March 7, 1997
SEC Amends Rules for Resale of Restricted Securities
The Securities and Exchange Commission ("SEC") recently took a significant step in enabling small businesses and other companies to raise capital without registration by shortening the amount of time that investors must hold the securities that they buy in private placements before they can sell the securities publicly under Securities Act Rule 144. The SEC believes that the shorter holding periods will reduce the cost of capital formation since companies should no longer have to provide as large an illiquidity discount to investors who purchase stock in private placements of unregistered securities. In addition, the reduced holding period will permit holders of restricted securities to recoup their investments more quickly.
Prior to the SEC's action, investors holding "restricted" securities - that is, securities issued in Regulation D offerings and other unregistered private placements - could publicly resell their securities if the investors either held the securities for at least two years after purchase (in which case the investor could resell them with certain limitations) or if the investors who were not affiliates of the issuing company held the securities for at least three years after purchase (in which case the investor could resell them without limitation). Beginning April 29, 1997, investors can resell their restricted securities - with certain limitations - if they held the securities for as little as one year or without limitation if they held the securities for as little as two years and were not affiliates of the issuing company.
The SEC also similarly shortened by one year the periods in which persons affiliated with an acquired company who receive registered securities in a merger, consolidation, sale of assets or similar transactions may resell their securities. Securities Act Rule 145 places certain limitations on resales by these persons.
The SEC also proposed (but has not yet adopted) further amendments to Rules 144 and 145 to make these rules easier to understand and apply. The SEC is proposing to modify but not eliminate volume limitations for resales of securities under Rule 144. In addition, the SEC proposes to eliminate the "presumptive underwriter" provisions of Rule 145, so that affiliated persons of an acquired company can resell without restriction registered securities they receive in a merger, consolidation, sale of assets or similar transactions.
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