On December 22, 2020, the SEC proposed amendments to Rule 144 to eliminate ‘tacking of’ the holding period of security and amend the filing requirements and the deadline to coincide with the Form 4 filing deadline. Under the proposed rule, the holding period for the “market-adjustable securities” acquired upon conversion or exchange will not begin until the conversion or exchange, meaning that a purchaser would need to hold the underlying securities for the applicable holding period before reselling them under Rule 144.
Market-adjustable securities are securities issued to investors with features like a discount or exchange to provide them protection against investment losses due to reduced market value before conversion or exchange. An example includes convertible notes, where the investor lends money to the issuer that can either be repaid in cash or converted into securities. These notes tend to cause a drip in the stock price of the issuer:
- The SEC recognizes the holders are at risk only during the holding period if the company were to become delinquent or bankrupt and not after conversion. Rule 144 permits the investor to sell the notes in the public market immediately upon conversion, allowing them to book a profit.
- The notes also have an equity blocker meaning that the holder is prohibited from owning more than a certain percentage (usually 4.99%) of the company at any given time to avoid being considered as an underwriter. (Underwriters are required to file ownership reports under either Sections 13 or 16 of the Exchange Act). There exists a potential that a note holder may opt-in for multiple conversions, each at 4.99%, each at a discounted price.
Because of the tremendous selling pressure, in both situations explained above, there is a possibility of an increased number of outstanding shares and a drastic decrease in the share price. Both the NYSE and Nasdaq require prior shareholder approval for more than 20% of total outstanding private issuance; hence only companies not trading on a national securities exchange face extreme dilution risk.
Current Rule 144:
- Rule 144 defines holding periods, public information, manner of sale, etc. for investors so they can avoid being identified as an underwriter
- Section 2(a)(11) defines an underwriter as a person involved in direct or indirect participation through the offer or sell of an issuer’s securities
- The holding period is six months for reporting issuers and one year for non-reporting issuers.
- The company must be current in reporting and information requirements.
Proposed Rules:
A. Elimination of Tacking for Market Adjustable Securities:
Amendment to Rule 144(d)(3)(ii) – Where new securities are acquired as an exchange from the same issuer, the exchange time will be the same as the surrender time, even if the surrendered securities were not convertible or exchangeable by their terms, unless:
- The new securities were bought from an issuer who does not have listed or approved for listing on a national securities exchange registered according to Section 6 of the Exchange Act (15 USC 78f); and
- The proposal also mentions that non-inclusion of convertible securities(that are not market-adjustable) with provisions for adjustments for splits, dividends, or other issuer initiated changes in capitalization.
B. Filing Requirement Amendment
- Compulsory electronic filing of Form 144;
- Issuers not bound by the reporting requirements of the Exchange Act need not file Form 144 during the sale of securities ;
- Amendment in filing deadline to enable concurrent filing of Form 144 with Form 4
- Inclusion of an optional check box in Forms 4 and 5 indicating that a reported transaction was intended to satisfy Rule 10b5-1(c). This change will provide positive trading affirmation based on material non-public information in insider trading cases.
To read in details about the proposal, click here
Rule 144 provides an exemption and permits the public resale of restricted or controlled securities on the satisfaction of certain conditions under the able guidance of an experienced Transfer Agent who is authorized to remove the restriction. Colonial Stock provides personalized transfer agent services. Click here to connect.