9242 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

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.

3Conforming 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.

5Release No. 33–7391 (February 20, 1997).

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

591].

7See, e.g., Final Reports of the SEC GovernmentBusiness 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).

8The 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 (§ 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).

9See Section 2(11) of the Securities Act [15 U.S.C.

77b(11)].

10 15 U.S.C. 77(d)(1).

11Section 4(1) exempts transactions by persons

who are not issuers, underwriters or dealers.

12 17 CFR 230.145(d).

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.

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 oneyear, 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

§§ 230.144 and 230.145 will be effective

April 29, 1997.

FOR FURTHER INFORMATION CONTACT:

Elizabeth M. Murphy, Office of Chief

Counsel, Division of Corporation

Finance at (202) 942–2900, 450 Fifth

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

SUPPLEMENTARY INFORMATION: On June

27, 1995, the Commission published for

comment a release proposing

amendments to Rule 144,1 the nonexclusive safe harbor from registration

for resales of restricted securities and

securities held by affiliates of the issuer,

under the Securities Act of 1933 (the

‘‘Securities Act’’).2 These proposals are

being adopted today. As amended, the

holding period for resales of limited

amounts of restricted securities by any

person has been reduced from two years

to one year. The holding period for

resales by non-affiliates without

compliance with the provisions of the

rule has been reduced from three years

to two years.3 The Commission also is

adopting parallel changes to Securities

Act Rule 145.4 The revised holding

periods are applicable to all securities,

whether acquired before or after the

effective date of the changes announced

today. The Commission today also is

publishing a companion release

soliciting comment on additional

changes to Rule 144 that would simplify

the rule’s operation and further modify

the Rule 144 holding periods.5

I. Discussion

Today, for the first time since the

adoption of Rule 144 in 1972,6 the

Commission is adopting amendments to

shorten the holding period that must be

satisfied before limited resales of

restricted securities may be made by

affiliates and non-affiliates in reliance

upon the rule. As had been proposed,

the amendments reduce that holding

period from two years to one year. Also

as proposed, the amendments reduce

the length of the holding period that

non-affiliates must hold restricted

securities before making unlimited

resales of such securities from three

years to two years.

The Commission is adopting the

shortened holding periods based on its

more than 20 years of experience with

Rule 144 and the favorable public

comments received on the 1995 Release.

Shorter holding periods should reduce

the cost of capital. This particularly

should benefit smaller companies,

which often sell securities in private

placements. A shorter holding period

should lower the illiquidity discount

given by companies raising capital in

private placements and increase the

usefulness of the Rule 144 safe harbor.

Shorter Rule 144 holding periods

have been recommended by participants

in the SEC Government-Business Forum

on Small Business Capital Formation.7

The Commission believes that the

shorter holding periods will not

diminish investor protection, since they

are sufficiently long to ensure that

resales under Rule 144 will not facilitate

indirect public distributions of

unregistered securities by issuers or

affiliates.

Rule 144 provides an objective safe

harbor for resales of restricted securities

and control securities. Restricted

securities generally are securities issued

in private placements; 8 control

securities are securities owned by

affiliates of the issuer, however

acquired. The rule provides that a

person complying with its terms and

conditions will not be engaged in a

distribution of securities and, thus, not

be an ‘‘underwriter’’ 9 for purposes of

the Section 4(1) 10 exemption from

Securities Act registration for ordinary

trading transactions.11

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 marketmaker, and that a notification of the

resale be filed with the Commission.

Under the amendments, after a two-year

holding period, restricted securities may

be resold by non-affiliates without

compliance with any of these

provisions.

At the suggestion of commenters, the

Commission also is adopting parallel

changes to the holding period

provisions included in Securities Act

Rule 145(d),12 which governs the resale

of securities received in connection

with reclassifications, mergers,
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9243

13 17 CFR 230.145(c).

14Release No. 33–7391 (February 20, 1997). 15 5 U.S.C. § 604.

16 17 CFR 240.0–10.

17There is no comparable definition of ‘‘person’’

under the Securities Act.

consolidations and asset transfers. Rule

145(c) 13 provides that any party to a

transaction covered by Rule 145 (other

than the issuer), or any person who is

an affiliate of such party at the time the

transaction is submitted for vote or

consent, who publicly resells securities

of the issuer acquired in connection

with that transaction will be deemed to

be engaged in a distribution, and

therefore to be an underwriter of those

securities, except where the securities

are resold in accordance with Rule

145(d). The holding period

requirements of Rule 145(d) correspond

to the holding periods for resales in

Rule 144.

The 1995 Release also requested

comment on whether the holding period

or other requirements in Rule 144

should be revised to address the

concern that holders utilizing certain

new hedging strategies may not be

economically ‘‘at risk’’ during the

holding period. This issue is addressed

further by the Commission in the

companion release soliciting comment

on additional changes to Rule 144.14

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.

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 nonaffiliates 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

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
9244 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

18Release No. 33–7391 (February 20, 1997).

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.

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:

§ 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 threemonth 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;

* * * * *
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 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 § 230.145 by revising

paragraphs (d)(2) and (d)(3) to read as

follows:

§ 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

§ 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 § 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

§ 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