirements with greater flexibility in satisfying their requirements.

133
See,
e.g.
, comment letters on the 2007 Proposing Release from ABA; BAIS; Brill 1; Fried Frank; Pink Sheets; Sichenzia; SCSGP; and Sullivan. The comment letters from ABA, BAIS, SCSGP and Sullivan advocated that the Commission should eliminate the Form 144 filing requirement; however, to the extent that we determine to retain any items required by Form 144, they provided suggestions regarding the proposal to combine Form 144 with Form 4.

F. Codification of Several Staff Positions

In the 2007 Proposing Release, we proposed to codify several interpretive positions issued by the staff of the Division of Corporation Finance. We proposed to codify the first three staff positions listed below in both the 1997 Proposing Release and the 2007 Proposing Release, but we proposed to codify the last four staff positions listed below only in the 2007 Proposing Release.

Some commenters expressed general support for the proposed codifications of staff interpretations relating to Rule 144.
134

One commenter specifically expressed the view that the action should help to resolve any lingering confusion regarding the calculation of holding periods in the circumstances addressed by the interpretations.
135

We are adopting all of the codifications substantially as proposed. The codifications should make these interpretations more transparent and readily available to the public.

134
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Financial Associations; Fried Frank; and Richardson Patel.

135
See comment letter on the 2007 Proposing Release from Financial Associations.

1. Securities Acquired Under Section 4(6) of the Securities Act Are Considered “Restricted Securities”

In 1997, we first proposed to codify the Division of Corporation Finance's interpretive position that securities acquired from the issuer pursuant to an exemption from registration under Section 4(6) of the Securities Act
136

are considered “restricted securities” under Rule 144(a)(3).
137

We did not receive any comments on this proposal at the time. In the 2007 Proposing Release, we again proposed to codify this position. We did not receive any comments.

136
15 U.S.C. 77d(6). Section 4(6) was included in the Securities Act pursuant to the Small Business Investment Incentive Act of 1980 [Pub. L. No. 96-477 (Oct. 21, 1980)].

137
17 CFR 230.144(a)(3). See the Division of Corporation Finance's Compliance and Disclosure Interpretations on Rule 144 (Updated April 2, 2007), at Section 104 (Rule 144(a)(3)), Question No. 104.03.

Section 4(6) provides for an exemption from registration for an offering that does not exceed $5,000,000 that is made only to accredited investors, that does not involve any advertising or public solicitation by the issuer or anyone acting on the issuer's behalf and for which a Form D has been filed.
138

Because the resale status of securities acquired in Section 4(6) exempt transactions should be the same as securities received in other non-public offerings that are included in the definition of restricted securities, we are of the view that securities acquired under Section 4(6) should be defined as restricted securities for purposes of Rule 144. Therefore, we are adopting an amendment to add securities acquired under Section 4(6) of the Securities Act to the definition of restricted securities, as proposed.
139

138
See 15 U.S.C. 77d(6).

139
See amendments to Rule 144(a)(3).

2. Tacking of Holding Periods When a Company Reorganizes Into a Holding Company Structure

In 1997, we also proposed to codify the Division of Corporation Finance's interpretive position that holders may tack the Rule 144 holding period in connection with transactions made solely to form a holding company.
140

When “tacking,” holders may count the period during which they held the restricted securities of the predecessor company before the predecessor company reorganized into a holding company structure when calculating the holding period of the restricted securities of the holding company received in the reorganization. We did not receive any comments on this proposal.

140
See the Division of Corporation Finance's letter to Morgan, Olmstead, Kennedy & Gardner Capital Corporation (Jan. 8, 1988).

We again proposed to codify this interpretive position in the 2007 Proposing Release. Two commenters recommended codification of the staff interpretive position covering tacking, in certain circumstances, in connection with the reincorporation of the issuer in a different state.
141

We did not receive any comments opposing this proposal.

141
See comment letters on the 2007 Proposing Release from Sichenzia and Sullivan.

We are adopting this amendment to Rule 144(d), as proposed.
142

This provision will permit tacking of the holding period if the following three conditions are satisfied:

142
See new Rule 144(d)(3)(ix).

• The newly formed holding company's securities were issued solely in exchange for the securities of the predecessor company as part of a reorganization of the predecessor company into a holding company structure;

• Security holders received securities of the same class evidencing the same proportional interest in the holding company as they held in the predecessor company, and the rights and interests of the holders of such securities are substantially the same as those they possessed as holders of the predecessor company's securities; and

• Immediately following the transaction, the holding company had no significant assets other than securities of the predecessor and its existing subsidiaries and had substantially the same assets and liabilities on a consolidated basis as the predecessor had before the transaction.

