Resales of Restricted Securities By Non-Affiliates

Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), requires that all offers and sales of securities be registered with the Securities and Exchange Commission (“SEC”) or exempt from SEC registration. When shares have not been registered with the SEC, investors receive restricted securities. Investors most often receive restricted securities in private placements that are exempt pursuant to Rule 506(b) or Rule 506(c) of Regulation D of the Securities Act. 

In most circumstances, restricted securities are not subject to a Form S-1 registration statement under the Securities Act. Resales of restricted shares can be registered with the SEC on Form S-1 or other SEC registration statement. Investors with restricted securities may resell their shares publicly if they comply with the requirements of SEC Rule 144 of the Securities Act.

Rule 144 Safe Harbor

Rule 144 of the Securities Act provides a safe harbor for resale of restricted securities and control securities by affiliates and non-affiliates of an issuer. A non-affiliate can rely on Rule 144 if he or she is not an underwriter and the sale does not involve a distribution of securities. If the sale of restricted securities is made in compliance with Rule 144, it is not a distribution, and the investor is deemed not to be a statutory underwriter. 

Rule 144 provides different requirements for resales by affiliates and non-affiliates of an issuer and for resales of securities of reporting companies and non-reporting companies so it is important for investors to understand the distinction.

Who is a Non-Affiliate of the Issuer?

Investors who are not affiliates of the issuer can rely on Rule 144 to publicly resell their restricted securities so long as they paid consideration for their shares at least 6 months prior to their sale date if the issuer of the securities is subject to SEC reporting requirements or 12 months if not. After holding the securities for at least one year, a non-affiliate investor can sell their restricted securities without needing to satisfy the information requirement.

Rule 144 for Non-Affiliate Resales

An affiliate or control person is a person with the power to control or direct management and policies of the issuer. Officers and directors are considered affiliates, and so are holders with 10% or more of an issuer’s securities. The issue of whether an investor is an affiliate requires a fact-based analysis. Under certain circumstances, a holder who owns much less than 10% of an issuer’s stock could be an affiliate if certain facts are present. For example, if they control a large percentage of the issuer’s public float, they may be deemed to have the ability or power to control or direct management of the issuer even if they hold less than 10% of the issuer’s total outstanding shares. Similarly, a stockholder owning more than 10% might not be an affiliate of the issuer if they have no influence over management. 

When is a Public Company “Subject To” SEC Reporting Obligations?

Public companies become subject to SEC reporting requirements when they file a registration statement covering a class of securities under the Securities Exchange Act of 1934 (the “Exchange Act”) become “subject to” SEC reporting requirements. It is important to note that public companies that voluntarily submit filings and reports with the SEC but who do not have a class of securities registered under the Exchange Act are not subject to SEC reporting requirements.  To be “subject to” SEC reporting requirements, the issuer must file a registration statement on Form 10 or Form 8-A. A registration statement on Form S-1 or other Securities Act registration statement will not make the Company “subject to” SEC reporting obligations.

For public companies subject to SEC reporting requirements under Section 13 or Section 15(d) of the Exchange Act which have reported under the Exchange Act for at least 90 days before their resale of restricted securities, they must have filed all reports required under the Exchange Act except for Form 8-K for the prior year.

Current Public Information About the Issuer

For public companies subject to SEC reporting requirements, which have been reporting under the Exchange Act for at least 90 days before their resale of restricted securities, they must have filed all reports required under the Exchange Act except Form 8-K for the prior 12 months.

Rule 144 and Shell Companies

Rule 144 is not available for restricted securities issued by present or former shell companies. A shell company is defined in Rule 144(i)(1).  An issuer is a Shell Company if it has no or nominal operations and either has:

• no or nominal assets,
• assets consisting solely of cash and cash equivalents; or
• assets consisting of cash and cash equivalents and nominal other assets.

For investors of issuers who engaged in reverse mergers with present or former shell companies to rely upon the safe harbor of Rule 144, Rule 144(i)(2) requires that the issuer:

• no longer be a shell company,
• be subject to the reporting requirements of the Exchange Act,
• have filed all reports required to be filed under the Exchange Act for the past 12 months (other than Form 8-K reports), and
• has filed all of the information required by Form 10 or Form 20-F, as applicable, to register the class of securities under the Exchange Act. This filing is often done by a “super 8-K,” which is a Form 8-K report that contains all of the required Form 10 (or Form 20-F) information.

If the above requirements are satisfied, an investor can sell restricted securities under Rule 144 one year after the date that Form 10 or Form 20-F information was filed with the SEC.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney, at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit www.securitieslawyer101.com.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
200 E. Palmetto Park, Suite 103
Boca Raton, Florida 33432