[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Rules and Regulations]
[Pages 9242-9245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4665]
[[Page 9241]]
_______________________________________________________________________
Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 228, et al.
Revision of Holding Period Requirements in Rules 144 and 145; Revision
of Rules 144 and 145 and Form 144; Offshore Offers and Sales; Delayed
Pricing for Certain Registrants; Final Rule and Proposed Rules
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 /
Rules and Regulations
[[Page 9242]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-7390; File No. S7-17-95]
RIN 3235-AG53
Revision of Holding Period Requirements in Rules 144 and 145
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission is amending the holding period requirements
contained in Rule 144 to permit the resale of limited amounts of
restricted securities by any person after a one-year, rather than a
two-year, holding period. Also, the amendments permit unlimited resales
of restricted securities held by non-affiliates of the issuer after a
holding period of two years, rather than three years. These changes
should reduce the cost of capital, particularly for small business
issuers. Parallel changes to Rule 145 also are being adopted.
EFFECTIVE DATE: The changes to Secs. 230.144 and 230.145 will be
effective April 29, 1997.
FOR FURTHER INFORMATION CONTACT: Elizabeth M. Murphy, Office of Chief
Counsel, Division of Corporation Finance at (202) 942-2900, 450 Fifth
Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: On June 27, 1995, the Commission published
for comment a release proposing amendments to Rule 144,1 the non-
exclusive safe harbor from registration for resales of restricted
securities and securities held by affiliates of the issuer, under the
Securities Act of 1933 (the ``Securities Act'').2 These proposals
are being adopted today. As amended, the holding period for resales of
limited amounts of restricted securities by any person has been reduced
from two years to one year. The holding period for resales by non-
affiliates without compliance with the provisions of the rule has been
reduced from three years to two years.3 The Commission also is
adopting parallel changes to Securities Act Rule 145.4 The revised
holding periods are applicable to all securities, whether acquired
before or after the effective date of the changes announced today. The
Commission today also is publishing a companion release soliciting
comment on additional changes to Rule 144 that would simplify the
rule's operation and further modify the Rule 144 holding periods.5
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\1\ 17 CFR 230.144. Release No. 33-7187 (June 27, 1995) [60 FR
35645] (``1995 Release''). Comment letters are available for
inspection and copying in the Commission's Public Reference Room,
450 Fifth Street, N.W., Washington, D.C. 20549. Interested persons
should refer to File No. S7-17-95.
\2\ 15 U.S.C. 77a et seq.
\3\ Conforming changes also have been made in paragraph (e)(3)
of Rule 144 relating to determination of the limits on amounts
resalable by pledgees, donees and trusts, reducing the period from
two years to one year after the event of pledge, default, donation,
or trust acquisition.
\4\ 17 CFR 230.145.
\5\ Release No. 33-7391 (February 20, 1997).
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I. Discussion
Today, for the first time since the adoption of Rule 144 in
1972,6 the Commission is adopting amendments to shorten the
holding period that must be satisfied before limited resales of
restricted securities may be made by affiliates and non-affiliates in
reliance upon the rule. As had been proposed, the amendments reduce
that holding period from two years to one year. Also as proposed, the
amendments reduce the length of the holding period that non-affiliates
must hold restricted securities before making unlimited resales of such
securities from three years to two years.
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\6\ Release No. 33-5223 (January 11, 1972) [37 FR 591].
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The Commission is adopting the shortened holding periods based on
its more than 20 years of experience with Rule 144 and the favorable
public comments received on the 1995 Release. Shorter holding periods
should reduce the cost of capital. This particularly should benefit
smaller companies, which often sell securities in private placements. A
shorter holding period should lower the illiquidity discount given by
companies raising capital in private placements and increase the
usefulness of the Rule 144 safe harbor.