In such transactions, tacking is appropriate because the securities being exchanged are substantially equivalent, and there is no significant change in the economic risk of the investment in the restricted securities. The amendment that we are adopting does not change the staff interpretive position that permits tacking in connection with the reincorporation of the issuer in a different state in certain situations.

3. Tacking of Holding Periods for Conversions and Exchanges of Securities

The 1997 Proposing Release proposed codifying the Division of Corporation Finance's position that, if the securities to be 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.
143

As noted in the 1997 release, Rule 144 does not state whether the surrendered securities must have been convertible by their terms in order for tacking to be permitted, which led to some confusion on how to calculate the Rule 144 holding period. We did not receive any comments on this proposal.

143
See the Division of Corporation Finance's letter to Planning Research Corp. (Dec. 8, 1980).

We again proposed this amendment to Rule 144(d)(3)(ii) in the 2007 Proposing Release. In addition, we proposed a note to this provision that clarifies the Division's position that if:

• The original securities do not permit cashless conversion or exchange by their terms;

• The parties amend the original securities to allow for cashless conversion or exchange; and

• The security holder provides consideration, other than solely securities of the issuer, for that amendment,

then the newly acquired securities will be deemed to have been acquired on the date that the original securities were so amended.
144

144
See the Division of Corporation Finance's letter to Morgan Stanley & Co., Inc. (June 30, 1993).

One commenter expressed support for this proposed amendment.
145

Another commenter provided a suggestion for a technical change to the proposed note, that the phrase “so long as the conversion or exchange itself meets the conditions of this section,” be deleted.
146

We are adopting the changes to Rule 144(d), substantially as proposed.
147

In response to comment, we are further clarifying the note to Rule 144(d)(3)(ii) to clarify that the newly acquired securities shall be deemed to have been acquired at the same time as the amendment to the surrendered securities, so long as, in the conversion or exchange, the securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer.

145
See comment letter on the 2007 Proposing Release from Feldman.

146
See comment letter on the 2007 Proposing Release from Sullivan.

147
See amendments to Rule 144(d)(3)(ii).

4. Cashless Exercise of Options and Warrants

Several commenters responding to the 1997 Proposing Release suggested that we codify the Division of Corporation Finance's position that, upon a cashless exercise of options or warrants, the newly acquired underlying securities are deemed to have been acquired when the corresponding options or warrants were acquired, even if the options or warrants originally did not provide for cashless exercise by their terms.
148

148
See the Division of Corporation Finance's Compliance and Disclosure Interpretations on Rule 144 (Updated April 2, 2007), at Section 212 (Rule 144(d)(3)), Interpretation No. 212.01.

In the 2007 Proposing Release, we proposed to revise Rule 144 to codify that position. We also proposed to add two notes to this new paragraph. As proposed, the first note would codify the Division's position that if:

• The original options or warrants do not permit cashless exercise by their terms; and

• The holder provides consideration, other than solely securities of the issuer, to amend the options or warrants to allow for cashless exercise,

then the amended options or warrants would be deemed to have been acquired on the date that the original options or warrants were so amended.
149

This treatment is analogous to our treatment of conversions and exchanges.

149
See the Division of Corporation Finance's letter to Morgan Stanley & Co., Inc. (June 30, 1993).

The second note would codify the Division's position that the grant of certain options or warrants that are not purchased for cash or property does not create an investment risk in a manner that would justify tacking the holding period for the options or warrants to the holding period for the securities received upon exercise of the options or warrants.
150

This is the case for options granted under an employee benefit plan. The note would clarify that, in such instances, the holder would not be allowed to tack the holding period of the option or warrant and would be deemed to have acquired the underlying securities on the date the option or warrant was exercised, if the conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of exercise.

150
See the Division of Corporation Finance's letters to Morgan Stanley & Co., Inc. (June 30, 1993) and Malden Trust Corporation (Feb. 21, 1989).

Three commenters supported the codification of the staff interpretation relating to the cashless exercise of options and warrants.
151

Some commenters believed that the proposed rule should be expanded,
152

such as to include warrants and options that have only a
de minimis
exercise price.
153

One commenter suggested that we delete the phrase “so long as the conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of exercise,” in the second proposed note.
154

151
See comment letters on the 2007 Proposing Release from Cleary Gottlieb; Feldman; and Richardson Patel.

152
See comment letters on the 2007 Proposing Release from Cleary Gottlieb; Financial Associations; Richardson Patel; and Weisman.

