Rule 144 governs the sale of restricted or control securities — stocks that could not otherwise be sold because of the United States’ Securities Act of 1933. The Securities Act was the U.S. federal government’s first regulation of the stock market and was enacted in the wake of the stock market crash of 1929. Among the act’s objectives were to help level the playing field between the average investor and the “insiders” who might have an unfair advantage because of their position in a regulated company.
Restricted securities are those that have not been previously registered with the U.S. Securities and Exchange Commission (SEC), which oversees stocks. Publicly issued stocks are registered as part of the initial offering process, but certain other stocks escape this scrutiny. Small, localized offerings often are exempted, as are stocks paid out as part of an employee benefit plan or as compensation for professional services. Restricted stock certificates normally are stamped with a notice of their restricted status.
Control securities are owned by “insiders,” directors or large shareholders of a company who are in a position to potentially control its policies or management. These insiders or affiliates are assumed to have access to information that is unavailable to members of the investing public. This combination of inside knowledge and ownership of large blocs of stock constitute an unfair advantage and enhance the potential for fraud. Rule 144 provides a balancing remedy for this advantage when affiliates want to liquidate their holdings.
Rule 144 lays out five basic conditions to help ensure that the transactions are equitable:
1. Holding Period: Restricted securities of a company subject to the reporting requirements of the Securities Exchange Act of 1934 must be held for at least six months. For those not required to report, the holding period is one year.
2. Adequate Current Information: Before a sale can be made, the issuing company must have complied with the reporting requirements of the Exchange Act
3. Trading Volume Formula: The volume sold by an affiliate during any three month period is limited to either 1 percent of the outstanding shares or 1 percent of the weekly trading volume during the four weeks prior to the sale, whichever is greater.
4. Ordinary Brokerage Transactions: Sales by affiliates must be handled as normal transactions at normal commission rates, without solicitation of buy orders.
5. Filing a Notice of Proposed Sale: The SEC must be notified if aggregate sales exceed 5,000 shares or $50,000 US Dollars in any three month period — and if the entire sale is not completed.
Finally, Rule 144 requires the removal from the certificates of the stamp designating the stock as restricted. This can be removed only by the stock transfer agent. The concurrence of the issuing company’s attorney also is required.