[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Rules and Regulations]
[Pages 9242-9245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4665]



[[Page 9241]]

_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 228, et al.



Revision of Holding Period Requirements in Rules 144 and 145; Revision 
of Rules 144 and 145 and Form 144; Offshore Offers and Sales; Delayed 
Pricing for Certain Registrants; Final Rule and Proposed Rules

Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / 
Rules and Regulations

[[Page 9242]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7390; File No. S7-17-95]
RIN 3235-AG53


Revision of Holding Period Requirements in Rules 144 and 145

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: The Commission is amending the holding period requirements 
contained in Rule 144 to permit the resale of limited amounts of 
restricted securities by any person after a one-year, rather than a 
two-year, holding period. Also, the amendments permit unlimited resales 
of restricted securities held by non-affiliates of the issuer after a 
holding period of two years, rather than three years. These changes 
should reduce the cost of capital, particularly for small business 
issuers. Parallel changes to Rule 145 also are being adopted.

EFFECTIVE DATE: The changes to Secs. 230.144 and 230.145 will be 
effective April 29, 1997.

FOR FURTHER INFORMATION CONTACT: Elizabeth M. Murphy, Office of Chief 
Counsel, Division of Corporation Finance at (202) 942-2900, 450 Fifth 
Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: On June 27, 1995, the Commission published 
for comment a release proposing amendments to Rule 144,<SUP>1 the non-
exclusive safe harbor from registration for resales of restricted 
securities and securities held by affiliates of the issuer, under the 
Securities Act of 1933 (the ``Securities Act'').<SUP>2 These proposals 
are being adopted today. As amended, the holding period for resales of 
limited amounts of restricted securities by any person has been reduced 
from two years to one year. The holding period for resales by non-
affiliates without compliance with the provisions of the rule has been 
reduced from three years to two years.<SUP>3 The Commission also is 
adopting parallel changes to Securities Act Rule 145.<SUP>4 The revised 
holding periods are applicable to all securities, whether acquired 
before or after the effective date of the changes announced today. The 
Commission today also is publishing a companion release soliciting 
comment on additional changes to Rule 144 that would simplify the 
rule's operation and further modify the Rule 144 holding periods.<SUP>5
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    \1\ 17 CFR 230.144. Release No. 33-7187 (June 27, 1995) [60 FR 
35645] (``1995 Release''). Comment letters are available for 
inspection and copying in the Commission's Public Reference Room, 
450 Fifth Street, N.W., Washington, D.C. 20549. Interested persons 
should refer to File No. S7-17-95.
    \2\ 15 U.S.C. 77a et seq.
    \3\ Conforming changes also have been made in paragraph (e)(3) 
of Rule 144 relating to determination of the limits on amounts 
resalable by pledgees, donees and trusts, reducing the period from 
two years to one year after the event of pledge, default, donation, 
or trust acquisition.
    \4\ 17 CFR 230.145.
    \5\ Release No. 33-7391 (February 20, 1997).
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I. Discussion

