SEC Shortens Rule 144 Holding Periods and Loosens Restrictions on Resales of Privately Placed Securities

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1 T M O O U R F R I E N D S A N D C L I E N T S e m o r a n d u m December 28, SEC Shortens Rule 144 Holding Periods and Loosens Restrictions on Resales of Privately Placed Securities The SEC has adopted significant amendments to Rule 144 which will increase the liquidity of privately placed securities and ease the burden on issuers caused by having to grant burdensome registration rights. The amendments shorten the holding periods before affiliates and non-affiliates may sell restricted securities and otherwise loosen restrictions on the public resale of equity and debt securities acquired in private placements 1. See the attached charts for a summary of the changes. The new rules become effective on February 15, 2008 but are applicable to securities acquired before or after that date. Key changes include the following: Shortened Holding Periods. Under the new rules, debt and equity securities acquired from an issuer in a private placement may be resold freely subject to the following requirements: For reporting companies, non-affiliates may sell freely after six months subject only to the current public information requirement (which requirement disappears after one year) 2. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements, which are described more fully in the attached charts. For non-reporting companies, non-affiliates may sell freely after one year, and affiliates may sell after one year subject to the Rule 144 requirements described above. 1 Section 5 of the Securities Act of 1933, as amended, requires any offer or sale of securities to be made pursuant to a registration statement filed with the Securities & Exchange Commission, unless an exemption is otherwise available. Section 4(1) of the Securities Act provides an exemption for offers and sales by any person other than an underwriter, issuer or dealer. Because most sellers of securities are clearly not an issuer or dealer, a pivotal question is often whether the seller can be deemed an underwriter. Rule 144 is an SEC rule which provides that a person who offers or sells securities in compliance with its requirements will not be deemed an underwriter. 2 In order to satisfy the current public information requirement, an issuer must have been subject to the SEC s periodic reporting requirements for at least 90 days and have filed all reports required to be filed with the SEC during the 12 months preceding such sale (or for such shorter period that the issuer was required to file such reports), other than Form 8-K s. A Delaware Limited Liability Partnership

2 Elimination of Most Requirements for Non-Affiliates. Non-affiliates will no longer be subject to Rule 144 s volume, manner of sale or notice requirements. After six months, non-affiliates may freely sell securities acquired in a private placement from a reporting company, subject only to compliance with the current public information requirement until the end of the one year period following acquisition. After one year, the securities may be freely sold with no requirements (for both reporting and nonreporting companies). Accordingly, public companies will want to consider providing significantly fewer or no registration rights to non-affiliates if the intention is for the purchaser to hold the securities for at least six months. The rule amendments make it increasingly beneficial to be considered a non-affiliate rather than an affiliate. For reporting companies, the distinction now becomes relevant after six months rather than two years as under the previous rules. Affiliate status under the securities laws is generally a facts and circumstances test looking at whether a person directly or indirectly controls a company. In order to no longer be deemed an affiliate, holders of equity securities may consider resigning from boards of directors or decreasing the size of their equity position more quickly than previously. Relaxation of Requirements for Sales of Debt Securities. The rule changes make Rule 144 much more attractive for the sale of debt securities. For reporting companies, purchasers of privately placed debt securities who are non-affiliates can freely resell these securities after six months, subject only to compliance with the current public information requirement which only continues for one year. Affiliates can also resell debt securities of reporting companies after six months (one year for non-reporting companies), subject to compliance with Rule 144, but the SEC has eliminated the manner of sale requirement and introduced an alternative volume limitation equal to 10% of the tranche of debt securities during any three-month period. These changes should have a significant impact on the requirement to effect an Exxon-Capital exchange offer for Rule 144A debt securities. Due to the 2-year holding period required previously by Rule 144, underwriters typically would require issuers of Rule 144A debt securities to complete a registered exchange offer, often within 365 days of the closing of the Rule 144A offering. However, with the reduction of the holding period to one year for non-reporting companies (and six months for reporting companies), and the elimination of most other Rule 144 requirements for non-affiliates, the registered exchange offer may no longer be necessary because holders will already have freely tradeable securities as a matter of law after the end of the holding period. Given the additional flexibility in reselling restricted securities, the market will need to consider whether the information and transparency benefits of SEC registration outweigh the additional cost to issuers if filings with the SEC are required. Moreover, if an exchange offer is not required, underwriters and issuers will need to consider including additional informational covenants that will provide debt investors with information substantially consistent with what they would have received upon consummation of an exchange offer. For example, issuers may be required to post information on their website, release information to Bloomberg or other wire services, and/or hold quarterly conference calls. A Delaware Limited Liability Partnership 2

3 Authors and Contributors: New York Valerie Ford Jacob Daniel J. Bursky Stuart H. Gelfond Michael A. Levitt Paul D. Tropp Washington, DC Vasiliki B. Tsaganos Frankfurt Michael Schlitt Hong Kong Edward T. Kim Joseph Lee Victoria S.T. Lloyd Stephen Mok Richard A. Steinwurtzel Joshua Wechsler London Timothy E. Peterson Karen C. Wiedemann Sian E. Withey Paris Francois Hellot Patrick Jais Shanghai Michael Hickman * * * A Delaware Limited Liability Partnership 3

