The SEC recently published the final rules amending Rule 144 and Rule
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1 , Arps, Slate, Meagher & Flom LLP & Affiliates December 14, 2007 SEC Adopts Significant Changes to Rule 144 and Rule 145 and Creates Compensatory Employee Stock Option Exemptions Overview The SEC recently published the final rules amending Rule 144 and Rule 145 and creating two exemptions for compensatory employee stock options. The final rules, among other things: If you have any questions regarding the matters discussed in this memorandum, please call your regular, Arps contact. * * * This memorandum is provided by, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws. (1) reduce the holding periods under, and modify other requirements of, Rule 144 under the Securities Act of 1933 (Securities Act) for the resale of restricted securities; 1 and (2) establish two new exemptions from registration under the Securities Exchange Act of 1934 (Exchange Act) Section 12(g). 2 The amendments to Rule 144 shorten the holding periods for the resale of restricted securities and substantially reduce the restrictions on the sale of restricted securities by non-affiliates of the issuer. In addition, the SEC codified several existing staff interpretations relating to Rule 144. The amendments also eliminate the presumptive underwriter provision of Rule 145, except with respect to Rule 145 transactions involving shell companies (other than business combination related shell companies), and conform the resale restrictions of Rule 145(d) to the revisions to Rule 144 that apply to the resale of securities issued by shell companies. The amendments to Rule 12h-1 under the Exchange Act provide two exemptions from registration under Exchange Act Section 12(g) for compensatory employee stock options, one of which is available only to issuers that are not required to file periodic reports under the Exchange Act. 3 Changes to Rule 144 Background Generally, all offers and sales of securities must be registered with the SEC unless an exemption from registration is available. Section 4(1) of the Securities Act exempts transactions by any person other than an underwriter, issuer or dealer. If a selling securityholder meets the requirements of Rule 144, such person will not be deemed an underwriter in connection with the resale of restricted or control securities. 4 As a result, such securityholder may sell the applicable 1 The final rules relating to the revisions to Rule 144 and Rule 145 are set forth in SEC Release No and are available at 2 The final rules relating to compensatory employee stock options are set forth in SEC Release No and are available at 3 Rule 12h-1 under the Exchange Act provides exemptions from the requirement to register securities under Exchange Act Section 12(g). 4 Securities acquired pursuant to a transaction of the type listed in Rule 144(a)(3), which includes securities acquired from an issuer in transactions not involving a public offering, are restricted securities. Generally, control securities are securities held by an affiliate of the issuer, regardless of how such securities were acquired. Other than the changes to the Form 144 threshold and the increased volume limitations for debt securities, the amendments do not significantly change the ability of affiliates to resell control securities that are not otherwise restricted securities. Holding period requirements continue not to apply to unrestricted control securities.
2 2 securities under Rule 144 without registration under the Securities Act. In addition to other criteria, Rule 144 sets forth requirements relating to the availability of public information, volume limitations and manner of sale requirements, and it establishes holding periods for the resale of restricted securities. 5 Effect of Amendments The amendments maintain a clear distinction between sales made by affiliates and non-affiliates of the issuer as well as between securities of a reporting company and securities of a non-reporting company. 6 The amendments to Rule 144 shorten the holding period for the resale of restricted securities if the issuer of the securities is subject to the Exchange Act reporting requirements. The amendments also substantially reduce the restrictions applicable to resales of restricted securities by non-affiliates of both reporting and non-reporting companies. Holders of restricted or control securities acquired before the effective date of the amendments may rely on the amended rules. The following table summarizes the rule changes for restricted securities: Type of Selling Securityholder/Type of Issuer Affiliate of a Reporting Company - Hold restricted security for 1 Old Rule 144 Amended Rule 144 threshold is met - Hold restricted security for 6 months 7 8 only for equity securities 9 new threshold is met 10 5 Requirements relating to the availability of current public information are set forth in Rule 144(c), requirements relating to volume limitations are set forth in Rule 144(e), requirements relating to manner of sale are set forth in Rules 144(f) and 144(g), and requirements with respect to holding periods are set forth in Rule 144(d). 6 For purposes of Rule 144, a reporting company is a company that has been subject to the reporting requirements of the Exchange Act for at least 90 days prior to the sale of the security. Exchange Act reporting requirements are generally triggered under Section 13 or 15(d) for companies with a security registered on a national exchange or with total assets exceeding $10 million and a class of equity security (other than an exempted security) held of record by more than 500 persons. 7 Current public information is deemed available for reporting issuers if the issuer has been subject to the Exchange Act reporting requirements for at least 90 days and has filed all required reports (other than Form 8-K reports) during the 12 months preceding the sale (or such shorter period that the issuer was required to file such reports). If the issuer is a nonreporting issuer, current public information is deemed available if the information specified in Rule 144(c)(2) is publicly available for such issuer. 8 The volume limitations for equity securities remain unchanged, at the greater of: (1) one percent of the shares or other units of the class outstanding as stated in the most recent report or statement published by the issuer, or (2) the average weekly volume of trading in such securities, calculated in accordance with the rule. The amendments raise the volume limitations for debt securities, allowing affiliates to sell up to 10 percent of a tranche (or class in the case of non-participatory preferred stock), together with all sales of securities of the same tranche (or class) sold for the account of the selling holder in any three-month period. For purposes of Rule 144, debt securities include non-participatory preferred stock (which has debt-like characteristics ) and asset-backed securities. 9 Debt securities are not subject to any manner of sale requirements under the amended rule. (continued)
