Top Takeaways from SEC’s Proposed Rule 144 Amendments

The Securities and Exchange Commission (SEC) recently proposed amendments to Rule 144 under the Securities Act of 1933…

The Securities and Exchange Commission (SEC) recently proposed amendments to Rule 144 under the Securities Act of 1933 and its related Form 144 filing requirements. The proposal seeks to revise the holding period determination for securities acquired upon the conversion or exchange of certain “market-adjustable securities” to reduce the risk of unregistered distributions in connection with sales of those securities. 

“Today’s proposed amendments modernize, clarify and strengthen Rule 144, including to ensure that holders of market-adjustable securities are assuming the economic risks of their investment rather than acting as a conduit for an unregistered sale of securities to the public on behalf of an issuer,” SEC Chairman Jay Clayton said in a press statement. “In addition, the proposed shift to electronic filing of Form 144 provides a necessary update to reflect today’s markets, particularly given the benefits – and the feasibility – of electronic filing our experience over the past nine months has demonstrated.”

Proposed Amendments to Rule 144 Holding Period

The SEC’s Proposed Rule would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As the SEC explains in its Rule Proposal, the application of the “tacking” provisions of Rule 144 to market-adjustable securities “undermines one of the key premises of Rule 144, which is that holding securities at risk for an appropriate period of time prior to resale can demonstrate that the seller did not purchase the securities with a view to distribution and, therefore, is not an underwriter for the purpose of Securities Act Section 4(a)(1).” The Rule Proposal maintains that amending the Rule 144 holding period for the securities received on conversion or exchange of market-adjustable securities so that it will not commence until the time the underlying securities are acquired would “help maintain the effectiveness of this key aspect of the Rule 144 safe harbor.”

Under the proposed amendment, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company, would not begin until the conversion or exchange of the market-adjustable securities. The change would apply only to market-adjustable securities transactions in which:

• The newly acquired securities were acquired from an issuer that, at the time of the conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange registered pursuant to Section 6 of the Exchange Act; and
• The convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization.

Proposed Amendments Forms 4, 5, and 144 Filing Requirements

The proposed amendments to the filing requirements for Forms 4, 5, and 144 aim to update and streamline those requirements. Accordingly, the SEC is proposing to:

• Mandate the electronic filing of Form 144;
• Eliminate the Form 144 filing requirement related to the sale of securities of issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
• Amend the Form 144 filing deadline so that Form 144 may be filed concurrently with Form 4 by persons subject to both filing requirements; and
• Amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was intended to satisfy Rule 10b5-1(c), which provides an affirmative defense for trading on the basis of material non-public information in insider trading cases.

According to the SEC, it plans to make an online fillable Form 144 available to simplify electronic filing and to streamline the electronic filing of Forms 4 and 144 reporting the same sale of an issuer’s securities. Under the proposal, there would be a six-month transition period to give Form 144 paper filers who would be first-time electronic filers sufficient time to apply for codes to make filings on EDGAR.

Key Takeaway

In its Rule 144 Rule Proposal, the SEC appears to be making a belated (by a decade or more) effort to curtail notorious hedge fund dumping of small market public company convertible securities. Smaller public companies in need of raising capital have too often found themselves in the grasp of stock manipulators dumping their shares willy-nilly after obtaining the shares at a discount from the trading price, leading to depressed stock prices — known as death-spiral financings. By imposing a new six-month holding period from conversion for market-adjusted conversions of those securities, the SEC is seeking to deter death spiral financings, which have previously resulted in many small companies’ stocks trading at far below even a penny per share.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.