9246 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

1 17 CFR 230.144.

2 17 CFR 230.145.

3 17 CFR 239.144.

4 15 U.S.C. 77a et seq.

5Restricted securities generally are securities

issued in non-public offerings; control securities are

securities owned by affiliates of the issuer.

6Release No. 33–5223 (January 11, 1972) [37 FR

591].

7Release No. 33–7187 (June 27, 1995) [60 FR

35645]. Additionally, the Commission requested

comment on whether Rule 144 should be revised

to address new trading strategies such as equity

swaps. Comment letters on the 1995 Release are

available for public 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.

8Release No. 33–7390 (February 20, 1997).

9 In addition, the Commission proposes to codify

existing staff positions regarding determination of

the holding period for securities acquired solely in

exchange for other securities of the same issuer and

in holding company formations, as well as the

treatment of securities issued pursuant to the

exemption under Section 4(6) of the Securities Act

[15 U.S.C. 77(d)(6)] as restricted securities.

10 15 U.S.C. 78p.

11 15 U.S.C. 78a et seq.

12The manner of sale requirements are contained

in current Rule 144(f) [17 CFR 230.144(f)]. Current

Rule 144(g) [17 CFR 230.144(g)], which defines the

term ‘‘brokers’ transactions’’ for purposes of Rule

144, also would be rescinded.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 230 and 239

[Release No. 33–7391; File No. S7–07–97]

RIN 3235–AH13

Revision of Rule 144, Rule 145 and

Form 144

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rules.

SUMMARY: The Commission proposes

changes to make Rule 144, a safe harbor

from the Securities Act definition of the

term ‘‘underwriter,’’ easier to

understand and apply. The proposed

amendments would revise the

Preliminary Note to Rule 144 to restate

the intent and effect of the rule, add a

bright-line test to the Rule 144

definition of ‘‘affiliate,’’ eliminate the

Rule 144 manner of sale requirements,

increase the Form 144 filing thresholds,

include in the definition of ‘‘restricted

securities’’ securities issued pursuant to

the Securities Act Section 4(6)

exemption, clarify the holding period

determination for securities acquired in

certain exchanges with the issuer and in

holding company formations, and

streamline and simplify several rule

provisions. The Commission also

proposes to eliminate the presumptive

underwriter provisions of Rule 145.

Additionally, the release solicits

comment on changes to the Rule 144

holding periods that differ from those

being adopted today in a companion

release, elimination of the trading

volume tests to determine the amount of

securities that can be resold under Rule

144, and several possible regulatory

approaches with respect to certain

hedging activities.

DATES: Comments should be received on

or before April 29, 1997.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Comments also

may be submitted electronically at the

following E-mail address: rulecomments @ sec.gov. All comment

letters should refer to File No. S7–07–

97; this file number should be included

in the subject line if E-mail is used.

Comment letters will be available for

inspection and copying in the

Commission’s Public Reference Room,

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters will be posted on the

Commission’s Internet Web Site (http:/

/www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Elizabeth M. Murphy, Mark W. Green or

Michael Hyatte, Office of Chief Counsel,

Division of Corporation Finance, at

(202) 942–2900, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission is proposing amendments

to Rule 144,1 Rule 145 2 and Form 144 3

under the Securities Act of 1933

(‘‘Securities Act’’).4

I. Executive Summary

Securities Act Rule 144 provides a

safe harbor for the resale of restricted

and control securities.5 The rule permits

persons who hold such securities to

publicly sell them without registration

and without being deemed

underwriters, if certain conditions are

satisfied. When Rule 144 was adopted

in 1972, the Commission noted that it

was experimental in nature and would

be rescinded or amended, as necessary,

based on actual experience.6 Since its

adoption, the Commission has

monitored the operation of Rule 144 and

has eliminated many compliance

burdens where consistent with the

investor protection objectives of the

Securities Act.

The Commission is continuing its

efforts to improve the clarity and

usefulness of Rule 144 and to eliminate

unnecessary compliance burdens. In

June 1995, the Commission proposed to

permit limited resales of restricted

securities after a one-, rather than twoyear holding period, and to allow

unlimited resales of such securities by

non-affiliates after a two-, rather than

three-year holding period (‘‘1995

Release’’).7 The proposed new holding

periods are being adopted in a

companion release being published

today (‘‘Adopting Release’’).8

After reviewing the comments

received on the 1995 Release, the

Commission staff undertook a more

comprehensive review of Rule 144 to

determine whether other provisions of

the rule were unnecessarily restrictive

or in need of updating. This Release

proposes several revisions intended to

make Rule 144 easier to understand and

apply.

The proposals in this release would

reorganize and rewrite the text of Rule

144, including the Preliminary Note, in

a more succinct and straightforward

fashion. The proposals also would

simplify and update the rule in three

main ways.9

First, the proposals would make it

easier to determine whether a person is

not an affiliate of an issuer for purposes

of Rule 144 by providing a bright-line

exclusion from the Rule 144 definition

of affiliate. Pursuant to the proposal, all

persons not subject to the provisions of

Section 16 10 of the Securities Exchange

Act of 1934 (‘‘Exchange Act’’) 11 would

be deemed not to be affiliates of an

issuer for purposes of Rule 144.

Second, the proposals would

eliminate the manner of sale

requirements. 12 This would facilitate

innovation in the methods used to resell

restricted securities, such as the use of

electronic bulletin boards.

Third, the threshold requirements for

filing Form 144 would increase from the

current 500 shares or $10,000 sale price

test to a 1,000 shares or $40,000 sale

price test.

Additionally, this Release solicits

comment on other possible changes to

Rule 144, including:

• Further revisions to the Rule 144 holding

periods that would result in changes to either

the one-or two-year holding periods being

adopted today, or both;

• Elimination of the two trading volume

tests that limit the amount of securities that

may be sold in reliance on Rule 144, with the

result that all sellers would rely on the

percentage of shares outstanding test; and

• Several possible approaches to

addressing the application of the Securities

Act to hedging of restricted and other

securities.

Finally, the Commission is proposing

to amend Securities Act Rule 145, a

Securities Act rule relating to certain

significant transactions, such as

mergers, to eliminate the resale

limitations that are based on a

‘‘presumptive underwriter’’ approach.
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9247

13 15 U.S.C. 77(b)(11).

14Section 2(11) states that the term ‘‘underwriter’’

shall not include a person whose interest is limited

to taking a commission from an underwriter or

dealer not in excess of the usual and customary

distributors’ or sellers’ commission, and uses the

term ‘‘issuer’’ to include, in addition to an issuer,

any person directly or indirectly controlling or

controlled by the issuer, or any person under direct

or indirect common control with the issuer.

15 15 U.S.C. 77(d)(1).

16Sections 4(3) and 4(4) of the Securities Act [15

U.S.C. 77(d)(3) and (d)(4)] provide exemptions from

the registration requirements for transactions by

dealers and brokers not acting as underwriters. 17 17 CFR 230.144(j).

18Rule 144(a)(1) [17 CFR 230.144(a)(1)].

19Unlike Section 16, the Rule 144 safe harbor

would ignore whether the company has equity

securities registered under Section 12 of the

Exchange Act.

20 17 CFR 240.16a–1. The definitions of the terms

‘‘beneficial owner’’ and ‘‘officer’’ in Rule 16a–1

would be used whether or not the securities to be

resold in reliance upon the Rule 144 safe harbor are

equity securities registered under Section 12 of the

Exchange Act.

21Proposed Rule 144(a)(1).

Instead, persons who receive securities

in these transactions would be treated

the same as other purchasers of

securities.

II. Background

The Securities Act protects investors

primarily by requiring public

information about issuers to be available

to investors and potential investors at

the time they make decisions regarding

investment in an issuer’s securities. The

statute thus prohibits offerings unless

the securities being offered are

registered with the Commission or an

exemption from registration is available.

The Securities Act requires

registration not only of direct

distributions of securities by issuers to

the public, but also indirect

distributions involving the transfer of

unregistered securities from issuers or

affiliates to persons in non-public

transactions followed by large-scale

public transfers of the securities by such

persons. To regulate these types of

indirect distributions, the Securities

Act, under certain circumstances, treats

even individual investors who are not

securities professionals as underwriters

if they act as links in the chain through

which securities move from issuers to

the public.

The term ‘‘underwriter’’ is defined in

Section 2(11) of the Securities Act 13 to

mean ‘‘any person who has purchased

from an issuer with a view to, or offers

or sells for an issuer in connection with,

the distribution of any security or

participates or has a direct or indirect

participation in any such undertaking,

or participates or has a participation in

the direct or indirect underwriting of

any such undertaking.’’ 14 The

definition of underwriter is relevant to

the ‘‘ordinary trading’’ exemption

provided in Section 4(1) of the

Securities Act, 15 which states that the

registration provisions shall not apply to

transactions by any person other than an

issuer, underwriter or dealer. 16

The statutory definition of

underwriter does not provide a means to

determine objectively whether a person

purchased securities from the issuer or

an affiliate with a view to distribution

of the securities. Rule 144 was adopted

as a non-exclusive safe harbor to set

forth objective criteria that could be

relied on by persons who wanted to

resell restricted or control securities, but

who were concerned whether they

could be deemed to be engaged in a

distribution, and therefore deemed to be

underwriters under Section 2(11). The

rule provides that a person who

complies with its terms and conditions

will not be engaged in a distribution of

securities and, thus, not be an

‘‘underwriter’’ within the meaning of

Section 2(11) of the Securities Act.

III. Discussion of Proposals

A. Changes to the Preliminary Note to

Rule 144

The Preliminary Note to Rule 144

would be revised to better describe the

two types of common transactions that

raise questions as to whether a person

who sells securities is acting as an

underwriter (the resale of restricted

securities and the resale of securities,

whether or not restricted, by or on

behalf of an affiliate of the issuer). It

also explains that satisfaction of the

criteria of Rule 144 will cause the sale

of restricted or control securities to be

viewed as an ordinary trading

transaction rather than a ‘‘distribution’’

of such securities that would require

registration under the Act.

