SEC Proposes Amendments to Rule 144 and Form 144
Washington D.C., Dec. 22, 2020 —
The Securities and Exchange Commission today voted to propose an amendment to Rule 144 under the Securities Act of 1933 to revise the holding period determination for securities acquired upon the conversion or exchange of certain “market-adjustable securities.” The proposed amendment is intended to reduce the risk of unregistered distributions in connection with sales of those securities. The Commission also voted to propose amendments to update and simplify the Form 144 filing requirements.
“Today’s proposed amendments modernize, clarify and strengthen Rule 144, including to ensure that holders of market-adjustable securities are assuming the economic risks of their investment rather than acting as a conduit for an unregistered sale of securities to the public on behalf of an issuer,” said SEC Chairman Jay Clayton. “In addition, the proposed shift to electronic filing of Form 144 provides a necessary update to reflect today’s markets, particularly given the benefits – and the feasibility – of electronic filing our experience over the past nine months has demonstrated.”
Currently, Rule 144 deems securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange. Under the amendments, the holding period for the underlying securities acquired upon conversion or exchange of “market-adjustable securities” would not begin until conversion or exchange, meaning that a purchaser would need to hold the underlying securities for the applicable Rule 144 holding period before reselling them under Rule 144.
Additionally, the proposed amendments would mandate electronic filing of Form 144, eliminate the requirement to file a Form 144 with respect to sales of securities issued by companies that are not subject to Exchange Act reporting, and amend the Form 144 filing deadline to coincide with the Form 4 filing deadline.
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
SEC Proposes Amendments to Rule 144 and Form 144
Dec. 22, 2020
Rule 144 provides a non-exclusive safe harbor from the statutory definition of “underwriter” to assist security holders in determining whether the Section 4(a)(1) exemption from registration is available for their resale of restricted or control securities. Rule 144 sets forth objective criteria on which security holders seeking to resell such securities may rely to avoid being deemed to be engaged in a distribution and, therefore, to avoid acting as an underwriter under Section 2(a)(11) of the Securities Act.
In transactions involving market-adjustable securities, the discounted conversion or exchange features in these securities typically provide holders with protection against investment losses that would occur due to declines in the market value of the underlying securities prior to conversion or exchange. Rule 144 currently deems securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange. As a result, after the Rule 144 holding period is satisfied, holders can convert the market-adjustable securities and quickly sell the underlying securities into the public market at prices above the price at which they were acquired. This creates an incentive to purchase the market-adjustable securities with a view to distribution of the underlying securities to capture the difference between the built-in discount and the market value of the underlying securities.
An affiliate of an issuer who intends to resell more than a specified amount of restricted or control securities of the issuer in reliance on Rule 144 must file a Form 144 with the Commission. The current rules permit Form 144 to be filed electronically or in paper if the issuer of the securities is subject to Exchange Act reporting requirements. Otherwise, Form 144 must be filed in paper.
Rule 144 Holding Period
The proposal would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As a result, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company,would not begin until the conversion or exchange of the market-adjustable securities.
The proposed amendment would not affect the use of Rule 144 for most convertible or variable-rate securities transactions. It would apply only to market-adjustable securities transactions in which:
- The newly acquired securities were acquired from an issuer that, at the time of the conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange registered pursuant to Section 6 of the Exchange Act; and
- The convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization.
Forms 4, 5, and 144 Filing Requirements
The proposed amendments to the filing requirements for Forms 4, 5, and 144 are intended to update and simplify those requirements. To do so, the proposal would:
- Mandate the electronic filing of Form 144;
- Eliminate the Form 144 filing requirement related to the sale of securities of issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
- Amend the Form 144 filing deadline so that Form 144 may be filed concurrently with Form 4 by persons subject to both filing requirements; and
- Amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was intended to satisfy Rule 10b5-1(c), which provides an affirmative defense for trading on the basis of material non-public information in insider trading cases.
The Commission plans to make an online fillable Form 144 available to simplify electronic filing and to streamline the electronic filing of Forms 4 and 144 reporting the same sale of an issuer’s securities. The proposal would provide a six-month transition period to give Form 144 paper filers who would be first-time electronic filers sufficient time to apply for codes to make filings on EDGAR.
The proposal will be subject to a 60-day public comment period.