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.

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.

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.

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.

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

  • Do we need to worry whether the shareholder is an affiliate of the company I want to acquire?

Only if the transaction involves a shell company. Otherwise, that person will no longer have restrictions on the resale of their shares.

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