Release No. 33-8869REVISIONS TO RULES 144 AND 145AGENCY: Securities and Exchange Commission. ACTION: Final rule; request for comment on Paperwork Reduction Act burden estimates. SUMMARY: Rule 144 under the Securities Act of 1933 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act. We are shortening the holding period requirement under Rule 144 for “restricted securities” of issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 to six months. Restricted securities of issuers that are not subject to the Exchange Act reporting requirements will continue to be subject to a one-year holding period prior to any public resale. The amendments also substantially reduce the restrictions applicable to the resale of securities by non-affiliates. In addition, the amendments simplify the Preliminary Note to Rule 144, amend the manner of sale requirements and eliminate them with respect to debt securities, amend the volume limitations for debt securities, increase the Form 144 filing thresholds, and codify several staff interpretive positions that relate to Rule 144. Finally, we are eliminating the presumptive underwriter provision in Securities Act Rule 145, except for transactions involving a shell company, and revising the resale requirements in Rule 145(d). We believe that the amendments will increase the liquidity of privately sold securities and decrease the cost of capital for all issuers without compromising investor protection. DATES: Effective Date: February 15, 2008. The revised holding periods and other amendments that we are adopting are applicable to securities acquired before or after the effective date of the changes announced today. Comment Date: Comments regarding the collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 should be received on or before January 16, 2008. ADDRESSES: Comments may be submitted by any of the following methods:
Paper Comments:
All submissions should refer to File Number S7-11-07. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/final.shtml). Comments are also available for public inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Katherine Hsu or Raymond A. Be, Special Counsels in the Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, 100 F Street, NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to Rule 144,1 Rule 145,2 Rule 190,3 Rule 701,4 Rule 903,5 and Form 1446 under the Securities Act of 1933.7 I. Background The Securities Act of 1933 (“Securities Act”) requires registration of all offers and sales of securities in interstate commerce or by use of the U.S. mails, unless an exemption from the registration requirement is available.8 Section 4(1) of the Securities Act provides such an exemption for transactions by any person other than an issuer, underwriter or dealer.9 The definition of the term “underwriter” is key to the operation of the Section 4(1) exemption. Section 2(a)(11) of the Securities Act defines an underwriter as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking.”10 The Securities Act does not, however, provide specific criteria for determining when a person purchases securities “with a view to . . . the distribution” of those securities. In 1972, the Commission adopted Rule 144 to provide a safe harbor from this definition of “underwriter” to assist security holders in determining whether the Section 4(1) exemption is available for their resale of securities.11 Rule 144 regulates the resale of two categories of securities − restricted securities and control securities. Restricted securities are securities acquired pursuant to one of the transactions listed in Rule 144(a)(3).12 Although it is not a term defined in Rule 144, “control securities” is used commonly to refer to securities held by an affiliate of the issuer,13 regardless of how the affiliate acquired the securities.14 Therefore, if an affiliate acquires securities in a transaction that is listed in Rule 144(a)(3), those securities are both restricted securities and control securities. A person selling restricted securities, or a person selling restricted or other securities on behalf of the account of an affiliate, who satisfies all of Rule 144’s applicable conditions in connection with the transaction, is deemed not to be an “underwriter,” as defined in Section 2(a)(11) of the Securities Act, and therefore may rely on the Section 4(1) exemption for the resale of the securities. Since its adoption, we have reviewed and revised Rule 144 several times. We last made major changes in 1997 (“1997 amendments”).15 At that time, we shortened the required holding periods for restricted securities.16 Before the 1997 amendments, security holders could resell restricted securities under Rule 144, subject to limitation, after two years, and persons who were not affiliates and had not been affiliates during the prior three months, could resell restricted securities without limitation after three years. The 1997 amendments changed these two-year and three-year periods to one-year and two-year periods, respectively. On the same day that we adopted those changes, we also proposed and solicited comment on several possible additional changes to Rule 144, Rule 145 and Form 144, including reducing the holding period further (“1997 Proposing Release” and “1997 proposals”).17 We received 38 comment letters on those proposed changes. While some commenters supported further shortening the holding periods, others suggested that we monitor the results of the 1997 amendments before making further changes. We did not take further action to adopt the 1997 proposals. Rule 144 states that a selling security holder shall be deemed not to be engaged in a distribution of securities, and therefore not an underwriter, with respect to such securities, thus making available the Section 4(1) exemption from registration, if the resale satisfies specified conditions. The conditions include the following:
Rule 144, as it existed before today’s amendments, permitted a non-affiliate to publicly resell restricted securities without being subject to the above limitations if the securities had been held for two years or more, provided that the security holder was not, and, for the three months prior to the sale, had not been, an affiliate of the issuer.23 On July 5, 2007, we again proposed to amend several aspects of Rule 144 and Rule 145, including by further shortening the holding periods (the “2007 Proposing Release”).24 We proposed to shorten the holding period requirement in Rule 144(d) for restricted securities of issuers that are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)25 to six months. Restricted securities of issuers that are not subject to Exchange Act reporting requirements would continue to be subject to a one-year holding period under Rule 144(d). We also proposed to relieve non-affiliates of reporting issuers from having to comply with all conditions in Rule 144, except the current public information requirement, after a six-month holding period. Non-affiliates of non-reporting issuers would be allowed to resell their securities freely after a one-year holding period. In addition, we proposed to:
We also solicited comment on amending the Form 144 filing deadline to coincide with the deadline for filing a Form 426 under Section 1627 of the Exchange Act and permitting persons who are subject to Section 16 to meet their Form 144 filing requirement by filing a Form 4.28 Finally, we proposed to eliminate the presumptive underwriter provision in Securities Act Rule 145, except for transactions involving a shell company, and to harmonize the resale provisions in Rule 145 with the Rule 144 provisions applicable to resales of securities of shell companies. We received 32 comment letters from 30 commenters on the proposals in the 2007 Proposing Release.29 A majority of the commenters expressed support for the proposals in general.30 Several of these commenters expressed support for the proposed amendments to shorten the holding period requirement in Rule 144 for both affiliates and non-affiliates of Exchange Act reporting issuers.31 Two commenters opposed shortening the holding period, as proposed.32 Some commenters expressed opposition to the proposed reintroduction of a provision that would toll, or suspend, for up to six months, the holding period during any period that a security holder engages in hedging activities with respect to any equity securities of the same class as the restricted securities or any securities convertible into that class (or, in the case of nonconvertible debt, with respect to any nonconvertible debt securities).33 The commenters thought that the tolling provision could have a negative effect on capital raising transactions. These commenters provided several recommendations on how we should modify the tolling provision, if we decide to adopt it. We received general support for the other aspects of the proposed amendments, including the proposals relating to Form 144, the elimination of the manner of sale requirements for debt securities and the codification of several staff interpretations. II. Discussion of Final Amendments A. Simplification of the Preliminary Note and Text of Rule 144 In the 2007 Proposing Release, we noted that the current Preliminary Note is complex and may be confusing to some security holders. We proposed amendments to simplify and clarify the Preliminary Note to Rule 144 and to incorporate plain English principles. The proposed amendments to the Preliminary Note were not intended to alter the substantive operation of the rule. In addition, we proposed changes throughout the rule to make the rule less complex and easier to read. We received a few comments on the proposed changes to simplify Rule 144 and the Preliminary Note. One commenter believed that the Preliminary Note to Rule 144 is no longer necessary, because the purpose and meaning of the rule are well-understood.34Some commenters recommended that we further explain how Rule 144 can be used for the resale of control securities.35 We are adopting the amendments to the Preliminary Note with some modification from the proposed version. The revised Preliminary Note retains an explanation of the relationship among the exemption in Section 4(1) of the Securities Act, the Section 2(a)(11) definition of “underwriter” and the Rule 144 safe harbor. Consistent with the proposal, the revised Preliminary Note also clarifies that any person who sells