Revision of Holding Period Requirements in Rules 144 and 145

SUMMARY: The Commission is amending the holding period requirements

contained in Rule 144 to permit the resale of limited amounts of

restricted securities by any person after a one-year, rather than a

two-year, holding period. Also, the amendments permit unlimited resales

of restricted securities held by non-affiliates of the issuer after a

holding period of two years, rather than three years. These changes

should reduce the cost of capital, particularly for small business

issuers. Parallel changes to Rule 145 also are being adopted.

EFFECTIVE DATE: The changes to Secs. 230.144 and 230.145 will be

effective April 29, 1997.

FOR FURTHER INFORMATION CONTACT: Elizabeth M. Murphy, Office of Chief

Counsel, Division of Corporation Finance at (202) 942-2900, 450 Fifth

Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: On June 27, 1995, the Commission published

for comment a release proposing amendments to Rule 144,1 the non-

exclusive safe harbor from registration for resales of restricted

securities and securities held by affiliates of the issuer, under the

Securities Act of 1933 (the ``Securities Act'').2 These proposals

are being adopted today. As amended, the holding period for resales of

limited amounts of restricted securities by any person has been reduced

from two years to one year. The holding period for resales by non-

affiliates without compliance with the provisions of the rule has been

reduced from three years to two years.3 The Commission also is

adopting parallel changes to Securities Act Rule 145.4 The revised

holding periods are applicable to all securities, whether acquired

before or after the effective date of the changes announced today. The

Commission today also is publishing a companion release soliciting

comment on additional changes to Rule 144 that would simplify the

rule's operation and further modify the Rule 144 holding periods.5

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\1\ 17 CFR 230.144. Release No. 33-7187 (June 27, 1995) [60 FR

35645] (``1995 Release''). Comment letters are available for

inspection and copying in the Commission's Public Reference Room,

450 Fifth Street, N.W., Washington, D.C. 20549. Interested persons

should refer to File No. S7-17-95.

\2\ 15 U.S.C. 77a et seq.

\3\ Conforming changes also have been made in paragraph (e)(3)

of Rule 144 relating to determination of the limits on amounts

resalable by pledgees, donees and trusts, reducing the period from

two years to one year after the event of pledge, default, donation,

or trust acquisition.

\4\ 17 CFR 230.145.

\5\ Release No. 33-7391 (February 20, 1997).

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I. Discussion

Today, for the first time since the adoption of Rule 144 in

1972,6 the Commission is adopting amendments to shorten the

holding period that must be satisfied before limited resales of

restricted securities may be made by affiliates and non-affiliates in

reliance upon the rule. As had been proposed, the amendments reduce

that holding period from two years to one year. Also as proposed, the

amendments reduce the length of the holding period that non-affiliates

must hold restricted securities before making unlimited resales of such

securities from three years to two years.

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\6\ Release No. 33-5223 (January 11, 1972) [37 FR 591].

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The Commission is adopting the shortened holding periods based on

its more than 20 years of experience with Rule 144 and the favorable

public comments received on the 1995 Release. Shorter holding periods

should reduce the cost of capital. This particularly should benefit

smaller companies, which often sell securities in private placements. A

shorter holding period should lower the illiquidity discount given by

companies raising capital in private placements and increase the

usefulness of the Rule 144 safe harbor.

Shorter Rule 144 holding periods have been recommended by

participants in the SEC Government-Business Forum on Small Business

Capital Formation.7 The Commission believes that the shorter

holding periods will not diminish investor protection, since they are

sufficiently long to ensure that resales under Rule 144 will not

facilitate indirect public distributions of unregistered securities by

issuers or affiliates.

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\7\ See, e.g., Final Reports of the SEC Government-Business

Forum On Small Business Capital Formation (June 1992, 1993, 1994 and

February 1995). The Small Business Incentive Act of 1980 directs the

Commission to host this annual meeting for the purpose of reviewing

the ``current status of problems and programs relating to small

business capital formation.'' Pub. L. No. 96-477, Section 503, 94

Stat. 2275, 2292-93 (1980).

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Rule 144 provides an objective safe harbor for resales of

restricted securities and control securities. Restricted securities

generally are securities issued in private placements; 8 control

securities are securities owned by affiliates of the issuer, however

acquired. The rule provides that a person complying with its terms and

conditions will not be engaged in a distribution of securities and,

thus, not be an ``underwriter'' 9 for purposes of the Section 4(1)

10 exemption from Securities Act registration for ordinary trading

transactions.11

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\8\ The term ``restricted securities'' is defined in Rule

