Resale of Restricted and Control Securities
Securities acquired through private placements and those held by company insiders can't just be dumped on the open market. The Securities and Exchange Commission (SEC) has specific rules (primarily Rule 144 and Rule 144A) that govern when and how these securities can be resold.
SEC Rule 144 (Resale Safe Harbor)
Rule 144 provides conditions under which holders of restricted securities (acquired in private placements) and control persons (affiliates of the issuer) may resell without registration.
Conditions for Affiliates vs. Non-Affiliates
| Condition | Affiliates (Control Persons) | Non-Affiliates |
|---|---|---|
| Holding period | 6 months (reporting issuers) or 1 year (non-reporting) | 6 months (reporting) or 1 year (non-reporting) |
| Volume limitation | Greater of: 1% of outstanding shares OR average weekly trading volume (prior 4 weeks) per 3-month period | None (after holding period + current public info) |
| Manner of sale | Must be sold through routine broker transactions | None (after holding period) |
| Form 144 filing | Required if sale exceeds 5,000 shares or $50,000 in any 3-month period | Not required |
| Current public information | Required | Required for first 6 months only (reporting issuers) |
Key Definitions
- Restricted securities: Securities acquired in unregistered, private sales (e.g., Regulation D (Reg D) offerings)
- Control securities: Securities held by an affiliate (officer, director, or 10%+ shareholder) of the issuer
- Affiliate: A person who controls, is controlled by, or is under common control with the issuer
Exam Tip: Gotchas
Non-affiliates face fewer restrictions than affiliates. After the holding period and with current public information available, non-affiliates can sell without volume limits, manner-of-sale restrictions, or Form 144 filings. Affiliates remain subject to all conditions regardless of how long they hold.
SEC Rule 144A (Private Resales to Institutions)
Rule 144A provides a safe harbor for resale of restricted securities to qualified institutional buyers (QIBs).
QIB Requirements
| Entity Type | Minimum Threshold |
|---|---|
| Most institutions | Own and invest at least $100 million in securities of unaffiliated issuers |
| Broker-dealers | Own and invest at least $10 million |
| Banks and savings institutions | Must also have a net worth of at least $25 million |
Key Features
- Securities resold under 144A do NOT need to be SEC-registered
- Enhances liquidity in the private placement market
- Available ONLY to QIBs; not available to retail investors
- No holding period requirement for the QIB purchaser
Exam Tip: Gotchas
Rule 144A resales are available ONLY to QIBs (institutions with $100M+ in securities). They are NOT available to retail investors. The $10 million threshold applies specifically to broker-dealers acting as QIBs.
Regulatory Requirements for Private Placement Resales
- Restricted securities acquired under Regulation D (Reg D) cannot be freely resold; they must either be registered or sold under an exemption (e.g., Rule 144, Rule 144A)
- Securities and Exchange Commission (SEC) Rule 145: Covers reclassification, mergers, consolidations, and asset acquisitions; securities received may be restricted depending on whether the holder is an affiliate