Securities Act Release No. 33-5979

September 19, 1978

Resales of Securities 

ACTION: Final rules.

SUMMARY: The Commission is amending two rules which provide safe harbors for the resale of securities to the public. The amendments will: (1) relax the limitations on the amount of securities that can be sold under the rules; (2) permit persons selling securities under the rules to deal directly with a market maker in lieu of engaging a broker; and (3) exempt estates and beneficiaries thereof who are not affiliates of the issuer of the securities from the requirement that all sales transaction under the rules be conducted through a broker or directly with a market maker. The amendments are being adopted in order to relax certain requirements of the rules which appear to be more burdensome than necessary.

EFFECTIVE DATE: September 25, 1978.

FOR FURTHER INFORMATION CONTACT: Peter J. Romeo, Division of Corporation Finance, Securities and Exchange Commission, Washington, D.C. 20549, (202) 755-1240.

SUPPLEMENTARY INFORMATION: The Commission today announced the adoption of various amendments to Rule 144 17 CFR 230.144 and Rule 148 17 CFR 230.148 under the Securities Act of 1933 ("1933 Act") 15 U.S.C. 77a et seq.. The amendments are intended to reduce the burdens imposed by the above rules in a manner that is consistent with the purpose and underlying policy of the 1933 Act to protect investors. In a related action, the Commission has determined to publish a separate release in the near future inviting public comments on certain proposed amendments to Rules 144 and 148 which also are designed to limit the burdensome effects of those rules.

BACKGROUND

Rule 144 prescribes standards which, if met, permit holders of restricted securities ¹ as well as affiliates ² of an issuer to sell their securities publicly without registration and without being deemed underwriters ³ under the 1933 Act. Rule 148 similarly provides a safe harbor for the resale of securities acquired in bankruptcy proceedings.

At the time Rule 144 was adopted, it was considered to be an experiment whose operation would be monitored by the Commission. ⁴ The rule now has been in existence for over six years and appears generally to have operated well insofar as achieving its intended purposes under the 1933 Act is concerned. It has, however, been subject in recent years to the criticism that its requirements, particularly those limiting the amount of securities that can be sold under it, are more stringent than necessary. ⁵

The Commission has not been unmindful of the critical comments concerning Rule 144, as evidenced by certain of its actions in recent years. For example, in Release No. 33-5613 (September 11, 1975) 40 FR 44541 it relaxed somewhat the volume limits applicable to sales of exchange-traded securities under the rule. This was accomplished by permitting NASDAQ ⁶ volume figures to be aggregated with exchange volume figures in determining the maximum amount of such securities that could be sold under the rule. In Release No. 33-5717 (June 8, 1976) 41 FR 24701 it further relaxed the volume limitations of Rule 144 by permitting trading data appearing on the consolidated transaction reporting system contemplated by Rule 17a-15 17 CFR 240.17a-15 under the Securities Exchange Act of 1934 ("1934 Act") 15 U.S.C. 78a et seq. to be used in determining the amount of exchange-listed securities which may be sold under the rule. In addition, the Commission invited public comments in that release on the need for further modifying the volume limitations of the rule. Finally, it authorized its Directorate of Economic and Policy Research ("EPR") to conduct a study of sales under the rule to assess the market impact of the rules volume limitations.

EPR recently completed its study and submitted its findings to the Commission. ⁷ The study encompassed a sample of 155 large transactions in exchange-listed securities only. ⁸ The study concluded that "In the aggregate, there did not appear to be any significant adverse price impacts associated with Rule 144 transactions." ⁹ It further stated that "... if the quantity limitation were relaxed, potential adverse price effects might be observed... but there is evidence which mutes this concern." ¹⁰

The EPR study suggests that the volume limitations of Rule 144 can be relaxed on an experimental basis. In light of that study, as well as its concern that the rule may be more restrictive than necessary in its present form, the Commission has determined to relax Rule 144 in certain significant respects. Similar changes also are being made in Rule 148 in line with the Commissions statement at the time it adopted the rule that if the Rule 144 volume limitations were relaxed as a result of the EPR study it anticipated making corresponding changes in Rule 148. ¹¹ In addition to the changes being adopted today, which are described in the next section of this release, certain additional revisions to Rules 144 and 148 will, as previously noted, be proposed for public comment in a separate release.