3 3 Type of Selling Securityholder/Type of Issuer Old Rule 144 Amended Rule 144 Affiliate of a Non-Reporting Company Non-Affiliate 11 of a Reporting Company Non-Affiliate 11 of a Non-Reporting Company - Hold restricted security for 1 threshold is met - Hold restricted security for 1 - Form 144 required if threshold is met - Under Rule 144(k), after two s, may make unlimited resales 11 - Hold security for 1 - Form 144 required if threshold is met - Under Rule 144(k), after two s, may make unlimited resales 11 - Hold restricted security for only for equity securities 9 new threshold is met 10 - Hold restricted security for 6 months - After six months, but before one, resales permitted in accordance with current public information requirement 12 - After one, unlimited resales permitted - No Form 144 required - Hold security for 1 - After one, unlimited resales permitted - No Form 144 required 10 The amendments increase the triggering amount for the filing of a Form 144 from an amount in excess of 500 shares or units or an aggregate sale price of more than $10,000 in a three-month period to an amount in excess of 5,000 shares or an aggregate sale price of more than $50,000 in a three-month period. Under the amendments, only affiliates are subject to the Form 144 filing requirement. 11 The selling securityholder must not have been an affiliate during the three months prior to the sale. 12 The volume limitations and manner of sale requirements do not apply under the amended rules. At this time, it is unclear what effect the amendments will have on Exxon Capital or A/B exchange offers. In an A/B exchange, an issuer typically offers debt (or non-participatory preferred) securities through a private placement and resale under Rule 144A and follows the private placement resale under Rule 144A with an exchange offer for similar registered securities. As the A/B exchange offer process removes securities law-related restrictions on resales of debt securities issued under Rule 144A, the shortened holding periods and relaxed restrictions may prompt the market to reconsider the utility and necessity of a registered exchange offer of this type.
4 4 In addition to the foregoing changes, the SEC revised the manner of sale requirements for equity securities by affiliates and codified prior staff interpretations relating to Rule 144, including: amending the definition of restricted securities under Rule 144(a)(3) to include securities acquired from an issuer pursuant to an exemption from registration under Section 4(6) of the Securities Act; amending Rule 144(d) to permit holders of restricted securities, subject to specified conditions, to tack the Rule 144 holding period in connection with transactions made solely to form a holding company; amending Rule 144(d) to permit the tacking of the Rule 144 holding period in connection with conversions or exchanges of securities where the holder acquired securities from the issuer solely in exchange for other securities of the same issuer, even if the securities surrendered were not originally convertible or exchangeable by their terms; and amending Rule 144(d) to provide that, upon a cashless exercise of options or warrants, the newly acquired underlying securities are deemed to have been acquired when the corresponding options or warrants were acquired, even if the options or warrants originally did not provide for cashless exercise by their terms. The SEC had proposed the adoption of a tolling provision that would have suspended the six-month holding period for restricted securities of a reporting company while the holder of the securities (or the previous owner of the securities) engaged in certain hedging transactions. The holding period would have excluded any period in which the securityholder had a short position or had entered into a put equivalent position (as defined by Exchange Act Rule 16a-1(h)) with respect to the same class of securities (or with respect to any nonconvertible debt securities of the same issuer in the case of nonconvertible debt). However, the holding period would not have lasted longer than one as a result of any such hedging suspension. The SEC did not adopt the proposed tolling provision but stated it will revisit the issue if it observes abuse relating to hedging activities by holders of restricted securities. The changes to Rule 144 will take effect on February 15, The amendments are applicable to restricted or control securities acquired before the effective date. A table designed to address common questions regarding Rule 144, as amended, is attached as Exhibit A to this memorandum. Changes to Rule 145 Background Rule 145(a) specifies that an offer or sale will be deemed to occur with exchanges of securities in connection with certain reclassifications, mergers or consolidations, or transfers of assets that are submitted for the vote or consent of the security holders of a corporation. Accordingly, the sale must be registered unless an exemption is available. Rule 145(c), prior to the amendments, defines any party to any transaction of the type set forth in Rule 145(a) (other than the issuer) or an affiliate of such party who publicly offers the securities acquired in such transaction as an underwriter. Prior to the amendments, such a presumptive underwriter would be required to comply with Rule 145(d) in connection with resales of the acquired securities even if the person, following the transaction, were no longer an affiliate of the combined entity and even if such person received registered securities in the business combination.
