July 10th, 2014 By Virtual Paralegal Services

144A is a SEC rule that allows (within specified circumstances) qualified institutional investors to trade unregistered securities on the NASDAQ Portal Market for investment purposes – but not for resale to the general public. The purpose of 144A is to enable a more efficient and liquid resale market for unregistered securities. This makes it easier for:

  • Private companies to raise money in US capital markets
  • Institutional investors to trade restricted non-registered securities

While section 5 of the Securities Act of 1933 requires all offers and security sales to be registered, it allows for exemptions. The US Securities and Exchange Commission states that Rule 144A provides the exemption, permitting the resale of restricted securities (securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer) if specified conditions are met, including:

  • Holding period: the issuer must have held the securities for one year – if the issuing company was subject to the reporting requirements of the 1934 Act, the required holding period is reduced to six months.
  • Current Public Information: The issuing company must provide the public with sufficient information regarding the nature of the business. They must also provide a complete list of all officers and directors and an up-to-date financial statement.
  • Trading Volume Formula: the amount of equity securities which can be sold in a given 3-month period are bound by the 1% measurement guideline.
  • Ordinary brokerage transactions:

 – Affiliates must conduct sales as routine trading transactions
 – Brokers and sellers may not solicit orders to purchase securities
 – Brokers are limited to standard commission

  • Filing Proposed Sale Notice with the SEC: A notice must be filed using Form 144

 – For sales of 5,000+ shares to totaling $50,000+ w/in a three-month period
 – Securities must be sold within three months of filing the notice
 – If sales are not completed, an amendment notice must be filed

  • The legend has been removed:

 – Only transfer agents can remove legends
 – Transfer agent must obtain the issuer’s consent
 – If a dispute over the removal of a legend arises, said dispute is covered by state law, rather than federal

Rule 144A also allows for general solicitation and reduced publicity restrictions, freeing the issuer from compliance with rule 135c under the securities act. The new rule permits offering participants to communicate with prospective investors in Rule 144A offerings with no limit as to the method of communication or the number or type of investors (QIBs or non-QIBs) contacted using the following methods:

  • Mass emails
  • Advertisements
  • Cold calls
  • Articles, Interviews, and other communications

All of the above can be distributed via printed materials, television and radio broadcasts, or online. They, however, remain subject to anti-fraud provisions under federal security laws. In addition, there must be reasonable evidence that all sales are made to qualified institutional buyers.

Virtual Paralegal Services provides senior securities paralegal support to law firms and businesses across the United States. Contact us to learn how we can assist you.

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