    Today, for the first time since the adoption of Rule 144 in 
1972,<SUP>6 the Commission is adopting amendments to shorten the 
holding period that must be satisfied before limited resales of 
restricted securities may be made by affiliates and non-affiliates in 
reliance upon the rule. As had been proposed, the amendments reduce 
that holding period from two years to one year. Also as proposed, the 
amendments reduce the length of the holding period that non-affiliates 
must hold restricted securities before making unlimited resales of such 
securities from three years to two years.
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    \6\ Release No. 33-5223 (January 11, 1972) [37 FR 591].
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    The Commission is adopting the shortened holding periods based on 
its more than 20 years of experience with Rule 144 and the favorable 
public comments received on the 1995 Release. Shorter holding periods 
should reduce the cost of capital. This particularly should benefit 
smaller companies, which often sell securities in private placements. A 
shorter holding period should lower the illiquidity discount given by 
companies raising capital in private placements and increase the 
usefulness of the Rule 144 safe harbor.
    Shorter Rule 144 holding periods have been recommended by 
participants in the SEC Government-Business Forum on Small Business 
Capital Formation.<SUP>7 The Commission believes that the shorter 
holding periods will not diminish investor protection, since they are 
sufficiently long to ensure that resales under Rule 144 will not 
facilitate indirect public distributions of unregistered securities by 
issuers or affiliates.
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    \7\ See, e.g., Final Reports of the SEC Government-Business 
Forum On Small Business Capital Formation (June 1992, 1993, 1994 and 
February 1995). The Small Business Incentive Act of 1980 directs the 
Commission to host this annual meeting for the purpose of reviewing 
the ``current status of problems and programs relating to small 
business capital formation.'' Pub. L. No. 96-477, Section 503, 94 
Stat. 2275, 2292-93 (1980).
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    Rule 144 provides an objective safe harbor for resales of 
restricted securities and control securities. Restricted securities 
generally are securities issued in private placements; <SUP>8 control 
securities are securities owned by affiliates of the issuer, however 
acquired. The rule provides that a person complying with its terms and 
conditions will not be engaged in a distribution of securities and, 
thus, not be an ``underwriter'' <SUP>9 for purposes of the Section 4(1) 
<SUP>10 exemption from Securities Act registration for ordinary trading 
transactions.<SUP>11
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    \8\ The term ``restricted securities'' is defined in Rule 
144(a)(3) [17 CFR 230.144(a)(3)] and includes: securities acquired 
from the issuer or an affiliate in a transaction or chain of 
transactions not involving a public offering; securities acquired 
from the issuer and subject to resale limitations under Regulation D 
[17 CFR 230.501-508] or Rule 701 [17 CFR 230.701]; securities 
subject to the Regulation D resale limitations and acquired in a 
transaction or chain of transactions not involving a public 
offering; securities acquired in a transaction or chain of 
transactions meeting the requirements of Rule 144A [17 CFR 
230.144A]; and securities acquired from the issuer that are subject 
to the resale limitations of Regulation CE (Sec. 230.1001). Separate 
releases being issued today propose to amend the term to also 
include securities issued pursuant to an exemption under Securities 
Act Section 4(6) [15 U.S.C. 77(d)(6)] as well as equity securities 
of domestic issuers, and of foreign issuers where the primary market 
for such securities is in the United States, sold under Regulation S 
[17 CFR 230.901-230.904 and Preliminary Notes]. Release Nos. 33-7391 
and 33-7392 (February 20, 1997).
    \9\ See Section 2(11) of the Securities Act [15 U.S.C. 77b(11)].
    \10\ 15 U.S.C. 77(d)(1).
    \11\ Section 4(1) exempts transactions by persons who are not 
issuers, underwriters or dealers.
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    The rule includes holding periods for restricted securities to 
establish that the holder did not purchase with a view to an 
unregistered public distribution. Pursuant to the amendments adopted 
today, all restricted securities must be held at least one year before 
resale, measured from the date the securities are acquired from the 
issuer or an affiliate. For restricted securities held between one and 
two years, other provisions of the rule require that current public 
information be available about the issuer, that limited amounts of 
securities be resold, that the resales be effected in ordinary 
brokerage transactions or directly with a market-maker, and that a 
notification of the resale be filed with the Commission. Under the 
amendments, after a two-year holding period, restricted securities may 
be resold by non-affiliates without compliance with any of these 
provisions.
    At the suggestion of commenters, the Commission also is adopting 
parallel changes to the holding period provisions included in 
Securities Act Rule 145(d),<SUP>12 which governs the resale of 
securities received in connection with reclassifications, mergers,

[[Page 9243]]

consolidations and asset transfers. Rule 145(c) <SUP>13 provides that 
any party to a transaction covered by Rule 145 (other than the issuer), 
or any person who is an affiliate of such party at the time the 
transaction is submitted for vote or consent, who publicly resells 
securities of the issuer acquired in connection with that transaction 
will be deemed to be engaged in a distribution, and therefore to be an 
underwriter of those securities, except where the securities are resold 
in accordance with Rule 145(d). The holding period requirements of Rule 
145(d) correspond to the holding periods for resales in Rule 144.
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    \12\ 17 CFR 230.145(d).
    \13\ 17 CFR 230.145(c).
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    The 1995 Release also requested comment on whether the holding 
period or other requirements in Rule 144 should be revised to address 
the concern that holders utilizing certain new hedging strategies may 
not be economically ``at risk'' during the holding period. This issue 
is addressed further by the Commission in the companion release 
soliciting comment on additional changes to Rule 144.<SUP>14
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    \14\ Release No. 33-7391 (February 20, 1997).
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II. Cost-Benefit Analysis

