Rule 144

Rule 144 is the SEC rule governing public resales of restricted stock (shares acquired without registration, typically in a private placement) and control stock, shares held by affiliates such as officers, directors, and 10%-plus owners.

Rule 144 is a safe harbor, not a prohibition. Unregistered and insiders’ shares are not frozen forever; the rule sets the conditions for reaching the public market without a new registration statement. Nearly every SIE question here asks which category a holding falls into, because each carries its own condition.

Two categories, two conditions

Restricted stock is defined by how it was acquired. Buy unregistered shares from the issuer in a Regulation D placement and they are restricted, whoever you are. The condition is time: held, fully paid, six months when the issuer is an SEC-reporting company, twelve months when it is not.

Control stock is defined by who holds it. Any shares an affiliate holds are control stock, however acquired, and already-registered shares carry no holding period. The condition is size: in any 90-day period the affiliate may sell no more than the greater of 1% of shares outstanding or the average weekly volume of the preceding four weeks. A Form 144 notice goes to the SEC when the sale is placed, whenever sales in a three-month period exceed 5,000 shares or $50,000.

Example: a director owns shares in a company with 8,000,000 outstanding. One percent is 80,000; the four-week average weekly volume is 62,000. The greater figure controls, so she may sell up to 80,000 in a 90-day window. Had news lifted that average to 95,000, it would control instead. The test is always “the greater of,” never a flat 1%.

The exam trap

The exam’s favorite move is the reversal: giving control stock the holding period and restricted stock the volume limit. Anchor each definition to its trigger. Restricted comes from an unregistered purchase, so it must season. Control comes from the person’s status, so it trickles out under volume limits while that status lasts.

The second is the exempt-transaction misconception. A Reg D placement exempts the transaction, not the security. Shares stay restricted even when the issuer is public and its other shares trade freely, so “she may sell now because the company is publicly traded” is always wrong.

The third runs the opposite way: over-restriction. Officers and directors are not barred from selling their own company’s stock. What the law forbids is trading on material nonpublic information. An affiliate who respects the volume limit and files the notice may sell freely.

Related distinctions

One holder can carry both statuses: an officer who also bought in a private placement holds stock that is both restricted and control, so both conditions apply. Do not confuse the rule with Rule 144A, which lets unregistered securities be resold immediately among qualified institutional buyers.

Check yourself

1. A director asks to sell 80,000 shares she bought in the open market. The issuer has 5,000,000 shares outstanding, and average weekly volume over the prior four weeks was 60,000. How much may she sell now under Rule 144?

   1. Nothing, until a six-month holding period is satisfied
   2. All 80,000, because they were bought in the open market
   3. 50,000, being 1% of the shares outstanding
   4. 60,000, with the required Form 144 notice filed

   Show answer and explanation

   Answer: D. 60,000, with the required Form 144 notice filed.

   The trap is choice C, which stops at 1%. The limit is the greater of 1% of shares outstanding (50,000) or the four-week average weekly volume (60,000), so volume controls here. A misapplies the holding period to registered shares, and B forgets that affiliate status, not the method of purchase, creates control stock.

2. Four months ago a customer who is not an officer, director, or large shareholder bought unregistered shares of an SEC-reporting company in a Rule 506(b) private placement. He now wants to sell. What should the rep say?

   1. They may be sold now, since the issuer is a public reporting company
   2. They are restricted and generally may not be resold until a six-month holding period is met
   3. They may be sold now, subject only to volume limitations
   4. They may never be resold unless the issuer registers them

   Show answer and explanation

   Answer: B. They are restricted and generally may not be resold until a six-month holding period is met.

   The trap is A, which borrows the issuer's public status for the shares. Reg D exempted the transaction, not the security. C reverses the categories, and D forgets that Rule 144 permits resale without registration.

Practice it: offerings practice questions