On February 15, 2008, the Securities and Exchange Commission (SEC) made significant amendments to Rule 144, which governs the resale of restricted and controlled securities. These changes aimed to reduce the restrictions on resales by reporting companies, but they also introduced new complexities—particularly concerning companies that have at any point been classified as shell companies.

Rule 144 primarily serves as a safe harbor that allows holders of restricted or controlled securities to resell their shares without registering the securities, provided that certain conditions are met. The rule is designed to facilitate the flow of securities in the public market while maintaining transparency and protecting investors.

Key Changes to Rule 144

The most notable amendments to Rule 144 involved changes to the holding period for restricted securities, particularly for non-affiliates of reporting companies. The previous one-year holding period for non-affiliates was reduced to six months for reporting companies. Additionally, the revised rule eliminates volume and manner-of-sale limitations for non-affiliates who have satisfied the holding period.

However, Rule 144(i) introduced specific limitations on companies that have previously been shell companies. Under the revised rules:

• If a company has ever been a shell company, it must be current on its SEC filings for 12 months after ceasing to be a shell company before Rule 144 can be applied.
• This rule ensures that investors have access to complete and up-to-date information about the company before selling restricted securities.

Non-affiliates of non-reporting companies, however, are still required to adhere to the one-year holding period, but once this requirement is met, they are free from volume limitations and manner-of-sale restrictions.

Holding Periods and Tacking

The revised Rule 144 clarifies the holding period requirements for both affiliates and non-affiliates, but a certain level of ambiguity remains when it comes to "tacking"—the ability to combine the holding periods of previous and current owners to meet the requirements. Generally, tacking is allowed in some cases, but the SEC and case law impose limitations on when and how it applies.

For affiliates of reporting companies, 90 days of subjectivity to SEC reporting requirements is necessary before any resale under Rule 144 can occur. Affiliates of non-reporting companies must continue to meet the one-year holding period, but once the securities are held for two years, the transaction may qualify for resale without restrictions, even if the company is a non-reporting entity.

Resales by Affiliates and Non-Affiliates

The revised Rule 144 distinguishes between affiliates and non-affiliates, each of whom has different obligations:

• Non-affiliates: Non-affiliates of a reporting company can resell restricted securities after six months with no volume or manner-of-sale restrictions, provided the issuer is compliant with reporting requirements.
• Affiliates: Affiliates of a company must continue to adhere to volume restrictions, manner-of-sale limitations, and the reporting requirements of Sections 13 or 15(d) of the Securities Act of 1934 for at least 90 days prior to the resale.

For non-affiliates of non-reporting companies, the one-year holding period remains unchanged. Affiliates, however, must still comply with volume and manner-of-sale limitations.

The Impact of Shell Company Status

One of the most significant changes under Rule 144(i) concerns companies that have previously been classified as shell companies. A shell company is generally defined as a company with no or minimal operations and no significant assets other than cash or nominal assets.

The revisions mandate that if a company has ever been a shell company, it must meet specific conditions to be eligible for the Rule 144 safe harbor:

• The company must be current in its SEC reporting obligations for 12 consecutive months after ceasing to be a shell company.
• This rule ensures that shell companies provide sufficient transparency and financial disclosures before insiders or non-affiliates can sell restricted securities.

Safe Harbor Provisions

Rule 144 is technically a "safe harbor", meaning that compliance with its conditions offers a presumptive exemption from registration for resales. However, the rule itself is not the only mechanism available to sell restricted securities. In some cases, resales may still be exempt from registration even if they do not meet all of Rule 144's requirements.

For example, if the owner of a controlling block of stock in a public company sells a significant portion of their stock through a private transaction, Rule 144 does not apply. This is because the rule is designed for public, not private, resales. The owner would need to rely on another exemption, such as Section 4(a)(1) or 4(a)(2) of the Securities Act, depending on the circumstances of the transaction.

Conclusion: Navigating the Revised Rule 144

The revisions to Rule 144 bring greater flexibility for non-affiliates of reporting companies, who now benefit from shorter holding periods and fewer restrictions on the resale of restricted securities. However, the addition of Rule 144(i) introduces complexity for companies that have ever been shell companies. These companies must ensure compliance with SEC reporting requirements for a full 12 months after ceasing to be a shell before relying on Rule 144 for resales.

For securities attorneys and their clients, understanding the nuances of holding periods, tacking, and the rules around shell company status is critical. While Rule 144 offers a clear framework for resales, it is essential to remain aware of competing securities laws and case law that may impact eligibility.

For more information or legal assistance in navigating Rule 144 compliance, consult with an experienced securities attorney to ensure your transactions meet all regulatory requirements.