5 5 Effect of Amendments The amendments eliminate the presumptive underwriter provision of Rule 145(c), except with respect to transactions involving a shell company (other than a business combination related shell company). With respect to a transaction of the type set forth in Rule 145(a) not involving a shell company, a prior affiliate of the acquired company who is not an affiliate of the combined company after the transaction will no longer be presumptively deemed an underwriter in connection with the resale of the securities acquired in the transaction. Any party to a transaction of the type set forth in Rule 145(a) involving a shell company, other than the issuer, may resell the securities acquired in the transaction only in compliance with the resale restrictions of Rule 145(d), which have been conformed with the requirements of Rule 144, as amended. 13 If a person has expressly acknowledged or agreed in writing to be subject to, and bound by, the previous provisions of Rule 145 with respect to securities acquired in a transaction, such persons will presumably remain bound by those terms. A holder subject to such restrictions may wish to seek a waiver or modification of such writing to reflect the amendments to Rule 145. The changes to Rule 145 will take effect on February 15, Compensatory Employee Stock Option Exemptions Background Section 12(g) requires that a company with 500 or more holders of record of a class of equity securities and more than $10 million in assets at the end of its most recently ended fiscal must register the class of securities under the Exchange Act unless an exemption from registration is available. For purposes of Section 12(g), stock options are considered to be a separate class of equity securities. Although an exemption exists for other types of employee benefit plans involving securities, such exemption does not cover compensatory employee stock options. As a result, prior to the amendments, the issuance of compensatory employee stock options could have triggered registration under Exchange Act Section 12(g). Over the s, the SEC has received a number of requests for relief by companies facing registration due to the number of holders of compensatory employee stock options. As many companies utilize compensatory employee stock options to attract, retain and motivate employees, directors and consultants, the registration requirement resulted in compensation decisions of this type being influenced by the Section 12(g) threshold. The new exemptions provide regulatory relief for both non-reporting and reporting issuers. Effect of Amendments Under the amendments to Exchange Act Rule 12h-1, a private, non-reporting issuer will not be required to register under Exchange Act Section 12(g) compensatory employee stock options issued for compensatory purposes pursuant to a written compensatory stock option plan, provided that: 13 The SEC has previously taken the position that Rule 145(d) applies to securities acquired pursuant to exempt exchanges under Section 3(a)(10). The adopting release stated that the SEC intends to address the treatment of parties to a transaction and their affiliates that have acquired securities in a transaction exempt from registration pursuant to Section 3(a)(10) of the Securities Act in a revised Staff Legal Bulletin No. 3.
