The SEC proposed amendments to rules and forms to "mitigate the risk of unregistered distributions in connection with sales of market-adjustable securities."

The SEC proposed amendments to Securities Act Rule 144 ("Persons deemed not to be engaged in a distribution and therefore not underwriters") to: (i) amend the date on which the Rule 144 holding period commences for securities of unlisted issuers acquired in exchange for convertible securities that protect the holder against declines in the value of the underlying securities that may occur prior to conversion ("market-adjustable securities"); and (ii) modernize and simplify Form 144 filing requirements.

Holding Period for Market-Adjustable Securities

The SEC proposes to require the holding period for securities of unlisted issuers acquired in exchange for market-adjustable securities to commence on the date that the holder acquires the underlying securities (e.g., common stock) in exchange for the market-adjustable securities, not the (earlier) date of acquisition of the market-adjustable securities, as is currently the case under Rule 144. For this purpose, "market-adjustable securities" are convertible securities of unlisted issuers that "offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization." The SEC explained that: "The proposed amendment is intended to avoid the potential under the current Rule 144 safe harbor for holders to acquire market-adjustable securities with a view to an unregistered distribution of the underlying securities acquired upon their conversion or exchange, resulting in significant resales of the underlying securities without investors having the benefit of registration."

Amendments to Form 144 Filing Requirements

The SEC proposed to:

  • require Form 144 be filed electronically;
  • eliminate the Form 144 filing requirement for sales of securities of issuers that are not subject to Exchange Act reporting requirements;
  • conform the deadline for filing Form 144 with the filing deadline for Form 4 (reporting by insiders under Section 16 of the Exchange Act) so that both forms may be filed simultaneously by persons subject to both requirements; and
  • provide an additional optional check box on Forms 4 and 5 to indicate if a transaction was conducted pursuant to a trading plan in accordance with Exchange Act Rule 10b5-1(c) requirements.

Comments on the proposal must be submitted within 60 days of its publication in the Federal Register.

SEC Commissioner Statements

Commissioner Elad Roisman explained  that the proposed amendment would "close a loophole that could put investors at risk." Chair Jay Clayton stated that the proposal aims to ensure that "holders of market-adjustable securities are assuming the economic risks of their investment rather than acting as a conduit for an unregistered sale of securities to the public on behalf of an issuer."

Primary Sources

  1. SEC Press Release: SEC Proposes Amendments to Rule 144 and Form 144
  2. SEC Proposed Rule: Rule 144 Holding Period and Form 144 Filings
  3. SEC Statement, Elad Roisman: Statement on the Proposed Amendment to Rule 144

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