144(a)(3) [17 CFR 230.144(a)(3)] and includes: securities acquired

from the issuer or an affiliate in a transaction or chain of

transactions not involving a public offering; securities acquired

from the issuer and subject to resale limitations under Regulation D

[17 CFR 230.501-508] or Rule 701 [17 CFR 230.701]; securities

subject to the Regulation D resale limitations and acquired in a

transaction or chain of transactions not involving a public

offering; securities acquired in a transaction or chain of

transactions meeting the requirements of Rule 144A [17 CFR

230.144A]; and securities acquired from the issuer that are subject

to the resale limitations of Regulation CE (Sec. 230.1001). Separate

releases being issued today propose to amend the term to also

include securities issued pursuant to an exemption under Securities

Act Section 4(6) [15 U.S.C. 77(d)(6)] as well as equity securities

of domestic issuers, and of foreign issuers where the primary market

for such securities is in the United States, sold under Regulation S

[17 CFR 230.901-230.904 and Preliminary Notes]. Release Nos. 33-7391

and 33-7392 (February 20, 1997).

\9\ See Section 2(11) of the Securities Act [15 U.S.C. 77b(11)].

\10\ 15 U.S.C. 77(d)(1).

\11\ Section 4(1) exempts transactions by persons who are not

issuers, underwriters or dealers.

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The rule includes holding periods for restricted securities to

establish that the holder did not purchase with a view to an

unregistered public distribution. Pursuant to the amendments adopted

today, all restricted securities must be held at least one year before

resale, measured from the date the securities are acquired from the

issuer or an affiliate. For restricted securities held between one and

two years, other provisions of the rule require that current public

information be available about the issuer, that limited amounts of

securities be resold, that the resales be effected in ordinary

brokerage transactions or directly with a market-maker, and that a

notification of the resale be filed with the Commission. Under the

amendments, after a two-year holding period, restricted securities may

be resold by non-affiliates without compliance with any of these

provisions.

At the suggestion of commenters, the Commission also is adopting

parallel changes to the holding period provisions included in

Securities Act Rule 145(d),12 which governs the resale of

securities received in connection with reclassifications, mergers,

[[Page 9243]]

consolidations and asset transfers. Rule 145(c) 13 provides that

any party to a transaction covered by Rule 145 (other than the issuer),

or any person who is an affiliate of such party at the time the

transaction is submitted for vote or consent, who publicly resells

securities of the issuer acquired in connection with that transaction

will be deemed to be engaged in a distribution, and therefore to be an

underwriter of those securities, except where the securities are resold

in accordance with Rule 145(d). The holding period requirements of Rule

145(d) correspond to the holding periods for resales in Rule 144.

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\12\ 17 CFR 230.145(d).

\13\ 17 CFR 230.145(c).

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The 1995 Release also requested comment on whether the holding

period or other requirements in Rule 144 should be revised to address

the concern that holders utilizing certain new hedging strategies may

not be economically ``at risk'' during the holding period. This issue

is addressed further by the Commission in the companion release

soliciting comment on additional changes to Rule 144.14

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\14\ Release No. 33-7391 (February 20, 1997).

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II. Cost-Benefit Analysis

The Commission believes, and the public comments support the view,

that reduction in the Rule 144 holding periods will reduce compliance

burdens and costs without significant impact on investor protection.

The Commission also believes that the action being taken will promote

market efficiency, investment and capital formation by reducing the

liquidity costs of holding restricted securities and reducing issuers'

cost of raising capital through the sale of restricted securities.

Issuers typically must offer restricted shares at a discount

relative to prices at which their unrestricted shares trade in the

public markets. In recent years, this discount has generally ranged

from 20-50%. The discount compensates the purchasers of the restricted

shares for their inability to resell the securities before completion

of the requisite holding period. Since the amendments shorten the

holding period, the purchasers will demand a smaller liquidity premium

and issuers will be able to sell their restricted securities at higher

prices.

The actual amount by which the annual volume of restricted shares

privately placed and resales of restricted securities will increase

cannot be reliably predicted. The actual size of these increases will

depend on the response of investors and issuers to the shortened

holding period requirements.

III. Final Regulatory Flexibility Analysis

This Final Regulatory Flexibility Analysis has been prepared in

accordance with Section 604 of the Regulatory Flexibility Act,\15\ and

relates to the adoption of amendments to Rules 144 and 145 under the

Securities Act.

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\15\ 5 U.S.C. Sec. 604.

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Reasons for, and Objectives of, Proposed Action

Rule 144 provides a safe harbor for the resale of restricted and

control securities. It sets forth conditions which, if satisfied,

permit persons who hold such securities to sell them publicly without

registration and without being deemed underwriters. One of the

conditions is that the securities must be held for a specified period

of time before any sales may be made.

Rule 145 governs the offer or sale of securities received in

connection with reclassifications, mergers, consolidations and asset

transfers. It provides that any party to a transaction covered by the

rule (other than the issuer), or any person who is an affiliate of such

party at the time the transaction is submitted for vote or consent, who

publicly offers or sells securities of the issuer acquired in

connection with such a transaction will be deemed to be engaged in a

distribution, and therefore to be an underwriter of the securities,

except where the securities are resold in accordance with Rule 145(d).