    The Commission believes, and the public comments support the view, 
that reduction in the Rule 144 holding periods will reduce compliance 
burdens and costs without significant impact on investor protection. 
The Commission also believes that the action being taken will promote 
market efficiency, investment and capital formation by reducing the 
liquidity costs of holding restricted securities and reducing issuers' 
cost of raising capital through the sale of restricted securities.
    Issuers typically must offer restricted shares at a discount 
relative to prices at which their unrestricted shares trade in the 
public markets. In recent years, this discount has generally ranged 
from 20-50%. The discount compensates the purchasers of the restricted 
shares for their inability to resell the securities before completion 
of the requisite holding period. Since the amendments shorten the 
holding period, the purchasers will demand a smaller liquidity premium 
and issuers will be able to sell their restricted securities at higher 
prices.
    The actual amount by which the annual volume of restricted shares 
privately placed and resales of restricted securities will increase 
cannot be reliably predicted. The actual size of these increases will 
depend on the response of investors and issuers to the shortened 
holding period requirements.

III. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with Section 604 of the Regulatory Flexibility Act,\15\ and 
relates to the adoption of amendments to Rules 144 and 145 under the 
Securities Act.
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    \15\ 5 U.S.C. Sec. 604.
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Reasons for, and Objectives of, Proposed Action

    Rule 144 provides a safe harbor for the resale of restricted and 
control securities. It sets forth conditions which, if satisfied, 
permit persons who hold such securities to sell them publicly without 
registration and without being deemed underwriters. One of the 
conditions is that the securities must be held for a specified period 
of time before any sales may be made.
    Rule 145 governs the offer or sale of securities received in 
connection with reclassifications, mergers, consolidations and asset 
transfers. It provides that any party to a transaction covered by the 
rule (other than the issuer), or any person who is an affiliate of such 
party at the time the transaction is submitted for vote or consent, who 
publicly offers or sells securities of the issuer acquired in 
connection with such a transaction will be deemed to be engaged in a 
distribution, and therefore to be an underwriter of the securities, 
except where the securities are resold in accordance with Rule 145(d). 
Rule 145(d) imposes holding periods that correspond to the holding 
periods for resales in Rule 144.
    The Commission has determined to adopt amendments to Rules 144 and 
145 to shorten the holding period requirements. The amendments to Rule 
144 permit the limited resale of restricted securities after a one-
year, rather than a two-year, holding period. They also permit 
unlimited resales of restricted securities held by non-affiliates of 
the issuer after a holding period of two, rather than three years.
    The Commission believes that shorter holding periods should reduce 
the costs of capital formation, particularly for smaller companies, by 
reducing the illiquidity discount companies must give when raising 
capital in private placements. Investors will also be able to recoup 
their capital more quickly.
    The Commission believes that the shorter holding periods will not 
diminish investor protection, since they are sufficiently long to 
ensure that resales under Rule 144 will not facilitate indirect public 
distributions of unregistered securities by issuers or affiliates. The 
amendments were recommended by small business representatives 
participating in the SEC Government-Business Forum on Small Business 
Capital Formation.

Significant Issues Raised by the Public Comments

    The Commission received five requests for the Initial Regulatory 
Flexibility Analysis prepared in connection with the 1995 Release, and 
no public comments specifically addressed that analysis. The Commission 
received public comment, however, on the amendments to the Rule 144 and 
145 holding periods. The commenters agreed that shorter holding periods 
should reduce the costs of capital formation and be of particular 
benefit to small companies, which often sell securities in private 
placements. At the suggestion of commenters, the Commission is 
soliciting comment on further changes to the holding periods in the 
companion proposing release.

