SEC Rule 144 Trap for the Unwary

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 SEC Rule 144  Trap for the Unwary

The doctrine of "Acting in Concert" can be a trap for the unwary under SEC Rule 144.

SEC Rule 144 is the primary tool for making sales in the public market of securities acquired from a public company or its affiliates in a transaction that did not involve a public offering.

If you bought stock in a public company in a private transaction, you may sell into the public market if you meet certain conditions.

Rule 144 has different requirements for affiliates and non-affiliates. Generally, affiliates are persons that directly, or indirectly control or are controlled by the issuer.

For non-affiliates, these limitations generally involve adequate current public information on the company and an adequate holding period after the securities are acquired and fully paid for.

For affiliates there are also restrictions on the manner of sale, volume limitations and a notice requirement.

We focus here  on the volume limitations.

Rule 144(3)(e )(vi) provides that "When two or more affiliates or other persons agree to act in concert for the purpose of selling securities of an issuer, all securities of the same class sold for the account of all such persons during any three-month period shall be aggregated for the purpose of determining the limitation on the amount of securities sold; . . . ."

In other words, when two or more persons agree to act in concert to sell securities, all securities sold by them during any three-month period are aggregated for the volume limitations.

We find that affiliates may overlook the fact that their sales will be aggregated with sales of others with whom they are "acting in concert"

There are many fact situations where people would be acting in concert.  For example, two persons coordinating the timing of sales of their securities might be deemed to be acting in concert.  More subtly, if both sellers' accounts were run by the same investment advisor, these sellers might be deemed to be acting in concert.

If an affiliate of an issuer is the general partner of limited partnerships which hold or held restricted securities of the issuer the affiliate may be aggregated with the partnerships and their partners.

Further aggregation may also be required if the affiliate is "acting in concert" with other persons under Rule 144(e)(3)(vi)

We therefore warn you to be aware of this provision of Rule 144 and act accordingly.

Violating Rule 144 is selling restricted stock as free trading stock and the penalties are severe.

Non-affiliates can be aggregated with other holders so they control enough stock to be affiliates.

Seek competent legal counsel to make sure you are in compliance.

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Disclaimer: This is not legal or investment advice of any kind. Consult qualified securities attorneys. Your situation may vary.