On December 22, 2020, the Securities and Exchange Commission voted to propose amendments to Rule 144 under the Securities Act of 1933 (the Securities Act) relating to tacking of holding periods for certain “market-adjustable securities.” Under the proposed rules, the Rule 144 holding period with respect to the underlying securities of these market-adjustable securities would not commence until such securities are acquired from the issuer upon conversion or exchange. The SEC also proposed amendments related to Form 144 filings, including mandating that such filings be made electronically.
Rule 144 Background
Generally, all offers and sales of securities in the United States must be registered with the SEC, unless an exemption from registration is available. Rule 144 provides a non-exclusive safe harbor for the resale of restricted securities (securities acquired directly from an issuer in an unregistered transaction) and is also applicable in the case of the resale of control securities (securities held by affiliates of the issuer). If a transaction satisfies the requirements of Rule 144, then the holder is not deemed a statutory “underwriter” and not engaged in a “distribution” within the meaning of the Securities Act and may resell the restricted securities, including in the public markets, without registration.
Among other requirements, under Rule 144, the holder of restricted securities must satisfy the minimum holding period required by Rule 144, which in the case of securities of a public reporting company is six months. The holding period requirement helps ensure that the holder has assumed the full economic risk of the investment and is not otherwise acting as a conduit for the issuer in selling securities to the public.
Importantly, Rule 144 provides for the “tacking” of the holding period in certain situations. In particular, Rule 144(d)(3)(ii) allows a holder to tack the holding period with respect to securities that were acquired from the issuer solely in exchange for other securities of the same issuer. Accordingly, in the case of convertible or exchangeable securities, the holding period with respect to shares acquired directly from the issuer upon conversion or exchange of securities of such issuer is deemed to have commenced upon the initial acquisition of the convertible or exchangeable security, not the later acquisition of the underlying security.
Proposed Amendments — Market-Adjustable Securities
The SEC’s proposed amendments provide that the holding period for securities acquired upon conversion or exchange of “market-adjustable securities” issued by unlisted issuers does not begin until the conversion or exchange, as opposed to upon the initial issuance of the market-adjustable securities as currently provided for in Rule 144(d)(3)(ii).
Unlike conventional convertible and exchangeable securities that typically convert or exchange based on a fixed price (subject to customary anti-dilution protections) and, thus, subject the holder to the economic risk based on the performance of the underlying security, market-adjustable securities do not contain a fixed conversion price. Instead, the holders have the right to convert at a conversion price based on the market price of the underlying securities at the time of conversion or exchange, and typically at a discount to such market price. Market-adjustable securities protect the holder against general decreases in the market value of the underlying securities. As a result, the holder is not subject to the same economic risk of a decline in the market value of the underlying security as is a holder of a conventional convertible or exchangeable security with a fixed conversion price or exchange price. Such market-adjustable securities have been referred to as “death spiral” or “toxic” securities and, the SEC noted, tend to have been issued by a subpopulation of issuers, who are unable to issue conventional fixed rate securities due to being financially distressed, low revenue companies or approaching bankruptcy.
The proposed amendments would not allow tacking in the case of these market-adjustable securities only when:
- The underlying securities were acquired from an issuer that, at the time of the conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange; and
- The securities contain terms, such as conversion rate or price adjustments, that offset, in whole or part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than customary adjustments for stock splits, dividends or other issuer-initiated changes in capitalization (but not price-based anti-dilution).
The SEC excluded securities of listed issuers from the proposed new rule on the grounds that such issuers are subject to stock exchange listing requirements, including rules requiring shareholder approval for issuances of 20 percent or more of the issuer’s common stock, that provide additional investor protections.
Other Proposed Amendments
An affiliate of an issuer selling securities in reliance on Rule 144 must file a notice of the sale on Form 144, if such affiliate intends to sell, during a three-month period, an amount exceeding 5,000 shares or securities with an aggregate sales price of more than $50,000. Currently, the Form 144 must be filed concurrently with the placing of a sales order with a broker or the execution of a sale directly with a market maker. For securities of issuers subject to the reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act), the Form 144 may be filed either electronically through the SEC’s EDGAR system or in paper format. Historically, the vast majority of Form 144 filings have been made in paper format, limiting the ability of the public to review such filings without access to specialized reporting databases. Electronic filings, on the other hand, are more easily accessed through the SEC’s publicly available EDGAR system.
The SEC has proposed to (1) eliminate the Form 144 filing requirement with respect to securities of issuers that are not subject to the Exchange Act reporting requirements, (2) mandate that all Form 144 filings be submitted electronically through the SEC’s EDGAR system, and (3) amend the Form 144 filing deadline to be before the end of the second business day following the day on which the sale of the securities has been executed to align the Form 144 filing deadline with the existing Form 4 filing deadline.
Finally, the SEC has proposed to modify Forms 4 and 5, used for beneficial ownership reporting under Section 16 of the Exchange Act, to allow filers to indicate through a check box on the applicable form that the sale or purchase of securities reported on the form was made pursuant to a pre-arranged trading plan in compliance with Rule 10b5-1 of the Exchange Act. While many filers already disclose when transactions are made pursuant to a prearranged trading plan in a footnote to the filing, the check box is designed to provide a more efficient method for the disclosure.
The full text of the proposed amendments is available here.