SEC Revisions to Rules 144 and 145 Benefit Smaller Companies

John Shu, Stradling Yocca Carlson & Rauth, Newport Beach, California

      In late 2007 the SEC approved revisions to Rules 144 and 145 under the Securities Act of 1933, which governs the sale of restricted securities and affects smaller public companies (e.g. less than $700 million in annual revenue).[1], [2]  The revisions take effect on February 15, 2008 and are retroactive. 

     Previously, restricted security holders had to hold their securities for at least one year, and thereafter could only sell those securities subject to various requirements (e.g. sufficient public information about the issuer).  The Rule 144 and 145 revisions significantly reduce the previous restrictions on resales, shorten the holding periods, and eliminate certain manner of sale requirements such as the volume limitations.

    These changes will very likely make private placements by smaller publicly traded companies more attractive to investors.  Restricted securities will also likely become more attractive as a form of acquisition currency.  Because the Revisions increase the liquidity of restricted securities, the Revisions will also likely decrease the cost of capital for issuers (e.g. reducing liquidity discount).  All of this is especially helpful in the current environment of tightened credit markets. 

Under Revised Rule 144:   

•  For Rule 144 resales of restricted securities of reporting companies,[3] the holding period is six months.  After six months, affiliates may resell if the Rule 144 conditions relating to current public information, volume limitations, manner of sale (for equity securities),[4] and Form 144 notices are satisfied.   Non-affiliates may resell if the current public information condition is satisfied.  After one year, non-affiliates may resell without restriction.
•  For Rule 144 resales of restricted securities of non-reporting companies, the holding period remains one year.  After one year, affiliates may resell if the Rule 144 conditions relating to current public information, volume limitations, manner of sale (for equity securities), and Form 144 notices are satisfied.  Non-affiliates may resell without any restrictions.  
• Form 144 notice thresholds for affiliates increased from 500 shares or $10,000 to 5,000 shares or $50,000.  Non-affiliates no longer have a Form 144 notice requirement.      

Under Revised Rule 145:    

•   Revised Rule 145(c) eliminates the presumptive underwriter doctrine, except for transactions involving blank check or shell companies.[5]^{, [6]}  Thus, affiliates of a target company will, in general, be exempt from the prior resale restrictions.

• Revised Rule 145(d) harmonizes the resale restrictions to Revised Rule 144.  

 Foreign Private Issuers: 

       Foreign private issuers may now file their financial statements in accordance with the English language version of the International Financial Reporting Standards as issued by the International Accounting Standards Board, and where such financial statements are filed to eliminate the U.S. GAAP reconciliation requirement.  Issuers who rely upon other accounting standards, however, must continue to reconcile their financial statements with U.S. GAAP.  The SEC's rule change will encourage foreign private issuers to offer securities in the market, increase opportunities for investors to diversify in foreign securities, and is a step forward on the path to converging international accounting standards. 

Please contact the attorneys listed below with any questions, or any Stradling Yocca Carlson & Rauth attorney with whom you regularly consult.   

•  Mr. John Cannon, (949) 725-4107, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
•  Mr. Michael Flynn, (949) 725-4245, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it  
•  Mr. Shivbir Grewal, (949) 725-4119, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it  
•  Mr. John Shu, (949) 725-4142, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

 [2]           http://www.sec.gov/rules/final/finalarchive/finalarchive2007.shtml; Release No. 33-8869

 [3]           "Reporting companies" are issuers that are, and have been for at least 90 days before the sale, subject to the reporting requirements of § 13 or § 15(d) of the Securities Exchange Act of 1934.

 [4]           The revisions eliminated the manner of sale requirements of Rule 144(f) with respect to debt securities, non-participating preferred stock, and asset-backed securities.

 [5]           A "shell company" is a registrant, other than an "asset-backed issuer," which has no nominal operations and either (a) no or nominal assets or (b) assets consisting solely of cash and cash equivalents, or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets.

 [6]           A "blank check" company is a company that (1) is in the development stage; (2) has no specific business plan or purpose, or has indicated that its business plan is to merge with or acquire an unidentified third party; and (3) issues penny stock.