restricted securities, and any person who sells restricted securities or other securities on behalf of an affiliate, shall be deemed not to be engaged in a distribution of such securities and therefore shall be deemed not to be an underwriter with respect to such securities if the sale in question is made in accordance with all the applicable provisions of the rule. The revised Preliminary Note further states that, although Rule 144 provides a safe harbor for establishing the availability of the Section 4(1) exemption, it is not the exclusive means for reselling restricted and control securities. Therefore, Rule 144 does not eliminate or otherwise affect the availability of any other exemption for resales.36Consistent with a statement that was included in the original Rule 144 adopting release,37we are adding a statement to the Preliminary Note that the Rule 144 safe harbor is not available with respect to any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.38 We also are adopting plain English changes throughout the rule text substantially as proposed. B. Amendments to Holding Periods for Restricted Securities 1. Six-Month Rule 144(d) Holding Period Requirement for Exchange Act Reporting Companies As stated above, in 1997, we reduced the Rule 144 holding periods for restricted securities for both affiliates and non-affiliates.39 Before the 1997 amendments, security holders could sell limited amounts of restricted securities after holding those securities for two years if they satisfied all other conditions imposed by Rule 144.40 Under Rule 144(k), non-affiliates could sell restricted securities without being subject to any of the conditions in Rule 144 after holding their securities for three years. The 1997 amendments to Rule 144 reduced the two-year Rule 144(d) holding period to one year and amended the three-year Rule 144(k) holding period to two years. In the 1997 Proposing Release, we solicited comment on whether the Rule 144(d) holding period should be further reduced for both affiliates and non-affiliates, and whether restrictions applicable to sales by non-affiliates also should be reduced. We received numerous comments on this issue. Twelve commenters recommended that we further reduce the holding period to six months.41 Two other commenters thought that we should maintain the holding periods that we had just recently adopted.42 Eight commenters recommended that we gain more experience with the new holding periods before proposing further amendments to those holding periods.43 In the 2007 Proposing Release, we again proposed to shorten the Rule 144(d) holding period for restricted securities held by affiliates and non-affiliates.44 The proposal would have permitted both affiliates and non-affiliates to publicly sell restricted securities of Exchange Act reporting issuers45 after holding the securities for six months, subject to any other applicable condition of Rule 144, if they had not engaged in hedging transactions with respect to the securities. Because of our concern that the market does not have sufficient information and safeguards with respect to non-reporting issuers, we proposed to retain the one-year holding period for restricted securities of issuers that are not subject to Exchange Act Section 13(a) or Section 15(d) reporting obligations for both affiliates and non-affiliates. Several commenters supported the proposal to shorten the holding period to six months for securities of reporting issuers.46 These commenters noted that the shortened holding period would increase liquidity for issuers, make capital investment more attractive, and decrease costs of capital for smaller companies without sacrificing investor protection.47 In this regard, one commenter noted that today’s markets now function at an accelerated pace, and technology, particularly the Internet, has caused the markets to become more efficient.48 Two commenters advocated an even shorter holding period requirement than the proposed six-month period, with one commenter advocating a four-month holding period and the other a three-month holding period.49 Two commenters opposed shortening the holding period requirement under Rule 144, as proposed.50 The purpose of Rule 144 is to provide objective criteria for determining that the person selling securities to the public has not acquired the securities from the issuer for distribution. A holding period is one criterion established to demonstrate that the selling security holder did not acquire the securities to be sold under Rule 144 with distributive intent. We do not want the holding period to be longer than necessary or impose any unnecessary costs or restrictions on capital formation. After observing the operation of Rule 144 since the 1997 amendments, we believe that a six-month holding period for securities of reporting issuers provides a reasonable indication that an investor has assumed the economic risk of investment in the securities to be resold under Rule 144. Therefore, we are adopting a six-month holding period for reporting companies, as proposed.51 Most commenters agreed that shortening the holding period to six months for restricted securities of reporting issuers will increase the liquidity of privately sold securities and decrease the cost of capital for reporting issuers, while still being consistent with investor protection.52 By reducing the holding period for restricted securities, these amendments are intended to help companies to raise capital more easily and less expensively. For example, by making private offerings more attractive, the amendments may allow some companies to avoid certain types of costly financing structures involving the issuance of extremely dilutive convertible securities. Many commenters supported the proposal to maintain the existing one-year holding period for restricted securities of non-reporting issuers.53 Under the amendments that we are adopting, the six-month holding period requirement will apply to the securities of an issuer that has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days before the Rule 144 sale.54 Restricted securities of a “non-reporting issuer” will continue to be subject to a one-year holding period requirement.55 A non-reporting issuer is one that is not, or has not been for a period of at least 90 days before the Rule 144 sale, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.56 We believe that different holding periods for reporting and non-reporting issuers are appropriate given that reporting issuers have an obligation to file periodic reports with updated financial information (including audited financial information in annual filings) that are publicly available on EDGAR, the Commission’s electronic filing system. Although non-reporting issuers must make some information publicly available before resales can be made under Rule 144, this information typically is much more limited in scope than information included in Exchange Act reports, is not required to include audited financial information, and is not publicly available via EDGAR.57 For these reasons, we believe that continuing to require security holders of non-reporting issuers to hold their securities for one year is not unduly burdensome and is consistent with investor protection. 2. Significant Reduction of Conditions Applicable to Non-Affiliates Before adoption of these amendments, both non-affiliates and affiliates were subject to all other applicable conditions of Rule 144, in addition to the Rule 144(d) holding period requirement, including the condition that current information about the issuer of the securities be publicly available, the limitations on the amount of securities that may be sold in any three-month period, the manner of sale requirements and the Form 144 notice requirement. However, pursuant to paragraph (k) of Rule 144 as it existed prior to the amendments that we are adopting, a non-affiliate of the issuer at the time of the Rule 144 sale who had not been an affiliate during the three months prior to the sale, could sell the securities after holding them for two years without complying with these other conditions. In the 2007 Proposing Release, we proposed to permit non-affiliates to resell their restricted securities freely after meeting the applicable holding period requirement (i.e., six months with respect to a reporting issuer and one year with respect to a non-reporting issuer), except that non-affiliates of reporting issuers still would be subject to the current public information requirement in Rule 144(c) for an additional six months after the end of the initial six-month holding period. In general, commenters supported the proposal to reduce substantially the requirements for the resale of restricted securities by non-affiliates under Rule 144.58Noting the importance of the current public information condition, two commenters expressed support for the proposed retention of that requirement for the resales of restricted securities by non-affiliates occurring between six months and one year after acquisition of the securities.59 Some commenters expressed support for removal of the manner of sale requirements and the Form 144 notice requirement,60 while a few objected to removal of those requirements.61 The commenters objecting to the removal of those requirements expressed concern about the transparency of Rule 144 transactions and the potential increase in violations of the holding period requirement if the manner of sale requirements and the Form 144 notice requirement were eliminated.62 The two commenters that opposed shortening the Rule 144(d) holding period also opposed the proposals to permit non-affiliates to resell without being subject to any other condition (except the public information requirement, with respect to resales of securities of reporting companies) after they meet the holding period.63 We are adopting the amendments for the sale of restricted securities by non-affiliates after the holding period, as proposed.64 Under the amendments, after the applicable holding period requirement is met, the resale of restricted securities by a non-affiliate under Rule 144 will no longer be subject to any other conditions of Rule 144 except that, with regard to the resale of securities of a reporting issuer, the current public information requirement in Rule 144(c) will apply for an additional six months after the six-month holding period requirement is met.65 Therefore, a non-affiliate will no longer be subject to the Rule 144 conditions relating to volume limitations, manner of sale requirements, and filing Form 144.66 We believe that the complexity of resale restrictions may inhibit sales by, and imposes costs on, non-affiliates. Because Rule 144 is relied upon by many individuals to resell their restricted securities, we believe that it is particularly helpful to streamline and reduce the complexity of the rule as much as possible while retaining its integrity. We continue to believe that retaining the current public information requirement with regard to resales of restricted securities of reporting issuers for up to one year after the acquisition of the securities is important to help provide the market with adequate information regarding the issuer of the securities. In addition, we generally believe that most abuses in sales of unregistered securities involve affiliates of issuers67 and securities of shell companies. As discussed below, we are codifying the staff’s current interpretive position that Rule 144 cannot be relied upon for the resale of the securities of reporting and non-reporting shell companies.68 The final conditions applicable to the resale under Rule 144 of restricted securities held by affiliates and non-affiliates of the issuer can be summarized as follows:
3. Tolling Provision In 1990, we eliminated a Rule 144 provision that tolled, or suspended, the holding period of a security holder maintaining a short position in, or any put or other option to dispose of, securities equivalent to the restricted securities owned by the security holder.69 We eliminated this provision in conjunction with an amendment to broaden a security holder’s ability to tack the holding periods of prior owners to the security holder’s own holding period.70 We previously have expressed concern regarding the effect of hedging activities designed to shift the economic risk of investment away from the security holder with respect to restricted securities.71 In the 1997 Proposing Release, we solicited comment on several alternatives designed to address these concerns.72 Seven commenters recommended that we adopt measures to eliminate or restrict hedging activities during the holding period.73 Six commenters recommended maintaining the status quo.74 Six other commenters suggested that we adopt a safe harbor for certain hedging activities that would be deemed permissible under Rule 144.75 In the 2007 Proposing Release, we acknowledged a concern about the effect of hedging activities in connection with the adoption of a six-month holding period for securities of reporting issuers. We noted that, when we eliminated the tolling provision in 1990, the Rule 144 holding periods were longer.76 We also expressed the view that the proposal to shorten the holding period to six months could make the entry into such hedging arrangements significantly easier and less costly because these arrangements would cover a much shorter period.77 We therefore proposed to reintroduce a Rule 144 tolling provision that would have suspended the holding period for restricted securities of Exchange Act reporting issuers while a security holder engaged in certain hedging transactions.78 However, we proposed that any suspension due to hedging would not have caused, under any circumstances, the holding period to extend beyond one year. Because the proposed tolling provision also would have worked in conjunction with the Rule 144 provisions that permit tacking of holding periods, a selling security holder would have been required to determine whether a previous owner of the securities had engaged in hedging activities with respect to the securities, if the selling security holder wished to tack the previous owner’s holding period to the holding period of the selling security holder. The proposed provision would have tolled the holding period during any period in which the previous owner held a short position or put equivalent position with respect to the securities, however, there would have been no tolling of the previous owner’s holding period if the security holder for whose account the securities were to be sold reasonably believed that no such short or put equivalent position was held by the previous owner. In connection with the proposed tolling provision, we also proposed other related changes to Rule 144. First, we proposed to require that information be provided in Form 144 regarding any short or put equivalent position held with respect to the securities prior to the resale of the securities. The second proposal related to the manner of sale requirements in paragraphs (f) and (g) of Rule 144.79 Several commenters objected to the proposed reintroduction of the tolling provision and suggested modifications to the proposed provision, if the Commission chose to adopt it.80 Commenters objecting to the proposed tolling provision provided the following reasons, among others, why the Commission should not adopt the proposed tolling provision:
Some commenters reasoned that if the Commission detects an increase in abuse after implementation of the revised holding period, as proposed, the Commission could modify its treatment of hedging activities.88 This would be consistent with the approaches taken by the Commission when it first adopted Rule 144, and in 1997 when commenters recommended that the Commission gain more experience with the shortened holding periods before making additional revisions.89 After considering the comments, we are not adopting the proposed tolling provision and related amendments. We note, in particular, the comments asserting that, in the current environment, the tolling provision would unduly complicate Rule 144 and could require security holders or brokers to incur significant costs to monitor hedging positions for purposes of determining whether they have met the holding period requirement. This would frustrate our primary objectives to streamline Rule 144 and reduce the costs of capital for issuers. We will revisit the issue if we observe abuse relating to the hedging activities of holders of restricted securities.90 C. Amendments to the Manner of Sale Requirements Applicable to Resales by Affiliates Before today’s amendments, the manner of sale requirements in Rule 144(f) required securities to be sold in “brokers’ transactions”91 or in transactions directly with a “market maker,” as that term is defined in Section 3(a)(38) of the Exchange Act.92Additionally, the rule prohibits a selling security holder from: (1) soliciting or arranging for the solicitation of orders to buy the securities in anticipation of, or in connection with, the Rule 144 transaction; or (2) making 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. In the 1997 Proposing Release, we proposed to eliminate the manner of sale requirements for the sale of both equity and debt securities alike, reasoning that the manner of sale requirements are not necessary to satisfy the purposes of Rule 144 and limit the liquidity of the security.93 Some commenters opposed this proposal, asserting that brokers help ensure that selling security holders are complying with the applicable Rule 144 conditions to resale.94 As discussed below, although we proposed to eliminate the manner of sale requirements only for debt securities and not equity securities in the 2007 Proposing Release, we requested comment on whether it would be appropriate to eliminate the manner of sale requirements for the sale of equity securities as well. The comments were mixed on this point. One commenter strongly discouraged the elimination of the manner of sale requirements for equity securities,95 while another supported such a change.96 One commenter did not object to retaining the manner of sale requirements for resales of equity securities of affiliates, on the grounds that affiliates generally find the assistance of a broker useful in navigating compliance with Rule 144 and thus brokers serve a useful function that is not unduly burdensome.97 Instead of completely eliminating the manner of sale requirements, some commenters requested that we consider expanding the methods to sell the securities permitted by the manner of sale requirements.98 For example, two commenters discussed amending the requirement to permit sales through alternative trading systems such as electronic venues where the broker’s identity is anonymous prior to trade execution.99 In response to comments, we are adopting amendments to the manner of sale requirements that apply to resales of equity securities of affiliates.100 We last made substantive amendments to the manner of sale requirements in 1978.101 Since then, the growth of technological and other developments directed at meeting the investment needs of the public and reducing the cost of capital for companies have led us to refine the rules governing the trading of securities.102 We believe that it is appropriate now to adopt two amendments to the manner of sale requirements so that the restrictions better reflect current trading practices and venues. First, we are adopting a change to Rule 144(f) to permit the resale of securities through riskless principal transactions in which trades are executed at the same price, exclusive of any explicitly disclosed markup or markdown, commission equivalent, or other fee, and the rules of a self-regulatory organization permit the transaction to be reported as riskless.103 We believe that these riskless principal transactions are equivalent to agency trades.104 As with agency trades, in order to qualify as a permissible manner of sale under the revised rule, the broker or dealer conducting the riskless principal transaction must meet all the requirements of a brokers’ transaction, as defined by Rule 144(g), except the requirement that the broker does no more than execute the order or orders to sell the securities as agent for the person for whose account the securities are sold. The broker or dealer must neither solicit nor arrange for the solicitation of customers’ orders to buy the securities in anticipation of or, in connection with, the transaction, must receive no more than the usual and customary markup or markdown, commission equivalent, or other fee, and must conduct a reasonable inquiry regarding the underwriter status of the person for whose account the securities are to be sold. Second, we are amending Rule 