153
See comment letters on the 2007 Proposing Release from Cleary Gottlieb and Financial Associations.

154
See comment letter on the 2007 Proposing Release from Sullivan.

We are adopting the amendments, substantially as proposed.
155

In response to comment, we have further clarified the second note to Rule 144 to make it clear that the newly acquired securities shall be deemed to have been acquired at the same time as the amendment to the options or warrants so long as the exercise itself was cashless.
156

155
See new Rule 144(d)(3)(x) and related notes.

156
See Note 2 to Rule 144(d)(3)(x).

5. Aggregation of Pledged Securities

In response to suggestions from commenters on the 1997 proposals, we proposed in the 2007 Proposing Release to add a note that would address how a pledgee of securities should calculate the Rule 144(e) volume limitation condition.
157

The note would codify the Division of Corporation Finance's position that, so long as the pledgees are not the same “person” under Rule 144(a)(2), a pledgee of securities may sell the pledged securities without having to aggregate the sale with sales by other pledgees of the same securities from the same pledgor, as long as there is no concerted action by those pledgees.
158

As an example, assume that a security holder (the pledgor) pledges the securities he owns in Company A to two banks, Bank X and Bank Y (the pledgees). If the pledgor defaults:

157
Under the amendments that we are adopting, the volume limitations in Rule 144(e) would apply only to affiliates.

158
See the Division of Corporation Finance's Compliance and Disclosure Interpretations on Rule 144 (Updated April 2, 2007), at Section 216 (Rule 144(e)(3)), Interpretation No. 216.01. See also the Division of Corporation Finance's letter to Standard Chartered Bank (June 22, 1987).

• Upon default, Bank X does not have to aggregate its sales of Company A securities with Bank Y's sales of Company A securities unless Bank X and Bank Y are acting in concert, but

• Bank X individually still must aggregate its sales with the pledgor's sales, and

• Bank Y individually still must aggregate its sales with the pledgor's sales.

Provided that the loans and pledges are bona fide transactions and there is no concerted action among pledgees and no other aggregation provisions under Rule 144(e) apply, we do not believe that extra burdens on pledgees to track and coordinate resales by other pledgees are warranted.

We received no comments on this proposal, and we are adopting the amendment to Rule 144(e), as proposed.
159

159
See amendments to Rule 144(e)(3)(ii).

6. Treatment of Securities Issued by “Reporting and Non-Reporting Shell Companies”

A blank check company is a company that:

• Is in the development stage;

• Has no specific business plan or purpose, or has indicated that its business plan is to merge with or acquire an unidentified third party; and

• Issues penny stock.
160

160
17 CFR 230.419. The term “penny stock” is defined in Exchange Act Rule 3a51-1 [17 CFR 240.3a51-1].

Such companies historically have provided opportunity for abuse of the federal securities laws, particularly by serving as vehicles to avoid the registration requirements of the securities laws.
161

Rule 419 under the Securities Act
162

was adopted in 1992 to control the extent to which such companies are able to access funds from a public offering.

161
See Release No. 33-6932 (Apr. 28, 1992) [57 FR 18037].

162
17 CFR 230.419.

In 2005, we amended Securities Act Rule 405
163

to define a “shell company” to mean a registrant, other than an asset-backed issuer, that has:

163
17 CFR 230.405.

(1) No or nominal operations; and

(2) Either:

• No or nominal assets;

• Assets consisting solely of cash and cash equivalents; or

• Assets consisting of any amount of cash and cash equivalents and nominal other assets.
164

164
See Release No. 33-8587 (Jul. 15, 2005) [70 FR 42234].

On January 21, 2000, the Division of Corporation Finance concluded in a letter to NASD Regulation, Inc. that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies.
165

In an effort to curtail misuse of Rule 144 by security holders through transactions in the securities of blank check companies, we proposed to codify this position with some modifications. First, we proposed to modify the staff interpretation to address securities of all companies, other than asset-backed issuers, that meet the definition of a shell company, including blank check companies. The category of companies to whom the staff interpretation was proposed to apply is broader than the Rule 405 definition of a “shell company,” however, as it would apply to any “issuer” meeting that standard, whereas the Rule 405 definition refers only to “registrants.” For purposes of the discussion in this release only, we call these companies, “reporting and non-reporting shell companies.” Under the proposed rule, a person who wishes to resell securities of a company that is, or was, a reporting or a non-reporting shell company, other than a business combination related shell company,
166

would not be able to rely on Rule 144 to sell the securities.

165
See the Division of Corporation Finance's letter to Ken Worm, NASD Regulation, Inc. (Jan. 21, 2000). In that letter, the Division stated that “transactions in blank check company securities by their promoters or affiliates . . . are not the kind of ordinary trading transactions between individual investors of securities already issued that Section 4(1) [of the Securities Act] was designed to exempt.” The Division stated its view that “both before and after the business combination or transaction with an operating entity or other person, the promoters or affiliates of blank check companies, as well as their transferees, are ‘underwriters’ of the securities issued. . . . Rule 144 would not be available for resale transactions in this situation, regardless of technical compliance with that rule, because these resale transactions appear to be designed to distribute or redistribute securities to the public without compliance with the registration requirements of the Securities Act.”