The proposed Note states explicitly

that if a sale of securities is made in

accordance with all of the applicable

provisions of Rule 144: (1) any person

who sells restricted securities will be

deemed not to be an underwriter for that

transaction; (2) any person who sells

restricted or other securities on behalf of

an affiliate of the issuer will be deemed

not to be an underwriter for that

transaction; and (3) the purchaser

receives unrestricted securities. The

proposed Note also incorporates the

statement in current Rule 144(j) 17 that

Rule 144 is not an exclusive safe harbor

and therefore does not eliminate or

otherwise affect the availability of any

other exemption for resales under the

Securities Act.

Are there other matters that should be

discussed in the Preliminary Note? Are

there matters discussed in the

Preliminary Note that should be

removed?

B. Change to the Rule 144 Definition of

‘‘Affiliate’’

Rule 144 defines an affiliate of an

issuer as a person that directly, or

indirectly through one or more

intermediaries, controls, or is controlled

by, or is under common control with,

such issuer.18 This subjective ‘‘facts and

circumstances’’ test presents a great deal

of uncertainty regarding whether a seller

is an affiliate of the issuer and

introduces additional regulatory

complexity that is not always necessary.

Issuers and sellers of securities have,

therefore, asked for greater guidance in

determining who is an affiliate.

Under the proposal, the same criteria

used to determine those persons that are

not ‘‘insiders’’ under Exchange Act

Section 16 would be used for Rule 144.

Many practitioners already use the

Section 16 criteria as a guide. The

Commission believes it is likely that

most persons who are not officers,

directors or 10% holders are not in a

‘‘control’’ position.19 Therefore, the

Commission proposes to add the

following to the definition of affiliate in

Rule 144.

A person shall be deemed not to be an

affiliate for purposes of this section if the

person: (i) is not the beneficial owner,

directly or indirectly, of more than 10% of

any class of equity securities of the issuer; (ii)

is not an officer of the issuer; and (iii) is not

a director of the issuer.

A note would add:

The determination of a person’s beneficial

ownership and whether that person is an

‘‘officer’’ shall be made in accordance with

Rule 16a–1 20 of this chapter, regardless of

whether the issuer’s securities are subject to

Section 16 of the Securities Exchange Act of

1934 (‘‘Exchange Act’’) and regardless of

whether the class of securities is registered

under Section 12 of the Exchange Act.21

The proposal clearly excludes from

the definition persons who are not

executive officers, directors or 10%

holders. Members of one or more of

these classes may contend, nevertheless,

that they are not affiliates because they

are not in a ‘‘control’’ position. For such

persons, the determination of affiliate

status would be a ‘‘facts and

circumstances’’ test.

The need for increased certainty in

the definition of affiliate also was

recognized by the Advisory Committee

on the Capital Formation and

Regulatory Processes (‘‘Advisory

Committee’’). The Advisory Committee

recommended an objective test for
9248 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

22See Report of the Advisory Committee on the

Capital Formation and Regulatory Processes (July

24, 1996) (the ‘‘Advisory Committee Report’’) at p.

24.

23See Advisory Committee Report at p.24.

24Current Rule 144(g) defines the term for

purposes of Rule 144.

25 15 U.S.C. 78c(a)(38).

26The manner of sale requirements also do not

apply to securities sold for the account of the estate

of a deceased person or for the account of a

beneficiary of such estate, provided the estate or

beneficiary is not an affiliate of the issuer.

27Release No. 33–5186 (September 10, 1971) [36

FR 18586].

28The use of electronic bulletin boards has been

the subject of recent no-action letters. See Real

Goods Trading Corp. (June 24, 1996), PerfectData

Corp. (August 5, 1996) and The Flamemaster Corp.

(October 29, 1996).

29 If this proposal is adopted, Form 144 also

would be amended to eliminate references to the

manner of sale requirements. Rule 144(g) defines

the term ‘‘brokers’ transactions’’ for purposes of

Rule 144. It would also be deleted if Rule 144(f) is

eliminated.

30Elimination of the manner of sale requirements

effectively would treat resales complying with the

public information, holding period, volume, and

notice requirements of the rule as not constituting

a ‘‘distribution’’ for Securities Act purposes. The

Commission notes, however, that such resales

under certain circumstances would be subject to the

requirements of recently adopted Regulation M. 17

CFR 242.100 et seq. Regulation M was adopted in

Release No. 34–38067 (December 20, 1996) [62 FR

520].

determining affiliate status as part of an

overall reform package that includes

registration of most securities that,

under the current system, would not be

registered.22 The Advisory Committee

definition would include only the

following persons as affiliates: the Chief

Executive Officer; inside directors;

holders of 20% of the company’s voting

power; and holders of 10% of the voting

power with at least one director

representative on the board.23 Should

this definition be adopted, instead of the

one proposed, even in the absence of the

other reforms recommended by the

Advisory Committee?

Is there a need to provide more

objective guidance as to who is an

affiliate for purposes of Rule 144? Is

reliance on the Section 16 insider test

over-inclusive or under-inclusive?

Should the exclusion from the

definition of affiliate include an express

presumption that those persons not so

excluded are affiliates? If so, should

such a presumption be rebuttable?

For affiliate status based on

shareholdings, is the 10% test

appropriate, or should it be higher (such

as 20%), or lower (such as 5%)? Should

the shareholdings test be combined, at

a certain level of ownership, with the

ability to place persons on the board of

directors? For example, as

recommended by the Advisory

Committee, should the safe harbor

exclude only those 10% holders that

also have the ability to place at least one

director on the board?

Should the definition of affiliate

exclude non-employee directors?

Should non-employee directors be

excluded from the definition only if

they have less than a specified amount

of shareholdings, such as 2%, 3% or

5%? If non-employee directors should

be excluded from the definition of

affiliate, should the exclusion apply to

non-employee directors who are

securities professionals? Should the

exclusion apply to non-employee

directors who are representatives of

controlling shareholders?

Some have argued in favor of

retaining a subjective test, given the

varied contractual arrangements with a

control feature entered into by issuers,

particularly smaller companies. Should

a facts and circumstances test be

retained in order to reflect the different

ways a control relationship can be

established with an issuer?

C. Manner of Sale Requirements

Rule 144(f) requires that securities be

sold in ‘‘brokers’ transactions,’’ 24 or in

transactions directly with a ‘‘market

maker,’’ as that term is defined in

Section 3(a)(38) of the Exchange Act.25

Additionally, the rule prohibits a seller

from: (1) soliciting or arranging for the

solicitation of orders to buy the

securities in anticipation of, or in

connection with, the Rule 144

transaction; or (2) making any payment

in connection with the offer or sale of

the securities to any person other than

the broker who executes the order to sell

the securities. These manner of sale

restrictions do not apply to securities

sold for the account of a non-affiliate of

an issuer when the holding period of

Rule 144(k) is met.26

The manner of sale requirements were

intended to assure that special selling

efforts and compensation arrangements

usually associated with a distribution

are not present in a Rule 144 sale.27 The

manner of sale requirements currently,

however, appear to impose obstacles to

transactions that are not distributive in

nature. For example, a consequence of

the manner of sale requirements is that

a seller may not privately negotiate a

sale of a public company’s stock in

reliance on Rule 144 without a broker

even if the seller does not solicit the

buyer’s purchase of the securities, the

holding period has been satisfied and

the amount sold is within the volume

limitations. Similarly, sellers are unable

to use trading systems such as passive

bulletin boards to contact potential

buyers that have indicated an interest in

buying the type of securities to be sold

under Rule 144.28

When a transaction is made in

accordance with the current public

information, holding period, volume

and notice requirements of Rule 144, the

manner in which that transaction is

effected does not appear to be

determinative of a distribution.

Therefore, it appears that the manner of

sale requirements of Rule 144(f) are not

necessary to satisfy the purpose of Rule

144 and are proposed to be eliminated.29

Removal of the manner of sale

requirements would permit holders of

restricted securities to solicit purchasers

in a Rule 144 transaction.30 Is it

consistent with the Rule’s ‘‘nondistribution’’ purpose to allow either

transactions in which special selling

efforts may be used or privately

negotiated transactions? Should the

manner of sale requirements be retained

but modified to permit specific types of

transactions other than brokers’ and

market makers’ transactions, e.g.,

passive bulletin board transactions?

Are there other purposes served by

the manner of sale requirements that

would justify retaining those

requirements? For example, does the

manner of sale requirement serve an

important purpose by inserting a market

professional as a ‘‘gatekeeper’’ that

assures compliance with the public

information, holding period, volume,

and notice requirements of the rule?

How will the removal of the manner of

sale requirements affect participants,

such as transfer agents, brokers and

market makers, in Rule 144

transactions? Will transfer agents

assume a greater role in determining

compliance with the resale provisions?

Would the elimination of the

definition of ‘‘brokers’ transactions’’ in

Rule 144(g) affect the ability of brokers

to determine compliance with the

exemption provided by Securities Act

Section 4(4)? Would removal of the

manner of sale requirements diminish

security transaction transparency by

encouraging more privately negotiated

transactions? If so, would the markets be

adversely affected, particularly for

stocks of smaller companies and more

thinly traded securities?

D. Notice of Sale Requirement

Rule 144(h) requires a person selling

more than 500 shares or $10,000 of

securities in reliance on the rule during

any three-month period to file a notice

on Form 144 with the Commission. The

Report of the Commission’s Task Force
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9249

31The Task Force Report was issued in March

1996. The recommendations concerning Rule

144(h) are discussed on p. 71.

32Rule 144(d)(3)(ii).

33Proposed Rule 144(d)(3)(ii). This would codify

the position taken in Planning Research

Corporation (November 6, 1980). The provision also

would state that if securities are acquired from the

issuer solely in exchange (in addition to upon

conversion) for other securities of the issuer, the

securities so acquired are deemed to have been

acquired at the same time as the securities

surrendered in the exchange. This also would

codify a staff interpretive position.