Small Entities Subject to Requirements

    The reduced holding periods will affect both small entities that 
issue restricted or control securities and small entities that hold 
such securities. The term ``small business,'' when used with reference 
to an issuer, other than an investment company, is defined by 
Securities Act Rule 157 as an issuer whose total assets on the last day 
of its most recent fiscal year were $5 million or less and is engaged 
or proposing to engage in small business financing. An issuer is 
considered to be engaged in small business financing if it is 
conducting or proposes to conduct an offering of securities that does 
not exceed the dollar limitation prescribed by Section 3(b) of the 
Securities Act. Exchange Act Rule 0-10 \16\ defines small entity when 
used with reference to an issuer or person, other than an investment 
company, to mean an issuer or person that, on the last day of its most 
recent fiscal year, had total assets of $5,000,000 or less.\17\
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    \16\ 17 CFR 240.0-10.
    \17\ There is no comparable definition of ``person'' under the 
Securities Act.
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    The Commission is aware of approximately 1,019 Exchange Act 
reporting companies that currently satisfy the definition of ``small 
business'' under Rule 157 and may be affected by the reduced holding 
periods. The reduced holding periods also may affect small businesses 
that are not subject to Exchange Act reporting requirements. The 
Commission is unable to determine the number of such

[[Page 9244]]

small businesses due to the absence of filings with the Commission by 
such companies.
    An estimated 3,800 entities, excluding natural persons, annually 
file Form 144 based upon a staff review of a sample of Form 144 
filings. The Commission has no basis for estimating the number of these 
entities that are small entities under the definition of person in 
Exchange Act Rule 0-10, because Form 144 does not require that such 
information be provided and such information is not otherwise available 
to the Commission.
    The amendments are expected to affect favorably businesses of all 
sizes, but particularly small businesses, by reducing the cost of 
capital formation through private placements of unregistered securities 
and allowing investors to recoup their capital more quickly. Issuers 
generally must sell unregistered stock at a discount; the amount of the 
discount should be reduced as a result of the shortening of the holding 
periods.

Reporting, Recordkeeping and Other Compliance Requirements

    Because of the nature of the amendments, the Commission does not 
expect that reporting, recordkeeping and compliance burdens will 
increase materially as a result of the changes. Indeed, the Commission 
expects that compliance burdens will decrease as a result of the 
reduced holding periods because sellers will not have to wait as long 
to resell securities in reliance on Rule 144.
    Nevertheless, the Commission expects the annual volume of Form 144 
filings to increase as a result of the reductions in the required 
holding periods and the increased incentive for issuers to raise 
capital through sales of unregistered securities subject to Rule 144. 
The Commission has no basis for reliably estimating this increased 
volume of filings. The average cost associated with filing a Form 144 
is approximately $200 based on a compensation rate of $100 per hour and 
a task time of two hours per filing.

Steps Taken To Minimize Significant Economic Impact on Small Entities

    The amendments adopted today will benefit issuers of all sizes 
since a reduction in the length of the Rule 144 and 145 holding periods 
will reduce issuers' cost of capital. The amendments will also benefit 
all holders of restricted securities, who will be able to recoup their 
capital more quickly pursuant to the reduced holding periods. Specific 
consideration was given to small businesses in the formulation of these 
amendments; as stated above, the amendments were recommended by small 
business representatives.
    The Commission considered a number of significant alternatives to 
the amendments being adopted that might minimize the significant 
economic impact on small entities. One alternative was to shorten the 
holding periods even further. Comment is being solicited on that 
alternative in a release proposing changes to Rules 144, 145 and Form 
144.\18\ The Commission intends to give further consideration to the 
treatment of small entities in connection with the Rule 144 proposing 
release.
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    \18\ Release No. 33-7391 (February 20, 1997).
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    The Commission also considered the types of alternatives set forth 
in section 603 of the Regulatory Flexibility Act to minimize the 
economic impact of the amendments on small entities: (1) the 
establishment of differing reporting compliance or reporting timetables 
that take into account the resources available to small entities; (2) 
the clarification, consolidation, or simplification of compliance and 
reporting requirements for such small entities; (3) the use of 
performance rather than design standards; and (4) an exemption from 
coverage of the amendments, or any part thereof, for small entities. 
Because the amendments benefit all issuers and holders of restricted 
securities, differing compliance timetables for small entities would 
not be appropriate. Neither could the compliance requirements of the 
amendments be clarified or simplified further for small entities. 
Finally, the amendments being adopted do not use design standards, and 
an exemption from the amendments for small entities would not be 
desirable or consistent with the stated objectives of the applicable 
statutes.