166
A “business combination related shell company” is defined in Securities Act Rule 405 as a shell company that is (1) formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States; or (2) formed by an entity that is not a shell company solely for the purpose of completing a business combination transaction (as defined in § 230.165(f)) among one or more entities other than the shell company, none of which is a shell company.

Several commenters provided comments on the proposal to codify this staff interpretation with some modification. Some commenters expressed support for the proposed codification,
167

with one commenter noting that most micro-cap frauds result from the purchase and sale of securities issued by shell companies.
168

Two commenters expressed concern that expanding the staff interpretation to shell companies would prohibit reliance on Rule 144 by security holders of businesses attempting to implement real business plans that technically meet the definition of a shell company, but are not blank check companies.
169

One commenter recommended that the Commission only preclude reliance on Rule 144 for the resale of securities if they were issued at the time the issuer was a shell company.
170

167
See,
e.g.
, comment letters on the 2007 Proposing Release from Feldman; Financial Associations; Parsons; Pink Sheets; and Williams.

168
See comment letter on the 2007 Proposing Release from Pink Sheets.

169
See comment letters on the 2007 Proposing Release from Sichenzia and Williams.

170
See comment letter on the 2007 Proposing Release from Sichenzia.

We are adopting, as proposed, the amendment to prohibit reliance on Rule 144 for the resale of securities of a company that is a reporting or a non-reporting shell company.
171

Under the amended rules, Rule 144 will not be available for the resale of securities initially issued by either a reporting or non-reporting shell company (other than a business combination related shell company) or an issuer that has been at any time previously a reporting or non-reporting shell company, unless the issuer is a former shell company that meets all of the conditions discussed below.
172

171
See new Rule 144(i).

172
Rule 144(i) does not prohibit the resale of securities under Rule 144 that were not initially issued by a reporting or non-reporting shell company or an issuer that has been at any time previously such a company, even when the issuer is a reporting or non-reporting shell company at the time of sale. Contrary to commenters' concerns, Rule 144(i)(1)(i) is not intended to capture a “startup company,” or, in other words, a company with a limited operating history, in the definition of a reporting or non-reporting shell company, as we believe that such a company does not meet the condition of having “no or nominal operations.”

In another part of our proposal regarding the resale of securities of reporting and non-reporting shell companies, we proposed to modify the staff interpretation to make Rule 144 available for resales of securities of companies that were formerly shell companies under provisions that are similar to other provisions that permit the use of a Securities Act Form S-8
173

registration statement by reporting companies that were former shell companies.
174

Under the proposal, despite the general prohibition against reliance on Rule 144 with respect to securities acquired by shell companies or former shell companies, a security holder would have been able to resell securities subject to Rule 144 conditions if the issuer:

173
17 CFR 239.16b.

174
See Release No. 33-8587. These provisions are consistent with the Form S-8 provisions for shell companies, except that Form S-8 requires a former shell company to wait 60 days, rather than 90 days, before it is able to use the form to register securities.

• Had ceased to be a shell company;

• Is subject to Exchange Act reporting obligations;

• Has filed all required Exchange Act reports during the preceding twelve months; and

• At least 90 days have elapsed from the time the issuer files “Form 10 information” reflecting the fact that it had ceased to be a shell company before any securities were sold under Rule 144.

“Form 10 information” is equivalent to information that a company would be required to file if it were registering a class of securities on Form 10 or Form 20-F under the Exchange Act.
175

This information is ordinarily included in a Form 8-K if the former shell company has been filing Exchange Act reports.
176

As proposed, the Rule 144(d) holding period for restricted securities sold under this provision would have

commenced at the time that the Form 10 information was filed.

175
17 CFR 249.210 and 17 CFR 249.220f. In another Commission release, we are rescinding Form 10-SB [17 CFR 249.210b]. See SEC Press Release No. 2007-233 (Nov. 15, 2007), available at
http://www.sec.gov/news/press/2007/2007-233.htm
.

176
17 CFR 249.308. Items 2.01(f) and 5.01(a)(8) of Form 8-K require a company in a transaction where the company ceases being a shell company to file a current report on Form 8-K containing the information (or identifying the previous filing in which the information is included) that would be required in a registration statement on Form 10 or Form 10-SB to register a class of securities under Section 12 of the Exchange Act.

