Securities Act Release No. 33-5980

September 20, 1978

ACTION: Proposed rulemaking.

SUMMARY: The Commission is published for comment a proposal to amend two rules which provide safe harbors for the resale of securities to the public. The proposed amendments would permit persons who have held securities covered by the rules for a period of five years or more to sell such securities without any amount limitation, provided such persons are not affiliates of the issuer of the securities. The purpose of the amendments is to relax certain requirements of the rules which may be more burdensome than necessary.

DATE: Comments must be received on or before November 20, 1978.

ADDRESS: Comments should be submitted in triplicate to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549. Comment letters should refer to File No. S7-755 and will be available for public inspection.

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

SUPPLEMENTARY INFORMATION: The Commission today published for comment proposed 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 being proposed for the purpose of relaxing certain requirements of the rule which may be unnecessarily burdensome. In a related action, the Commission previously announced in a separate release ¹ the adoption of other amendments to Rules 144 and 148 which similarly are designed to reduce the burdens of those rules.

BACKGROUND

Both Rule 144 and Rule 148 provide a safe harbor for the public resale of certain types of securities. Rule 144 applies to the resale of "restricted securities" ² and securities held by affiliates ³ of an issuer, while Rule 148 is applicable to the resale of securities acquired in bankruptcy proceedings. Both of these rules prescribe standards which, if met, permit persons who hold such securities to sell them publicly without the need for registration and without being deemed underwriters ⁴ under the 1933 Act.

Rule 144 was considered to be an experiment at the time of its adoption. ⁵ Accordingly, the Commission has monitored its operation to determine how well it is working and what changes, if any, are necessary to improve it. Generally, it is the Commissions view that the rule has operated well insofar as achieving its primary purpose, the protection of investors, is concerned. It has, however, been subject in recent years to the criticism that several of the requirements, particularly those limiting the amount of securities that can be sold under it, are more restrictive than necessary to achieve the purposes of the 1933 Act.

The Commission has given consideration to the critical comments concerning Rule 144 and in the past several years has taken various steps to relax some of the rules requirements. ⁶ It now proposes to take a further step in that direction by publishing for comment an amendment that would permit sales under the rule to be made without any volume restrictions, provided the seller is not an affiliate of the issuer and has held his securities for at least five years. A similar amendment to Rule 148 also is being proposed for comment.

DISCUSSION OF THE PROPOSAL

Under the existing provisions of Rule 144, a nonaffiliate who has held restricted securities for at least two years may commence selling specified amounts of those securities during periods of three months each. ⁷ If, however, such a person does not sell any securities during a particular three month period, he is not permitted to cumulate the amount that could have been sold during the period with the amount permitted to be sold during a later three month period. Thus, for example, a person who has held restricted securities for five years without making any prior sales could not sell any greater number of securities during a three month period than a person who has held similar securities for only two years.

The inability to cumulate under the rules has fostered complaints that the rule is unnecessarily restrictive. For instance, it has been urged that a person who has held his securities for five years has demonstrated by his lengthy holding period that he is not an underwriter within the meaning of Section 2(11) of the 1933 Act. According to this line of reasoning, the lengthy holding period is an ample indication that the person did not acquire his securities "with a view to distribution." Thus, under this rationale the person with the five year holding period should be free to resell his securities without restriction under Section 4(1) of the 1933 Act, which exempts from registration sales of securities by any person who is not "issuer, underwriter, or dealer." Adherents of this point of view therefore argue that Rule 144 should not place limits on sales of securities which have been held for lengthy periods of time. ⁸

While the Commission agrees that the length of ones holding period is a major consideration in determining whether a person is an underwriter, it is not the only one which bears upon that issue. As the Commission pointed out in the release ⁹ which announced the adoption of Rule 144, the definition of "underwriter" in Section 2(11) also includes any person who participates in a distribution and this requires that other factors also be examined. Included among these other factors, which all bear upon whether a person may be engaged in a distribution, are the availability of adequate current information about the issuer and the impact on the trading market of the sale transaction.