Shorter Rule 144 holding periods have been recommended by
participants in the SEC Government-Business Forum on Small Business
Capital Formation.7 The Commission believes that the shorter
holding periods will not diminish investor protection, since they are
sufficiently long to ensure that resales under Rule 144 will not
facilitate indirect public distributions of unregistered securities by
issuers or affiliates.
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\7\ See, e.g., Final Reports of the SEC Government-Business
Forum On Small Business Capital Formation (June 1992, 1993, 1994 and
February 1995). The Small Business Incentive Act of 1980 directs the
Commission to host this annual meeting for the purpose of reviewing
the ``current status of problems and programs relating to small
business capital formation.'' Pub. L. No. 96-477, Section 503, 94
Stat. 2275, 2292-93 (1980).
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Rule 144 provides an objective safe harbor for resales of
restricted securities and control securities. Restricted securities
generally are securities issued in private placements; 8 control
securities are securities owned by affiliates of the issuer, however
acquired. The rule provides that a person complying with its terms and
conditions will not be engaged in a distribution of securities and,
thus, not be an ``underwriter'' 9 for purposes of the Section 4(1)
10 exemption from Securities Act registration for ordinary trading
transactions.11
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\8\ The term ``restricted securities'' is defined in Rule
144(a)(3) [17 CFR 230.144(a)(3)] and includes: securities acquired
from the issuer or an affiliate in a transaction or chain of
transactions not involving a public offering; securities acquired
from the issuer and subject to resale limitations under Regulation D
[17 CFR 230.501-508] or Rule 701 [17 CFR 230.701]; securities
subject to the Regulation D resale limitations and acquired in a
transaction or chain of transactions not involving a public
offering; securities acquired in a transaction or chain of
transactions meeting the requirements of Rule 144A [17 CFR
230.144A]; and securities acquired from the issuer that are subject
to the resale limitations of Regulation CE (Sec. 230.1001). Separate
releases being issued today propose to amend the term to also
include securities issued pursuant to an exemption under Securities
Act Section 4(6) [15 U.S.C. 77(d)(6)] as well as equity securities
of domestic issuers, and of foreign issuers where the primary market
for such securities is in the United States, sold under Regulation S
[17 CFR 230.901-230.904 and Preliminary Notes]. Release Nos. 33-7391
and 33-7392 (February 20, 1997).
\9\ See Section 2(11) of the Securities Act [15 U.S.C. 77b(11)].
\10\ 15 U.S.C. 77(d)(1).
\11\ Section 4(1) exempts transactions by persons who are not
issuers, underwriters or dealers.
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The rule includes holding periods for restricted securities to
establish that the holder did not purchase with a view to an
unregistered public distribution. Pursuant to the amendments adopted
today, all restricted securities must be held at least one year before
resale, measured from the date the securities are acquired from the
issuer or an affiliate. For restricted securities held between one and
two years, other provisions of the rule require that current public
information be available about the issuer, that limited amounts of
securities be resold, that the resales be effected in ordinary
brokerage transactions or directly with a market-maker, and that a
notification of the resale be filed with the Commission. Under the
amendments, after a two-year holding period, restricted securities may
be resold by non-affiliates without compliance with any of these
provisions.
At the suggestion of commenters, the Commission also is adopting
parallel changes to the holding period provisions included in
Securities Act Rule 145(d),12 which governs the resale of
securities received in connection with reclassifications, mergers,
[[Page 9243]]
consolidations and asset transfers. Rule 145(c) 13 provides that
any party to a transaction covered by Rule 145 (other than the issuer),
or any person who is an affiliate of such party at the time the
transaction is submitted for vote or consent, who publicly resells
securities of the issuer acquired in connection with that transaction
will be deemed to be engaged in a distribution, and therefore to be an
underwriter of those securities, except where the securities are resold
in accordance with Rule 145(d). The holding period requirements of Rule
145(d) correspond to the holding periods for resales in Rule 144.
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\12\ 17 CFR 230.145(d).
\13\ 17 CFR 230.145(c).