We are adopting this part of the amendments, with some modification.
177

We have modified the proposal to require at least one year to elapse after Form 10 information is filed with Commission before a security holder can resell any securities of an issuer that was formerly a shell company subject to Rule 144 conditions. We believe that the one-year period is necessary for investor protection given the comments relating to the abuse and micro-cap fraud occurring in connection with the securities of shell companies. Both restricted securities and unrestricted securities will be subject to the same one-year waiting period. Thus, under the amendments that we are adopting, Rule 144 is available for the resale of restricted or unrestricted securities that were initially issued by a reporting or non-reporting shell company or an issuer that has been at any time previously a reporting or non-reporting shell company, only if the following conditions are met:

177
See new Rule 144(i)(2).

• The issuer of the securities that was formerly a reporting or non-reporting shell company has ceased to be a shell company;

• The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;

• The issuer of the securities has filed all reports and material required to be filed under Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports (§ 249.308 of this chapter); and

• At least one year has elapsed from the time that the issuer filed current Form 10 type information with the Commission reflecting its status as an entity that is not a shell company.

One commenter requested clarification on when a Form 10 is deemed filed, if the staff is undertaking a review of the filing, and recommended that the Form 10 should be deemed filed when the information is filed initially with the Commission.
178

To promote consistency and to provide a date that security holders can rely upon, the Form 10 information will be deemed filed when the initial filing is made with the Commission, rather than when the staff of the Division of Corporation Finance has completed its review of the filing or an amendment is made in response to staff comments, for purposes of the amendments.
179

178
See comment letter on the 2007 Proposing Release from Sichenzia.

179
See new Rule 144(i)(3).

Some commenters recommended that we permit security holders of non-reporting companies that have merged with a private operating company and therefore have ceased to be shell companies to be able to rely on Rule 144.
180

We are not adopting a provision to permit this, because we believe that Form 10 type information and Exchange Act reporting requirements are important in protecting against potential abuse.

180
See,
e.g.
, comment letters on the 2007 Proposing Release from Charles Nelson; Tom Russell; and Williams.

7. Representations Required From Security Holders Relying on Exchange Act Rule 10b5-1(c)

Rule 10b5-1
181

under the Exchange Act defines when a purchase or sale constitutes trading “on the basis of” material nonpublic information in insider trading cases brought under Exchange Act Section 10(b)
182

and Rule 10b-5.
183

Specifically, a purchase or sale of a security of an issuer is “on the basis of” material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale. However, Rule 10b5-1(c) provides an affirmative defense that a person's purchase or sale was not “on the basis of” material nonpublic information. For this defense to be available, the person must demonstrate that:

181
17 CFR 240.10b5-1.

182
15 U.S.C. 78j(b).

183
17 CFR 240.10b-5. As stated in Rule 10b5-1(a), the “manipulative and deceptive devices” prohibited by Section 10(b) and Rule 10b-5 include, among other things, the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.

• Before becoming aware of the material nonpublic information, he or she had entered into a binding contract to purchase or sell the securities, provided instructions to another person to execute the trade for the instructing person's account, or adopted a written plan for trading the securities;

• The contract, instructions or written trading plan satisfy the conditions of Rule 10b5-1(c); and

• The purchase or sale that occurred was pursuant to the contract, instruction, or plan.

Form 144 requires a selling security holder to represent, as of the date that the form is signed, that he or she “does not know any material adverse information in regard to the current and prospective operations of the issuer of the securities to be sold which has not been publicly disclosed.” The Division of Corporation Finance has indicated that a selling security holder who satisfies Rule 10b5-1(c) may modify the Form 144 representation to indicate that he or she had no knowledge of material adverse information about the issuer as of the date on which the holder adopted the written trading plan or gave the trading instructions. In this case, the security holder must specify that date and indicate that the representation speaks as of that date.
184

184
See the Division of Corporation Finance's Manual of Publicly Available Telephone Interpretations, Fourth Supplement (May 30, 2001), at Rule 10b5-1; Form 144, Interpretation No. 2.

In order to reconcile the Form 144 representation with Rule 10b5-1, we proposed to codify this interpretive position. Under the proposed amendments, Form 144 filers would be able to make the required representation as of the date that they adopted written trading plans or gave trading instructions that satisfied Rule 10b5-1(c). We did not receive any comments specifically on this proposal. We are adopting this amendment, as proposed.
185

185
See amendments to Form 144.

G. Amendments to Rule 145

Securities Act Rule 145
186

provides that exchanges of securities in connection with reclassifications of securities, mergers or consolidations or transfers of assets that are subject to shareholder vote constitute sales of those securities. Unless an exemption from the registration requirement is available, Rule 145(a) requires the registration of these sales. Rule 145(c) deems persons who were parties to such a transaction, other than the issuer, or affiliates of such parties to be underwriters. Rule 145(d) permits the resale, subject to specified conditions, of securities received in such transactions by persons deemed underwriters. In the 1997 Proposing Release, we proposed to eliminate the presumed underwriter and resale provisions in Rule 145(c) and (d). Many commenters supported the 1997 proposal.
187

186
17 CFR 230.145.