144(g) which defines “brokers’ transactions” for purposes of the manner of sale requirements. Under the definition of brokers’ transactions, a broker must neither solicit nor arrange for the solicitation of customers’ orders to buy the securities in anticipation of, or in connection with, the transaction. However, certain activities specified in three subparagraphs of Rule 144(g)(2) are deemed not to be a solicitation.105 We are adding another subparagraph covering the posting of bid and ask quotations in alternative trading systems that will also be deemed not to be a solicitation. This new provision permits a broker to insert bid and ask quotations for the security in an alternative trading system, as defined in Rule 300 of Regulation ATS,106 provided that the broker has published bona fide bid and ask quotations for the security in the alternative trading system on each of the last 12 business days.107 D. Changes to Rule 144 Conditions Related to Resales of Debt Securities by Affiliates 1. Comments Received on Proposed Amendments Relating to Debt Securities In the 2007 Proposing Release, we proposed to eliminate the manner of sale requirements in Rule 144 with regard to sales of debt securities by affiliates.108 We also requested comment on whether there were any other conditions in Rule 144, such as the volume limitations, to which debt securities should not be subject. In the 2007 Proposing Release, we included preferred stock and asset-backed securities in the “debt securities” category for purposes of the proposed elimination of the manner of sale requirements. Four commenters expressly supported the proposal to eliminate the manner of sale requirements for resales of debt securities,109 and we did not receive any comments objecting to the proposal. We also did not receive any comments objecting to the proposed inclusion of preferred stock and asset-backed securities in the definition of debt securities. We received a few comments that we should expand the definition of debt securities for the purposes of proposed changes to the manner of sale requirements.110 2. No Manner of Sale Requirements Regarding Resales of Debt Securities We are adopting the amendments to eliminate the manner of sale requirements for resales of debt securities held by affiliates, as proposed.111 We agree that, as financial intermediaries, brokers serve an important function as gatekeepers for promoting compliance with Rule 144,112 and we are concerned that eliminating the manner of sale requirements for equity securities would lead to abuse. However, we do not believe that the fixed income securities market raises the same concerns about abuse,113 and are persuaded that the manner of sale requirements may place an unnecessary burden on the resale of fixed income securities.114 Combined with the changes that we are making to the Rule 144(e) volume limitations, these amendments will permit holders of debt securities to rely on the Rule 144 to resell their debt securities in a way and amount that was not possible previously. As proposed, our definition of debt securities in Rule 144 includes non-participatory preferred stock (which has debt-like characteristics)115 and asset-backed securities (where the predominant purchasers are institutional investors including financial institutions, pension funds, insurance companies, mutual funds and money managers)116 in addition to other types of nonconvertible debt securities. This definition of debt securities is consistent with the treatment of such securities under Regulation S.117 3. Raising Volume Limitations for Debt Securities We also are adopting amendments to raise the Rule 144(e) volume limitations for debt securities. Before the amendments that we are adopting, under Rule 144(e), the amount of securities sold in a three-month period could not exceed the greater of: (1) 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 (2) the average weekly volume of trading in such securities, as calculated pursuant to provisions in the rule.118 In response to our request for comment regarding whether we should eliminate or revise any other conditions in Rule 144 with regard to debt securities, three commenters noted that the Rule 144(e) volume limitations effectively precluded resales of debt securities by affiliates.119 Debt securities generally are issued in tranches.120 We agree that, prior to our amendments, the volume limitations in Rule 144 constrained the ability of debt holders to rely on Rule 144 for the resales of their securities. For the same reasons that we are eliminating the manner of sale requirements for debt securities, we believe that it is appropriate to adopt an alternative volume limitation that is specifically applicable to the resale of debt securities. We are amending Rule 144(e) to permit the resale of debt securities in an amount that does not exceed ten percent of a tranche (or class when the securities are non-participatory preferred stock), together with all sales of securities of the same tranche sold for the account of the selling security holder within a three-month period.121 We believe that this new ten percent limitation provision will permit a more reasonable amount of trading in debt securities than the one percent limitation has permitted.122 These revised volume limitations also apply to resales of non-participatory preferred stock or asset-backed securities, which are defined as debt securities for purposes of Rule 144. E. Increase of the Thresholds that Trigger the Form 144 Filing Requirement for Affiliates Before today’s amendments, Rule 144(h) required a selling security holder to file a notice on Form 144 if the security holder’s intended sale exceeded either 500 shares or $10,000 within a three-month period.123 These filing thresholds had not been modified since 1972.124 In the 1997 Proposing Release, we proposed to increase the filing thresholds to 1,000 shares or $40,000. Thirteen commenters supported raising the filing threshold and no commenters opposed the idea.125 Some commenters suggested that we eliminate Form 144 altogether.126 One commenter suggested raising the threshold to $100,000.127 Another commenter suggested raising it to $250,000.128 In the 2007 Proposing Release, we proposed to increase the Form 144 filing thresholds to cover sales of 1,000 shares or $50,000 within a three-month period.129Some commenters specifically expressed support for raising the Form 144 filing thresholds.130 One of these commenters recommended filing thresholds of 10,000 shares or $100,000, if the Commission chose to retain a Form 144 filing requirement for affiliates.131 We are adopting the increased Form 144 filing thresholds with some modification. As proposed, we are raising the dollar threshold to $50,000 to adjust for inflation since 1972.132 After considering the comments, we are raising the share threshold to 5,000 shares, rather than the proposed 1,000 shares. We believe that the 5,000 share threshold is an appropriate alternate threshold for trades in amounts that may not reach the $50,000 dollar threshold, but that merit notice to the market. In the 2007 Proposing Release, we also solicited comment on whether we should coordinate the Form 144 filing requirements with Form 4 filing requirements. Many commenters supported a combination of the two forms.133 Although we are not adopting those changes today, we expect to issue a separate release in the future to provide affiliates that are subject to both the Form 4 and Form 144 filing requirements with greater flexibility in satisfying their requirements. F. Codification of Several Staff Positions In the 2007 Proposing Release, we proposed to codify several interpretive positions issued by the staff of the Division of Corporation Finance. We proposed to codify the first three staff positions listed below in both the 1997 Proposing Release and the 2007 Proposing Release, but we proposed to codify the last four staff positions listed below only in the 2007 Proposing Release. Some commenters expressed general support for the proposed codifications of staff interpretations relating to Rule 144.134 One commenter specifically expressed the view that the action should help to resolve any lingering confusion regarding the calculation of holding periods in the circumstances addressed by the interpretations.135We are adopting all of the codifications substantially as proposed. The codifications should make these interpretations more transparent and readily available to the public. 1. Securities Acquired under Section 4(6) of the Securities Act are Considered “Restricted Securities” In 1997, we first proposed to codify the Division of Corporation Finance’s interpretive position that securities acquired from the issuer pursuant to an exemption from registration under Section 4(6) of the Securities Act136 are considered “restricted securities” under Rule 144(a)(3).137 We did not receive any comments on this proposal at the time. In the 2007 Proposing Release, we again proposed to codify this position. We did not receive any comments. Section 4(6) provides for an exemption from registration for an offering that does not exceed $5,000,000 that is made only to accredited investors, that does not involve any advertising or public solicitation by the issuer or anyone acting on the issuer’s behalf and for which a Form D has been filed.138 Because the resale status of securities acquired in Section 4(6) exempt transactions should be the same as securities received in other non-public offerings that are included in the definition of restricted securities, we are of the view that securities acquired under Section 4(6) should be defined as restricted securities for purposes of Rule 144. Therefore, we are adopting an amendment to add securities acquired under Section 4(6) of the Securities Act to the definition of restricted securities, as proposed.139 2. Tacking of Holding Periods When a Company Reorganizes into a Holding Company Structure In 1997, we also proposed to codify the Division of Corporation Finance’s interpretive position that holders may tack the Rule 144 holding period in connection with transactions made solely to form a holding company.140 When “tacking,” holders may count the period during which they held the restricted securities of the predecessor company before the predecessor company reorganized into a holding company structure when calculating the holding period of the restricted securities of the holding company received in the reorganization. We did not receive any comments on this proposal. We again proposed to codify this interpretive position in the 2007 Proposing Release. Two commenters recommended codification of the staff interpretive position covering tacking, in certain circumstances, in connection with the reincorporation of the issuer in a different state.141 We did not receive any comments opposing this proposal. We are adopting this amendment to Rule 144(d), as proposed.142 This provision will permit tacking of the holding period if the following three conditions are satisfied:
