Rule 144 was promulgated by the SEC to offer a ‘safe harbor’ for the resale of private securities under Section 4 (1). Essentially the SEC is saying “yes it can be tough to know for sure how to avoid the status of underwriter, so we are going to create an example for you of how to do it”. Rule 144 contains a set of requirements, and meeting those requirements can assure you that you are complying with Section 4(1). It is not exclusive, therefore there are other ways to comply, but it’s one clear way of doing so.
Rule 144 is especially useful for small shareholders that are not corporate officers or directors. This is because of the concept of company ‘affiliate’. An affiliate is someone who has a form of control over the company. Usually you can be an affiliate if you onw 10% or more of the shares, or if you are a director of officer.
Affiliates must comply with the requirements that adequate information about the company is available and must also file notice of sale with the SEC, among others. Non-affiliates only have to comply with the holding period requirements. That is in most cases 1 year. Yes, 1 year. That means after exercising your shares options, you must wait one year before being able to rely on Rule 144.
What if you want to sell your shares before having held them for one year? That is where Section 4 (1 1/2) comes in.
I will discuss Section 4 (1 1/2) in the next post…