6 6 (1) the eligible optionholders under the plan are limited to employees, directors, consultants and advisors of an issuer, its parents, and majority owned subsidiaries of the issuer or its parents and permitted transferees; 14 (2) the transferability of the options and, prior to the exercise of the options, the shares issuable on exercise of those options, is restricted (subject to limited exceptions); 15 and (3) optionholders are periodically provided with the same risk and financial information as would be required under Rule 701 of the Securities Act if securities sold in reliance on Rule 701 exceeded $5 million in a 12-month period. 16 Only issuers that are not required to report under the Exchange Act are eligible for this exemption. After an issuer becomes subject to the reporting requirements of the Exchange Act or no longer meets the conditions of the exemption, such issuer will have 120 calendar days to register the class of compensatory employee stock options. Issuers that are required to file periodic reports under the Exchange Act pursuant to Exchange Act Sections 13 or 15(d) are also granted an exemption to provide certainty to such issuers of their obligations. To qualify for the exemption, compensatory employee stock options issued by such companies must be issued pursuant to a written plan to participants permitted under Rule 701 under the Securities Act or participants permitted to be granted options under an issuer s Form S-8. The SEC recognized that a reporting issuer may have a small number of optionholders that do not qualify as permitted participants. The exemption may still be available to such an issuer if there is an insignificant deviation from the exemption eligibility conditions. 17 For reporting companies, separate risk and financial information is not required as such optionholders will have access to the publicly filed Exchange Act reports of the issuer. A reporting issuer that becomes ineligible for the exemption will have 60 days to file a registration statement registering the class of compensatory employee stock options or a class of security under Exchange Act Section 12(g). The SEC stressed that the exemptions only apply to the compensatory employee stock options as opposed to the class of securities underlying the options. These amendments took effect on December 7, Eligible optionholders are the same as those permitted under Rule 701 under the Securities Act. 15 Options are only permitted to be transferred to limited categories of transferees and under limited circumstances. 16 The optionholders must be provided with the required information every six months, including financial statements that are no older than 180 days. However, an issuer is not obligated to provide the information to an optionholder that will not agree to maintain the confidentiality of the information. 17 The deviation must be insignificant with respect to the number of optionholders and number of options outstanding. In addition, after the effective date, the issuer must have made a reasonable, good faith attempt to be in compliance with the terms of the exemption.
7 7 Exhibit A Common Questions Regarding the Sale of Restricted Securities Under Amended Rule 144 Holder/Length of Time Held/Restricted Security Type Rule 144 Sale Permitted? Current Public Information Required? i Volume Limitations Applicable? ii Manner of Sale Form 144 Applicable? iii Required if Threshold Met? iv AFFILIATE OF REPORTING COMPANY: Held security for less than 6 months (Debt or Equity) No Held security for 6 months or more (Equity) Yes Yes Yes Yes Yes Held security for 6 months or more (Debt) Yes Yes Yes No Yes AFFILIATE OF NON-REPORTING COMPANY: Held security for less than 1 (Debt or Equity) No Held security for 1 or more (Equity) Yes Yes Yes Yes Yes Held security for 1 or more (Debt) Yes Yes Yes No Yes NON-AFFILIATE OF REPORTING COMPANY: Held security for less than 6 months (Debt or Equity) No Held security for more than 6 months but less than Yes Yes No No No 1 (Debt or Equity) Held security for 1 or more (Debt or Equity) Yes (unlimited) No No No No NON-AFFILIATE OF NON-REPORTING COMPANY: Held security for less than 1 (Debt or Equity) No Held security for 1 or more (Debt or Equity) Yes (unlimited) No No No No i ii Current public information is deemed available for reporting issuers, if the issuer has been subject to the Exchange Act reporting requirements for at least 90 days and has filed all required reports (other than Form 8-K reports) during the 12 months preceding the sale (or such shorter period that the issuer was required to file such reports). If the issuer is a non-reporting issuer, current public information is deemed available if the information specified in Rule 144(c)(2) is publicly available for such issuer. The volume limitations for equity securities remain unchanged, at the greater of: (1) one percent of the shares or other units of the class outstanding as stated in the most recent report or statement published by the issuer, or (2) the average weekly volume of trading in such securities, calculated in accordance with the rule. The amendments raise the volume limitations for debt securities, allowing affiliates to sell up to 10 percent of a tranche (or class in the case of non-participatory preferred stock), together with all sales of securities of the same tranche (or class) sold for the account of the selling holder in any three-month period. For purposes of Rule 144, debt securities include non-participatory preferred stock (which has debt-like characteristics ) and asset-backed securities. iii Debt securities are not subject to the manner of sale requirements under the amended rule. iv The amendments increase the triggering amount for the filing of a Form 144 to an amount in excess of 5,000 shares or an aggregate sale price of more than $50,000 in a three-month period. Under the amendments, only affiliates are subject to the Form 144 filing requirement. Four Times Square, New York, NY Telephone:
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