Control and Restricted Securities (Securities and Exchange Commission (SEC) Rule 144)
All the equity securities we've covered so far can generally be bought and sold freely on public markets. But some shares come with restrictions on when and how they can be sold. SEC Rule 144 governs these sales.
Two Categories of Restricted Sales
Think of it this way: "Restricted" is about how the shares were acquired (private placement, not on the open market). "Control" is about who owns them (insiders with influence over the company). Different reason, same result: extra rules before you can sell.
Restricted Securities
- Acquired through private placements (Regulation D (Reg D)), employee compensation plans, or other unregistered transactions
- Cannot be freely sold in the public market without registration or an exemption
- Must satisfy a holding period before selling under Rule 144
Holding periods:
| Company Type | Minimum Holding Period |
|---|---|
| SEC reporting company | 6 months |
| Non-reporting company | 12 months |
Exam Tip: Gotchas
- Restricted stock comes from private placements, NOT open market purchases. If shares were bought on an exchange, they are not restricted.
- Holding period is 6 months for reporting companies, 12 months for non-reporting. The exam tests both.
Control Securities
- Owned by affiliates - officers, directors, or shareholders who own 10% or more of outstanding shares
- Subject to volume limitations regardless of how the shares were acquired (even if purchased on the open market)
- Volume limit: The greater of:
- 1% of outstanding shares, OR
- Average weekly trading volume over the preceding 4 weeks
Exam Tip: Gotchas
- Affiliates = officers, directors, or 10%+ shareholders. The exam expects you to know who counts as an affiliate.
- Affiliates face volume limits on ALL shares, not just restricted ones. Even shares purchased on the open market are subject to volume restrictions.
Rule 144 Requirements
When an affiliate or holder of restricted stock wants to sell, Rule 144 provides a safe harbor if these conditions are met:
| Requirement | Detail |
|---|---|
| Current public information | Adequate information about the company must be publicly available |
| Holding period | 6 months (reporting) or 12 months (non-reporting) for restricted stock |
| Volume limitations | Greater of 1% of outstanding shares or average 4-week trading volume |
| Ordinary brokerage transaction | No special solicitation allowed |
| Form 144 filing | Required if sale exceeds 5,000 shares or $50,000 in a 3-month period |
Exam Tip: Gotchas
- Form 144 threshold: 5,000 shares OR $50,000 in 3 months. Either trigger alone is enough to require the filing.
Affiliates vs. Non-Affiliates
This is one of the most tested distinctions on the SIE:
| Condition | Affiliates | Non-Affiliates |
|---|---|---|
| Volume limits | Always apply | None (after holding period) |
| Form 144 filing | Required (if threshold met) | Not required (after holding period) |
| Holding period (restricted stock) | 6 or 12 months | 6 or 12 months |
| Holding period (unrestricted stock) | None (but volume/filing rules apply) | None, and no restrictions at all |
Exam Tip: Gotchas
- Affiliates ALWAYS have volume and filing restrictions when selling - even for shares they bought on the open market.
- Non-affiliates who have held restricted stock for 6+ months (reporting company) or 12+ months (non-reporting) can sell freely with NO volume limits or filing requirements.