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The 1995 Release also requested comment on whether the holding
period or other requirements in Rule 144 should be revised to address
the concern that holders utilizing certain new hedging strategies may
not be economically ``at risk'' during the holding period. This issue
is addressed further by the Commission in the companion release
soliciting comment on additional changes to Rule 144.14
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\14\ Release No. 33-7391 (February 20, 1997).
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II. Cost-Benefit Analysis
The Commission believes, and the public comments support the view,
that reduction in the Rule 144 holding periods will reduce compliance
burdens and costs without significant impact on investor protection.
The Commission also believes that the action being taken will promote
market efficiency, investment and capital formation by reducing the
liquidity costs of holding restricted securities and reducing issuers'
cost of raising capital through the sale of restricted securities.
Issuers typically must offer restricted shares at a discount
relative to prices at which their unrestricted shares trade in the
public markets. In recent years, this discount has generally ranged
from 20-50%. The discount compensates the purchasers of the restricted
shares for their inability to resell the securities before completion
of the requisite holding period. Since the amendments shorten the
holding period, the purchasers will demand a smaller liquidity premium
and issuers will be able to sell their restricted securities at higher
prices.
The actual amount by which the annual volume of restricted shares
privately placed and resales of restricted securities will increase
cannot be reliably predicted. The actual size of these increases will
depend on the response of investors and issuers to the shortened
holding period requirements.
III. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis has been prepared in
accordance with Section 604 of the Regulatory Flexibility Act,\15\ and
relates to the adoption of amendments to Rules 144 and 145 under the
Securities Act.
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\15\ 5 U.S.C. Sec. 604.
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Reasons for, and Objectives of, Proposed Action
Rule 144 provides a safe harbor for the resale of restricted and
control securities. It sets forth conditions which, if satisfied,
permit persons who hold such securities to sell them publicly without
registration and without being deemed underwriters. One of the
conditions is that the securities must be held for a specified period
of time before any sales may be made.
Rule 145 governs the offer or sale of securities received in
connection with reclassifications, mergers, consolidations and asset
transfers. It provides that any party to a transaction covered by the
rule (other than the issuer), or any person who is an affiliate of such
party at the time the transaction is submitted for vote or consent, who
publicly offers or sells securities of the issuer acquired in
connection with such a transaction will be deemed to be engaged in a
distribution, and therefore to be an underwriter of the securities,
except where the securities are resold in accordance with Rule 145(d).
Rule 145(d) imposes holding periods that correspond to the holding
periods for resales in Rule 144.
The Commission has determined to adopt amendments to Rules 144 and
145 to shorten the holding period requirements. The amendments to Rule
144 permit the limited resale of restricted securities after a one-
year, rather than a two-year, holding period. They also permit
unlimited resales of restricted securities held by non-affiliates of
the issuer after a holding period of two, rather than three years.
The Commission believes that shorter holding periods should reduce
the costs of capital formation, particularly for smaller companies, by
reducing the illiquidity discount companies must give when raising
capital in private placements. Investors will also be able to recoup
their capital more quickly.
The Commission believes that the shorter holding periods will not
diminish investor protection, since they are sufficiently long to
ensure that resales under Rule 144 will not facilitate indirect public
distributions of unregistered securities by issuers or affiliates. The
amendments were recommended by small business representatives
participating in the SEC Government-Business Forum on Small Business
Capital Formation.
Significant Issues Raised by the Public Comments
The Commission received five requests for the Initial Regulatory
Flexibility Analysis prepared in connection with the 1995 Release, and
no public comments specifically addressed that analysis. The Commission
received public comment, however, on the amendments to the Rule 144 and
145 holding periods. The commenters agreed that shorter holding periods
should reduce the costs of capital formation and be of particular
benefit to small companies, which often sell securities in private
placements. At the suggestion of commenters, the Commission is
soliciting comment on further changes to the holding periods in the
companion proposing release.
