Shares bought in a private placement, or received as compensation, are restricted securities. They carry a legend and cannot be resold publicly without registration or an exemption. Rule 144 is the safe harbor most holders use.
The holding period
- Reporting company: if the issuer has been subject to SEC reporting for at least 90 days, the holding period is generally six months.
- Non-reporting company: the holding period is generally one year.
- The clock generally starts when the securities are purchased and fully paid. In some cases, such as certain conversions, holding periods can be tacked.
Non-affiliates vs. affiliates
A non-affiliate who has held reporting-company shares for six months can generally sell, provided current public information about the issuer is available. After one year, a non-affiliate can generally sell freely.
An affiliate, typically an officer, director or large shareholder, faces additional conditions on every sale: current public information, volume limits of the greater of 1% of the outstanding class or the average weekly trading volume over the prior four weeks in any three-month period, manner-of-sale requirements for equity securities, and a Form 144 filing when sales in a three-month period exceed 5,000 shares or $50,000.
Shell companies
Rule 144 is generally unavailable for securities of current or former shell companies until specific conditions are met, including at least one year after the company files information equivalent to a Form 10. This trips up many holders of shares in reverse-merger companies.
Getting the legend removed
The transfer agent controls the legend, and it will usually require an opinion of counsel confirming that Rule 144 is available for the proposed sale or transfer. The opinion rests on the holder’s representations, the issuer’s reporting status and the facts of the acquisition, so accurate information up front saves weeks.
If you are an affiliate, or you hold shares in a company that was ever a shell, get advice before you place the trade. It is much harder to fix after a broker rejects the sale.
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Rules change; talk to counsel about your specific situation.