In such transactions, tacking is appropriate because the securities being exchanged are substantially equivalent, and there is no significant change in the economic risk of the investment in the restricted securities. The amendment that we are adopting does not change the staff interpretive position that permits tacking in connection with the reincorporation of the issuer in a different state in certain situations. 3. Tacking of Holding Periods for Conversions and Exchanges of Securities The 1997 Proposing Release proposed codifying the Division of Corporation Finance’s position that, if the securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms.143 As noted in the 1997 release, Rule 144 does not state whether the surrendered securities must have been convertible by their terms in order for tacking to be permitted, which led to some confusion on how to calculate the Rule 144 holding period. We did not receive any comments on this proposal. 140 See the Division of Corporation Finances letter to Planning Research Corp. (Dec. 8, 1980). We again proposed this amendment to Rule 144(d)(3)(ii) in the 2007 Proposing Release. In addition, we proposed a note to this provision that clarifies the Division’s position that if:
One commenter expressed support for this proposed amendment.145 Another commenter provided a suggestion for a technical change to the proposed note, that the phrase “so long as the conversion or exchange itself meets the conditions of this section,” be deleted.146 We are adopting the changes to Rule 144(d), substantially as proposed.147In response to comment, we are further clarifying the note to Rule 144(d)(3)(ii) to clarify that the newly acquired securities shall be deemed to have been acquired at the same time as the amendment to the surrendered securities, so long as, in the conversion or exchange, the securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer. 4. Cashless Exercise of Options and Warrants Several commenters responding to the 1997 Proposing Release suggested that we codify the Division of Corporation Finance’s position that, upon a cashless exercise of options or warrants, the newly acquired underlying securities are deemed to have been acquired when the corresponding options or warrants were acquired, even if the options or warrants originally did not provide for cashless exercise by their terms.148 In the 2007 Proposing Release, we proposed to revise Rule 144 to codify that position. We also proposed to add two notes to this new paragraph. As proposed, the first note would codify the Division’s position that if:
issuer, to amend the options or warrants to allow for cashless exercise, then the amended options or warrants would be deemed to have been acquired on the date that the original options or warrants were so amended.149 This treatment is analogous to our treatment of conversions and exchanges. The second note would codify the Division’s position that the grant of certain options or warrants that are not purchased for cash or property does not create an investment risk in a manner that would justify tacking the holding period for the options or warrants to the holding period for the securities received upon exercise of the options or warrants.150 This is the case for options granted under an employee benefit plan. The note would clarify that, in such instances, the holder would not be allowed to tack the holding period of the option or warrant and would be deemed to have acquired the underlying securities on the date the option or warrant was exercised, if the conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of exercise. Three commenters supported the codification of the staff interpretation relating to the cashless exercise of options and warrants.151 Some commenters believed that the proposed rule should be expanded,152 such as to include warrants and options that have only a de minimis exercise price.153 One commenter suggested that we delete the phrase “so long as the conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of exercise,” in the second proposed note.154 We are adopting the amendments, substantially as proposed.155 In response to comment, we have further clarified the second note to Rule 144 to make it clear that the newly acquired securities shall be deemed to have been acquired at the same time as the amendment to the options or warrants so long as the exercise itself was cashless.156 5. Aggregation of Pledged Securities In response to suggestions from commenters on the 1997 proposals, we proposed in the 2007 Proposing Release to add a note that would how a pledgee of securities should calculate the Rule 144(e) volume limitation condition.157 The note would codify the Division of Corporation Finance’s position that, so long as the pledgees are not the same “person” under Rule 144(a)(2), a pledgee of securities may sell the pledged securities without having to aggregate the sale with sales by other pledgees of the same securities from the same pledgor, as long as there is no concerted action by those pledgees.158 As an example, assume that a security holder (the pledgor) pledges the securities he owns in Company A to two banks, Bank X and Bank Y (the pledgees). If the pledgor defaults:
Provided that the loans and pledges are bona fide transactions and there is no concerted action among pledgees and no other aggregation provisions under Rule 144(e) apply, we do not believe that extra burdens on pledgees to track and coordinate resales by other pledgees are warranted. We received no comments on this proposal, and we are adopting the amendment to Rule 144(e), as proposed.159 6. Treatment of Securities Issued by “Reporting and Non-Reporting Shell Companies” A blank check company is a company that:
Such companies historically have provided opportunity for abuse of the federal securities laws, particularly by serving as vehicles to avoid the registration requirements of the securities laws.161 Rule 419 under the Securities Act162 was adopted in 1992 to control the extent to which such companies are able to access funds from a public offering. In 2005, we amended Securities Act Rule 405163 to define a “shell company” to mean a registrant, other than an asset-backed issuer, that has: (1) no or nominal operations; and (2) either:
On January 21, 2000, the Division of Corporation Finance concluded in a letter to NASD Regulation, Inc. that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies.165 In an effort to curtail misuse of Rule 144 by security holders through transactions in the securities of blank check companies, we proposed to codify this position with some modifications. First, we proposed to modify the staff interpretation to address securities of all companies, other than asset-backed issuers, that meet the definition of a shell company, including blank check companies. The category of companies to whom the staff interpretation was proposed to apply is broader than the Rule 405 definition of a “shell company,” however, as it would apply to any “issuer” meeting that standard, whereas the Rule 405 definition refers only to “registrants.” For purposes of the discussion in this release only, we call these companies, “reporting and non-reporting shell companies.” Under the proposed rule, a person who wishes to resell securities of a company that is, or was, a reporting or a non-reporting shell company, other than a business combination related shell company,166 would not be able to rely on Rule 144 to sell the securities. Several commenters provided comments on the proposal to codify this staff interpretation with some modification. Some commenters expressed support for the proposed codification,167 with one commenter noting that most micro-cap frauds result from the purchase and sale of securities issued by shell companies.168 Two commenters expressed concern that expanding the staff interpretation to shell companies would prohibit reliance on Rule 144 by security holders of businesses attempting to implement real business plans that technically meet the definition of a shell company, but are not blank check companies.169 One commenter recommended that the Commission only preclude reliance on Rule 144 for the resale of securities if they were issued at the time the issuer was a shell company.170 We are adopting, as proposed, the amendment to prohibit reliance on Rule 144 for the resale of securities of a company that is a reporting or a non-reporting shell company.171 Under the amended rules, Rule 144 will not be available for the resale of securities initially issued by either a reporting or non-reporting shell company (other than a business combination related shell company) or an issuer that has been at any time previously a reporting or non-reporting shell company, unless the issuer is a former shell company that meets all of the conditions discussed below.172 In another part of our proposal regarding the resale of securities of reporting and non-reporting shell companies, we proposed to modify the staff interpretation to make Rule 144 available for resales of securities of companies that were formerly shell companies under provisions that are similar to other provisions that permit the use of a Securities Act Form S-8173 registration statement by reporting companies that were former shell companies.174 Under the proposal, despite the general prohibition against reliance on Rule 144 with respect to securities acquired by shell companies or former shell companies, a security holder would have been able to resell securities subject to Rule 144 conditions if the issuer:
“Form 10 information” is equivalent to information that a company would be required to file if it were registering a class of securities on Form 10 or Form 20-F under the Exchange Act.175 This information is ordinarily included in a Form 8-K if the former shell company has been filing Exchange Act reports.176 As proposed, the Rule 144(d) holding period for restricted securities sold under this provision would have commenced at the time that the Form 10 information was filed. We are adopting this part of the amendments, with some modification.177 We have modified the proposal to require at least one year to elapse after Form 10 information is filed with Commission before a security holder can resell any securities of an issuer that was formerly a shell company subject to Rule 144 conditions. We believe that the one-year period is necessary for investor protection given the comments relating to the abuse and micro-cap fraud occurring in connection with the securities of shell companies. Both restricted securities and unrestricted securities will be subject to the same one-year waiting period. Thus, under the amendments that we are adopting, Rule 144 is available for the resale of restricted or unrestricted securities that were initially issued by a reporting or non-reporting shell company or an issuer that has been at any time previously a reporting or non-reporting shell company, only if the following conditions are met:
One commenter requested clarification on when a Form 10 is deemed filed, if the staff is undertaking a review of the filing, and recommended that the Form 10 should be deemed filed when the information is filed initially with the Commission.178 To promote consistency and to provide a date that security holders can rely upon, the Form 10 information will be deemed filed when the initial filing is made with the Commission, rather than when the staff of the Division of Corporation Finance has completed its review of the filing or an amendment is made in response to staff comments, for purposes of the amendments.179 Some commenters recommended that we permit security holders of non-reporting companies that have merged with a private operating company and therefore have ceased to be shell companies to be able to rely on Rule 144.180 We are not adopting a provision to permit this, because we believe that Form 10 type information and Exchange Act reporting requirements are important in protecting against potential abuse. 7. Representations Required from Security Holders Relying on Exchange Act Rule 10b5-1(c) Rule 10b5-1181 under the Exchange Act defines when a purchase or sale constitutes trading “on the basis of” material nonpublic information in insider trading cases brought under Exchange Act Section 10(b)182 and Rule 10b-5.183 Specifically, a purchase or sale of a security of an issuer is “on the basis of” material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale. However, Rule 10b5-1(c) provides an affirmative defense that a person’s purchase or sale was not “on the basis of” material nonpublic information. For this defense to be available, the person must demonstrate that:
Form 144 requires a selling security holder to represent, as of the date that the form is signed, that he or she “does not know any material adverse information in regard to the current and prospective operations of the issuer of the securities to be sold which has not been publicly disclosed.” The Division of Corporation Finance has indicated that a selling security holder who satisfies Rule 10b5-1(c) may modify the Form 144 representation to indicate that he or she had no knowledge of material adverse information about the issuer as of the date on which the holder adopted the written trading plan or gave the trading instructions. In this case, the security holder must specify that date and indicate that the representation speaks as of that date.184 In order to reconcile the Form 144 representation with Rule 10b5-1, we proposed to codify this interpretive position. Under the proposed amendments, Form 144 filers would be able to make the required representation as of the date that they adopted written trading plans or gave trading instructions that satisfied Rule 10b5-1(c). We did not receive any comments specifically on this proposal. We are adopting this amendment, as proposed.185 G. Amendments to Rule 145 Securities Act Rule 145186 provides that exchanges of securities in connection with reclassifications of securities, mergers or consolidations or transfers of assets that are subject to shareholder vote constitute sales of those securities. Unless an exemption from the registration requirement is available, Rule 145(a) requires the registration of these sales. Rule 145(c) deems persons who were parties to such a transaction, other than the issuer, or affiliates of such parties to be underwriters. Rule 145(d) permits the resale, subject to specified conditions, of securities received in such transactions by persons deemed underwriters. In the 1997 Proposing Release, we proposed to eliminate the presumed underwriter and resale provisions in Rule 145(c) and (d). Many commenters supported the 1997 proposal.187 In the 2007 Proposing Release, we proposed amendments to Rule 145(c) and (d) that would:
in Rule 144 that would apply to securities of shell companies. Under the proposed rule, where a party to a Rule 145(a) transaction, other than the issuer, is a shell company (other than a business combination related shell company), the party and its affiliates could resell securities acquired in connection with the transaction only in accordance with Rule 145(d). Five commenters expressly supported the proposed changes to Rule 145.189 Two commenters requested that we reassess the impact of the proposed Rule 145 amendments on the staff’s position that stock received in a reorganization that is exempt from registration pursuant to Section 3(a)(10) of the Securities Act190 could be publicly resold pursuant to Rule 145(d)(2).191 After considering the comments, we believe that it is appropriate to adopt the amendments to Rule 145, as proposed. The presumptive underwriter provision in Rule 145 is no longer necessary in most circumstances. However, based on our experience with transactions involving shell companies that have resulted in abusive sales of securities, we believe that there continues to be a need to apply the presumptive underwriter provision to reporting and non-reporting shell companies and their affiliates and promoters. We are amending Rule 145 to eliminate the presumptive underwriter provision except when a party to the Rule 145(a) transaction is a shell company.192 Rule 145(c) now provides that any party, other than the issuer, to a Rule 145(a) transaction involving a shell company (but not a business combination related shell company), including any affiliate of such party, who publicly offers or sells securities of the issuer acquired in connection with the transaction, will continue to be deemed an underwriter.193 Under the amendments to Rule 145 that we are adopting, if the issuer has met the requirements of new paragraph (i)(2) of Rule 144,194 the persons and parties deemed underwriters will be able to resell their securities subject to paragraphs (c), (e), (f), and (g) of Rule 144 after at least 90 days have elapsed since the securities were acquired in the transaction. After six months have elapsed since the securities were acquired in the Rule 145(a) transaction, the persons and parties will be permitted to resell their securities, subject only to the Rule 144(c) current public information condition, provided that the sellers are not affiliates of the issuer at the time of sale and have not been affiliates during the three months before the sale. After one year has elapsed since the securities were acquired in the transaction, the persons and parties will be permitted to resell their securities without any limitations under Rule 145(d), provided that they are non-affiliates at the time of sale and have not been affiliates during the three months before the sale. In addition, we are adopting, as proposed, a note to paragraphs (c) and (d) of Rule 145 that paragraph (d) is not available with respect to any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.195 We have included a similar statement in the Preliminary Note to Rule 144. We also are adopting, as proposed, the clarification to the language in Rule 145(d) regarding the securities that were acquired in a transaction specified in Rule 145(a).196 H. Conforming and Other Amendments 1. Regulation S Distribution Compliance Period for Category Three Issuers The purpose of the distribution compliance period in Regulation S197 is to ensure that during the offering period and in the subsequent aftermarket trading that takes place offshore, the persons complying with the Rule 903198 safe harbor (issuers, distributors and their affiliates) are not engaged in an unregistered, non-exempt distribution of securities into the United States capital markets.199 In the 2007 Proposing Release, we requested comment on whether to amend Regulation S to conform the one-year distribution compliance period in Rule 903(b)(3)(iii) for Category 3 issuers (U.S. reporting issuers) to the proposed six-month Rule 144(d) holding period, or to retain the one-year distribution compliance period. Several commenters recommended revising the Regulation S distribution compliance period in Rule 903(b)(3)(iii) to coincide with the six-month holding period under a revised Rule 144.200 Commenters reasoned, among other things, that such a revision is logical and would promote consistency among the rules.201 We did not receive any comment letters objecting to such an amendment to Regulation S. When Regulation S was amended in 1998, the distribution compliance period was revised to coincide with the Rule 144(d) holding period.202 In making this revision, we noted that a distribution compliance period that is longer than the Rule 144 holding period is unnecessary and could be confusing to apply. For the same reason, we are amending Regulation S to conform the distribution compliance period in Rule 903(b)(3)(iii) for Category 3 reporting issuers to the amendments to the Rule 144 holding period.203 As a result, U.S. reporting issuers will be subject to a distribution compliance period of six months under Regulation S. 2. Underlying Securities in Asset-Backed Securities Transactions In 2004, we adopted Securities Act Rule 190 to clarify when registration of the sale of underlying securities in asset-backed securities transactions is