4 Equity Securities: Sale of Restricted Securities by Non-Affiliates and Affiliates Requirement Old Rule 144 New Rule 144: Non-Affiliates New Rule 144: Affiliates Holding period Within 1 st year: not tradeable After 1 year: tradeable in accordance with all Rule 144 requirements After 2 years (for non-affiliates only): freely compliance with any Rule 144 requirements Within 1 st six months (reporting companies): not tradeable Within 6 months to 1 year (reporting other than current public information Within 1 year (nonreporting companies): not tradeable After 1 year (all Applicable within 6 months to 1 year (for reporting companies) Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange Within 1 st six months (reporting companies): not tradeable Within 6 months to 1 year (reporting tradeable, subject to full Within 1 year (non-reporting companies): not tradeable After 1 year (all tradeable, subject to full Rule 144 compliance Current public information Issuer either (1) has securities registered under section 12 of the Securities Exchange, has been subject to the reporting requirements for at least 90 days and has filed all required reports for 12 months (or such shorter period that the issuer was required to file reports) or (2) is a nonreporting company and makes publicly available information specified in Rule 15c-11 During any three-month period, no more than the greater of (1) 1% of the shares or units outstanding and (2) the average weekly trading volume of trading in such securities during the prior four weeks Securities must be sold in brokers transactions or in transactions directly with a market maker Applicable Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange Volume limitation Applicable Manner of sale Securities must be sold in brokers transactions (broadened to include publication of bid and ask quotations in alternative trading systems), transactions directly with a market maker, or in riskless principal transactions (a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell) 5,000 shares or units or has an $50,000 Filing of Form 144 in any threemonth period exceeds 500 shares or units or has an $10,000 A Delaware Limited Liability Partnership 4

5 Debt Securities: Sale of Restricted Securities by Non-Affiliates and Affiliates Requirement Old Rule 144 New Rule 144: Non-Affiliates Holding Within 1 st year: not tradeable period Current public information Volume limitation Manner of sale Filing of Form 144 After 1 year: tradeable in accordance with all Rule 144 requirements After 2 years (for non-affiliates only): freely compliance with any Rule 144 requirements Issuer either (1) has securities registered under section 12 of the Securities Exchange, has been subject to the reporting requirements for at least 90 days and has filed all required reports for 12 months (or such shorter period that the issuer was required to file reports) or (2) is a nonreporting company and makes publicly available information specified in Rule 15c-11 During any three-month period, no more than the greater of (1) 1% of the shares or units outstanding and (2) the average weekly trading volume of trading in such securities during the prior four weeks Securities must be sold in brokers transactions or in transactions directly with a market maker in any threemonth period exceeds 500 shares or units or has an $10,000 Within 1 st six months (reporting companies): not tradeable Within 6 months to 1 year (reporting other than current public information Within 1 year (nonreporting companies): not tradeable After 1 year (all Applicable within 6 months to 1 year (for reporting companies) Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange New Rule 144: Affiliates Within 1 st six months: not tradeable Within 6 months to 1 year (reporting tradeable, subject to full Within 1 year (non-reporting companies): not tradeable After 1 year (all tradeable, subject to full Rule 144 compliance Applicable Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange During any three-month period, no more than the greater of (1) 1% of the units outstanding, (2) the average weekly trading volume of trading in such securities during the prior four weeks or (3) 10% of the principal amount of the tranche attributable to the securities sold 5,000 shares or units or has an $50,000 A Delaware Limited Liability Partnership 5

6 Equity and Debt Securities: Sale of Control Securities (Unrestricted Securities) by Affiliates Topic Old Rule 144 Equity: New Rule 144 Debt: New Rule 144 Holding period Current public information Same Same Volume limitation Manner of sale Filing of Form 144 Issuer either (1) has securities registered under section 12 of the Securities Exchange and has been subject to the reporting requirements for at least 90 days and has filed all required reports for 12 months (or such shorter period that the issuer was required to file reports) or (2) is a nonreporting company and makes publicly available information specified in Rule 15c-11 During any three-month period, no more than the greater of (1) 1% of the units outstanding and (2) the average weekly trading volume of trading in such securities during the prior four weeks Securities must be sold in brokers transactions or in transactions directly with a market maker 500 shares or units or has an $10,000 Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange Same Securities must be sold in brokers transactions (broadened to include publication of bid and ask quotations in alternative trading systems), transactions directly with a market maker, or in riskless principal transactions (a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell) 5,000 shares or units or has an $50,000 Note: in clause (1), no longer required to have securities registered under section 12 of the Securities Exchange During any three-month period, no more than the greater of (1) 1% of the units outstanding and (2) the average weekly trading volume of trading in such securities during the prior four weeks or (3) 10% of the principal amount of the tranche attributable to the securities sold Form 144 required if the amount sold in any three-month period exceeds 5,000 shares or units or has an aggregate sale price in excess of $50,000 A Delaware Limited Liability Partnership 6

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