34Proposed Rule 144(d)(3)(ix).

35Rule 144(d)(3)(viii) [17 CFR 230.144(d)(3)(viii)].

36 Morgan Olmstead (January 8, 1988).

37Proposed Rule 144(a)(3)(vi).

38The Section 4(6) exemption also requires the

filing of a notice of the offering with the

Commission. This notice currently is filed on Form

D. In Release No. 33–7301 (June 14, 1996) [61 FR

30405], the Commission proposed to eliminate the

Form D filing requirement.

39 In Release No. 33–7392 (February 20, 1997)

concerning Regulation S (‘‘Regulation S Proposing

Release’’), the Commission is proposing to revise

Rule 144(a)(3) [17 CFR 230.144(a)(3)] to define

equity securities of domestic issuers, and of foreign

issuers where the principal market for such

securities is in the United States, issued pursuant

to Rule 901 or 903, as restricted securities.

40 17 CFR 230.144(k).

on Disclosure Simplification (‘‘Task

Force Report’’) 31 recommended that the

thresholds for small business issuers be

raised to 500 shares or $40,000, and that

the thresholds be raised to 1,000 shares

or $100,000 for other issuers.

The $10,000 limit was established in

1972. This amount, adjusted for

inflation, is approximately $36,000

today. The Commission therefore

believes that it is appropriate to increase

the $10,000 threshold. Under the

proposed requirements, Form 144

would be filed if the amount of

securities to be resold in reliance upon

Rule 144 during any three-month period

exceeds 1,000 shares or has an aggregate

sales price in excess of $40,000.

Should the share number and dollar

thresholds be set at a different

combination of share number and dollar

amount, e.g., any share number ranging

between 500 and 2,000 shares and any

dollar amount ranging between $10,000

and $100,000 for sales of securities of all

types of issuers? Should there be a

single filing threshold, and if so, which

threshold should be retained, the share

number or dollar amount threshold? If

there were a single threshold based on

share number, would 500 shares, 1,000

shares or a different share number

ranging between 500 and 2,000 shares

be appropriate? If there were a single

threshold based on dollar amount,

would a different dollar value ranging

between $10,000 and $100,000 be

appropriate?

The Commission is not proposing to

establish different filing thresholds for

sales of small business issuer securities

out of concern that different standards

for small business issuers and other

issuers would needlessly complicate the

Form 144 requirements. Should the

Commission establish separate

thresholds for small business and nonsmall business issuers, and if so, are the

thresholds recommended in the Task

Force Report appropriate? The

Commission notes that a smaller

threshold for small businesses would

result in more filings by persons selling

small business securities. This could be

justified in that a smaller transaction

can have a greater impact on a small

business issuer.

E. Other Proposed Amendments to Rule

144

1. Codification of Staff Interpretive

Positions

The Commission is proposing to

codify a variety of staff interpretive

positions regarding Rule 144 in order to

make it easier to comply with the rule.

a. Holding Period—Conversions and

Exchanges

First, the Commission proposes to

amend the Rule 144 provision on

calculating the holding period for

securities acquired upon conversion of

other securities of the same issuer. Rule

144 generally allows holders to count

the time they held securities

surrendered for conversion or exchange

when counting the holding period for

the securities received in the conversion

or exchange, what is commonly referred

to as ‘‘tacking’’ the holding periods.32

This provision of Rule 144 does not

state, however, whether the surrendered

securities must have been convertible by

their terms in order for tacking to be

permitted. This silence has led to

confusion by some persons regarding

how to calculate their Rule 144 holding

period.

Rule 144 permits tacking of holding

periods in the case of securities received

in a conversion because the exchange

continues the shareholder’s investment

in that same issuer. Because the

significant factor in this analysis is that

securities of the issuer are exchanged for

other securities of that issuer, the staff

has taken the interpretive position that

tacking is allowed whether or not the

surrendered securities are convertible

by their terms. The proposed

amendment would clarify the

application of this provision by

codifying the staff’s interpretive

position.33

b. Holding Period—Holding Company

Formations

Second, the proposed revisions would

codify a staff position to clarify that

holders can tack the Rule 144 holding

period in connection with transactions

effected solely for the purpose of

forming a holding company.34 Although

tacking through a holding company

formation appears to be contemplated

by the rule, the rule does not clearly

state when and how this is allowed.35

The proposed revisions would codify a

staff interpretive position by allowing

for tacking in holding company

formations, subject to the following

conditions:

• The holding company’s securities must

be issued in a transaction involving an

exchange of securities as part of a

reorganization of the predecessor into a

holding company structure;

• Holders must receive securities of the

same class evidencing the same proportional

interest in the holding company as they held

in the predecessor; and

• Immediately following the transaction,

the holding company must have no

significant assets other than securities of the

predecessor and its existing subsidiaries and

have substantially the same assets and

liabilities on a consolidated basis as the

predecessor had prior to the transaction.36

c. Definition of Restricted Securities

Third, the proposed revisions would

codify the staff position that securities

acquired from the issuer pursuant to the

exemption under Section 4(6) of the

Securities Act should be considered

‘‘restricted securities.’’ 37 Section 4(6)

provides an exemption for non-public

offerings of less than $5 million that are

made only to accredited investors.38

Because the resale status of securities

received in Section 4(6)-exempt

transactions should be the same as

securities received in other non-public

offerings, the staff has taken the

interpretive position that securities sold

pursuant to the Section 4(6) exemption

also should be deemed to be restricted

securities.39

2. Simplification and Streamlining

The Commission is proposing a

number of revisions intended to make

Rule 144 more readable and easily

understood. The simplifying revisions

would address the conditions to be met

to satisfy the rule, the current public

information requirement, the volume

limitations and the holding period

provisions relating to trusts and estates

in addition to the proposed revisions to

the Preliminary Note to Rule 144

discussed above. Current paragraph

(k),40 which applies to restricted

securities held by non-affiliates for more
9250 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

41 17 CFR 230.144(i).

42Proposed Rule 144(f).

43 17 CFR 230.144(j).

44See Preliminary Note 3 to Regulation D and

Preliminary Note 3 to Rule 701.

45Rule 145(c) [17 CFR 230.145(c)].

46 17 CFR 230.145(d). The companion Adopting

Release amends Rule 145(d) by shortening the

requisite holding periods from two and three years

to one and two years, respectively, consistent with

the amendments to the Rule 144 holding periods.

Persons who are effecting resales of registered

securities issued in Rule 145 transactions generally

fall into four categories. Rule 145(d) applies to their

resales as follows: (1) Non-affiliate of acquired

company who is a non-affiliate of the acquiring

company after the transactions—Rule 145 (c) and

(d) not applicable and securities are unrestricted;

(2) Non-affiliate of acquiring company who is an

affiliate of the acquiring company after the

transaction—Rule 145 (c) and (d) not applicable,

but Rule 144 would be, if no other exemption could

be found; (3) Affiliate of acquired company who is

a non-affiliate of the acquiring company after the

transaction—resale may be made under Rule 145(d)

(1), (2) or (3); and (4) Affiliate of acquired company

who is an affiliate of the acquiring company after

the transaction—Rule 145(d)(1) applies.

47Rule 144(d) [17 CFR 230.144(d)].

48This requirement is proposed to be rescinded,

as discussed above.

49Current Rule 144(k) and proposed Rule 144(g).

50Other provisions of the federal securities laws

may offer support for a six-month holding period.

For example, it may be useful to consider the six

month anti-integration standard in Regulation D,

which is comprised of several rules governing the

limited offer and sale of securities without

registration under the Securities Act. Rule 502 of

Regulation D provides that offers and sales made

more than six months before the start, or after the

completion, of a Regulation D offering will not be

considered part of that offering. Six months also is

the test used in Exchange Act Section 16 to

evidence a sufficient separation between purchase

and sale to make recapture of ‘‘short swing’’ profits

unnecessary.

than two years, would be simplified and

re-designated as paragraph (g).

Current paragraph (i) 41 requires the

person filing a Form 144 to have a bona

fide intention to sell the securities

described in the Form 144 within a

reasonable period of time after that

filing. The wording of this requirement

is proposed to be simplified and moved

into the Form 144 filing requirement.42

Finally, current paragraph (j),43 which

states that Rule 144 is a non-exclusive

provision that does not affect the

availability of any Securities Act

exemption from registration for resales

of securities, would be eliminated. As

discussed above, the non-exclusive

nature of Rule 144 is proposed to be

discussed in the Preliminary Note. This

would be consistent with other

Commission safe harbor provisions.44

F. Rule 145

Securities Act Rule 145 provides that

exchanges of securities in connection

with reclassifications of securities,

mergers or consolidations or transfers of

assets that are subject to a shareholder

vote constitute sales of those securities.

As a result, unless an exemption is

available, the offering of securities in

those transactions must be registered

under the Securities Act.

The rule explicitly deems persons

who were affiliates of any party to the

transaction to be underwriters.45

Therefore, the Section 4(1) resale

exemption is not available to these

persons for resales of securities acquired

in connection with transactions

described in the rule. The rule provides

some relief from this ‘‘presumptive

underwriter’’ provision, however, by

permitting the affiliates to resell

securities received in the transaction in

compliance with the holding period and

other requirements of Rule 145(d).46

Rule 145 is the only Securities Act

rule that contains a presumptive

underwriter provision. The Commission

believes that it may no longer be

appropriate to rely on a presumptive

underwriter approach when addressing

the resales of securities acquired in Rule

145 transactions. Rather, it appears to be

more appropriate to rely on the

provisions of Rule 144 and traditional

considerations in determining whether

the persons covered by current Rule

145(c) are underwriters in connection

with resales. The presumptive

underwriter and resale provisions of

Rule 145(c) and (d) are, therefore,

proposed to be eliminated.