Small Entities Subject to Requirements
The reduced holding periods will affect both small entities that
issue restricted or control securities and small entities that hold
such securities. The term ``small business,'' when used with reference
to an issuer, other than an investment company, is defined by
Securities Act Rule 157 as an issuer whose total assets on the last day
of its most recent fiscal year were $5 million or less and is engaged
or proposing to engage in small business financing. An issuer is
considered to be engaged in small business financing if it is
conducting or proposes to conduct an offering of securities that does
not exceed the dollar limitation prescribed by Section 3(b) of the
Securities Act. Exchange Act Rule 0-10 \16\ defines small entity when
used with reference to an issuer or person, other than an investment
company, to mean an issuer or person that, on the last day of its most
recent fiscal year, had total assets of $5,000,000 or less.\17\
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\16\ 17 CFR 240.0-10.
\17\ There is no comparable definition of ``person'' under the
Securities Act.
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The Commission is aware of approximately 1,019 Exchange Act
reporting companies that currently satisfy the definition of ``small
business'' under Rule 157 and may be affected by the reduced holding
periods. The reduced holding periods also may affect small businesses
that are not subject to Exchange Act reporting requirements. The
Commission is unable to determine the number of such
[[Page 9244]]
small businesses due to the absence of filings with the Commission by
such companies.
An estimated 3,800 entities, excluding natural persons, annually
file Form 144 based upon a staff review of a sample of Form 144
filings. The Commission has no basis for estimating the number of these
entities that are small entities under the definition of person in
Exchange Act Rule 0-10, because Form 144 does not require that such
information be provided and such information is not otherwise available
to the Commission.
The amendments are expected to affect favorably businesses of all
sizes, but particularly small businesses, by reducing the cost of
capital formation through private placements of unregistered securities
and allowing investors to recoup their capital more quickly. Issuers
generally must sell unregistered stock at a discount; the amount of the
discount should be reduced as a result of the shortening of the holding
periods.
Reporting, Recordkeeping and Other Compliance Requirements
Because of the nature of the amendments, the Commission does not
expect that reporting, recordkeeping and compliance burdens will
increase materially as a result of the changes. Indeed, the Commission
expects that compliance burdens will decrease as a result of the
reduced holding periods because sellers will not have to wait as long
to resell securities in reliance on Rule 144.
Nevertheless, the Commission expects the annual volume of Form 144
filings to increase as a result of the reductions in the required
holding periods and the increased incentive for issuers to raise
capital through sales of unregistered securities subject to Rule 144.
The Commission has no basis for reliably estimating this increased
volume of filings. The average cost associated with filing a Form 144
is approximately $200 based on a compensation rate of $100 per hour and
a task time of two hours per filing.
Steps Taken To Minimize Significant Economic Impact on Small Entities
The amendments adopted today will benefit issuers of all sizes
since a reduction in the length of the Rule 144 and 145 holding periods
will reduce issuers' cost of capital. The amendments will also benefit
all holders of restricted securities, who will be able to recoup their
capital more quickly pursuant to the reduced holding periods. Specific
consideration was given to small businesses in the formulation of these
amendments; as stated above, the amendments were recommended by small
business representatives.
The Commission considered a number of significant alternatives to
the amendments being adopted that might minimize the significant
economic impact on small entities. One alternative was to shorten the
holding periods even further. Comment is being solicited on that
alternative in a release proposing changes to Rules 144, 145 and Form
144.\18\ The Commission intends to give further consideration to the
treatment of small entities in connection with the Rule 144 proposing
release.
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\18\ Release No. 33-7391 (February 20, 1997).
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The Commission also considered the types of alternatives set forth
in section 603 of the Regulatory Flexibility Act to minimize the
economic impact of the amendments on small entities: (1) the
establishment of differing reporting compliance or reporting timetables
that take into account the resources available to small entities; (2)
the clarification, consolidation, or simplification of compliance and
reporting requirements for such small entities; (3) the use of
performance rather than design standards; and (4) an exemption from
coverage of the amendments, or any part thereof, for small entities.
