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Restricted Securities and Rule 144

30. What is a “Rule 502(d)” and “Rule 144 Safe Harbor”?

Rule 502(d) requires that issuers of securities pursuant to an exemption under Regulation D take the following three steps to make certain the shares are not resold during the restricted period:

•    reasonable inquiry to determine if each purchaser is buying the security for himself or for someone else,
•    written disclosure to each purchaser that the securities are restricted, and
•    a legend on the securities noting the resale restriction.

The SEC promulgated Rule 144, which allows a “safe harbor” for purchasers to resell their shares after one or two years, depending on how much public information about the issuer is available. In any case, the issuer must make certain that the shares are not being purchased with the intent of immediate resale. This safe harbor rule provides additional comfort to a purchaser of the security. As such, it adds liquidity to the security by making it easier to later sell and trade in the market.

•    Discussion: What do you think is the underlying purpose or rationale for Rule 502(d) and Rule 144? Do you think these rules are adequate to achieve their objectives? Why or why not?

•    Practice Question: ABC Corp issues securities pursuant to Rule 505 registration exemption. Kerry is a purchaser of securities. He realizes that the shares are restricted for a substantial period. What should ABC Corp and Kerry do to make certain that later reselling the shares does not potentially violate the Rule 505 offering?

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