Are there some persons currently

presumed to be underwriters under Rule

145 that should continue to be

presumed to be underwriters? If the

presumptive underwriter standard is

removed, should Rule 145 still include

provisions addressing the underwriter

issue with respect to resales of securities

acquired in Rule 145 transactions?

Would it be helpful to retain a resale

safe harbor in the rule for those persons

who are concerned that they might be

determined to be underwriters with

respect to their resales? Would it be

unnecessary to retain a resale safe

harbor in the rule because affiliates of

the surviving company would be able to

rely on Rule 144 for resales in any

event?

IV. Solicitation of Comment

A. Other Possible Rule 144 Changes

The Commission solicits comment on

additional revisions to Rule 144 in the

two sections below. After review of the

public comments on these possible

revisions, the Commission may choose

to adopt either or both without further

solicitation of public comment.

1. Rule 144 Holding Periods

Under the Rule 144 amendments

being adopted today in the Adopting

Release, all restricted securities must be

held at least one year before resale if

Rule 144 is used, with the year

measured from the date the securities

were purchased from the issuer or an

affiliate.47 For restricted securities held

between one and two years, other

provisions of the rule require current

information about the issuer to be

available to the market, limit the

amount of securities that may be resold,

require resales to be made in ordinary

brokerage transactions or directly with a

market-maker,48 and require filing with

the Commission of a notification of the

resale on Form 144, if the amount of

securities sold exceeds specified

thresholds. After a two-year holding

period, restricted securities may be

resold by non-affiliates without

compliance with any of these

provisions.49

There was a consensus among

commenters that shortened holding

periods would facilitate efforts to raise

capital through private placements by

shrinking the discount in price

attributable to illiquidity of capital

during the restricted period and

allowing investors to recoup their

capital faster. Two commenters,

however, argued that the holding period

for limited resales should be shorter

than the proposed one year, with one

commenter suggesting a six-month

period and the other suggesting a threemonth period.

The holding period requirement

provides an objective criterion for

determining that the securities are not

being sold as part of a public

distribution by the issuer. As such, this

holding period should be long enough

to prevent circumvention of the

registration requirements by assuring

that the securities are not still linked to

the issuer’s offering, but no longer than

necessary to satisfy this purpose, so as

to avoid imposing unnecessary costs or

placing unnecessary restraints on the

flow of capital.

The Commission seeks comment on

whether the Rule 144(d) holding period

after which limited resales are allowed

should be shortened from one year to

six months.50 Would this period be long

enough to ensure that the Rule 144

resales would not be part of an

unregistered public distribution?

Should the further shortening be tied to

some other safeguard such as a

prohibition on hedging during the

holding period?

Commenters favoring a six-month

holding period are asked to consider
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9251

51Rule 144(e) [17 CFR 230.144(e)].

52 17 CFR 239.13.

53The staff has taken the interpretive position

that offshore resales of securities under Regulation

S need not be included in the calculation of the

amount of securities sold under Rule 144. The

Regulation S Proposing Release proposes to codify

this interpretive position.

54See Deborah Lohse & Dave Kansas, Big Board

is Crying Foul to Regulators Over How Nasdaq

Figures Daily Volume, Wall St. J., August 5, 1996

at C1 and Big Board Seeks Volume Change, N.Y.T.,

July 16, 1996 at D7.

55The Petition for Rulemaking was filed on July

9, 1996 and is available in File No. 4–390 in the

Commission’s Public Reference Room, 450 Fifth

Street, N.W., Washington, D.C. 20549.

56The petition asks the Commission to change

Rule 144 and other rules with trading volume

standards so that the standards would operate

comparably in all markets. The petition asserts that

dealer interpositioning on Nasdaq ‘‘on virtually

every trade approximately doubles the reported

volume of trading of shares changing hands

between investors, as compared with auction

markets where buyers and sellers meet directly and

reported volume reflects that direct interaction as

a single reported trade.’’ The Commission has not

instituted rulemaking based on the New York Stock

Exchange petition. See Letter to the New York Stock

Exchange regarding Petition for Rulemaking, File

No. 4–390 (February 19, 1997). Commenters

favoring retention of a trading volume test for Rule

144 resales may wish to address the comparability

issues raised by the petition.

whether the volume limitations 51

should be made more restrictive and/or

hedging activities should be proscribed

or further restricted if the holding

period is reduced to six months. For

example, if the Commission reduced the

holding period to six months, should it

also reduce by one-half, one-third, one

quarter or some other measure the

amount of securities that could be

resold in any three-month period after

completion of the holding period?

Should there be a correlation between

the Rule 144 volume limitations and the

length of the holding period (for

example, for resales between six months

and one year the volume would be more

limited than between one year and two

years)? Should the volume limitations

relate to the amount of securities to be

sold in a monthly, rather than quarterly,

period? If so, should the monthly

volume test apply only during the six to

twelve month period, or through the

entire Rule 144 holding period? If a

monthly test is used, should Form 144

also relate to monthly rather than

quarterly sales?

Would it be appropriate to tie the

volume limitations to the amount of

restricted and control securities owned

by the seller? For example, should the

rule restrict Rule 144 sales in a quarterly

period to ten percent of the amount of

restricted and/or control securities

owned by the seller on the date of the

Rule 144 sale?

Should the holding period after which

non-affiliates can sell without

restriction be shorter than the two-year

period adopted today, e.g., one year or

18 months? Assuming the newly

adopted one-year holding period is not

shortened further, adoption of a oneyear holding period after which nonaffiliates can sell without restriction

would significantly simplify the rule

since it would include only one

measurement period. Is a one-year

holding period for unrestricted resales

by non-affiliates sufficient to assure that

the resales are not part of an

unregistered public distribution?

Should such a one-year period be

adopted either alone or in conjunction

with also adopting a six-month period

for limited resales?

Alternatively, should the holding

period for limited and unrestricted Rule

144 resales be set at a different but

uniform period, such as 18 months?

Would such a test strike an appropriate

balance between simplifying the rule

and restricting resales only in those

situations that raise the risk of an

indirect unregistered distribution?

Further comment is solicited on a

number of other variations. Should the

holding period depend on the size of the

company? For example, would it be

appropriate to implement a shorter

holding period for securities of larger

companies? If a shorter period were

appropriate for larger companies,

should it be limited to companies

eligible to use Form S–3,52 or to

companies traded on national securities

exchanges? Should the period be

reduced for securities of larger

companies to six months, while

securities of all other companies would

be subject to a longer holding period,

such as one year? Moreover, should

different holding periods be established

for debt and equity securities, such as

allowing unlimited resales of debt

securities after six months?

2. Rule 144(e) Volume Limitations

The volume limitations in Rule 144(e)

restrict the amount of restricted or

control securities that can be sold.53

Currently, the amount of these

securities, together with all sales by the

seller of restricted and control securities

of the same class within the preceding

three month period, cannot exceed the

greater of the following three tests:

(1) one percent of the shares or other units

of the class outstanding as shown by the most

recent report or statement published by the

issuer;

(2) the average weekly volume of trading in

such securities on all national securities

exchanges and/or reported through the

automated quotation system of a registered

securities association during the four

calendar weeks preceding the filing of Form

144, or if no Form 144 is required to be filed,

the date of receipt of the order to execute the

transaction by the broker or the date of

execution of the transaction directly with a

market maker; or

(3) the average weekly volume of trading in

such securities reported through the

consolidated transaction reporting system

during the four week period specified in (2).

The Commission solicits comment on

whether the two tests based on trading

volume should be eliminated. There are

two reasons why the Commission is

considering this possibility. First, the

trading volume tests appear to

needlessly complicate the rule. Based

on a review of a large number of Rule

144 transaction filings by the staff, the

Commission believes that most persons

selling securities under Rule 144

currently rely on the shares outstanding

test because it allows sufficient shares to

be sold and is easier to apply than the

trading volume tests. Accordingly, it

could be appropriate to simplify the rule

by eliminating these tests.

Second, there is an issue as to

whether the trading volume limitations

are comparable between different

markets because of the effect on trading

volume of market structure differences

between the Nasdaq market and the

national securities exchanges.54 The

New York Stock Exchange has

submitted a rule petition asking that this

be addressed.55 According to the New

York Stock Exchange petition, these

differences in market structure may

mean that the Rule 144 test may not

provide sufficiently comparable

information to form the basis for a

uniform volume test.56

Comment is sought on the extent to

which persons use the trading volume

tests to calculate the number of

securities they can sell in reliance on

Rule 144. If the trading volume tests are

kept, should one or both of the tests be

adjusted to account for differences

between the Nasdaq market and the

national securities exchanges to

determine trading volume? Should the

Nasdaq volume test be one-half of the

national securities exchange volume, as

the New York Stock Exchange

suggested, or would some smaller

adjustment serve to make the tests more

comparable? Do differences in trading

characteristics of securities make a

simple adjustment not practicable?

Commenters are asked to supply

supporting data, if possible.

B. Possible Regulatory Approaches to

Hedging Transactions

The 1995 Release noted that recent

years have evidenced the growth of a
9252 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

57Hedging is a risk limiting device much like

buying insurance. For example, a person could

hedge common stock by purchasing a put option to

sell the common stock at a fixed price. If the stock

value increases, the holder profits. If the stock price

falls, the put option can be exercised to sell the

stock at a predetermined price.

58Equity swaps are individually negotiated

contracts, the specific terms of which may vary

from agreement to agreement. One form of equity

swap involves an agreement by a holder of equity

securities to pay, or ‘‘swap,’’ the return on the

securities (which may include dividends as well as

any change in market value) in exchange for the

return on an equity index, basket of securities, or

an interest-rate based cash flow.