DISCUSSION OF THE CHANGES

The provisions of Rules 144 and 148 that are being revised involve the volume limitation and brokerage transaction requirements of those rules.

A. Volume Limitations

Prior to the amendments announced today, paragraph (e) of Rule 144 provided that the amount of securities that could be sold under the rule during any six-month period could not exceed the following: (a) for securities listed on a national securities exchange ("listed securities"), the lesser of either one percent of the shares or other units of the class outstanding or the average weekly trading volume during the four week period immediately preceding the sale; and (b) for securities not listed on an exchange ("unlisted securities"), one percent of the outstanding securities of the class. Rule 148 provided in paragraph (b)(1) thereof that the volume limit during any six-month period shall be one percent of the sum of those securities of the class which are outstanding and those which are reserved for future issuance to settle claims and interests arising from bankruptcy proceedings.

The amendments to the above provisions announced today involve two major changes. First, the six-month period for measuring sales under the rules has been reduced to three months. Second, the standard used in Rule 144 to determine the amount of securities that may be sold during the measuring period has been revised to permit, for both listed and unlisted securities, the sale of the greater of one percent of the outstanding securities of the class or the average weekly trading volume during the four calendar weeks preceding the sale. A similar change also has been made in Rule 148. ¹² These revisions will more than double the amount of securities that formerly could be sold under the rules. ¹³ In addition, the changes will have the effect of eliminating the disparity that formerly existed in Rule 144 between the volume standards for listed securities and those for unlisted securities.

It should be noted that in computing the average weekly trading volume for purposes of the revised volume standards, both exchange volume and NASDAQ volume will continue to be included in such computations. And, to the extent that volume figures are available through the consolidated transaction reporting system contemplated by Rule 17a-15 under the 1934 Act, such figures also will continue to be considered in determining the volume limits. Of course, if volume figures are not available through an exchange, NASDAQ, or the consolidated transaction reporting system, the amount limitation for purposes of Rule 144 will have to be based solely on one percent of the outstanding securities of the class.

In adopting the changes described above, the Commission wishes to emphasize that they are experimental in nature and are subject to review as to their effect on the marketplace. Because no one can predict in advance the point at which market disruptions due to excessive sales under Rules 144 and 148 may occur, it is necessary to be somewhat arbitrary in selecting the limits for sales under the rules. While the changes announced today represent the Commissions best estimate at this time as to acceptable volume limits, the possibility exists that they may prove to be unsatisfactory. For that reason, the Commission intends to monitor their effects and may consider further amendments to the volume limits at some future date.

B. Brokers Transaction Requirement

Rule 144 until now has required persons relying on the rule for the sale of securities to effect all such sales in brokers transactions. The broker in turn has been prohibited by the rule from soliciting orders to buy the securities, and the seller has not been permitted to make payments in connection with the sale of the securities to any other person other than the broker. Rule 148 has contained a similar requirement.

The Commission has determined to make two changes in the brokers transaction requirement, as explained in the paragraphs which follow: (1) transactions directly with a market maker will be permitted in lieu of brokers transactions; and (2) estates and beneficiaries thereof who are not affiliates of the issuer will be exempted from the brokers transaction requirement. The prohibitions against the solicitation of buy orders and making payments to any person other than the broker, however, have not been changed and therefore, will continue to apply.

1. Transactions with a market maker.

The brokers transaction requirement of Rules 144 and 148 was included to insure that persons selling under those rules did not solicit orders to buy the securities in connection with such transactions. Such solicitations not only are inconsistent with the effort in those rules to limit sales to "routine trading transactions" but also raise the corresponding concern whether such persons are participating in a distribution of the securities being sold. The brokers transaction requirement appears, however, to impose unnecessary expense by requiring the interpositioning of a broker in those situations where a seller could trade directly with a market maker, ¹⁴ absent the brokers transaction requirement. Because a market maker, by definition, holds himself out as willing to buy that particular security on a regular or continuous basis, a seller should not, for purposes of Rules 144 and 148, be considered to have solicited a trade directly with a market maker. The Commission finds no policy reason why a seller should not be able to trade directly with a market maker under essentially the same circumstances that he could trade indirectly with that market maker through a broker and, accordingly, has revised Rules 144 and 148 to eliminate the brokers transaction requirement in such situations.