required.204 One of the basic premises underlying asset-backed securities offerings is that an investor is buying participation in the underlying assets. Therefore, if the assets being securitized are themselves securities under the Securities Act (commonly referred to as a “resecuritization”), the offering of the underlying securities must itself be registered or exempt from registration under the Securities Act. Rule 190 provides the framework for determining if registration of the sale of these underlying assets is required at the time of the registered asset-backed securities offering. One of the requirements of Rule 190 is that the depositor must be free to publicly resell the securities without registration under the Securities Act.205 Before the amendments that we are adopting, this provision noted as an example that if the underlying securities are Rule 144 restricted securities, under the conditions of the previous Rule 144(k), at least two years must have elapsed from the date the underlying securities were acquired from the issuer, or an affiliate of the issuer, and the date they are pooled and resecuritized pursuant to Rule 190. The changes to Rule 144 with no concurrent revision to Rule 190 would have allowed privately placed debt or other asset-backed securities to be publicly resecuritized in as little as six months after their original issuance without registration of the underlying securities.206 Given that Rule 190 addresses the public distribution of privately placed securities via resecuritization transactions, we proposed to revise Rule 190 to retain the current two-year period for resecuritizations that do not require registration of the underlying securities.207 A particular issuance of asset-backed securities often involves one or more publicly offered classes (e.g., classes rated investment grade) as well as one or more privately placed classes (e.g., non-investment grade subordinated classes). In most instances, the subordinated classes act as structural credit enhancement for the publicly offered senior classes by receiving payments after, and therefore absorbing losses before, the senior classes. These unregistered asset-backed securities are typically rated below investment grade, or are unrated, and as such could not be offered on Form S-3. They typically are not fungible with registered securities from the same offering and are held by very few investors. Further, the trust or issuing entity usually ceases reporting under the Exchange Act with respect to the publicly offered classes after its initial Form 10-K is filed. We understand that the privately placed subordinated securities in these transactions are often the types of securities that are pooled and resecuritized into new asset-backed securities.208 One commenter provided comments on the proposal to retain the two-year period for resecuritizations that do not require registration of the underlying securities.209 The commenter submitted that the proposed two-year holding period for resecuritizations should be shortened to no more than six months (or twelve months, if tolling were to be reinstituted). With respect to non-asset-backed securities (e.g., corporate debt), the commenter stated that we should permit securitization without registration during the revised period, as these securities face fewer complications and are not the focus of our concerns. Due to the particular circumstances of asset-backed securities and our experience with a two-year period under both Regulation AB and the prior staff positions that were codified by those rules, we are not making any changes to shorten the current two-year holding period for restricted securities that are to be resecuritized in publicly registered offerings. In light of the changes that we are making to Rule 144, we are amending Rule 190 to provide that if the underlying securities are restricted securities, Rule 144 is available for the sale of the securities in the resecuritization, if at least two years have elapsed since the later of the date the securities were acquired from the issuer of the underlying securities or from an affiliate of the issuer of the underlying securities.210 Of course, the underlying securities could still be resecuritized if they do not meet this requirement; their sale would need to be concurrently registered with the offering of the asset-backed securities on a form for which the offering of the class of underlying securities would be eligible. In addition, nothing in Rule 190, as amended, will lengthen the six-month holding period of the underlying securities under Rule 144 for resales other than in connection with publicly registered resecuritizations. 3. Securities Act Rule 701(g)(3) Securities Act Rule 701(g)(3)211 outlines the resale limitations for securities issued under Rule 701. The limitations for resales by non-affiliates includes references to paragraphs (e) and (h) of Rule 144, which under the amendments that we are adopting no longer apply to resales by non-affiliates. We received one comment on the conforming change, and the commenter concurred with the proposed amendment to Securities Act Rule 701(g)(3).212 Accordingly, we believe that it is appropriate to conform the resale restrictions of securities acquired pursuant to employee benefit plans under Rule 701 of the Securities Act. We are adopting the amendment to remove references to Rule 144(e) and (h) from Rule 701.213 III. Paperwork Reduction Act A. Background Our amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).214 We submitted the amendments to Form 144 to the Office of Management and Budget (OMB) for review in accordance with the PRA.215 OMB has approved the revision. The title for the information collection is “Notice of Proposed Sale of Securities Pursuant to Rule 144 under the Securities Act of 1933” (OMB Control No. 3235-0101). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a current valid control number. The primary purpose of this collection of information is the disclosure of a proposed sale of securities by security holders deemed not to be engaged in the distribution of the securities and therefore not underwriters. Form 144 may be filed in paper or electronically using the EDGAR filing system. Form 144 filings are publicly available. Persons reselling securities in reliance on Rule 144 are the respondents to the information required by Form 144. The information collection requirements imposed by Form 144 are mandatory. B. Summary of Amendments In the 2007 Proposing Release, we proposed an amendment to the Form 144 filing requirement to eliminate the need for non-affiliates of the issuer to file Form 144 in order to sell their securities under Rule 144. In addition, the proposal would have raised the filing threshold for Form 144 to 1,000 shares or $50,000 worth of securities during a three-month period. Currently, the Form 144 filing threshold is 500 shares or $10,000. The proposed amendments also included two other minor changes to Form 144.216 The 2007 Proposing Release included a PRA analysis. We received one comment letter addressing this analysis. The commenter noted that our estimate of burden hours necessary to complete a notice on Form 4 is 0.5 hours, while we estimate that it takes 2.0 burden hours to complete Form 144.217 This commenter believed our estimates for the two forms should be comparable. Because this commenter estimated that it takes only three minutes on average to key and proof Form 144 data items, the commenter believed that 0.5 hours is probably a more accurate estimate of the burden hours needed to complete the Form 144. In addition, in response to comment, we are raising the thresholds that trigger a Form 144 filing requirement to 5,000 shares or $50,000 of securities within a three month period, from the proposed thresholds of 1,000 shares or $50,000. Therefore, we are adjusting our paperwork burden estimates for Form 144. C. Revised Burden Estimates Due to comment and the changes that we are adopting, we are publishing revised burden estimates for Form 144. Currently, we estimate that 60,500 notices on Form 144 are filed annually for a total burden of 121,000 hours.218 As noted in the proposing release, the amendments that eliminate the need for non-affiliates to file Form 144 notices will decrease the annual Form 144 filings by approximately 45%. As a result, we estimate that the number of annual Form 144 filings will be reduced from 60,500 filings to 33,373 filings.219 In addition, we estimate that increasing the Form 144 filing thresholds from 500 shares or $10,000 to 5,000 shares or $50,000 will further reduce the number of Form 144 filings that we receive annually by approximately 30% (10,012 fewer filings).220 After considering the comment letter that we received on the current PRA estimate for Form 144, we estimate that each notice on Form 144 imposes a burden for PRA purposes of one hour. Therefore, under these revised estimates, the amendments that we are adopting will reduce the burden on selling security holders who sell the securities under Rule 144 by a total of approximately 37,139 burden hours. D. Solicitation of Comments Pursuant to 44 U.S.C. 3506(c)(2)(A), we request comments to (1) evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information would have practical utility; (2) evaluate the accuracy of our estimate of the burden of the proposed collection of information; (3) determine whether there are ways to enhance the quality, utility and clarity of the information to be collected; and (4) evaluate whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Persons submitting comments on the collection of information requirements should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-9303, with reference to File No. S7-11-07. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-11-07, and be submitted to the Securities and Exchange Commission, Public Reference Room, 100 F Street, NE, Washington, DC 20549-0609. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. IV. Cost-Benefit Analysis A. Background Rule 144 under the Securities Act of 1933 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act. Specifically, a selling security holder is deemed not to be an underwriter under Section 2(a)(11), and therefore may take advantage of the Section 4(1) exemption and need not register its sale of securities, if the sale complies with the provisions of the rule. Securities Act Rule 145 requires Securities Act registration of certain types of business combination transactions, unless an exemption from the registration requirement is available. Rule 145 contains a safe harbor provision similar to Rule 144 for presumed underwriters who receive securities in such a business combination transaction. Form 144 is required to be filed by persons intending to sell securities in reliance on Rule 144 if the amount of securities to be sold in any three-month period exceeds specified thresholds. The primary purpose of the form is to publicly disclose the proposed sale of securities by persons deemed not to be engaged in the distribution of the securities. B. Description of Amendments We are adopting, substantially as proposed, amendments to Rule 144, Rule 145, and Form 144 that will accomplish the following:
