Key Takeaways

  • Rule 145 governs securities exchanges in mergers, acquisitions, and reclassifications, requiring registration of certain transactions to protect investors.
  • It was adopted to replace the older “no sale” approach of Rule 133, ensuring shareholder votes on reorganizations are treated as sales of securities.
  • Registration is required for reclassifications, mergers/consolidations, and asset transfers involving exchanges of securities.
  • Insiders of acquired companies face resale restrictions under Rule 145 and Rule 144, while non-insiders may receive unrestricted “clean shares.”
  • The 2007 amendments eliminated the presumptive underwriter doctrine but kept restrictions for shell company transactions.
  • Recent SEC interpretations provide flexibility on lock-up agreements in business combinations under Rule 145(a).
  • Rule 145 interacts closely with Rule 144, which sets holding periods and conditions for resale of restricted securities.
  • Reverse mergers and shell company transactions raise additional constraints, particularly for resales of acquired shares.

Rule 145: What is it?

Rule 145 is an SEC rule that allows companies to sell certain securities without first having to register the securities with the SEC.  This specifically refers to stocks that an investor has received because of a merger, acquisition, or reclassification.

Historical Background of Rule 145

Rule 145 was introduced by the SEC to replace Rule 133, which had long been criticized as conceptually flawed. Rule 133 treated certain shareholder votes—such as approving a merger—as if no “sale” of securities occurred, leaving investors without the full protections of registration. By adopting Rule 145, the SEC clarified that these types of reorganizations and exchanges do involve sales of securities, thereby requiring disclosure and registration to safeguard shareholders. This marked a significant policy shift toward investor protection in corporate restructuring transactions.

When Registration Is Required Under Rule 145

In addition to allowing certain types of securities to go unregistered, Rule 145 also requires that the following transactions must be registered if security holders vote on such transactions:

  • Reclassification of securities that will replace one security for a different one.
  • A merger, consolidation, or acquisition where the securities of one corporation or company are exchanged for those of a different company or organization.
  • If company A is purchasing company B and company A is going to give securities to the shareholders of company B, those securities must be registered.

Limitations for Shell Companies and Reverse Mergers

Although the 2007 amendments eliminated many resale restrictions, the SEC preserved stricter rules for blank check and shell company transactions. Securities issued in a merger with a shell company cannot be freely resold under the relaxed provisions of Rule 145. Instead, they remain subject to Rule 144 restrictions, ensuring that investors have adequate information before securities enter the public market. This limitation particularly impacts reverse mergers, where a private company merges into a public shell. These transactions often draw heightened SEC scrutiny to prevent abuses and protect public investors.

Rule 145 Terms Explained

  • Reclassification: A reclassification refers to the substitution of one security for another. This does not include a stock split, reverse stock split, or change in par value.
  • Mergers or Consolidations: A merger or consolidation, or similar plan of acquisition where the securities of one company become or are exchanged for the securities of any other company.
  • Transfers of Assets: This is when the stockholders of a company sell or exchange its assets and in return receive stock in the company that has been acquired through sale or exchange.  

If Company A takes over Company B, there are three types of shares that can result: clean shares, Rule 145 shares, and Rule 144 shares.

  • Clean Shares: A non-insider of Company B, who has shares in Company B and does not become an insider of Company A, will receive clean shares. You can sell these shares on the open market without any restrictions.
  • Rule 145 Shares: An insider of Company B, who has shares in Company B but does not become an insider of Company A, will receive shares that are subject to resale based on Rule 145.
  • Rule 144 Shares: An insider of Company B, who has shares in Company B and then becomes an insider of Company A, will receive fully registered shares in Company A. They are subject to resale based on Rule 144.