2. Exemption for non-affiliated estates and beneficiaries.

The brokers transaction requirements of Rules 144 and 148 presently apply to all securities sold under those rules, regardless of the nature of the seller. The rule has been criticized on the ground that it is not always possible for estates or beneficiaries thereof who are not affiliates of the issuer to sell blocks of restricted securities in brokers transactions in those circumstances where the issuer is small and there is no ready market for its securities. In view of the special circumstances attendant to securities acquired by or from an estate, as well as the fact that non-affiliated estates and beneficiaries are exempted from the holding period ¹⁵ and volume limitation ¹⁶ requirements of Rule 144, the Commission has determined to provide a similar exemption from the brokers transaction requirement as well. A corresponding change is also being made in Rule 148.

TEXT OF THE AMENDMENT

I. 17 CFR 230.144 is amended to read as follows:

§230.144 Persons deemed not to be engaged in a distribution and therefore not underwriters.

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(e) Limitation on Amount of Securities Sold. Except as hereinafter provided, the amount of securities which may be sold in reliance upon this rule shall be determined as follows:

(1) Sales by Affiliates. If restricted or other securities are sold for the account of an affiliate of the issuer, the amount of securities sold, together with all sales of restricted and other securities of the same class for the account of such person within the preceding three months, shall not exceed the greater of (i) one percent of the shares or other units of the class outstanding as shown by the most recent report or statement published by the issuer, or (ii) the average weekly reported volume of trading in such securities on all national securities exchanges and report through the automated quotation system of a registered securities association during the four calendar weeks preceding the filing of notice required by paragraph (h), or if no such notice is required, the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker, or (iii) the average weekly volume of trading in such securities reported through the consolidated transaction reporting system contemplated by Rule 17a-15 under the Securities Exchange Act of 1934 during the four-week period specified in (ii) above.

(2) Sales by persons other than affiliates. The amount of restricted securities sold for the account of any person other than an affiliate of the issuer, together with all other sales of restricted securities of the same class for the account of such person within the preceding three months, shall not exceed the amount specified in paragraphs (1)(i), (1)(ii), or (1)(iii) of this section, whichever is applicable.

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(f) Manner of sale. The securities shall be sold in "brokers transactions" within the meaning of Section 4(4) of the Act or in transactions directly with a "market maker," as that term is defined in Section 3(a)(38) of the Securities Exchange Act of 1934, and the person selling the securities shall not (1) solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transactions, or (2) make any payment in connection with the offer or sale of the securities to any person other than the broker who executes the order to sell the securities. The requirements of this paragraph, however, shall not apply to securities sold for the account of the estate of a deceased person or for the account of a beneficiary of such estate, provided the estate or beneficiary thereof is not an affiliate of the issuer.

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II. 17 CFR 230.148 is amended to read as follows:

§230.148 Persons deemed not to be underwriters of securities issued or sold in connection with bankruptcy proceedings.

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(b) Securities issued under a plan. A person or entity who acquires securities issued under a plan in a transaction exempt from the registration requirements of the Securities Act of 1933 shall not be deemed an underwriter within the meaning of Section 2(11) of the Act with respect to resale of such securities if all of the following conditions are met:

(1) Volume Limitation. The amount of securities sold for the account of such person or entity during any three month period shall not exceed the greater of (i) one percent of the sum of the number of shares or other units of the class issued and outstanding and the number of shares or units of the class reserved for future issuance in respect of claims and interests filed and allowed under the plan, as shown by the most recent report or statement published by the issuer, or (ii) the average weekly reported volume of trading in such securities on all national securities exchanges and reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker, or (iii) the average weekly volume of trading in such securities reported through the consolidated transaction reporting system contemplated by Rule 17a-15 under the Securities Exchange Act of 1934 during the four-week period specified in (ii) above. For the purpose of determining the limitation on the amount of securities sold, all securities of the same class sold under this rule by persons or entities acting in concert shall be aggregated.