187
See comment letters on the 1997 Proposing Release from ABA; ASCS; AT&T; BG&E; Brobeck, Phleger & Harrison, LLP (“Brobeck”); Corporate Counsel; Intel; NY Bar; NY City Bar; SIA; Smith Barney; Sullivan; and Testa Hurwitz.

In the 2007 Proposing Release, we proposed amendments to Rule 145(c) and (d) that would:

• Eliminate the presumed underwriter provision in Rule 145(c), except with regard to Rule 145(a) transactions that involve a shell company (other than a business combination related shell company);
188

and

188
The terms “shell company” and “business combination related shell company” are defined in Securities Act Rule 405. See also Release No. 33-8587 (Jul. 15, 2005) [70 FR 42233].

• Harmonize the requirements in Rule 145(d) with the proposed provisions in Rule 144 that would apply to securities of shell companies.

Under the proposed rule, where a party to a Rule 145(a) transaction, other than the issuer, is a shell company (other than a business combination related shell company), the party and its affiliates could resell securities acquired in connection with the transaction only in accordance with Rule 145(d).

Five commenters expressly supported the proposed changes to Rule 145.
189

Two commenters requested that we reassess the impact of the proposed Rule 145 amendments on the staff's position that stock received in a reorganization that is exempt from registration pursuant to Section 3(a)(10) of the Securities Act
190

could be publicly resold pursuant to Rule 145(d)(2).
191

189
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Fried Frank; Financial Associations; and SCSGP.

190
15 U.S.C. 77c(a)(10).

191
See comment letters on the 2007 Proposing Release from Barron and Fried Frank.

After considering the comments, we believe that it is appropriate to adopt the amendments to Rule 145, as proposed. The presumptive underwriter provision in Rule 145 is no longer necessary in most circumstances. However, based on our experience with transactions involving shell companies that have resulted in abusive sales of securities, we believe that there continues to be a need to apply the presumptive underwriter provision to reporting and non-reporting shell companies and their affiliates and promoters. We are amending Rule 145 to eliminate the presumptive underwriter provision except when a party to the Rule 145(a) transaction is a shell company.
192

192
With respect to a transaction that is exempt from registration pursuant to Section 3(a)(10) of the Securities Act that falls within Rule 145(a), if any party to the transaction is a shell company, then any party to the transaction, other than the issuer, and its affiliates will be permitted to resell their securities in accordance with the restrictions of Rule 145(d). Also, the staff intends to issue a revised Staff Legal Bulletin No. 3 concurrently with the effective date of the amendments that we are adopting that will address the treatment of parties to a transaction and their affiliates that have acquired securities in a transaction exempt from registration pursuant to Section 3(a)(10) of the Securities Act.

Rule 145(c) now provides that any party, other than the issuer, to a Rule 145(a) transaction involving a shell company (but not a business combination related shell company), including any affiliate of such party, who publicly offers or sells securities of the issuer acquired in connection with the transaction, will continue to be deemed an underwriter.
193

193
We are also adding the definition of “affiliate” to paragraph (e) and transferring the definition of “party” from paragraph (c) to paragraph (e).

Under the amendments to Rule 145 that we are adopting, if the issuer has met the requirements of new paragraph (i)(2) of Rule 144,
194

the persons and parties deemed underwriters will be able to resell their securities subject to paragraphs (c), (e), (f), and (g) of Rule 144 after at least 90 days have elapsed since the securities were acquired in the transaction. After six months have elapsed since the securities were acquired in the Rule 145(a) transaction, the persons and parties will be permitted to resell their securities, subject only to the Rule 144(c) current public information condition, provided that the sellers are not affiliates of the issuer at the time of sale and have not been affiliates during the three months before the sale. After one year has elapsed since the securities were acquired in the transaction, the persons and parties will be permitted to resell their securities without any limitations under Rule 145(d), provided that they are non-affiliates at the time of sale and have not been affiliates during the three months before the sale.

194
The requirement in the newly added Rule 144(i)(2) that Form 10 information be filed reflecting a company's status as no longer a shell company is fulfilled with respect to a Rule 145(a) transaction through the filing of the registration statement.

In addition, we are adopting, as proposed, a note to paragraphs (c) and (d) of Rule 145 that paragraph (d) is not available with respect to any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.
195

We have included a similar statement in the Preliminary Note to Rule 144. We also are adopting, as proposed, the clarification to the language in Rule 145(d) regarding the securities that were acquired in a transaction specified in Rule 145(a).
196

195
See new Note to Rule 145(c) and (d).

196
See amendments to Rule 145(d) relating to “securities acquired in a transaction specified in paragraph (a) that was registered under the Act.”