Rule 145(d) imposes holding periods that correspond to the holding

periods for resales in Rule 144.

The Commission has determined to adopt amendments to Rules 144 and

145 to shorten the holding period requirements. The amendments to Rule

144 permit the limited resale of restricted securities after a one-

year, rather than a two-year, holding period. They also permit

unlimited resales of restricted securities held by non-affiliates of

the issuer after a holding period of two, rather than three years.

The Commission believes that shorter holding periods should reduce

the costs of capital formation, particularly for smaller companies, by

reducing the illiquidity discount companies must give when raising

capital in private placements. Investors will also be able to recoup

their capital more quickly.

The Commission believes that the shorter holding periods will not

diminish investor protection, since they are sufficiently long to

ensure that resales under Rule 144 will not facilitate indirect public

distributions of unregistered securities by issuers or affiliates. The

amendments were recommended by small business representatives

participating in the SEC Government-Business Forum on Small Business

Capital Formation.

Significant Issues Raised by the Public Comments

The Commission received five requests for the Initial Regulatory

Flexibility Analysis prepared in connection with the 1995 Release, and

no public comments specifically addressed that analysis. The Commission

received public comment, however, on the amendments to the Rule 144 and

145 holding periods. The commenters agreed that shorter holding periods

should reduce the costs of capital formation and be of particular

benefit to small companies, which often sell securities in private

placements. At the suggestion of commenters, the Commission is

soliciting comment on further changes to the holding periods in the

companion proposing release.

Small Entities Subject to Requirements

The reduced holding periods will affect both small entities that

issue restricted or control securities and small entities that hold

such securities. The term ``small business,'' when used with reference

to an issuer, other than an investment company, is defined by

Securities Act Rule 157 as an issuer whose total assets on the last day

of its most recent fiscal year were $5 million or less and is engaged

or proposing to engage in small business financing. An issuer is

considered to be engaged in small business financing if it is

conducting or proposes to conduct an offering of securities that does

not exceed the dollar limitation prescribed by Section 3(b) of the

Securities Act. Exchange Act Rule 0-10 \16\ defines small entity when

used with reference to an issuer or person, other than an investment

company, to mean an issuer or person that, on the last day of its most

recent fiscal year, had total assets of $5,000,000 or less.\17\

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\16\ 17 CFR 240.0-10.

\17\ There is no comparable definition of ``person'' under the

Securities Act.

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The Commission is aware of approximately 1,019 Exchange Act

reporting companies that currently satisfy the definition of ``small

business'' under Rule 157 and may be affected by the reduced holding

periods. The reduced holding periods also may affect small businesses

that are not subject to Exchange Act reporting requirements. The

Commission is unable to determine the number of such

[[Page 9244]]

small businesses due to the absence of filings with the Commission by

such companies.

An estimated 3,800 entities, excluding natural persons, annually

file Form 144 based upon a staff review of a sample of Form 144

filings. The Commission has no basis for estimating the number of these

entities that are small entities under the definition of person in

Exchange Act Rule 0-10, because Form 144 does not require that such

information be provided and such information is not otherwise available

to the Commission.

The amendments are expected to affect favorably businesses of all

sizes, but particularly small businesses, by reducing the cost of

capital formation through private placements of unregistered securities

and allowing investors to recoup their capital more quickly. Issuers

generally must sell unregistered stock at a discount; the amount of the

discount should be reduced as a result of the shortening of the holding

periods.

Reporting, Recordkeeping and Other Compliance Requirements

Because of the nature of the amendments, the Commission does not

expect that reporting, recordkeeping and compliance burdens will

increase materially as a result of the changes. Indeed, the Commission

expects that compliance burdens will decrease as a result of the

reduced holding periods because sellers will not have to wait as long

to resell securities in reliance on Rule 144.

Nevertheless, the Commission expects the annual volume of Form 144

filings to increase as a result of the reductions in the required

holding periods and the increased incentive for issuers to raise

capital through sales of unregistered securities subject to Rule 144.

The Commission has no basis for reliably estimating this increased

volume of filings. The average cost associated with filing a Form 144

is approximately $200 based on a compensation rate of $100 per hour and

a task time of two hours per filing.

Steps Taken To Minimize Significant Economic Impact on Small Entities

The amendments adopted today will benefit issuers of all sizes

since a reduction in the length of the Rule 144 and 145 holding periods

will reduce issuers' cost of capital. The amendments will also benefit

all holders of restricted securities, who will be able to recoup their

capital more quickly pursuant to the reduced holding periods. Specific

consideration was given to small businesses in the formulation of these

amendments; as stated above, the amendments were recommended by small

business representatives.

