Tracing the history and ownership of securities presents problems for companies in the private and public markets because Securities and Exchange Commission (SEC) Rule 144 stipulates that certain conditions need to be met in order to sell securities. As a result, tracking the flow of security issuances is essential for all private companies looking to enter the public marketplace to avoid compliance issues with the SEC and delays during the due diligence review.
What is Rule 144?
Rule 144 is an exemption to the Securities Act of 1933 that allows the public sale or resale of restricted, unregistered, and control securities under certain conditions without triggering registration requirements. Rule 144 is not an exemption from registration, but a safe harbor provision that outlines how a sale of securities can be conducted lawfully.
With this exemption, Rule 144 protects public investors from the risks associated with unregistered securities and insider trading while promoting secondary market transactions and liquidity. Rule 144 applies to all types of sellers, in addition to issuers of securities, underwriters, and dealers.
Rule 144 provides a legal safe harbor for these sales, while ensuring buyers have adequate information about the securities being sold. By imposing conditions like holding periods and volume limits, Rule 144 prevents insiders from flooding the market with large volumes of shares, which could negatively impact stock prices.
What are restricted and control securities?
Restricted securities are typically acquired in private transactions, including private placements, Regulation D offerings, preferred issuances, mergers, or employee stock benefit plans, and can't be sold until specific regulatory conditions are met.
Control securities are held by affiliates of the issuing company with influence over the issuer’s management and policies, including executives, directors, and large shareholders.
If you acquire restricted securities, you will typically receive a certificate stamped with a “restrictive legend.” The restrictive legend indicates that the securities cannot be resold unless they are registered with the SEC, or exempt from registration requirements. Only a transfer agent can remove a restrictive legend. Control security certificates are usually not stamped with a legend.
Rule 144 conditions
The Rule 144 conditions must be met for the resale of restricted or control securities in the public market without requiring registration. These conditions vary depending on whether the seller is an affiliate or non-affiliate.
1. Holding period
The Rule 144 holding period requirement prevents securities in private transactions from being immediately resold into the public market.
Restricted securities: For securities issued by SEC reporting companies, a minimum six-month holding period is required. If the issuing company is not subject to reporting requirements, a minimum one-year holding period is required.
Control securities: Control securities have no specific holding period, but sales are subject to the other conditions of the rule.
2. Current public information
The current public information requirement ensures transparency and informed decision-making. The issuing company must make adequate current information publicly available.
For reporting companies, this means they have complied with the periodic reporting requirements of the Securities Exchange Act of 1934.
For non-reporting companies, this means company information such as the nature of its business, its officers and directors, and its financial statements are publicly available.
3. Trading volume limits
Volume limits prevent large sales from destabilizing the market or the securities’ price.
For affiliate sellers, the number of securities that can be sold during any three-month period cannot exceed the greater of:
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1% of the outstanding shares of the same class being sold.
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The average reported weekly trading volume during the four weeks preceding the filing notice of sale on Form 144. Over-the-counter stocks can only be sold using the 1% measurement.
Non-affiliate sellers are not subject to volume limits once the holding period is satisfied.
4. Manner of sale
Ensures orderly market transactions and prevents manipulation or over-promotion of securities.
Manner of sale conditions apply only to affiliates selling equity securities. Non-affiliates are exempt from this condition. Additionally:
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Sales must be handled as routine trading transactions.
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Brokers may not receive more than a normal commission.
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Neither the seller nor the broker can solicit orders.
5. Filing of Form 144
Form 144 provides the SEC with notice of sales by insiders, promoting transparency.
Affiliates must file Form 144 with the SEC if the sale involves:
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More than 5,000 shares, or
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An aggregate dollar amount greater than $50,000 in any three-month period.
Non-affiliates are exempt from this filing requirement.
Exceptions for non-affiliates:
Once non-affiliates have met the applicable holding period for restricted securities:
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They are not subject to volume limits, manner-of-sale requirements, or Form 144 filing requirements.
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They must still ensure the issuer of the securities provides current public information.
| Condition | Affiliate | Non-Affiliate (After holding period) |
| Holding period | Not required | 6 months (reporting) or 1 year (non-reporting) |
| Current public information | Required | Required |
| Volume limits | Required | Not required |
| Manner of sale | Required (for equity) | Not required |
| Form 144 filing | Required (if thresholds met) | Not required |
The Rule 144 date problem
An important hurdle to qualifying for this exemption is complying with the Rule 144 holding period for each issuance before the resale of the security. If the issuing company is a reporting company with regards to the Securities Exchange Act of 1934, the qualifying holding period is six months. If the company is not a reporting company, the qualifying holding period is one year. The Rule 144 holding period begins from the security’s original date of issuance regardless of resale or conversion. Many private companies do not currently track this metric on their capitalization tables, and if there have been several secondary transactions such as transfers or tender offers, identifying the correct date can be a difficult task.
Carta can help alleviate issues that arise with Rule 144 compliance and establish a framework to position a company for future regulatory success.
The Carta solution for SEC Rule 144
With Carta, the original Rule 144 date will be attached to issuances of common and preferred stock certificates. In most instances, the date will be attached to the shares as they are transferred, converted, or sold, allowing companies to automatically track this regulatory requirement. Transfers and repurchases completed on the platform require the Rule 144 date to be included before the transaction can be processed, ensuring this information is always attached to the correct issuance.
Although there are other requirements and stipulations associated with Rule 144, tracking this information through Carta helps private companies with regulatory requirements at all stages of the corporate lifecycle, from Series Seed through IPO.
The earlier companies establish a single-source of truth for equity management the better, and the greater likelihood they’ll be able to move through a due diligence process unscathed.
There are a litany of additional online resources related to SEC Rule 144 and restricted and control securities; here are three:
