Many people own stock in start up technology companies that they received as employee compensation or in return for investment in those companies. Most of this stock has not been registered with the U.S. Securities Exchange Commission ("SEC") because it was issued pursuant to some exemption from the registration requirement. Usually, the stock's primary economic value depends upon its eventual sale, not dividend earnings. Unfortunately, stock issued pursuant to an exemption generally cannot be sold unless it subsequently has been registered with the SEC or the resale qualifies for an exemption from registration. Accordingly, before the holder can resell the stock, the stock first must be registered or an exemption from registration must be found which is applicable to the resale.

The Terminology

In order to understand the recent actions taken by the SEC, it is necessary to understand the definition of some key terms:

• "Affiliate" - includes a person (including an entity) who either directly or indirectly controls, is controlled by, or is under common control with an issuer (an issuer's directors and senior management are considered affiliates of the issuer), a person owning a significant percentage of the outstanding stock of the issuer (ownership percentages greater than 5% should be evaluated by a securities lawyer), and a person who has been an affiliate at any time during the 90-day period preceding the sale;
  
  
•  "Control securities" - generally are securities held by an affiliate of the issuer regardless of the manner in which such securities were acquired;
  
  
• "Debt securities" - are securities represented by loans, debentures, bonds, etc. that require repayment, as opposed to stock or other forms of equity;
  
  
•  "Issuer" - is any person (including corporations and other types of entities) who issues a security;
  
  
• "Non reporting issuer" - means an issuer that is not subject to the reporting requirements of the Securities Exchange Act of 1934 ("Exchange Act");
  
  
• "Restricted securities" - as discussed above, are securities that have been received from the issuer or an affiliate of the issuer in a private offering or some other offering exempt from the registration requirement;
  
  
• "Reporting issuer" - means an issuer that is subject to and has satisfied, for the 12 month period preceding the sale in question, all applicable reporting requirements of the Exchange Act; and,
  
  
• "Tranche" - means all securities having the same risks, rewards, and maturities.
  
  

Section 4(1) of the Securities Act of 1933 ("Securities Act") provides an exemption for sales by any person other than an issuer, an underwriter, or dealer. SEC Rule 144 ("Rule") contains five conditions which, until recently, generally applied to resales by both affiliates and non-affiliates of an issuer. The requirements of the Rule are:

• Current, adequate public information about the issuer must be available;
• The securities must be held for specified minimum periods before resale ("Holding Period");
• The number of shares sold must not exceed certain thresholds;
• The securities may be sold only in certain ways; and,
• The seller must file a Form 144 with the SEC.
  

Recently, the SEC relaxed or, in some cases, eliminated several of these requirements for certain sales.

• Effective February 15, 2008, the requirements of the Rule were relaxed significantly. Under the current Rule, the only requirements applicable to resales by non-affiliates are the Holding Period requirement and, in some cases, the adequate public information requirement. Under the revised Rule, non-affiliates may resell restricted securities of a reporting issuer six months after acquiring such securities, provided there is adequate public information regarding the issuer. Non-affiliates now may sell restricted securities of both reporting and non-reporting issuers without restriction after holding such securities for a period of at least one year. Previously, the required holding period before a non-affiliate could resell restricted securities without restriction was two years.
  
  
• The requirements for resales of control securities by affiliates also were relaxed significantly. Previously, control securities of both reporting and non-reporting issuers were required to be held for a period of at least one year before they could be sold. Now, control securities of reporting issuers can be sold after a holding period of six months, provided the other requirements of the Rule are met.
  
  
• The maximum volume of securities (both restricted and registered) that may be sold by affiliates during any three-month period also has been increased. In addition to the existing maximum of the greater of 1% of the class of security outstanding or the average weekly trading volume of the security, up to 10% of each tranche of debt securities or non-convertible preferred stock can be sold.
  
  
• The revised Rule eliminates the restrictions on the manner of sale of debt securities, non-participating preferred stock, and asset-backed securities.
  
  
• Finally, the revised Rule raises the threshold beyond which the filing of a Form 144 is required. Previously, the filing of a Form 144 was required if there was a sale or sales of 500 or more shares or an aggregate sales price of $10,000 during any three-month period. The revised Rule increases this threshold to 5,000 shares or an aggregate sales price of $50,000.
  
  

The revised Rule still requires resales of control securities to be handled by brokers as routine trading transactions, prohibits brokers from receiving more than a normal commission, and prohibits both the seller and the broker from soliciting orders to purchase the securities. Furthermore, it is important to note that special, much more restrictive, rules apply to securities issued by shell companies.

The revisions to the Rule likely will serve to increase the liquidity of restricted and control securities and allow the holders of such securities to realize a return on those assets sooner, and with more ease, than was previously allowed — particularly for non-affiliates. Also, it is important to note that the Rule is not the exclusive mechanism for the resale of restricted or control securities. Other exemptions may be available which are applicable when the Rule is not, or that are more appropriate based upon the specific facts and circumstances surrounding the transaction.

The revised Rule provides a safe harbor for the sale of restricted and control securities. Provided that each of the applicable requirements of the Rule is satisfied, the seller is deemed not to be an underwriter and is not subject to registration requirements. It is important, however, to consult with an attorney familiar with securities transactions prior to selling any securities in reliance on the Rule to confirm that the particular proposed transaction satisfies the requirements of the Rule.

For further information regarding the issues described above, please contact John P. Crolle.

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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.