Further to our blog post about Rule 144 for non-affiliates, we would like to provide some general guidance on Rule 144 for affiliates in this post. Please note, however, that Rule 144 is complicated and this post is only intended to provide limited background information. If you intend to resell pursuant to Rule 144, we urge you to consult with a qualified professional.

Short Answer

The following short answer applies to a seller who is an affiliate of the company whose securities are to be sold, and applies only to securities of a company that is not currently a “shell company” and that has been a reporting company in the United States for at least 90 days immediately prior to the sale.

In the situation described above, Rule 144 may be available for resale by a seller if the following conditions are satisfied:

1. the seller owned the securities for at least six months;
2. the company is current in its U.S. reporting obligations (other than Form 8-K reports);
3. the volume limitation requirement must be satisfied. For example, if the company’s shares trade on the OTCBB, OTCQX or OTCQB, the amount of shares sold, together with all sales of shares of the same company sold within the three months prior to the Rule 144 sale cannot exceed 1% of the outstanding shares of the company;
4. the manner of sale limitation requirement must be satisfied. One of the permitted manners of sale is to sell the shares using a broker who (a) does no more than execute the order to sell the shares as an agent for the seller, (b) receives no more than the usual and customary broker’s commission, (c) neither solicits nor arranges for the solicitation of the customers’ orders to buy the shares in anticipation of or in connection with the Rule 144 sale, and (d) after reasonable inquiry is not aware of circumstances indicating that the seller is an underwriter or that the Rule 144 sale is a part of a distribution of securities of the company; and
5. if the amount of securities to be sold in reliance upon Rule 144 during any period of three months exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the Securities and Exchange Commission (the “SEC”) and any U.S. national securities exchange, if the securities are listed.

Rule 144 cannot be used to resell securities of a “shell company”. If the securities to be sold were initially issued by a shell company or a former shell company that has since ceased to be a shell company, Rule 144 can be used if:

1. the company is subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports; and
2. at least one year has elapsed since the company filed a document (typically on Form 8-K) containing the type of disclosure about the company and its business that would normally be included in a Form 10 initial registration statement, reflecting the company’s status as an entity that is no longer a shell company. Form 10 is the initial registration form used to register a company as a reporting company with the SEC under the Securities Exchange Act of 1934.

Background Information

For the background information about Rule 144, please see our blog post about Rule 144 for non-affiliates.

Two very important classifications are key to any use of Rule 144. First, is the company a reporting company and, second, is the seller an affiliate of the company? Different conditions apply depending on the answers to those questions.

Reporting Company

Rule 144 has different conditions for reporting companies and non-reporting companies. Companies that have been reporting companies for less than 90 days are considered non-reporting companies. Also voluntary filers (e.g. companies that did not file a registration statement on Form 10 or Form 8-A) are also considered non-reporting companies.

This blog post discusses Rule 144 as it applies to reporting companies only.

Affiliates

Rule 144 has different conditions for affiliates and non-affiliates. An affiliate of a company is “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with” such company. Officers, directors and stockholders owning 10% or more of the company’s outstanding securities are generally presumed to be affiliates, but such presumption may be rebuttable depending on facts and circumstances.

This blog post considers Rule 144 as it applies to persons who are affiliates or were affiliates at any time during the three months before the date of sale.

Rule 144 Conditions

An affiliate wishing to sell the restricted securities of a reporting company must comply with at least five conditions: holding period requirement, current information requirement, volume limitations, manner of sale limitations, and Form 144 notice filing requirement. If the restricted securities were initially issued by a shell company or a former shell company, Rule 144 imposes additional conditions.

Holding Period Requirement

For restricted securities, the seller must have held the securities for at least six months.

Current Information Requirement

Adequate current public information with respect to the company that issued securities must be available. For reporting companies, such information is deemed to be available only if the following conditions are satisfied:

1. the company is, and has been for a period of at least 90 days immediately before the Rule 144 sale, subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
2. the company must have filed all reports required by section 13 or 15(d) of the Securities Exchange Act of 1934 (e.g. Forms 10-K and 10-Q) during the 12 months preceding such sale, other than Form 8-K reports; and
3. the company must have submitted electronically and posted on its corporate website, if any, every interactive data file (XBRL) required to be submitted and posted during the 12 months preceding such sale.

Volume Limitations

Rule 144 imposes a limit on the amount of securities sold for the account of an affiliate of a company. The amount of securities sold, together with all sales of securities of the same class sold for the account of the affiliate within the three months prior to the Rule 144 sale cannot exceed the greatest of:

1. 1% of the shares or other units of the class outstanding as shown by the most recent report or statement published by the company;
2. The average weekly reported volume of trading in such securities on all national securities exchanges and/or reported through the automated quotation system of a registered securities association (e.g. New York Stock Exchange, NASDAQ, and NYSE MKT) during the four calendar weeks preceding the filing of Rule 144 notice, or if no such notice is required the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker; or
3. The average weekly volume of trading in such securities reported pursuant to an effective transaction reporting plan or an effective national market system plan (as defined in Rule 600 of Regulation NMS) during the four-week period specified above.

Manner of Sale Limitations

Rule 144 requires an affiliate to sell the securities in one of the following manners:

1. Brokers’ transactions executed upon customers’ orders on any exchange or in the over-the-counter market.

Such brokers’ transactions include transactions by a broker where such broker;

(a) does no more than execute the order or orders to sell the securities as agent for the affiliate;

(b) receives no more than the usual and customary broker’s commission;

(c) neither solicits nor arranges for the solicitation of customers’ orders to buy the securities in anticipation of or in connection with the Rule 144 sale; and

(d) after reasonably inquiry is not aware of circumstances indicating that the affiliate is an underwriter or that the Rule 144 sale is a part of a distribution of securities of the company;

2. Transactions directly with a market maker.

The term “market maker” means any specialist permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis; or

3. Riskless principal transactions where:

(a) The offsetting trades must be executed at the same price (exclusive of an explicitly disclosed markup or markdown, commission equivalent, or other fee);

(b) The transaction is permitted to be reported as riskless under the rules of a self-regulatory organization; and

(C) The requirements of paragraphs (1)(b)(applicable to any markup or markdown, commission equivalent, or other fee), (1)(c), and (1)(d) above are met.

The term “riskless principal transaction” means a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell.

In addition, an affiliate must not:

1. Solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transaction, or
2. Make any payment in connection with the offer or sale of the securities to any person other than the broker or dealer who executes the order to sell the securities.

Form 144 Notice of Proposed Sale

If the amount of securities to be sold in reliance upon Rule 144 during any three month period exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000, an affiliate must file a notice on Form 144 with the SEC and any national securities exchange, if the securities are listed.

The Form 144 must be filed concurrently with either the placing with a broker of an order to execute a sale of securities or the execution directly with a market maker of such a sale. The person filing the Form 144 must have a bona fide intention to sell the securities referred to in the Form 144 within a reasonable time after the filing of the Form 144.

Requirements for Former Shell Companies

Rule 144 imposes additional conditions for the resale of securities initially issued by a shell company or a former shell company. A shell company is an issuer that has (A) no or nominal operations and (B) either: (1) no or nominal assets; (2) assets consisting solely of cash and cash equivalents; or (3) assets consisting of any amount of cash and cash equivalents and nominal other assets.

Additional conditions are:

1. such company must have ceased to be a shell company;
2. the company must be subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
3. the company must have filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports;
4. the company must have filed current “Form 10 information” with the SEC reflecting its status as an entity that is no longer a shell company; and
5. at least one year has elapsed since the date that the company filed “Form 10 information” with the SEC.