In an effort to take into consideration all of the factors that should be considered in determining whether a person is an underwriter, while at the same time attempting to provide appropriate relief to those who have held their securities for periods of considerable length, the Commission has decided to invite public comment on the proposal briefly referred to in the preceding section. As stated therein, the proposal would permit non-affiliates of an issuer to sell their securities under Rule 144 without any volume restrictions after they have held the securities for a period of five or more years. This proposal not only would give major recognition to the length of ones holding period, but also would continue to take into consideration the other elements involved in Section 2(11) by applying certain other provisions of Rule 144, such as the public information and manner of sale requirements, to transactions covered by the proposal.

The effect of the proposal outlined above would be to exempt non-affiliates from the volume limitations of the rule after they have held their securities for at least five years. All other provisions of the rule would continue to apply to such persons. In this regard, however, the Commission is interested in receiving comments on whether the notice of sale requirement of paragraph (h) of the rule should continue to be applied to non-affiliates who might wish to avail themselves of the new provision.

With respect to the holding period of five years contained in the proposal, the Commission also invites comments on whether it would be appropriate to consider reducing the time period requirement, depending on whether the issuer files periodic reports with the Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934 15 U.S.C. 78a, et seq. (in which case the holding period might be reduced to four years) or whether the issuers securities are listed on a national stock exchange (in which case the holding period might be reduced to three years).

The Commission wishes to emphasize that persons who are deemed to be affiliates of an issuer would not be able to avail themselves of the new provision. The control relationship which such persons have the issuer of the securities would appear to increase the likelihood that they might attempt to utilize the provision for distributions rather than routine trading transactions. Accordingly, the Commission does not believe it would be appropriate to make the new provision available to persons who have a relationship with the issuer.

TEXT OF THE PROPOSED AMENDMENTS

(ATTENTION: Arrows are used to indicate additions. There are no deletions.)

I. It is proposed to amend 17 CFR Chapter II by revising §230.144 to read as follows:

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

* * * * *

(e) * * *

(1) * * *

(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. The limitation in this paragraph (e)(2), however, shall not apply to restricted securities sold for the account of a person who is not an affiliate of the issuer, provided the securities have been beneficially owned by the person for a period of at least five years prior to the sale of such securities, except that in the event such securities, except that in the event such securities were purchased, the full purchase price or other consideration shall have been paid or given at least five years prior to the sale.

* * * * *

II. It is proposed to amend 17 CFR Chapter II by revising §230.148 to read as follows:

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

* * * * *

(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 resales 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 purposes 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. The limitation in this paragraph (b)(1) on the amount of securities that may be sold, however, shall not apply to securities sold for the account of a person who is not an affiliate of the issuer, provided the securities have been beneficially owned by the person for a period of at least five years prior to the sale of such securities, except that in the event such securities were purchased, the full purchase price or other consideration shall have been paid or given at least five years prior to the sale.

* * * * *

Secs. 2(11), 4(1), 4(4), 19(a), 48 Stat. 74, 77, 85; secs. 201, 203, 209, 210, 48 Stat. 905, 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

The amendments to Rules 144 and 148 are being proposed by the Commission pursuant to the Securities Act of 1933, particularly Sections 2(11), 4(1), 4(4) and 19(a) thereof.

By the Commission.

George A. Fitzsimmons

Secretary

¹Release No. 33-5979 (September 19, 1973) 43 FR.

² 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.

³ An "affiliate" of an entity is defined in Rule 404 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)."

⁴ 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" or who participate directly or indirectly in the distribution of a security.

⁵ See in this regard the portion of Release No. 33-5223 (January 11, 1972) 37 FR 591 entitled "Operation of the Rule."

⁶ For more information in this regard, see the release cited in footnote 1, infra.

⁷ In general, a person may sell during any three month period an amount equal to the greater of the average weekly trading volume (if available) or one percent of the outstanding securities of the class. See, in this regard, paragraph (e) of Rule 144, as recently amended in the release cited in footnote 1, infra.

⁸ It should be noted that Rule 144 is not the exclusive means for selling restricted securities without registration under the Act. The rule is intended simply to be a safe harbor for establishing the availability of the exemption provided by Section 4(1). Thus, sales of restricted securities which do not constitute a distribution may be made by non-affiliates directly under Section 4(1), provided they are in accordance with current interpretations of that section.

⁹Release No. 33-5223 (January 11, 1972) 37 FR 591.