Benefits We believe that the amendments will reduce the cost of complying with Rules 144 and 145. We examined the Forms 144 that were filed with the Commission since 1997.221 In 2006, the volume of transactions filed under Rule 144 exceeded $71 billion, and more than 50% of U.S. public companies, large and small alike, every year have had at least one transaction reported on Form 144. Reducing the burden associated with these transactions can reduce the cost of capital to these companies. One item on Form 144 requires security holders to provide information on the nature of the acquisition transaction. Some Form 144 filers acquire their securities from the issuer as a private investment, while others receive the securities as part of their employee awards, or as a form of payment for services to the issuer. Reducing the burden associated with selling these securities not only can reduce the cost of raising capital, but also may increase the value of these securities in non-cash transactions and thereby may reduce the cost of services and employment. For the most part, transactions that have been reported on Form 144 have been small. In 2006, about 90% of the transactions had a market value of less than $2 million and 99% of these transactions had a market value of less than $20 million. More than half of the investors report total annual transactions of a market value of less than $240,000 with any specific issuer. Thus, reducing the costs associated with filing Form 144 and raising the thresholds that trigger a Form 144 filing requirement are likely to affect a large number of investors. We expect that the increase in the value of these securities will come from several sources under the amendments we are adopting. The first is the increase in the liquidity of the securities. Investors, suppliers, or employees who are restricted from selling securities and who cannot hedge their positions are generally exposed to more risk than those who are not subject to such limitations, and generally require higher compensation (or a larger discount with respect to the securities) for this risk.222 We also should expect that the longer the non-trading period, the higher the premium that investors will charge for their lack of liquidity.223 Thus, reducing the time limit for selling these securities in the market is likely to reduce the discount that investors will charge for these securities, or the amount of securities that the issuer will need to provide for services. The actual reduction in this cost of capital will depend on the extent to which the six-month limit has a binding impact on security holders’ decisions to resell their securities, and the extent to which investors, employees, or service providers can protect themselves against such exposure. Commenters expressed support for the belief that the proposals would increase liquidity for issuers and make capital investment more attractive without sacrificing investor protection.224 Some commenters also stated that the proposals would decrease the cost of capital for smaller companies.225 One commenter noted that if the proposals are adopted, companies will have greater financing options, which will save them time and resources.226 One commenter noted that the reduction of the holding period requirement will reduce costs involved in any private investment in public equity financings, since investors will be incurring less risk in holding restricted securities.227 Also, resale transactional costs for non-affiliate selling security holders should decrease as a result of the removal of all conditions other than the holding period condition and the current public information condition applicable to non-affiliates of reporting issuers. Reducing restrictions on resales by non-affiliates should streamline the rule and reduce the complexity of the rule. This and other simplifications of Rule 144 and its Preliminary Note should make it easier to understand and follow, reducing the time that investors must spend analyzing whether or not they can rely on the rule as a safe harbor from the requirement to register the resale of their securities. The differences in holding period conditions between resales of securities of reporting issuers and resales of securities of non-reporting issuers, however, adds some complexity to the rule that may diminish the effect of simplifying other aspects of the rule. Under the amendments, non-affiliates no longer are required to file Form 144 or comply with the manner of sale requirements and volume limitations, after the Rule 144(d) holding period requirement is met. Therefore, they will save the cost of preparing and filing Form 144, as well as the transactional costs related to complying with the manner of sale requirements and volume of sale limitations. As noted above, we estimate that the amendments reducing the restrictions applicable to non-affiliates will decrease the annual Form 144 filings by approximately 45%. In addition, the increase in the Form 144 filing thresholds should further reduce the number of transactions for which Form 144 needs to be filed for proposed sales of securities held by affiliates of the issuer. This will eliminate the cost of preparing and filing the form for transactions that fall below the new thresholds. The elimination of the manner of sale requirements, combined with the relaxation of volume limitations, applicable to resales of debt securities will reduce costs for debt security holders. It is difficult to estimate the amount of reduction. Among the Forms 144 filed with the Commission in 2005, we found at least 200 filings covering a sale of debt securities, although we believe the actual number of debt securities resales relying on Rule 144 may be higher than this.228 The elimination of the manner of sale requirements for resales of debt securities may also reduce brokers’ fees and, therefore, result in a reduction of revenue for brokers. In the 2007 Proposing Release, we requested comment on whether to eliminate the manner of sale requirements also for resales of equity securities. After considering the comments, we are retaining and amending the manner of sale requirements for resales of equity securities by affiliates. We believe that the amendments we are adopting will benefit investors and companies by modernizing Rule 144 so that it better reflects current trading practices and venues for sales of securities.229 The codification of existing staff interpretive positions should not create added cost to companies or investors because, substantively, there is no expected change in practice as a result of the codification.230 However, these codifications should provide substantial benefit to the investing community by clarifying and better publicizing the staff’s positions. Greater clarity and transparency of our rules should reduce security holders’ transactional costs by eliminating uncertainty and reducing the need for legal analysis. We received one comment letter in support of this reasoning, noting that codification of the staff’s interpretive positions should help to resolve any lingering confusion and assist in making Rule 144 more readily understandable to market participants.231 Another commenter noted that the codification of staff interpretations should reduce legal research costs for those who are considering the question for the first time.232 The amendments to Rule 145 remove what we believe are unnecessary restraints on the resale of securities by parties, or their affiliates, to a merger, recapitalization, or other transaction listed in Rule 145(a). The amendments to Rule 145 will reduce costs incurred by companies, parties to the transaction, and their affiliates to comply with the resale and other restrictions of the rule. Retaining the presumptive underwriter provision for transactions involving shell companies is intended to preserve for investors protection against manipulative practices or abusive sales by parties to the transaction and their affiliates after the completion of the Rule 145 transaction. D. Costs Relative to other options, the choice to register equity securities is attractive to issuers, because issuers can assure investors that there will be a liquid aftermarket for their equity securities. However, in the 2007 Proposing Release, we noted that reducing the requirements under Rule 144 might also cause a substitution effect, where companies might choose to rely more on private transactions than on public transactions to raise capital. Also, reducing the requirements under Rule 144 could also lead to the movement of certain investors from public transactions to private transactions. We also acknowledge that there is the risk that the market will not be informed about the nature of these transactions, given that these transactions are not required to be registered and given the changes to the Form 144 filing requirements. The market may also be less informed, given that restricted securities of reporting companies could be resold by non-affiliates earlier without satisfying the condition that current information on the issuer of the securities be publicly available, and restricted securities of non-reporting companies could be resold by non-affiliates without current information on the issuer ever being publicly available. This, in return, could lead to a less efficient price formation. Direct negotiated deals with companies could also lead to informational advantage of some investors. The effect of the amendments on t |
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