Quick Answer
The restricted-share resale safe harbor lets holders resell unregistered securities without underwriter liability. Affiliates must meet current public information, a volume cap (greater of 1% outstanding or 4-week average volume), manner of sale, and Form 144 above 5,000 shares or $50,000 per 3-month period. Restricted securities also need a 6-month (reporting) or 12-month (non-reporting) hold.
Without this resale safe harbor (or another exemption), an unregistered resale of restricted or control securities risks being deemed an unregistered distribution requiring a registration statement. The safe harbor is the workhorse path that lets insiders and Reg D investors get liquid without triggering the registration mandate.
What Two Types of Securities Does the Safe Harbor Cover?
| Type | Description |
|---|---|
| Restricted securities | Securities acquired in unregistered, exempt transactions (the private Reg D safe harbor, the no-public-offering statutory exemption, the QIB resale safe harbor, employee stock plans, etc.); typically marked with a restrictive legend |
| Control securities | Securities held by an affiliate of the issuer (officer, director, 10%+ holder, or person otherwise controlling, controlled by, or under common control with the issuer); may or may not also be restricted |
A single block of securities can be both restricted AND control (a director's shares purchased in a Reg D placement, for example). In that case, the holder must satisfy the full safe-harbor conditions for both characteristics.
Exam Tip: Gotchas
- A person who WAS an affiliate within the last three months is treated as an affiliate for purposes of the resale safe harbor. A departing director cannot resign on Monday and resell freely on Tuesday. The three-month look-back must elapse before the seller can shed affiliate status.
- The rule's affiliate paragraph words the same look-back as the 90 days immediately before the sale. Treat the two as one window, and keep it apart from the issuer's separate 90-day reporting history, which decides whether the 6-month holding period applies.
What Are the Five Affiliate Conditions?
When the seller is an affiliate, four conditions apply to every sale; the fifth (holding period) applies only when the securities sold are themselves restricted securities. Control securities that an affiliate acquired in the open market (never restricted) skip the holding-period condition entirely, but still owe current public information, the volume limit, manner of sale, and Form 144.
| # | Condition | Detail |
|---|---|---|
| 1 | Holding period (restricted securities only) | 6 months if issuer is a reporting company; 12 months if non-reporting. Tacking allowed in certain situations (gifts, estates, donor's holding period transfers to recipient) |
| 2 | Current public information | Adequate current information about the issuer must be publicly available (Form 10-K, Form 10-Q for reporting issuers; equivalent disclosure for non-reporting issuers) |
| 3 | Volume limitation | During any 3-month period, the affiliate may sell no more than the GREATER of: (a) 1% of outstanding shares of the class, OR (b) average weekly reported trading volume during the 4 calendar weeks preceding the Form 144 filing |
| 4 | Manner of sale | Equity sales must be through brokers' transactions (broker acts as agent, customary commission, no solicitation of buyers) or directly to a market maker; debt securities have a more limited manner-of-sale requirement |
| 5 | Form 144 filing | Required if sale would exceed 5,000 shares OR $50,000 in aggregate within any 3-month period; filed with the SEC at or before placement of the sell order with the broker |
How Does the Holding Period Split Between Reporting and Non-Reporting Issuers?
The holding period for reporting issuers was cut from a former flat 12 months to 6 months. The non-reporting period stayed at 12 months. The holding period condition only applies "if the securities sold are restricted securities"; an affiliate's control securities that were never restricted (bought on the open market, for example) carry no holding-period condition at all.
- Reporting issuer: 6-month holding period before any safe-harbor sale of restricted securities.
- Non-reporting issuer: 12-month holding period before any safe-harbor sale of restricted securities.
- "Reporting" means the issuer is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and has been current in its filings.
Is the Volume Limit the Greater or the Lesser Measure?
The volume cap is calculated as the GREATER of:
- 1% of the outstanding shares of the class, OR
- The average weekly reported trading volume in the 4 calendar weeks preceding the Form 144 filing.
For a thinly traded stock, the 1% measure typically governs. For an actively traded large-cap stock, the 4-week average volume typically governs (and gives the affiliate much more selling room).
What Does the Manner-of-Sale Requirement Involve?
For equity, the sale must be through a brokers' transaction or directly to a market maker.
