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Rule 144A Securities Regulation Explained

Rule 144A (Securities Law) Explained

Rule 144A is an exemption from the registration requirements prescribed in section 5 of the Securities Act. It allows public reselling of restricted and control securities without a registration if certain conditions are met.

A Little More About Rule 144A Transactions

The Securities Act of 1933 makes it mandatory for all the securities issued by a company to be registered with the Securities and Exchange Commission before any public offering or sale. Rule 144A provides a ‘safe harbor’ exemption to the sellers. This exemption can be used for reselling securities to the qualified buyers. The qualified buyers must be some institutions and not any individual. The rule allows the institutions to trade these securities among themselves avoiding a registration process.

The rule increases the liquidity of the restricted and control securities as it enables the large institutional investors to trade these securities more freely.

The rule makes it mandatory to remove the restrictive legends from the certificate before selling. Rule 144A describes how to have restrictive legend removed. There are certain other conditions need to be met for availing this exemption.

Holding Period for 144A Securities

According to the Rule 144A, one must hold the shares for a certain period of time before being able to sell the restricted securities in a marketplace. If the issuing company of the securities is a reporting company the required holding period is minimum six months and for the stocks of non-reporting companies the minimum required holding period is one year. The holding period begins on the day the securities are bought and fully paid.

Current Public Information Under Rule 144A

Minimum required information about the issuing company must be available publicly prior to the selling. Under the Securities Act, the reporting companies need to file its reports periodically. So, if the company is a reporting company and complies with the rules then the current information about the company should already be accessible by the public. For non-reporting companies, it is mandatory to disclose the basic information about the company publicly before the sale. This basic information includes the nature of its business, name, and identity of the directors and officers, financial statement etc.

Trading volume formula For Rule 144A

Affiliates are allowed to sell only up to a limited volume. During any three months of the period, their sell must not exceed the greater of 1% of the outstanding shares of the same class being sold or the average weekly reported volume during the four-week period preceding the notice of sale on Form 144.

Rule 144A Brokerage Transactions

For the affiliates, the sales must be considered and handled as routine trading transactions and the brokers must not receive more than the normal rate as commission. The sale of those securities cannot be solicited by either the seller or the broker.

Filing notice with the Security and Exchange Commission

If an affiliate sells more than 5,000 shares or the selling value exceeds $50,000 in any three- month period, it must be reported to the Security and Exchange Commission on Form 144.

References For Rule 144A Securities Regulation


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