H. Conforming and Other Amendments

1. Regulation S Distribution Compliance Period for Category Three Issuers

The purpose of the distribution compliance period in Regulation S
197

is to ensure that during the offering period and in the subsequent aftermarket trading that takes place offshore, the persons complying with the Rule 903
198

safe harbor (issuers, distributors and their affiliates) are not engaged in an unregistered, non-exempt distribution of securities into the United States capital markets.
199

In the 2007 Proposing Release, we requested comment on whether to amend Regulation S to conform the one-year distribution compliance period in Rule 903(b)(3)(iii) for Category 3 issuers (U.S. reporting issuers) to the proposed six-month Rule 144(d) holding period, or to retain the one-year distribution compliance period.

197
17 CFR 230.901 through 230.905 and Preliminary Notes.

198
See 17 CFR 230.903.

199
See Release No. 33-7505.

Several commenters recommended revising the Regulation S distribution compliance period in Rule 903(b)(3)(iii) to coincide with the six-month holding period under a revised Rule 144.
200

Commenters reasoned, among other things, that such a revision is logical and would promote consistency among the rules.
201

We did not receive any comment letters objecting to such an amendment to Regulation S.

200
See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Financial Associations; Fried Frank; Herbert Smith CIS LLP (“Herbert Smith”); London Forum; Parsons; and Sullivan.

201
See,
e.g.
, comment letters on the 2007 Proposing Release from Cleary Gottlieb; Financial Associations; and London Forum.

When Regulation S was amended in 1998, the distribution compliance period was revised to coincide with the Rule 144(d) holding period.
202

In making this revision, we noted that a distribution compliance period that is longer than the Rule 144 holding period is unnecessary and could be confusing to apply. For the same reason, we are amending Regulation S to conform the distribution compliance period in Rule 903(b)(3)(iii) for Category 3 reporting issuers to the amendments to the Rule 144 holding period.
203

As a result, U.S. reporting issuers will be subject to a distribution compliance period of six months under Regulation S.

202
See Release No. 33-7505.

203
See amendments to Rule 903(b)(3) of the Securities Act.

2. Underlying Securities in Asset-Backed Securities Transactions

In 2004, we adopted Securities Act Rule 190 to clarify when registration of the sale of underlying securities in asset-backed securities transactions is required.
204

One of the basic premises underlying asset-backed securities offerings is that an investor is buying participation in the underlying assets. Therefore, if the assets being securitized are themselves securities under the Securities Act (commonly referred to as a “resecuritization”), the offering of the underlying securities must itself be registered or exempt from registration under the Securities Act. Rule 190 provides the framework for determining if registration of the sale of these underlying assets is required at the time of the registered asset-backed securities offering.

204
17 CFR 230.190 and Release No. 33-8518.

One of the requirements of Rule 190 is that the depositor must be free to publicly resell the securities without registration under the Securities Act.
205

Before the amendments that we are adopting, this provision noted as an example that if the underlying securities are Rule 144 restricted securities, under the conditions of the previous Rule 144(k), at least two years must have elapsed from the date the underlying securities were acquired from the issuer, or an affiliate of the issuer, and the date they are pooled and resecuritized pursuant to Rule 190.

205
17 CFR 230.190(a)(3).

The changes to Rule 144 with no concurrent revision to Rule 190 would have allowed privately placed debt or other asset-backed securities to be publicly resecuritized in as little as six months after their original issuance without registration of the underlying securities.
206

Given that Rule 190 addresses the public distribution of privately placed securities via resecuritization transactions, we proposed to revise Rule 190 to retain the current two-year period for resecuritizations that do not require registration of the underlying securities.
207

206
Although the asset-backed securities we are discussing may be privately placed, the issuing trust will have also registered the sale of other asset-backed securities and may have a reporting obligation under Section 15(d) of the Exchange Act for some time.

207
This change would not in any way impact the disclosure requirements for resecuritizations.

A particular issuance of asset-backed securities often involves one or more publicly offered classes (
e.g.
, classes rated investment grade) as well as one or more privately placed classes (
e.g.
, non-investment grade subordinated classes). In most instances, the subordinated classes act as structural credit enhancement for the publicly offered senior classes by receiving payments after, and therefore absorbing losses before, the senior classes. These unregistered asset-backed securities are typically rated below investment grade, or are unrated, and as such could not be offered on Form S-3. They typically are not fungible with registered securities from the same offering and are held by very few investors. Further, the trust or issuing entity usually ceases reporting under the Exchange Act with respect to the publicly offered classes after its initial Form 10-K is filed. We understand that the privately placed subordinated securities in these transactions are often the types of securities that are pooled and resecuritized into new asset-backed securities.
208

208
See Saskia Scholtes,
Left in the Dark on Debt Obligations,
FT.com (Mar. 27, 2007) (describing privately placed collateralized debt obligations (CDOs) vehicles used to repackage portfolios of other debt and noting that “the biggest category of deals, at 44%, consisted of CDOS backed by asset-backed securities such as those backed by subprime mortgages”).