- Brokers' transaction: Broker acts as agent (not principal); takes a customary commission; does NOT solicit buyers; does NOT receive any payment beyond the commission.
- Market maker: Broker-dealer that posts firm two-sided quotations and stands ready to buy or sell on a regular basis.
- The manner-of-sale requirement for debt securities is narrower.
What Triggers a Form 144 Filing?
Form 144 must be filed if the sale exceeds:
- 5,000 shares, OR
- $50,000 in aggregate proceeds, within any 3-month period.
Either threshold triggers the filing; both do not need to be met. Form 144 is filed with the SEC at or before the placement of the sell order with the broker.
Exam Tip: Gotchas
- Holding period: 6 months for REPORTING, 12 months for NON-REPORTING. This is the most-tested fact in the resale-safe-harbor universe. It was formerly a flat 12 months for both; the current rule splits it by issuer reporting status, so older materials that cite a flat 12 months are out of date for reporting issuers.
- The holding period only applies to RESTRICTED securities. An affiliate's control securities that were never restricted (purchased on the open market, for example) skip the holding-period condition, but still owe current public information, the volume limit, manner of sale, and Form 144.
- Volume limit is the GREATER of 1% or 4-week average weekly volume, not the lesser. The exam phrases this both ways. "Greater of" gives the affiliate more selling room when the stock trades actively.
- Form 144 trigger is 5,000 shares OR $50,000 in any 3-month period, not "and." Either threshold tripped requires the filing.
- Brokers' transaction means the broker acts as AGENT and does NOT solicit buyers. A broker who runs a sales campaign to find buyers for the affiliate's stock is not within the brokers'-transaction definition.
How Does a Non-Affiliate Sell Restricted Securities?
Non-affiliates have a much lighter burden. They only need to satisfy the holding period (and, for the first 6 months after the holding period, the current public information requirement for reporting issuers).
| Issuer | After Holding Period | After 12 Months Held |
|---|---|---|
| Reporting (6-month hold) | Sell subject only to current public information requirement (for first 6 months post-hold) | Sell freely (no safe-harbor conditions apply) |
| Non-reporting (12-month hold) | Not applicable (holding period IS 12 months) | Sell freely (no safe-harbor conditions apply) |
- Non-affiliates do NOT have to satisfy volume limits, manner of sale, or Form 144 filing.
- "Non-affiliate" means the seller has not been an affiliate for at least 3 months preceding the sale.
Exam Tip: Gotchas
- A reporting-issuer non-affiliate who has held restricted shares for at least 12 months can sell FREELY with no conditions whatsoever. The current public information requirement only governs the window between the 6-month holding-period end and the 12-month mark.
How Do Affiliate and Non-Affiliate Conditions Compare?
| Condition | Affiliate (Control or Restricted) | Non-Affiliate (Restricted Only) |
|---|---|---|
| Holding period | 6 mo reporting / 12 mo non-reporting, ONLY if the securities sold are restricted | 6 mo reporting / 12 mo non-reporting |
| Current public information | Required (always) | Required only between holding period end and 12 months held (reporting issuer); none after 12 months |
| Volume limit (1% / weekly volume) | Required | Not required |
| Manner of sale (brokers' transaction) | Required (equity) | Not required |
| Form 144 filing | Required if over 5,000 shares / $50K in 3 mo | Not required |
Exam Tip: Gotchas
- The affiliate-vs-non-affiliate distinction is the most consequential split in the entire resale safe harbor. Affiliate status pulls in current public information, the volume limit, manner of sale, and Form 144; non-affiliate status drops volume, manner of sale, and Form 144 entirely. The holding period binds BOTH groups, but only when the securities being sold are restricted securities in the first place.
What Should You Check on Exam Day?
- Classify the seller as affiliate or non-affiliate FIRST; that single fact determines which conditions even apply.
- Match the holding period to reporting status (6 months reporting, 12 months non-reporting), not to affiliate status.
- Compute the volume cap as the GREATER of 1% of outstanding shares or 4-week average weekly volume, never the lesser.
- Check the Form 144 trigger against BOTH thresholds (5,000 shares OR $50,000); either one alone requires the filing.
- Remember the three-month affiliate look-back before treating a recently departed officer or director as a non-affiliate.