59 Deletion of the tolling provision in 1990 did not

mean that holders could freely engage in hedging

activities with respect to their restricted securities

without consideration of the registration

requirements. The Commission staff historically has

viewed the question of whether a hedging

transaction would toll the holding period as

separate from the question of whether a hedging

transaction was subject to Section 5 of the

Securities Act. With respect to short sales ‘‘against

the box,’’ (meaning that the person sells short even

though the person owns securities that can be

delivered) the Division continues to take the

position expressed in the 1979 Rule 144

interpretative release (Release No. 33–6099, (August

2, 1979) [44 FR 46572]) that a person who has held

restricted securities for less than one year cannot

effect a short sale of securities of that class and then

cover the short position with restricted securities

(even after expiration of the one year holding

period) since the initial short sale did not qualify

under Rule 144. Similarly, exchange-traded puts

and calls may be used for Rule 144 sales, but in the

case of restricted securities, the one-year holding

period requirement of Rule 144(d) must have been

satisfied by the date the put is purchased or call is

sold. See Bear Stearns & Co., Inc., (April 4, 1991)

and Release 33–6099. 60 17 CFR 240.16a–1(h).

variety of hedging strategies in both the

private and public securities markets

associated with separating the bundle of

rights that make up a security, including

voting, price appreciation and dividend

rights. 57 Through the use of equity

swaps 58 and similar strategies, holders

of restricted securities can retain legal

title to their securities, but sell some or

all of the rights associated with the

securities in order to decrease or

eliminate the risk that the market value

of their investment will decline during

a specific period of time.

The 1995 Release solicited public

comment on whether it is appropriate to

treat the securities underlying equity

swaps as ‘‘held’’ in the private markets

if the economic risk of the investment

has been shifted. It also stated that the

Commission was examining whether it

may be appropriate to revise Rule 144

to reflect the economic realities of these

transactions either by reintroducing the

holding period tolling concept that was

deleted in 1990 for periods when the

holder has entered into a hedging

strategy or by prohibiting risk-shifting

transactions altogether during the

holding period.59 Commenters also were

asked to provide their views as to the

need to have a fungibility doctrine

underlie Rule 144.

Several commenters argued that

hedging strategies should not be

restricted or prohibited during the Rule

144 holding periods, primarily because

hedging strategies do not permit holders

of restricted securities to shift all of the

economic risks of holding the securities

to another person or the public markets

and do not result in any leakage of

restricted stock into the public markets.

Other commenters thought that holders

of restricted securities should not be

engaging in hedging transactions during

the holding period.

Since issuance of the 1995 Release,

the Commission has given further

consideration to the issue of whether

the entry into equity swaps and other

hedging arrangements with respect to

restricted securities is inconsistent with

the principles underlying the

registration requirements of the

Securities Act and the Rule 144 safe

harbor. The Commission recognizes that

arguments can be made in favor of

treating ‘‘short against the box’’

transactions and equity swaps as sales

of the underlying restricted securities

since these transactions typically hedge

fully a holder of restricted securities

against any economic risk. Without risk,

there is arguably no investment intent,

suggesting that the holder is more of an

underwriter than an investor. At the

same time, it can be argued that hedging

transactions do not raise Section 5

issues because the restricted securities

are not being sold into the open

marketplace. Instead, only freely

tradeable securities are actually

redistributed to the public. Proponents

of this view argue that the two types of

securities are not ‘‘fungible’’ or

interchangeable.

The economic substance of the

transactions, however, gives rise to

concern. For example, it is arguable

that, in economic reality, a distribution

occurs when a company sells

unregistered restricted stock to an

investor who, in turn, hedges the market

risk through an equity swap with an

investment bank, which then sells an

equal number of securities into the

market. A staff review of industry

practices found that practitioners were

more concerned about the Section 5

ramifications of hedging during a short

period of time following acquisition of

the restricted securities (typically three

months) because a disposition of risk so

soon after acquisition raises questions

about the nature of the investment. The

industry also seems less concerned

about partial hedges. Partial hedges with

options may raise fewer concerns

because the investment bank is less

likely to sell an equal number of shares

into the marketplace (thereby involving

less of a distribution).

The Commission requests comment

on a number of possible regulatory

approaches to hedging. First, it could

make the Rule 144 safe harbor

unavailable for persons who hedge

during the restricted period. Second,

independent of Rule 144, it could

promulgate a rule that would define a

sale for purposes of Section 5 to include

specified hedging transactions. In order

to hedge, a person would need an

exemption from registration for the

transaction or else would have to

register the transaction with the

Commission. Under this approach, a

hedging transaction would be treated

the same as a sale of the underlying

security, so hedging would be

constrained in the same way (e.g., if an

exemption is used such as Rule 144, the

Rule 144 volume restrictions would

apply). Third, as a variant of the first

approach, it could adopt a shorter

holding period (e.g., three or six

months) during which hedging could

not occur without losing the safe harbor.

After that, hedging could occur, but the

underlying restricted securities would

be held the remainder of the one-year

holding period adopted today. Fourth, it

could reintroduce a tolling provision in

Rule 144 similar to the provision that

was included prior to 1990. The last

approach would be to maintain the

status quo with no specific prohibition

against hedging, relying instead upon

practitioners to apply a facts and

circumstances test to determine when

Section 5 is implicated. Comment is

solicited generally on each of the above

approaches.

For purposes of a definition, the

Commission is considering defining

hedging to include any sale or

combination of swap, option, or short

sale intended to limit or eliminate the

market risk of restricted or control stock.

Alternatively, the Commission could

use the definition of ‘‘put equivalent’’

position in Exchange Act Rule 16a–

1(h).60 Should the definition be

expanded to include futures, contracts,

‘‘collars’’ or other instruments that

operate similarly to a swap or option?

If the second overall approach were

adopted, should all hedging be

considered a sale for purposes of

Section 5? If not, should only

transactions like swaps and short sales

of securities of the same class as the

restricted securities be deemed sales

because they most closely approximate

a sale of the restricted securities? If

options are included, should there be a
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9253

61 5 U.S.C. § 603.

difference between in-the-money

options (which are likely to be

exercised) and out-of-the-money options

(which are less likely to be exercised)?

For example, should transactions

involving options be ignored if the

options are sufficiently out-of-themoney (e.g., 5%, 10%, 20%)? Should

there be different treatment for hedging

with cash settled derivative securities

since their exercise does not result in

any distribution of securities into the

market? Should hedging a transaction be

considered a sale of the underlying

security only if it results in a sale of

securities of the same class as the

underlying security to a third party?

Since hedging can be a dynamic

process, should there be a difference

between the initial hedge and a

subsequent ‘‘maintenance’’ hedge? For

example, a holder of restricted securities

might hedge only a portion of the

market risk initially. As the value of the

securities fluctuates, the holder may

have to adjust the hedge by buying more

put options, for example, or selling

more stock short to maintain the same

risk as initially envisioned. Presumably,

this adjustment has less distributive

aspects than the initial hedge. Should it

make a difference if the security being

hedged is control stock rather than

restricted stock?

Should control stock be treated

differently in general? It is not

uncommon for individual affiliates to

have a significant portion of their net

worth represented by control or

restricted stock. Such persons might

want to diversify or limit their risk

through hedging. Should the

Commission adopt a rule that permits

some limited hedging by these persons

without raising Section 5 concerns? If

such a safe harbor were crafted, should

it be limited to a percentage of the

affiliate’s total holdings of control stock

(e.g., 5%, 10%, 20% or even 49%)? Is

it sufficient to permit only hedging in

accordance with the volume limitations

of Rule 144(d)?

C. General Request for Comment

Any interested persons wishing to

submit comment on any of the

proposals set forth in this release are

invited to do so by submitting them in

triplicate to Jonathan G. Katz, U.S.

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549. Comments also may be

submitted electronically at the following

e-mail address: rule-comments

@sec.gov. All comment letters should

refer to File Number S7–07–97; this file

number should be included on the

subject line if e-mail is used. Comments

received will be available for public

inspection and copying in the

Commission’s Public Reference Room,

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov). Comments are solicited

from the point of view of issuers,

holders of restricted and control

securities, investment bankers and the

investing public.

V. Cost-Benefit Analysis

The proposed amendments, if

adopted, should reduce the costs of

complying with the Rule 144 safe harbor

requirements by making the rule easier

to understand and apply. Elimination of

the manner of sale requirements would

result in fewer brokerage commissions

being paid by persons reselling

securities in reliance on the Rule 144

safe harbor, since resale transactions no

longer would have to involve a broker

or market-maker. The proposed increase

in Form 144 filing thresholds would

result in fewer filings and also reduce

compliance costs.

For purposes of the Small Business

Regulatory Enforcement Act of 1996, the

Commission also is requesting

information regarding the potential

impact of the proposed rules on the

economy on an annual basis.

Commenters should provide empirical

data to support their views.

The Commission does not believe that

the proposed amendments would have

an adverse effect on competition,

employment, investment, productivity,

innovation, market efficiency, or capital

formation. In fact, the Commission

believes that the proposed amendments

will promote capital formation and

efficient, competitive markets by

enhancing investors’ confidence in the

integrity of the securities markets.

However, the Commission requests

comment on these preliminary views.

The Commission encourages

commenters to provide empirical data

or other facts to support their views.

VI. Initial Regulatory Flexibility

Analysis

This Initial Regulatory Flexibility

Analysis has been prepared in

accordance with Section 603 of the

Regulatory Flexibility Act,61 and relates

to the proposed amendments to Rules

144 and 145 and Form 144 under the

Securities Act.

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 publicly sell

them without registration and without

being deemed underwriters.

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) requires its own holding periods

that track the holding periods for resales

found in Rule 144.

Form 144 is required to be filed by

persons intending to sell securities in

reliance on Rule 144 if the amount of

securities to be sold in any three month

period exceeds 500 shares or other units

or the aggregate sales price exceeds

$10,000. The primary purpose of the

form is to publicly disclose the

proposed sale of unregistered securities

by persons not deemed to be engaged in

the distribution of securities.