The Commission considered a number of significant alternatives to

the amendments being adopted that might minimize the significant

economic impact on small entities. One alternative was to shorten the

holding periods even further. Comment is being solicited on that

alternative in a release proposing changes to Rules 144, 145 and Form

144.\18\ The Commission intends to give further consideration to the

treatment of small entities in connection with the Rule 144 proposing

release.

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\18\ Release No. 33-7391 (February 20, 1997).

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The Commission also considered the types of alternatives set forth

in section 603 of the Regulatory Flexibility Act to minimize the

economic impact of the amendments on small entities: (1) the

establishment of differing reporting compliance or reporting timetables

that take into account the resources available to small entities; (2)

the clarification, consolidation, or simplification of compliance and

reporting requirements for such small entities; (3) the use of

performance rather than design standards; and (4) an exemption from

coverage of the amendments, or any part thereof, for small entities.

Because the amendments benefit all issuers and holders of restricted

securities, differing compliance timetables for small entities would

not be appropriate. Neither could the compliance requirements of the

amendments be clarified or simplified further for small entities.

Finally, the amendments being adopted do not use design standards, and

an exemption from the amendments for small entities would not be

desirable or consistent with the stated objectives of the applicable

statutes.

IV. Statutory Basis

The amendments to Rule 144 and 145 are being adopted pursuant to

sections 2(11), 4(1) and 19(a) of the Securities Act.

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping, Securities.

Text of the Amendments

For the reasons set out above, title 17, chapter II of the Code of

Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for Part 230 continues to read in part,

as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,

78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,

and 80a-37, unless otherwise noted.

* * * * *

2. Section 230.144 is amended by revising paragraphs (d)(1),

(e)(3)(ii), (e)(3)(iii), (e)(3)(iv) and (k) to read as follows:

Sec. 230.144 Persons deemed not to be engaged in a distribution and

therefore not underwriters.

* * * * *

(d) * * *

(1) General rule. A minimum of one year must elapse between the

later of the date of the acquisition of the securities from the issuer

or from an affiliate of the issuer, and any resale of such securities

in reliance on this section for the account of either the acquiror or

any subsequent holder of those securities. If the acquiror takes the

securities by purchase, the one-year period shall not begin until the

full purchase price or other consideration is paid or given by the

person acquiring the securities from the issuer or from an affiliate of

the issuer.

* * * * *

(e) * * *

(3) * * *

(ii) The amount of securities sold for the account of a pledgee

thereof, or for the account of a purchaser of the pledged securities,

during any period of three months within one year after a default in

the obligation secured by the pledge, and the amount of securities sold

during the same three-month period for the account of the pledgor shall

not exceed, in the aggregate, the amount specified in paragraph (e) (1)

or (2) of this section, whichever is applicable;

(iii) The amount of securities sold for the account of a donee

thereof during any period of three months within one year after the

donation, and the amount of securities sold during the same three-month

period for the account of the donor, shall not exceed, in the

aggregate, the amount specified in paragraph (e) (1) or (2) of this

section, whichever is applicable;

(iv) Where securities were acquired by a trust from the settlor of

the trust, the amount of such securities sold for the account of the

trust during any period of three months within one year after the

acquisition of the securities by the trust, and the amount of

securities sold during the same three-month period for the account of

the settlor, shall not exceed, in the aggregate, the amount specified

in paragraph (e) (1) or (2) of this section, whichever is applicable;

* * * * *

[[Page 9245]]

(k) Termination of certain restrictions on sales of restricted

securities by persons other than affiliates. The requirements of

paragraphs (c), (e), (f) and (h) of this section shall not apply to

restricted securities sold for the account of a person who is not an

affiliate of the issuer at the time of the sale and has not been an

affiliate during the preceding three months, provided a period of at

least two years has elapsed since the later of the date the securities

were acquired from the issuer or from an affiliate of the issuer. The

two-year period shall be calculated as described in paragraph (d) of

this section.

3. By amending Sec. 230.145 by revising paragraphs (d)(2) and

(d)(3) to read as follows:

Sec. 230.145 Reclassification of securities, mergers, consolidations

and acquisitions of assets.

* * * * *

(d) * * *

(2) Such person or party is not an affiliate of the issuer, and a

period of at least one year, as determined in accordance with paragraph

(d) of Sec. 230.144, has elapsed since the date the securities were

acquired from the issuer in such transaction, and the issuer meets the

requirements of paragraph (c) of Sec. 230.144; or

(3) Such person or party is not, and has not been for at least

three months, an affiliate of the issuer, and a period of at least two

years, as determined in accordance with paragraph (d) of Sec. 230.144,

has elapsed since the date the securities were acquired from the issuer

in such transaction.

* * * * *

By the Commission.

Dated: February 20, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-4665 Filed 2-27-97; 8:45 am]

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