One commenter provided comments on the proposal to retain the two-year period for resecuritizations that do not require registration of the underlying securities.
209

The commenter submitted that the proposed two-year holding period for resecuritizations should be shortened to no more than six months (or twelve months, if tolling were to be reinstituted). With respect to non-asset-backed securities (
e.g.
, corporate debt), the commenter stated that we should permit securitization without registration during the revised period, as these securities face fewer complications and are not the focus of our concerns.

209
See comment letter on the 2007 Proposing Release from Financial Associations.

Due to the particular circumstances of asset-backed securities and our experience with a two-year period under both Regulation AB and the prior staff positions that were codified by those rules, we are not making any changes to shorten the current two-year holding period for restricted securities that are to be resecuritized in publicly registered offerings. In light of the changes that we are making to Rule 144, we are amending Rule 190 to provide that if the underlying securities are restricted securities, Rule 144 is available for the sale of the securities in the resecuritization, if at least two years have elapsed since the later of the date the securities were acquired from the issuer of the underlying securities or from an affiliate of the issuer of the underlying securities.
210

Of course, the underlying securities could still be resecuritized if they do not meet this requirement; their sale would need to be concurrently registered with the offering of the asset-backed securities on a form for which the offering of the class of underlying securities would be eligible. In addition, nothing in Rule 190, as amended, will lengthen the six-month holding period of the underlying securities under Rule 144 for resales other than in connection with publicly registered resecuritizations.

210
See amendments to Rule 190(a) of the Securities Act.

3. Securities Act Rule 701(g)(3)

Securities Act Rule 701(g)(3)
211

outlines the resale limitations for securities issued under Rule 701. The limitations for resales by non-affiliates includes references to paragraphs (e) and (h) of Rule 144, which under the amendments that we are adopting no longer apply to resales by non-affiliates. We received one comment on the conforming change, and the commenter concurred with the proposed amendment to Securities Act Rule 701(g)(3).
212

Accordingly, we believe that it is appropriate to conform the resale restrictions of securities acquired pursuant to employee benefit plans under Rule 701 of the Securities Act. We are adopting the amendment to remove references to Rule 144(e) and (h) from Rule 701.
213

211
17 CFR 230.701(g)(3).

212
See comment letter on the 2007 Proposing Release from ABA.

213
See amendments to Rule 701(g)(3) of the Securities Act.

III. Paperwork Reduction Act

A. Background

Our amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
214

We submitted the amendments to Form 144 to the Office of Management and Budget (OMB) for review in accordance with the PRA.
215

OMB has approved the revision. The title for the information collection is “Notice of Proposed Sale of Securities Pursuant to Rule 144 under the Securities Act of 1933” (OMB Control No. 3235-0101). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a current valid control number.

214
44 U.S.C. 3501
et seq.

215
See 44 U.S.C. 3507 and 5 CFR 1320.11.

The primary purpose of this collection of information is the disclosure of a proposed sale of

securities by security holders deemed not to be engaged in the distribution of the securities and therefore not underwriters. Form 144 may be filed in paper or electronically using the EDGAR filing system. Form 144 filings are publicly available. Persons reselling securities in reliance on Rule 144 are the respondents to the information required by Form 144. The information collection requirements imposed by Form 144 are mandatory.

B. Summary of Amendments

In the 2007 Proposing Release, we proposed an amendment to the Form 144 filing requirement to eliminate the need for non-affiliates of the issuer to file Form 144 in order to sell their securities under Rule 144. In addition, the proposal would have raised the filing threshold for Form 144 to 1,000 shares or $50,000 worth of securities during a three-month period. Currently, the Form 144 filing threshold is 500 shares or $10,000. The proposed amendments also included two other minor changes to Form 144.
216

216
We proposed to amend Form 144 to include information regarding security holders' hedging activities and to allow security holders to represent that they do not know of material adverse information about the company as of the date they adopt a plan under Exchange Act Rule 10b5-1. We are adopting the amendment to Form 144 regarding the representation that the security holder does not know of material adverse information about the company as of the date that he or she adopts a plan under Exchange Act Rule 10b5-1.

The 2007 Proposing Release included a PRA analysis. We received one comment letter addressing this analysis. The commenter noted that our estimate of burden hours necessary to complete a notice on Form 4 is 0.5 hours, while we estimate that it takes 2.0 burden hours to complete Form 144.
217

This commenter believed our estimates for the two forms should be comparable. Because this commenter estimated that it takes only three minutes on average to key and proof Form 144 data items, the commenter believed that 0.5 hours is probably a more accurate estimate of the burden hours needed to complete the Form 144.

217
See comment letter on the 2007 Proposing Release from Washington Servic

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A07-6013. Public record. Not legal advice.