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(3) Manner of sale. The securities shall be sold in "brokers transactions" within the meaning of Section 4(4) of the Securities Act or in the transactions directly with a "market maker," as that term is defined in Section 3(a)(38) of the Securities Exchange Act of 1934, and the person selling the securities shall not (i) solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transactions, or (ii) make any payment in connection with the offer or sale of the securities to any person other than the broker who executes the order to sell the securities. The requirements of this paragraph, however, shall not apply to securities sold for the account of the estate of a deceased person or for the account of a beneficiary of such estate, provided the estate or beneficiary thereof is not an affiliate of the issuer. For the purpose of this rule, the term "brokers transactions" shall be deemed to include transactions of the type described in Rule 144(g) (§230.144(g)) under the Securities Act.

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Secs 2(11), 4(1), 4(4), 19(a), 48 Stat. 74, 77, 85; secs. 201, 203, 209, 210, 48 Stat. 904, 906, 908; secs. 1-4, 6, 68, Stat. 683, 684; sec. 12, 78 Stat. 580; 15 U.S.C. 77b(11), 77d(1), 77d(4), 77s(a).

STATUTORY BASIS AND EFFECTIVE DATE

The amendments to Rules 144 and 148 have been adopted by the Commission pursuant to the Securities Act of 1933, particularly Sections 2(11), 4(1), 4(4) and 19(a) thereof. The amendments will become effective on September 25, 1978.

Because all of the amendments adopted today represent a relaxation of existing requirements that were previously published for comment pursuant to the Administrative Procedure Act 5 U.S.C. 533, the Commission finds that prior notice and public comment under the Act are not necessary.

By the Commission.

George A. Fitzsimmons

Secretary

¹ The term "restricted securities" includes securities acquired in non-public offerings, such as those under Section 4(2) of the 1933 Act, as well as securities acquired in offerings made in reliance upon Rule 240 17 CFR 230.240 under the Act.

² An "affiliate" of an entity is defined in Rule 405 17 CFR 230.405 under the 1933 Act as "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the entity."

³ The term "underwriter" is broadly defined in Section 2(11) of the 1933 Act and includes persons who acquire securities "with a view to... distribution."

⁴ See in this regard the portion of Release No. 33-5223 (January 11, 1972) 37 FR 591 entitled "Operation of the Rule."

⁵ For example, the report of the SBA Task Force on Venture and Equity Capital for Small Business, U.S. Small Business Administration (January 1977) recommends that the requirements of the rule be relaxed somewhat. In addition, several persons testified at the Commissions recent hearings on small business that the rule should be modified in various respects.

⁶ NASDAQ is the name of the automated quotation service of the NASD, Inc.

⁷ The study is entitled "An Analysis of the Rule 144 Volume Limitations" (hereinafter the "EPR Study") and is available for public inspection at the Commissions Public Reference room located at 1100 L Street, N.W., Washington, D.C.

⁸ A study of the volume limitation provisions of Rule 144 with respect to over-the-counter securities is currently in progress but will likely neither be as timely nor as reliable as the already-completed study due to data limitations.

⁹ EPR Study, 21.

¹⁰ Ibid., 22-23.

¹¹ Release No. 33-5918 (March 29, 1978) 43 FR 14445.

¹² For purposes of Rule 148, the base upon which the one percent standard will be computed will include, in addition to the outstanding securities of the class, the securities reserved for future issuance in settlement of claims or interests.

¹³ In view of the substantial increase in the amount of securities that will now be permitted to be sold under Rules 144 and 148, consideration should be given by persons who may be subject to Rule 10b-6 17 CFR 240.10b-6 under the 1934 Act to whether sales under the liberalized volume limitations of Rules 144 and 148, under certain circumstances, may involve distributions for purposes of Rule 10b-6.

¹⁴ Section 3(a)(38) of the 1934 Act defines the term "market maker" to mean "any specialist permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an interdealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis.

¹⁵ See paragraph (d)(4)(vii) of Rule 144.

¹⁶ See paragraph (e)(3)(v) of Rule 144.