Quick Answer
The restricted-share resale safe harbor lets a holder resell unregistered securities without being deemed an underwriter under the underwriter definition of the 1933 Act. Affiliates must satisfy five conditions: holding period (6 months reporting, 12 months non-reporting), current public information, volume limit (greater of 1% of outstanding or 4-week average weekly volume), manner of sale (brokers' transactions), and Form 144 filing if over 5,000 shares or $50,000 in any 3-month period.
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.
Two Types of Securities Covered
| 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 90 days 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 90-day look-back must elapse before the seller can shed affiliate status.
The Five Affiliate Conditions
When the seller is an affiliate, all five conditions must be satisfied for the sale to qualify under the safe harbor.
| # | Condition | Detail |
|---|---|---|
| 1 | Holding period | 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 |
Holding Period: The Reporting/Non-Reporting Split
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.
- Reporting issuer: 6-month holding period before any safe-harbor sale.
- Non-reporting issuer: 12-month holding period before any safe-harbor sale.
- "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.
Volume Limit: Greater Of, Not Lesser Of
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).
Manner of Sale: Brokers' Transactions
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.
Form 144 Trigger
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.
- 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.
Non-Affiliate Sale of 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.
Affiliate vs Non-Affiliate Conditions Summary
| Condition | Affiliate (Control or Restricted) | Non-Affiliate (Restricted Only) |
|---|---|---|
| Holding period | 6 mo reporting / 12 mo non-reporting | 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 all five conditions; non-affiliate status drops volume, manner of sale, and Form 144 entirely. Knowing which person is in front of you is the first analytical step.