IV. Statutory Basis

    The amendments to Rule 144 and 145 are being adopted pursuant to 
sections 2(11), 4(1) and 19(a) of the Securities Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping, Securities.

Text of the Amendments

    For the reasons set out above, title 17, chapter II of the Code of 
Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read in part, 
as follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30, 
and 80a-37, unless otherwise noted.

* * * * *
    2. Section 230.144 is amended by revising paragraphs (d)(1), 
(e)(3)(ii), (e)(3)(iii), (e)(3)(iv) and (k) to read as follows:


Sec. 230.144  Persons deemed not to be engaged in a distribution and 
therefore not underwriters.

* * * * *
    (d) * * *
    (1) General rule. A minimum of one year must elapse between the 
later of the date of the acquisition of the securities from the issuer 
or from an affiliate of the issuer, and any resale of such securities 
in reliance on this section for the account of either the acquiror or 
any subsequent holder of those securities. If the acquiror takes the 
securities by purchase, the one-year period shall not begin until the 
full purchase price or other consideration is paid or given by the 
person acquiring the securities from the issuer or from an affiliate of 
the issuer.
* * * * *
    (e) * * *
    (3) * * *
    (ii) The amount of securities sold for the account of a pledgee 
thereof, or for the account of a purchaser of the pledged securities, 
during any period of three months within one year after a default in 
the obligation secured by the pledge, and the amount of securities sold 
during the same three-month period for the account of the pledgor shall 
not exceed, in the aggregate, the amount specified in paragraph (e) (1) 
or (2) of this section, whichever is applicable;
    (iii) The amount of securities sold for the account of a donee 
thereof during any period of three months within one year after the 
donation, and the amount of securities sold during the same three-month 
period for the account of the donor, shall not exceed, in the 
aggregate, the amount specified in paragraph (e) (1) or (2) of this 
section, whichever is applicable;
    (iv) Where securities were acquired by a trust from the settlor of 
the trust, the amount of such securities sold for the account of the 
trust during any period of three months within one year after the 
acquisition of the securities by the trust, and the amount of 
securities sold during the same three-month period for the account of 
the settlor, shall not exceed, in the aggregate, the amount specified 
in paragraph (e) (1) or (2) of this section, whichever is applicable;
* * * * *

[[Page 9245]]

    (k) Termination of certain restrictions on sales of restricted 
securities by persons other than affiliates. The requirements of 
paragraphs (c), (e), (f) and (h) of this section shall not apply to 
restricted securities sold for the account of a person who is not an 
affiliate of the issuer at the time of the sale and has not been an 
affiliate during the preceding three months, provided a period of at 
least two years has elapsed since the later of the date the securities 
were acquired from the issuer or from an affiliate of the issuer. The 
two-year period shall be calculated as described in paragraph (d) of 
this section.
    3. By amending Sec. 230.145 by revising paragraphs (d)(2) and 
(d)(3) to read as follows:


Sec. 230.145  Reclassification of securities, mergers, consolidations 
and acquisitions of assets.

* * * * *
    (d) * * *
    (2) Such person or party is not an affiliate of the issuer, and a 
period of at least one year, as determined in accordance with paragraph 
(d) of Sec. 230.144, has elapsed since the date the securities were 
acquired from the issuer in such transaction, and the issuer meets the 
requirements of paragraph (c) of Sec. 230.144; or
    (3) Such person or party is not, and has not been for at least 
three months, an affiliate of the issuer, and a period of at least two 
years, as determined in accordance with paragraph (d) of Sec. 230.144, 
has elapsed since the date the securities were acquired from the issuer 
in such transaction.
* * * * *
    By the Commission.

    Dated: February 20, 1997.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4665 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-P