The Commission has determined to

propose amendments that would make

Rule 144 easier to understand and

apply. The staff has reorganized and

shortened the rule to make it easier to

understand and apply. In addition to

codifying certain staff interpretive

positions, the proposals would make the

following substantive changes to Rule

144:

• Provide a bright-line exclusion from

the Rule 144 definition of affiliate.

Pursuant to the proposal, persons who

would not be subject to the provisions

of Section 16, i.e., persons who are not

officers, directors or 10% holders of the

issuer, would be deemed not to be

affiliates of an issuer for purposes of

Rule 144;

• Eliminate the manner of sale

requirements; and

• Increase the thresholds for filing

Form 144 from the current 500 shares or

$10,000 sale price test to a 1000 shares

or $40,000 sale price test.

The proposals also would amend Rule

145, which relates to certain significant

transactions, such as mergers, to

eliminate the resale limitations that are

based on a ‘‘presumptive underwriter’’

approach. Instead of that approach,

persons who receive securities in these

transactions would be treated the same

as other purchasers of securities.
9254 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

62 17 CFR 240.0–10.

63There is no comparable definition of ‘‘person’’

under the Securities Act.

The revision to the definition of

affiliate would provide more objective

guidance for issuers and sellers of

securities as to the types of persons that

are not affiliates for purposes of Rule

144. Elimination of the manner of sale

requirements would remove obstacles to

transactions that are not distributive in

nature. An increase in the Form 144

filing thresholds would take into

account the effects of inflation since

adoption of Rule 144 in 1972.

The release solicits comment on

shorter Rule 144(d) and/or 144(k)

holding periods. Persons holding

restricted and control stock, including

small entities holding such stock, and

all issuers, including small business

issuers, would benefit from shortened

holding periods. The release also

solicits comment on elimination of the

trading volume limitation in Rule

144(e). It is unlikely that this change

would have a significant economic

impact on persons holding restricted

and control stock, including small

entities owning such stock.

Legal Basis

The amendments are proposed

pursuant to Sections 2(11), 4(1), 4(4)

and 19(a) of the Securities Act.

Small Entities Subject to Requirements

The proposed rules will affect both

small entities that issue restricted or

control securities and small entities that

hold such securities. When used with

reference to an issuer, other than an

investment company, the term ‘‘small

business’’ 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. When used

with reference to an issuer or person,

other than an investment company,

Exchange Act Rule 0–10 62 defines small

entity 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.63

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 proposed rules. The

proposed rules also may affect small

businesses that are not subject to

Exchange Act reporting requirements.

The Commission is unable to determine

the number of such small businesses

due to the absence of filings with the

Commission by such companies.

Comment is solicited on the number of

small businesses that are not subject to

Exchange Act reporting requirements

that may be affected by the proposed

rules.

An estimated 3,800 entities, excluding

natural persons, annually file Form 144

based upon a sample study of Form 144

filings by the Commission’s Office of

Economic Analysis. Since the form does

not require disclosure of the size of

entities reselling securities in reliance

on Rule 144, the Commission has no

basis for estimating the number of these

entities that are small entities. Comment

is solicited as to the number of small

entities who may rely on Rule 144 in

reselling restricted or control securities

if the proposed rules are adopted.

The proposals would favorably affect

small businesses and small entities

owning restricted or control securities of

issuers by improving the usefulness of

the Rule 144 safe harbor and removing

unnecessary and outdated requirements.

Reporting, Recordkeeping and Other

Compliance Requirements

If the change to the definition of

affiliate is adopted, it is expected that

fewer persons, including small entities,

owning restricted and control stock of

all issuers, including small issuers, will

file Form 144. The reduction would

result from the fact that some persons

who are not officers, directors or 10%

holders of an issuer presumably

consider themselves to be affiliates

under the current Rule 144 definition.

The Commission has no basis, however,

for estimating the size of this expected

decrease since it does not collect any

information that would provide a basis

for such an estimate and such

information is not otherwise available to

the Commission. Comment is solicited

as to how to quantify the expected

decrease.

If the manner of sale requirements

were eliminated, persons (including

small entities) owning restricted and

control stock of all issuers, including

small issuers, no longer would have to

sell their stock in a broker’s transaction

or directly with a market-maker. Those

choosing to sell their stock in a

transaction not involving a broker or

market-maker would not incur the

expense of commission fees.

Adoption of increased share number

and dollar amount thresholds for filing

Form 144 also is expected to decrease

the number of Form 144 filings required

to be made by persons (including small

entities) owning restricted and control

stock of all issuers, including small

issuers. Based on studies by the

Commission’s Office of Economic

Analysis, the number of Form 144

filings is expected to decrease by

approximately 5% (1,339 filings) if the

thresholds are increased to 1,000 shares

or $40,000 in market value.

The release solicits comment on

whether the thresholds should be

increased as high as 2,000 shares or

$100,000. It is estimated that if these

higher thresholds were adopted, the

number of Form 144 filings would

decrease by approximately 14% (3,677

filings).

Finally, some persons (including

small entities) owning stock in issuers,

including small issuers, that engage in

the type of transactions covered by Rule

145 would benefit from the proposed

revisions since there no longer would be

a presumption that persons who receive

securities in these transactions are

underwriters. The Commission has no

basis for estimating the number of

persons who may be deemed to be

underwriters under the current rule that

would not be determined to be

underwriters if the proposed change is

adopted since it does not collect any

information that would provide a basis

for such an estimate and such

information is not otherwise available to

the Commission. Comment is solicited

as to how to quantify such number.

Clerical skills are necessary to

complete Form 144.

Overlapping or Conflicting Federal

Rules

No current federal rules duplicate,

overlap or conflict with the rules and

forms to be proposed, except that

persons subject to the reporting

requirements under Section 16 of the

Securities Exchange Act of 1934 may

need to file reports on Form 4 as well

as Form 144 under certain

circumstances.

Significant Alternatives

The Commission considered the

establishment of different compliance

standards for small entities owning

restricted and control securities, as well

as for persons owning restricted and

control securities of small issuers. For

example, the Commission could

establish shorter holding periods or

more lenient Form 144 filing

requirements. Such differences,

however, would be inconsistent with

the purposes served by the holding

period and Form 144 filing

requirements and would needlessly
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9255

64 44 U.S.C. § 3501 et seq. 65 44 U.S.C. § 3507(d) and 5 CFR § 1320.11.

complicate the Form 144 filing

requirements. The Commission also

considered the other 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

clarification, consolidation, or

simplification of compliance and

reporting requirements for such small

entities; (2) the use of performance

rather than design standards; and (3) an

exemption from coverage of the

proposed amendments, or any part

thereof, for small entities. Because the

proposed amendments would 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

proposed amendments 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.

Solicitation of Comments

Written comments are encouraged

with respect to any aspect of this Initial

Regulatory Flexibility Analysis. In

particular, the Commission seeks

comment on: (i) the number of small

entities that would be affected by the

proposed rule; (ii) the expected impact

of the proposals as discussed above; and

(iii) how to quantify the number of

small entities that would be affected by,

and how to quantify the impact of, the

proposed rules. Commenters are asked

to describe the nature of any impact and

provide empirical data supporting the

extent of the impact. Such comments

will be considered in the preparation of

the Final Regulatory Flexibility Analysis

if the proposed revisions are adopted.

Persons wishing to submit written

comments should file them with

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

All comments received will be available

for public inspection and copying at the

Commission’s Public Reference Room at

the same address.

VII. Paperwork Reduction Act

Form 144 contains ‘‘collection of

information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995 (‘‘PRA’’).64 The Commission

has submitted the proposed revisions to

Form 144 to the Office of Management

and Budget for review in accordance

with PRA procedures.65 The title for the

information collection is ‘‘Notice of

Proposed Sale of Securities Pursuant to

Rule 144 under the Securities Act of

1933.’’

As proposed to be revised, Form 144

would be filed with the Commission by

persons who intend to sell securities in

reliance on Rule 144 if the amount of

securities to be sold during a threemonth period exceeds 1,000 shares or

other units or has an aggregate sales

price in excess of $40,000. The

proposed thresholds for filing Form 144

would be increased from existing

thresholds of 500 shares or a $10,000

sale price. Form 144 may be filed

electronically using the EDGAR filing

system. The information is used for the

primary purpose of disclosing the

proposed sale of unregistered securities

by persons deemed not to be engaged in

the distribution of the securities. It is

made publicly available. Persons

reselling securities in reliance on the

Rule 144 safe harbor are the likely

respondents to the information required

by Form 144.

An estimated 18,096 respondents are

expected to file Form 144 annually for

a total burden of 36,192 hours if the

proposed revisions to Form 144 are

adopted. This represents a decrease of

2,678 hours from the current annual

burden under existing thresholds. The

information collection requirements

imposed by Form 144 are mandatory.

The Commission may not require Form

144 filings unless the form displays a

currently valid OMB control number.

The Commission solicits comment to:

(i) evaluate whether Form 144, as

proposed to be revised, is necessary for

the proper performance of the functions

of the agency, including whether the

information shall have practical utility;

(ii) evaluate the accuracy of the agency’s

estimate of the burden of the proposed

collection of information; (iii) enhance

the quality, utility, and clarity of the

information to be collected; and (iv)

minimize the burden of collection of

information on those who are to

respond, including through the use of

automated collection techniques or

other forms of information technology.

Persons desiring to submit comments

on the collection of information

requirements should direct them to the

Office of Management and Budget,

Attention: Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Washington, D.C. 20503, and

should also send a copy of their

comments to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 5th Street, N.W.,

Washington, D.C. 20549 with reference

to File No. S7–07–97. OMB is required

to make a decision concerning the

collections of information between 30

and 60 days after publication, so a

comment to OMB is best assured of

having its full affect if OMB receives it

within 30 days of publication.

VIII. Statutory Basis

The amendments to Rules 144 and

145 and Form 144 are being proposed

pursuant to sections 2(11), 4(1), 4(4) and

19(a) of the Securities Act.

