SEC Rule 144 is a critical regulation enforced by the U.S. Securities and Exchange Commission (SEC) that outlines the conditions under which restricted, unregistered, and control securities can be sold or resold in the public market. This rule is pivotal in safeguarding against insider trading and ensuring that buyers receive adequate information.
Key Highlights
- SEC Rule 144 aims to prevent insider trading and ensure fairness by mandating specific conditions for selling unregistered securities.
- The regulation applies to transactions involving restricted, unregistered, and control securities, which are often transactions outside public markets.
- Rule 144 fosters transparency, helping to maintain market integrity while protecting investors.
- The rule is also applicable to transactions involving control securities held by company insiders.
- To comply with Rule 144, five specific conditions must be met, although there are exceptions.
The Unique Situation of Cryptocurrency
While the world of cryptocurrency is currently lightly regulated, and cryptocurrencies like Bitcoin are not classified as securities, the SEC is pushing to regulate cryptocurrency trading more stringently.
Understanding Rule 144
Rule 144 governs the sale and resale of restricted, unregistered, and control securities. Control securities are typically held by insiders or individuals with significant influence over the issuing company. These securities are commonly acquired over-the-counter (OTC) or through private sales, often constituting a controlling stake in the company.
Restricted securities can also be acquired through private placements or stock benefit plans offered to employees. The SEC prohibits the resale of these types of securities unless they are registered or exempt from registration, providing that certain conditions are met.
Exceptions to the Rule
- Sellers unaffiliated with the issuing company who have owned the securities for more than one year can sell without restrictions.
- Non-affiliated parties can sell if the securities were held for over six months, provided they meet current public information requirements.
Five Conditions for Resale Under Rule 144
To comply with Rule 144, the following five conditions must be met for the sale of restricted, unregistered, and control securities:
- Holding Period: For a public company, the holding period is six months from the date the securities were purchased. For non-reporting companies, the holding period is one year.
- Current Public Information: Adequate and current public information must be available about the company, including past financial statements and details about key officers and the business.
- Volume Restrictions: Affiliates cannot resell more than 1% of the total outstanding shares in any three-month period. For listed company stocks, either 1% of the total outstanding shares or the average of the previous four-week trading volume can be sold.
- Normal Trading Conditions: All standard conditions for trading apply. Brokers cannot solicit buy orders or charge excessive commissions.
- Filing Notice: Affiliates must file a notice if the sale exceeded $50,000 during a three-month period or involves more than 5,000 shares.
Rule 144 and Cryptocurrency Securities
While traditional cryptocurrencies like Bitcoin are not classified as securities, some financial products that offer returns based on lending or staking these tokens may fall under the definition of securities. The SEC has been investigating crypto exchanges to determine whether they are unlawfully offering unregistered securities to U.S. customers.
Are Cryptocurrencies Securities?
If a crypto asset is classified as a restricted security under Rule 144, it can only be resold under specific conditions, such as a holding period and complying with associated filing and quantity limitations.
Definition and Importance of Restricted Securities
Restricted securities, typically sold in private placements, cannot be traded freely on stock exchanges. They come with resale and transfer restrictions that often require registration with the SEC.
Role of Control Securities
Control securities are owned by corporate insiders or those with significant influence. These individuals, or affiliates, must follow additional restrictions under SEC regulations when selling these securities.
The Purpose of SEC Rule 144
Rule 144 provides a transparent framework for the resale and transfer of restricted and control securities. It aims to prevent market manipulation, ensure proper information disclosure, and protect investors.
Are Cryptocurrencies Affected by Rule 144?
Currently, cryptocurrencies are not directly subject to Rule 144. However, the SEC is advocating for more regulation in cryptocurrency trading, particularly following upheavals such as the collapse of FTX.
The Bottom Line
SEC Rule 144 is a pivotal regulation that sets the conditions for the public market sale of restricted and control securities, mitigating insider trading risks and ensuring information transparency. Affiliates of issuing companies must adhere to a minimum holding period and detailed reporting requirements, fostering a fair and transparent trading environment.
Related Terms: restricted securities, unregistered shares, control stock, holding period, affiliate persons, staking, cryptocurrency regulation.
References
- U.S. Securities and Exchange Commission. “Rule 144: Selling Restricted and Control Securities”.
