SEC Clarifies Guidance on Rule 144 Resales of Restricted Securities Following Partnership Distributions
Authors
Rule 144 under the Securities Act of 1933 provides a safe harbor for resales of "restricted securities" (typically securities acquired in private placements before a company goes public) such that persons complying with the rule will not need to file a registration statement in order to sell the shares. Rule 144 has a holding-period requirement and volume limitations (among other requirements).
Venture capital funds, many of which are organized as partnerships, generally purchase restricted securities from private companies and distribute these securities to their partners, usually after a company has gone public. The SEC has permitted limited partners of a closely held partnership to "tack" the holding period of the partnership to their own Rule 144 holding period if the partnership distributes its shares to its partners pro rata and without consideration from the partners.
Prior to February 15, 2008, when several Rule 144 amendments became effective, if limited partners were unaffiliated with the issuer (and had not been affiliated with the issuer for the prior three months) and held restricted shares for at least two years (using the "combined" holding period with the partnership), the unaffiliated limited partners could sell free and clear without worrying about volume limitations under Rule 144. Although partners of the partnership who were affiliates of the company were still subject to volume limitations under Rule 144, the staff of the SEC in various no-action letters did not require affiliated partners to aggregate sales made by non-affiliated partners for purposes of calculating the affiliated partners' compliance with the volume limitations of Rule 144.
Following the February 2008 amendments to Rule 144, questions arose as to whether affiliated partners needed to aggregate sales by all non-affiliated partners (for a period of six months if the company had been public for at least 90 days, or a period of one year otherwise) for purposes of determining whether or not the affiliated partners complied with the volume limitations of Rule 144.
The Division staff has now clarified in the new C&DIs that aggregation is not required. A new C&DI describes a situation in which an affiliate of the issuer is a general partner of three limited partnerships that hold restricted securities. If the limited partnerships distribute such securities to all their partners, an affiliated partner must, for purposes of determining its volume limitations, aggregate its Rule 144 sales with (1) Rule 144 sales of the distributed securities by other partners who are affiliates of the issuer and (2) Rule 144 sales of the same class of securities by the limited partnerships, for a period of six months following the distribution (or a period of one year if the company has not been a public company for at least 90 days before the distribution).
Although the Division staff indicated that further aggregation may also be required by the affiliate if it is "acting in concert" with other persons, "the affiliate partners and the limited partnerships need not aggregate their sales of the distributed shares with the sales of the distributed shares by partners who are not affiliates of the issuer." Under amended Rule 144, non-affiliates are no longer subject to volume limitations in any instance and need not worry about aggregation.