List of Subjects in 17 CFR Parts 230 and

239

Reporting and recordkeeping,

Securities.

Text of the Proposals

For the reasons set out above, title 17,

chapter II of the Code of Federal

Regulations is proposed to be 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 the Preliminary Note,

paragraphs (a)(1), (a)(3), (b), and (c),

adding notes to paragraph (c), revising

paragraphs (d)(3)(ii), (d)(3)(vi),

(d)(3)(vii) and (d)(3)(viii), adding

paragraph (d)(3)(ix), revising the

introductory text of paragraph (e)(1),

revising paragraph (e)(2), removing

paragraphs (f) and (g), re-designating

paragraph (h) as paragraph (f), removing

paragraphs (i) and (j), re-designating

paragraph (k) as paragraph (g) and by

revising newly designated paragraphs (f)

and (g) to read as follows:

§ 230.144 Persons deemed not to be

engaged in a distribution and therefore not

underwriters.

Preliminary Note

The Securities Act of 1933 requires that all

offers and sales of securities in interstate

commerce or by use of the mails must be

registered with the Commission or exempt

from registration. While Section 4(1) exempts

most routine trading, transactions by

underwriters are not exempt. Rule 144

creates safe harbor exemptions for two

common situations arising from the Act’s

definition of ‘‘underwriter.’’

First, anyone who has taken securities

directly from the issuer in an unregistered
9256 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

transaction and who effects a public resale in

the short term may be said to be a ‘‘person

who has purchased from an issuer with a

view to * * * distribution,’’ and thus an

‘‘underwriter’’ within the meaning of Section

2(11) of the Act. An investment banking firm

that arranges with an issuer for the public

sale of its securities is clearly an

‘‘underwriter’’ under that Section. Individual

investors who are not professionals in the

securities business may also be

‘‘underwriters’’ within the meaning of that

term as used in the Act if they act as links

in a chain of transactions through which

securities move from an issuer to the public.

Rule 144 provides an exemptive safe harbor

for the resale of these ‘‘restricted securities.’’

Second, Section 2(11) treats persons in a

relationship of control with the issuer

(‘‘affiliates’’) as if they were the issuer for the

purpose of determining which intermediaries

to the public markets are ‘‘underwriters.’’ As

a result, a public sale of an affiliate’s

securities (‘‘control securities’’), whether or

not the securities are ‘‘restricted,’’ is subject

to the same regulatory requirements as a

public offering by the issuer. Rule 144

provides an exemptive safe harbor for the

resale of control securities on behalf of an

affiliate of the issuer.

Rule 144 sets forth certain conditions

which are intended to distinguish between a

distribution and routine trading. First,

adequate current public information is

required to protect investors. Second, a

holding period before resale is needed to

assure that persons who buy restricted

securities in unregistered offerings have

assumed the economic risks of investment

and are not acting as conduits for the issuer

in an unregistered public distribution. Third,

Rule 144 requires a person relying on the

Rule to sell the securities in limited

quantities to further demonstrate that trading

is ordinary, rather than distributive.

If a sale of securities is made in accordance

with all of the provisions of Rule 144, (1) any

person who sells restricted securities will be

deemed not to be an underwriter for that

transaction; (2) any person who sells

restricted or other securities on behalf of an

affiliate of the issuer will be deemed not to

be an underwriter for that transaction; and (3)

the purchaser receives unrestricted

securities.

Rule 144 is not an exclusive safe harbor.

It does not affect the availability of any other

exemption for resales under the Securities

Act.

(a) * * *

(1) An affiliate of an issuer is a person

that directly, or indirectly through one

or more intermediaries, controls, or is

controlled by, or is under common

control with, such issuer. A person shall

be deemed not to be an affiliate for

purposes of this section if the person:

(i) Is not the beneficial owner, directly

or indirectly, of more than 10% of any

class of equity securities of the issuer;

(ii) Is not an officer of the issuer; and

(iii) Is not a director of the issuer.

Note to paragraph (a)(1): The

determination of a person’s beneficial

ownership and whether that person is an

‘‘officer’’ shall be made in accordance with

§ 240.16a–1 of this chapter, regardless of

whether the issuer’s securities are subject to

Section 16 (15 U.S.C 78(p)) of the Securities

Exchange Act of 1934 (‘‘Exchange Act’’) and

regardless of whether the class of securities

is registered under Section 12 (15 U.S.C. 78l)

of the Exchange Act.

* * * * *

(3) The term restricted securities

means:

(i) Securities acquired directly or

indirectly from the issuer, or from an

affiliate of the issuer, in a transaction or

chain of transactions not involving any

public offering;

(ii) Securities acquired from the issuer

that are subject to the resale limitations

of § 230.502(d) under Regulation D or

§ 230.701(c);

(iii) Securities acquired in a

transaction or chain of transactions

meeting the requirements of § 230.144A;

(iv) Securities acquired from the

issuer in a transaction subject to the

conditions of Regulation CE

(§ 230.1001);

(v) Equity securities of domestic

issuers, and of foreign issuers where the

principal market for such securities is in

the United States, acquired in a

transaction or chain of transactions

subject to the conditions of § 230.901 or

§ 230.903 under Regulation S

(§§ 230.901 thru 230.905 and

Preliminary Notes); or

(vi) Securities acquired from the

issuer that were issued pursuant to an

exemption under section 4(6) (15 U.S.C.

77(d)(6)) of the Act.

(b) Conditions to be met. (1) Any

affiliate or other person who sells

restricted securities of an issuer for such

person’s own account shall be deemed

not to be an underwriter thereof within

the meaning of section 2(11) (15 U.S.C.

77(b)(11)) of the Act if all of the

conditions of this section are met.

(2) Any person who sells restricted or

any other securities for the account of

an affiliate of the issuer of such

securities shall be deemed not to be an

underwriter thereof within the meaning

of Section 2(11) of the Act if all of the

conditions of this section are met.

(c) Current public information.

Adequate current public information

with respect to the issuer of the

securities must be available. Such

information will be deemed to be

available only if either of the following

conditions is met:

(1) Reporting Issuers. The issuer is,

and for at least 90 days before the sale

has been, subject to the reporting

requirements of Section 13 or 15(d) of

the Exchange Act (15 U.S.C. 78(m) or

(o)(d)) and has filed all required reports

during the 12 months preceding such

sale (or for such shorter period that the

issuer was required to file such reports);

or

(2) Non-reporting Issuers. If the issuer

is not subject to the reporting

requirements of Section 13 or 15(d) of

the Exchange Act, there is publicly

available the information concerning the

issuer specified in paragraph (a)(5)(i) to

(xiv), inclusive, and paragraph

(a)(5)(xvi) of § 240.15c2–11 of this

chapter, or, if the issuer is an insurance

company, the information specified in

Section 12(g)(2)(G)(i) of the Exchange

Act.

Notes to paragraph (c): 1. With respect to

paragraph (c)(1), the seller can rely upon:

(A) A statement in whichever is the most

recent report, quarterly or annual, required to

be filed and filed by the issuer that such

issuer has filed all reports required to be filed

by Section 13 or 15(d) of the Exchange Act

during the preceding 12 months (or for such

shorter period that the issuer was required to

file such reports) and has been subject to

such filing requirements for the past 90 days;

or

(B) A written statement from the issuer that

it has complied with such reporting

requirements. Neither type of statement may

be relied upon, however, if the person knows

or has reason to believe that the issuer has

not complied with such requirements.

2. Rule 144(c) cannot be satisfied during

the first 90 days after an issuer becomes

subject to the reporting requirements of

Section 13 or 15(d) of the Securities

Exchange Act.

(d) * * *

(3) * * *

(ii) Conversions and exchanges. If the

securities sold were acquired from the

issuer solely in exchange for other

securities of the same issuer, the newly

acquired securities shall be deemed to

have been acquired at the same time as

the securities surrendered for

conversion or exchange, even if the

securities surrendered were not

convertible or exchangeable by their

terms;

* * * * *

(vi) Trusts. Where a trust settlor is an

affiliate of the issuer, securities acquired

from the settlor by the trust, or acquired

from the trust by the beneficiaries, shall

be deemed to have been acquired when

they were acquired by the settlor.

(vii) Estates. Where a deceased person

was an affiliate of the issuer, securities

held by the estate of such person or

acquired from such an estate by the

beneficiaries shall be deemed to have

been acquired when they were acquired

by the deceased person. Regardless of

whether the deceased person was an

affiliate of the issuer, no further holding

period is required if the estate is not an

affiliate of the issuer or if the securities
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9257

are sold by a beneficiary of the estate

who is not an affiliate.

(viii) Rule 145(a) transactions. The

holding period for securities acquired in

a transaction specified in § 230.145(a)

shall be deemed to commence on the

date the securities were acquired by the

purchaser in such transaction, except as

otherwise provided in paragraphs

(d)(3)(ii) and (ix) of this section.

(ix) Holding company formations.

Securities acquired from the issuer in a

transaction effected solely for the

purpose of forming a holding company

shall be deemed to have been acquired

at the same time as the securities of the

predecessor issuer exchanged in the

holding company formation where:

(A) The holding company’s securities

were issued in a transaction involving

an exchange of securities as part of a

reorganization of the predecessor into a

holding company structure;

(B) Holders received securities of the

same class evidencing the same

proportional interest in the holding

company as they held in the

predecessor; and

(C) Immediately following the

transaction, the holding company has

no significant assets other than

securities of the predecessor and its

existing subsidiaries and has

substantially the same assets and

liabilities on a consolidated basis as the

predecessor had prior to the transaction.

(e) * * *

(1) Sales by affiliates. If any securities

are sold for the account of an affiliate of

the issuer, regardless of whether those

securities are restricted, the amount of

securities sold, together with all sales of

securities of the same class sold for the

account of such person within the

preceding three months, shall not

exceed the greatest of:

* * * * *

(2) Sales by persons other than

affiliates. The amount of restricted

securities sold for the account of any

person other than an affiliate of the

issuer, together with all other sales of

restricted securities of the same class

sold for the account of such person

within the preceding three months,

shall not exceed the greatest of the

amounts specified in paragraphs

(e)(1)(i), (ii) or (iii) of this section,

whichever is applicable.