Because the amendments benefit all issuers and holders of restricted
securities, differing compliance timetables for small entities would
not be appropriate. Neither could the compliance requirements of the
amendments be clarified or simplified further for small entities.
Finally, the amendments being adopted do not use design standards, and
an exemption from the amendments for small entities would not be
desirable or consistent with the stated objectives of the applicable
statutes.
IV. Statutory Basis
The amendments to Rule 144 and 145 are being adopted pursuant to
sections 2(11), 4(1) and 19(a) of the Securities Act.
List of Subjects in 17 CFR Part 230
Reporting and recordkeeping, Securities.
Text of the Amendments
For the reasons set out above, title 17, chapter II of the Code of
Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read in part,
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
2. Section 230.144 is amended by revising paragraphs (d)(1),
(e)(3)(ii), (e)(3)(iii), (e)(3)(iv) and (k) to read as follows:
Sec. 230.144 Persons deemed not to be engaged in a distribution and
therefore not underwriters.
* * * * *
(d) * * *
(1) General rule. A minimum of one year must elapse between the
later of the date of the acquisition of the securities from the issuer
or from an affiliate of the issuer, and any resale of such securities
in reliance on this section for the account of either the acquiror or
any subsequent holder of those securities. If the acquiror takes the
securities by purchase, the one-year period shall not begin until the
full purchase price or other consideration is paid or given by the
person acquiring the securities from the issuer or from an affiliate of
the issuer.
* * * * *
(e) * * *
(3) * * *
(ii) The amount of securities sold for the account of a pledgee
thereof, or for the account of a purchaser of the pledged securities,
during any period of three months within one year after a default in
the obligation secured by the pledge, and the amount of securities sold
during the same three-month period for the account of the pledgor shall
not exceed, in the aggregate, the amount specified in paragraph (e) (1)
or (2) of this section, whichever is applicable;
(iii) The amount of securities sold for the account of a donee
thereof during any period of three months within one year after the
donation, and the amount of securities sold during the same three-month
period for the account of the donor, shall not exceed, in the
aggregate, the amount specified in paragraph (e) (1) or (2) of this
section, whichever is applicable;
(iv) Where securities were acquired by a trust from the settlor of
the trust, the amount of such securities sold for the account of the
trust during any period of three months within one year after the
acquisition of the securities by the trust, and the amount of
securities sold during the same three-month period for the account of
the settlor, shall not exceed, in the aggregate, the amount specified
in paragraph (e) (1) or (2) of this section, whichever is applicable;
* * * * *
[[Page 9245]]
(k) Termination of certain restrictions on sales of restricted
securities by persons other than affiliates. The requirements of
paragraphs (c), (e), (f) and (h) of this section shall not apply to
restricted securities sold for the account of a person who is not an
affiliate of the issuer at the time of the sale and has not been an
affiliate during the preceding three months, provided a period of at
least two years has elapsed since the later of the date the securities
were acquired from the issuer or from an affiliate of the issuer. The
two-year period shall be calculated as described in paragraph (d) of
this section.
3. By amending Sec. 230.145 by revising paragraphs (d)(2) and
(d)(3) to read as follows:
Sec. 230.145 Reclassification of securities, mergers, consolidations
and acquisitions of assets.
* * * * *
(d) * * *
(2) Such person or party is not an affiliate of the issuer, and a
period of at least one year, as determined in accordance with paragraph
(d) of Sec. 230.144, has elapsed since the date the securities were
acquired from the issuer in such transaction, and the issuer meets the
requirements of paragraph (c) of Sec. 230.144; or
(3) Such person or party is not, and has not been for at least
three months, an affiliate of the issuer, and a period of at least two
years, as determined in accordance with paragraph (d) of Sec. 230.144,
has elapsed since the date the securities were acquired from the issuer
in such transaction.
* * * * *
By the Commission.
Dated: February 20, 1997.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4665 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-P
