Resales of Securities by Control Persons

The outline specifically calls out resales by control persons because affiliate liquidity is a recurring banker problem. An officer, director, or 10%+ holder cannot simply hit the market with a large block; the trade must fit a defined exemption or safe harbor.

Who Is a Control Person / Affiliate?

The affiliate definition is a facts-and-circumstances test built around CONTROL.

• A person that directly or indirectly controls, is controlled by, or is under common control with the issuer.
• Officers and directors are presumed affiliates.
• 10%+ shareholders are typically affiliates, though not always.
• Status depends on total share count, board representation, contractual control, and voting agreements.

A 5% holder with two board seats may be an affiliate. An 8% passive holder with no board representation may not be. The 10% rule is a useful default, not a bright line.

Exam Tip: Gotchas

• Affiliate status hinges on CONTROL, not just ownership percentage. A 5% holder with two board seats may be an affiliate; an 8% passive holder with no board representation may not be. The 10% rule is a safe assumption, not a bright line.

Why Affiliate Resale Triggers Underwriter Concerns

The mechanical reason affiliate resales are restricted is the underwriter definition.

• The underwriter definition in the Securities Act of 1933 sweeps in any person who sells securities for the issuer OR for "any person directly or indirectly controlling or controlled by the issuer, or under common control with the issuer" in connection with a distribution.
• Without a safe harbor, a control person reselling a large block could be deemed engaged in an unregistered distribution requiring a registration statement.
• The exemption analysis is identical to a primary distribution: either fit an exemption or safe harbor, or register.

Exam Tip: Gotchas

• The underwriter definition is the statute that drives the affiliate-resale problem in the first place. Without it, affiliates could simply resell freely. The safe harbors exist because the affiliate would otherwise be treated as an underwriter engaged in an unregistered distribution.

Paths to Resale by Control Persons

Resale Registration: The Expensive Path

A registered resale on Form S-1 or Form S-3 (a selling-stockholder registration) eliminates the affiliate-resale problem entirely, but it is expensive.

• The issuer must file a registration statement and pay legal, audit, and SEC filing fees.
• The affiliate is named in the prospectus as a selling stockholder, with the number of shares disclosed publicly.
• Once the registration is effective, the affiliate can sell freely on the open market, subject to ordinary insider-trading restrictions (the general anti-fraud rule, pre-arranged trading-plan safe harbors, short-swing profit recovery rules).
• Most companies use this approach only when an affiliate needs to dispose of a large block that would take many quarters under the restricted-share resale safe harbor's volume limit.

Exam Tip: Gotchas

• A registered resale (selling-stockholder registration on Form S-1 or Form S-3) removes the affiliate-resale problem entirely, but registered resales are EXPENSIVE and require disclosure of the affiliate by name. The restricted-share resale safe harbor is the cheaper path for most affiliate trades.

Mechanics of an Affiliate Sale

Most affiliate sales run through the restricted-share resale safe harbor with broker assistance.

• Affiliate works with a broker (typically the firm where shares are custodied).
• Broker confirms eligibility: holding period satisfied, public information current, no shell-company restrictions.
• Broker calculates the 3-month volume cap (greater of 1% of outstanding shares or 4-week average weekly volume).
• Form 144 filed at or before sell-order placement (if over 5,000 shares or $50,000 thresholds in any 3-month period).
• Broker executes via brokers' transactions or directly to a market maker.
• Within 3 months, all sales for the affiliate's account aggregate against the volume cap.

Think of it this way: the restricted-share resale safe harbor turns the affiliate's block into a trickle. Instead of dumping the entire position into the market (and risking the underwriter label), the affiliate releases shares quarterly within the volume cap. The market absorbs the supply gradually, and the disclosure-and-filing regime gives the market notice each time.

Practical Decision Tree for an Affiliate

Exam Tip: Gotchas

• Officers and directors are presumed affiliates regardless of share count. A new director who owns one share is still an affiliate. The restricted-share resale safe harbor's volume limit applies even though selling one share is far below the 1% / 4-week average cap.