* * * * *

(f) Notice of proposed sale. (1) If the

amount of securities to be sold in

reliance upon this section during any

period of three months exceeds 1,000

shares or other units or has an aggregate

sale price in excess of $40,000, three

copies of a notice on Form 144

(§ 239.144 of this chapter) shall be filed

with the Commission at its principal

office in Washington, DC. If such

securities are admitted to trading on any

national securities exchange, one copy

of such notice also shall be transmitted

to the principal exchange on which

such securities are admitted.

(2) The Form 144 shall be signed by

the person for whose account the

securities are to be sold and shall be

transmitted for filing concurrently with

either the sale of securities in reliance

upon this section or the placing with a

broker of an order to sell securities in

reliance upon this section. Neither the

filing of such notice nor the failure of

the Commission to comment thereon

shall be deemed to preclude the

Commission from taking any action it

deems necessary or appropriate with

respect to the sale of the securities

referred to in such notice. The person

filing the notice required by this

paragraph shall have a bona fide

intention to sell the securities referred

to therein within a reasonable time after

the filing of such notice.

(g) Termination of certain restrictions

on sales of restricted securities by

persons other than affiliates. The

requirements of paragraphs (c), (e) and

(f) of this section shall not apply to the

sale of restricted securities if:

(1) The sale is for the account of a

person who is not an affiliate of the

issuer at the time of the sale and who

has not been an affiliate of the issuer

during the three months preceding the

sale; and

(2) 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 should be calculated as

described in paragraph (d) of this

section.

3. By amending § 230.145 by

removing paragraphs (c) and (d) and redesignating paragraph (e) as paragraph

(c).

* * * * *

PART 239—FORMS PRESCRIBED

UNDER THE SECURITIES ACT OF 1933

4. The authority citation for part 239

continues to read in part as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,

77sss, 78c, 78l, 78m, 78n, 78o(d), 78w(a),

78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q,

79t, 80a–8, 80a–29, 80a–30 and 80a–37,

unless otherwise noted.

* * * * *

5. By amending § 239.144 by revising

paragraphs (a) and (b) to read as follows:

§ 239.144. Form 144, for notice of

proposed sale of securities pursuant to

§ 239.144 of this chapter.

(a) Except as indicated in paragraph

(b) of this section, this form shall be

filed in triplicate with the Commission

at its principal office in Washington, DC

by each person who intends to sell

securities in reliance upon § 230.144 of

this chapter and shall be transmitted for

filing concurrently with either the

execution of a sale of securities in

reliance upon § 230.144 of this chapter

or the placing with a broker of an order

to execute a sale of securities in reliance

upon § 230.144 of this chapter.

(b) This form need not be filed if the

amount of securities to be sold during

any period of three months does not

exceed 1,000 shares or other units and

the aggregate sale price does not exceed

$40,000.

* * * * *

6. By amending Form 144 (referenced

in § 239.144) by revising the statement

appearing under the Form title, revising

the caption to Item 3(b) in the

undesignated table, removing the ‘‘s’’ at

the end of ‘‘Instructions’’ after Table I,

removing Instruction 2 to Table I, and

removing the designation number for

the remaining instruction to read as

follows:

Note: The text of Form 144 does not, and

the amendments thereto will not, appear in

the Code of Federal Regulations.

Form 144

Notice of Proposed Sale of Securities

Pursuant to Rule 144 Under the

Securities Act of 1933

Attention: Transmit for filing 3 copies

of this form concurrently with either

placing an order with a broker to

execute a sale or executing a sale

directly with a market maker, or at the

time of executing a sale not involving a

broker or market maker.

* * * * *

Item 3(b). Name and Address of Each

Broker Through Whom the Securities

are to be Offered or Each Market Maker

who is Acquiring the Securities, if

Applicable

* * * * *

Table I—Securities To Be Sold

* * * * *

Instruction if the securities were

purchased and full payment therefore

was not made in cash at the time of

purchase, explain in the table, or in a

note thereto, the nature of the

consideration given. If the consideration

consisted of any note or other

obligation, or if payment was made in

installments, describe the arrangement

and state when the note or other
9258 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

1 17 CFR 230.903.

2 17 CFR 230.901–230.904 and Preliminary Notes.

3 15 U.S.C. 77a et seq. (the ‘‘Securities Act’’).

4See Proposed Rule 902(h) for the proposed

definition of ‘‘principal market in the United

States.’’

5 17 CFR 230.144(a)(3).

6Proposed Rule 905.

7 Id.

8Securities Act Release No. 7190 (June 27, 1995)

[60 FR 35663 (July 10, 1995)] (the ‘‘Interpretive

Release’’).

9See infra Section III.E.1. for a further discussion

of the proposed definition of ‘‘principal market in

the United States.’’

obligation was discharged in full or the

last installment paid.

By the Commission.

Dated: February 20, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–4667 Filed 2–27–97; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 228, 229, 230, and 249

[Release No. 33–7392; 34–38315; File No.

S7–8–97 International Series Release No.

1056]

RIN 3235–AG34

Offshore Offers and Sales

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rules.

SUMMARY: The Securities and Exchange

Commission (the ‘‘Commission’’) is

publishing for comment proposed

amendments to the Regulation S safe

harbor procedures. The proposed

amendments relate to offshore sales of

equity securities of U.S. issuers, and

foreign issuers where the principal

market for the securities is in the United

States. The proposals are designed to

stop abusive practices in connection

with offerings of equity securities

purportedly made in reliance on

Regulation S.

DATES: Comments should be received on

or before April 29, 1997.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Stop 6–9, Washington, D.C. 20549.

Comment letters also may be submitted

electronically to the following electronic

mail address: rule-comments@sec.gov.

Comment letters should refer to File No.

S7–8–97; this file number should be

included in the subject line if electronic

mail is used. All comment letters

received will be available for public

inspection and copying in the

Commission’s public reference room,

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Paul

M. Dudek, Luise M. Welby, or Walter G.

Van Dorn, Jr., Office of International

Corporate Finance, Division of

Corporation Finance, at (202) 942–2990.

SUPPLEMENTARY INFORMATION: The

Commission is proposing to revise Rule

903 1 of Regulation S,2 the issuer safe

harbor under the Securities Act of 1933 3

for offshore offerings of securities, to

address abusive practices under the

rule. The changes would apply to

offshore sales of equity securities of

domestic issuers, and of foreign issuers

where the principal market for those

securities is in the United States.4

Further, the Commission proposes

amendments to Rule 144(a)(3) 5 and a

new Rule 905 to deem these equity

securities to be ‘‘restricted securities,’’

as defined in Rule 144 under the

Securities Act.6 New Rule 905 also

would make clear that offshore resales

under Rule 904 of restricted equity

securities of covered issuers will not

affect the status of these securities as

restricted securities after the resale.7 In

addition, the Commission is proposing

to eliminate the current requirement

that reporting issuers disclose

Regulation S sales of equity securities

on a Form 8–K within 15 days of the

transaction. In light of the longer

restricted period proposed today,

issuers would report these sales on a

Form 10–Q on the same basis that

issuers report their other unregistered

sales of equity securities. Finally, the

Commission is proposing additional

technical and clarifying revisions to

Regulation S, in part to make the rule

more concise and understandable.

I. Executive Summary

The Commission constantly seeks to

reduce burdens on capital formation as

long as the deregulatory measures do

not harm investor protection. When

adopting safe harbors and other

deregulatory measures, the Commission

will include protections designed to

minimize the risk that those measures

will be abused. If abuses nevertheless

occur, the Commission will make the

necessary adjustments to prevent further

abuse while, to the extent possible,

preserving the original goals of the

reform. Today, the Commission is

proposing amendments to Regulation S

to prevent continued abuse of the rule.

In 1990, the Commission adopted

Regulation S to clarify the

extraterritorial application of the

registration requirements of the

Securities Act. In the interests of both

comity and the internationalization of

the world’s securities markets, the

Commission believed that the

registration provisions under U.S. law

should not apply where the offshore

placements were truly offshore. Instead,

the laws of the foreign jurisdiction

regulating the public offerings of

securities would serve to protect

investors in that market. Regulation S

permits both foreign and domestic

issuers to avail themselves of the safe

harbors when conducting offshore

placements of their securities.

Since the adoption of Regulation S in

1990, the Commission has become

aware of uses of Regulation S that the

rule not only did not contemplate, but

in fact expressly prohibited. Some

issuers, affiliates and others involved in

the distribution process are using

Regulation S as a guise for distributing

securities into the U.S. markets without

the protections of registration under

Section 5 of the Securities Act. In June

1995, the Commission issued an

interpretive release that listed certain

problematic practices under Regulation

S and requested comment on whether

the Regulation should be amended to

limit its vulnerability to abuse.8

As a result of the continuation of

certain of these abusive practices and in

response to the comment letters

received on the Interpretive Release, the

Commission is proposing to stop these

abusive practices by amending

Regulation S for placements of equity

securities by domestic companies. In

addition, although abusive practices

involving the equity securities of foreign

issuers are not as evident as with

domestic issuers, there is equal

potential for abuse where the principal

trading market for those securities is in

the United States. Therefore, the

Commission also is proposing to amend

the safe harbor procedures for

placements of equity securities of

foreign issuers where the principal

market for those securities is in the

United States. In general, the ‘‘principal

market’’ would be in the United States

if more than half of the trading in that

security takes place in the United

States.9

These Regulation S proposals would:

• classify these equity securities placed

offshore under Regulation S as ‘‘restricted

securities’’ within the meaning of Rule 144;

• align the Regulation S restricted period

for these equity securities with the Rule 144

holding periods by lengthening from 40 days