Effect of Lock-Up Agreements in Rule 145 Transactions

Lock-up agreements—where shareholders agree not to sell their newly acquired shares for a fixed period after a merger—play an important role in many business combinations. Historically, there was uncertainty as to whether such agreements created additional “sales” that triggered registration requirements under Rule 145(a). In recent years, however, the SEC staff clarified its position: lock-up agreements do not by themselves constitute sales requiring registration, so long as they are designed to support the transaction’s stability rather than to circumvent securities laws. This shift provides companies with more flexibility in structuring mergers and acquisitions while staying compliant with Rule 145.

Elimination of the Presumptive Underwriter Doctrine

In 2007, the SEC amended Rule 145 to remove the presumptive underwriter doctrine. The only exception to this new rule is for transactions involving blank checks or shell companies.

Under this original presumptive underwriter doctrine, anyone who was part of a business transaction was seen as an underwriter with respect to public sales of shares that they received in a business acquisition. This meant that even if the acquiring company in a Rule 145 transaction registered all of its issued shares, anyone affiliated with the company that was being acquired could not publicly sell the shares unless they were sold in compliance with Rule 144.

With the elimination of the original presumptive underwriter doctrine, people who receive shares from a company that has acquired theirs will be no longer be restricted to these resale regulations.

Policy Goals Behind Rule 145

The central goal of Rule 145 is to ensure transparency and fairness in significant corporate restructurings. By treating shareholder votes in mergers, consolidations, and reclassifications as sales of securities, the rule ensures investors receive disclosure comparable to that in a traditional offering. This policy balances the need for efficient corporate transactions with the SEC’s mandate to protect investors. Scholars have noted that Rule 145 also closes gaps in earlier law where investors could end up with new securities without the benefit of full registration or disclosure.

Rule 144

Rule 144 explains that a selling security holder will not be engaged in a distribution of securities and therefore is not seen as an underwriter. The following conditions must be met:

  • There needs to be current public information available about the issuer of the share.
  • If the securities that are being sold are restricted, the security holder must have held onto the security for a specific amount of time.
  • The number of securities sold within a 90-day period must be within the specified sales volume limits.
  • The resale needs to comply with all of the sale requirements.
  • The security holders that are selling the securities need to file Form 144 for anything other than minimal sales.

Rule 144 Amendments

Under the amendments to Rule 144, the following has occurred:

  • The holding period for restricted securities of reporting companies, whether you are an affiliate or non-affiliate, is now only six months.
  • Non-affiliates of reporting companies may freely resell restricted securities after the six-month holding period.
  • After 12 months, non-affiliates can freely resell restricted securities of both reporting and non-reporting companies without any restrictions.
  • The manner of sale requirements for resale by affiliates has been revised for equity securities. Riskless principal transactions are now allowed. A broker can now also insert bids and ask quotations in an alternative trading system.
  • The volume limitations for security registration has been relaxed for debt securities.
  • The thresholds that trigger the need for Form 144 have been raised from 500 shares or $10,000 to 5,000 shares or $50,000.

Frequently Asked Questions

1. Why was Rule 145 created?

Rule 145 was adopted to replace the outdated Rule 133, which failed to treat shareholder approvals of mergers and similar reorganizations as securities sales. It ensures better disclosure and investor protection.

2. Do lock-up agreements in mergers require additional registration under Rule 145?

No. The SEC clarified that lock-up agreements do not trigger separate registration requirements if they are meant to stabilize the transaction rather than serve as disguised resales.

3. How does Rule 145 apply to shell company transactions?

Securities acquired in mergers with shell companies remain subject to resale restrictions under Rule 144, even after the 2007 amendments, to prevent market abuses.

4. What is the difference between Rule 145 shares and Rule 144 shares?

Rule 145 shares apply to former insiders of an acquired company who do not become insiders of the new company, while Rule 144 shares apply when a person becomes an insider of the acquiring company.

5. How does Rule 145 interact with Rule 144?

Rule 145 governs whether securities must be registered in reorganization transactions, while Rule 144 provides the framework for when restricted securities can later be resold without registration.

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