Sales of securities by affiliates and control persons of publicly traded companies are subject to requirements not applicable to other sellers under federal securities laws. Rule 405 of the Securities Act of 1933, as amended (the “Securities Act”) contains definitions of each.
Securities held by an affiliate or person with control of the issuer are known as Control Securities. Control Securities can be registered securities pursuant to a registration statement declared effective by the SEC or unregistered securities issued under exemptions from registration such as Regulation D. The question of whether securities are Control Securities requires a fact based analysis; however, each definition includes officers and directors and presumably 10% holders.
Restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings such as under Rule 506(c) or Rule 504, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities.
Any person who is selling restricted or Control Securities must comply with Rule 144 of the Securities Act for their public resale. Restricted and Control Securities are not treated the same under Rule 144. Rule 144(d) imposes a six-month holding period for restricted securities of a public company subject to SEC reporting requirements under the Securities Exchange Act of 1934 (the “Exchange Act”) for at least 90 days and is current in those reporting obligations at the time of the sale. Rule 144(d) imposes a twelve-month holding period for restricted securities of a non-reporting company or a reporting company that is not current in its SEC reporting obligations at the time of sale.
If a non-affiliate holds securities that are not restricted securities such as securities registered on Form S-1 or other registration statement under the Securities Act, there are no limitations on that holder’s resales. If, however, a non-affiliate of the issuer holds restricted securities, they must satisfy the holding period required by Rule 144. The resale analysis is fairly simple.
If an affiliate holds Control Securities that are not restricted securities, then they would not be subject to the holding period of Rule 144, but would be required to sell in accordance with the manner of sale requirements of Rule 144, including volume limitations, manner of sale requirements and filing requirements on Form 144. If an affiliate holds Control Securities that are restricted, they must satisfy the Rule 144 holding period applicable to the restricted securities and then comply with the other requirements of Rule 144, including volume limitations, manner of sale requirements and filing requirements on Form 144.
Since affiliate status determines the requirements for resales of securities, it is important that issuers and shareholders familiarize themselves with the rules that apply to affiliate status under the securities laws.
This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding, sponsoring market makers and Form 211, dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.
