Holding Periods for Investors
With private placement offerings (not public offerings), investors must hold the securities for certain minimum periods of time. These securities are called “restricted” because of these conditions regarding resale. The basic purpose of holding periods is to ensure that an investor is not buying the securities for someone else.
Federal Rule 144 provides the basic guidelines for resales to third parties for private placement offerings that cross state lines. Rule 506 offerings are an example. In addition, some state securities laws apply Rule 144 for certain single-state offerings even where the recipient is a resident of that same state. This is the case, for example, with California 25102(n) offerings. Single-state offering exemptions that do not specify a holding period for resales to residents of that state probably have to be held for at least six months, by analogy to the shortest specified holding period under Rule 144.
(Although Rule 144 is the holding-period rule that applies most often, different offering exemptions can have different holding periods. Securities sold under the Model Accredited Investor Exemption must be held for at least 12 months. Rule 147 prohibits the resale of securities purchased in single-state offerings to persons outside that state unless nine months have passed from the last sale by the issuer of the offering.)
The holding period under Rule 144 depends on whether the owner is an “affiliate” of the issuer, and whether the issuer is a “reporting company,” meaning whether the company is required to file quarterly reports with the SEC. (Generally, only companies that have had a public offering of their stock are reporting companies.) Rule 144 also imposes some addition requirements on resales of the stock.
Who Is an Affiliate?
Although the SEC definitions are not precise, generally an “affiliate” is someone who is a director or officer of the company, or who holds at least 10% of the ownership of the company. In addition, a spouse of an affiliated person or a relative of either the affiliated person or the affiliated person’s spouse is also considered an affiliated person.
Further, a (separate) company in which an affiliated person owns 10% or more of the ownership – or a trust where an affiliated person is a beneficiary of 10% or more of the trust assets – is an affiliated person.
Securities held by affiliated persons are called “control” securities. (These are a subset of “restricted securities.”)
Restricted Securities of Non-Reporting Issuers
The holding periods for restricted securities of non-reporting issuers (the usual situation) begin when the securities have been fully paid for and last as follows:
For those who are not an affiliate and have not been an affiliate during the last three months, there is a one-year holding period. After that, the securities can be sold without any further requirements.
For affiliates, there is also a one-year holding period. After that, though, the securities can only be sold if certain requirements (“Affiliate Requirements”) are met.
First, the company must make publicly available information similar to the information required to be included in an annual report to shareholders.
Second, in most cases an affiliate in each three-month period can sell only the greater of a) 1% of the outstanding shares of the same class being sold or b) if the class is listed on a stock exchange, the OTC Bulletin Board or the Pink Sheets, 1% of the average reported weekly trading volume during the preceding four weeks.
Third, the sale must be handled as a routine trading transaction and a brokers cannot receive more than a normal commission. In addition, neither the broker nor the seller may solicit orders to buy the securities.
Lastly, an affiliate must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.
Restricted Securities of Reporting Issuers
Generally, companies that have not had a public offering of securities are not reporting issuers. Still, where they are reporting issuers, the following holding periods apply to their private offerings, with the periods beginning when the securities are fully paid for.
For those who are not an affiliate and have not been an affiliate during the last three months, there can be no sales for six months. Sales may be made between six months and one year, although current public information about the company must be supplied. After one year the securities can be sold without any requirements.
For affiliates, no resales within six months are permitted. After six months, the securities may be resold if the Affiliate Requirements discussed above are met.
Effect on Gift Recipients and Purchasers
The Rule 144 holding periods do not apply to a gift (versus a sale) of securities – but the recipient must satisfy the holding periods and requirements as if he/she were the original purchaser.
Where the securities are sold and the requirements of Rule 144 are met, the purchaser receives the stock without any holding restrictions.
–Bruce E. Methven
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