The end of the year is usually the busiest time of the year for gift giving, both holiday gifts and charitable gifts, as folks are overcome with the holiday spirit, aided perhaps by the need for tax deductions. It is not uncommon for executives (who are typically affiliates for Rule 144 purposes) to gift company stock, instead of or in addition to cash. These gifts can have special implications for Rule 144 purposes.
The most recent issue of The Corporate Counsel highlighted some of the Rule 144 pitfalls that still apply to gifts. According to the article, when an affiliate gifts stock to a non-affiliate, the donee “stands in the shoes” of the donor until the stock has been held by both for a combined period of at least six months and up to 12 months. For up to six months, the non-affiliate donor must meet all the requirements of Rule 144 (except the holding period, provide that the stock is control stock only and not restricted securities). From six months to 12 months, there are no restrictions if the issuer is current in its Exchange Act reporting.
The time the donor has held the stock is tacked onto the donee’s holding period. For example, where the donor had held the stock for two months prior to the gift and the company is current in its Exchange Act reporting, the donee only has to comply with Rule 144 (other than the holding period requirement) for four additional months.
Another trap exists for the donor, who must aggregate his/her sales of stock with those of the donee for purposes of comply with the Rule 144 volume limitation. This requirement applies for six months after the gift (12 months where the issuer is not a reporting company or is not current in its Exchange Act reporting).
Model Rule 144 Compliance Letters
In response to requests, Jesse Brill recently crafted six very helpful model Rule 144 gift compliance letters that lay out for donors and their donees the restrictions and procedures that still apply in six key gift giving scenarios (including the need to keep track of and report back to the donor any sales for one year following the gift, for example).
These letters were recently sent as a bonus to all 2012 subscribers to The Corporate Counsel. If you are not a subscriber to The Corporate Counsel (or have not yet renewed) you can gain immediate access online to the gift compliance letters by taking advantage of the no-risk trial. (Almost all of our member companies and law firms are long-term subscribers to The Corporate Counsel. If you know of someone who is not, you may wish to pass on to them the 50% off new subscriber offer, which they can take advantage of by writing 50% off on the order form.)
– Barbara
Tags: control stock, restricted securities, Rule 144
Background
The Securities Act of 1933 (1933 Act) is a piece of federal legislation that was enacted to prevent securities fraud by regulating the sale of securities in interstate commerce through registration of offers and sales. The basic filings used by companies are the Form S-1, S-3, and S-8. There are exemptions to the filing requirements outlined in the 1933 Act; Rule 701, Regulation D, and Rule 144. Rule 144 provides an exemption from securities registration through a safe harbor on the resale of restricted and/or control securities. To take advantage of the safe harbor provided by Rule 144, sales must comply with restrictions on the information publicly available on the company, holding period for restricted securities, sale amount limitations, the manner of the sale, and notification requirements.
Restricted and Control Securities
With restricted stock units and award grants growing in popularity, it’s easy for new stock professionals to hear “restricted securities” and think that it refers to a restricted stock grant. Restricted securities, as they apply to the Rule 144 safe harbor, refer to shares that were acquired in an unregistered offering. Restricted securities are restricted from resale until or unless they are registered or sold pursuant to an exemption. The most common example of restricted securities is shares that are acquired by employees of a private equity company, often in anticipation of an initial public offering. Restricted securities become restricted because of the manner in which they are acquired. Control securities are shares that are owned by affiliates of the company or persons who are in a control position in the company (such as your Section 16 officers and directors). Control securities may also be restricted securities (when they are acquired in an unregistered offering), but they are control securities because of the holder’s relationship to the company.
Affiliate Status All directors, policy making executive officers, and 10% shareholders should be considered control persons (affiliates). In addition, any relative or spouse living in the same household, trust or estate in which the affiliate or relative/spouse is a trustee, or any corporation in which the seller or family is a 10% owner fall under the same umbrella and will be considered affiliates of the company for the purposes of determining control securities. There may be other situations that give rise to control securities; stock plan administrators should work closely with their legal team to ensure that these people and/or entities are properly identified.
Safe Harbor Requirements
Restricted securities will need to either be registered, or sold pursuant to Rule 144, including the holding requirements. Restricted securities of a public company must be held for six months prior any sale, and restricted securities of a private company must be held for one year prior to any sale.
Control securities are a more common issue for public companies because they arise due to the holder’s relationship to the company. Even if the shares are acquired by the affiliate through an open market purchase, they become control securities subject to Rule 144 because they are held by the affiliate. In order for affiliates to sell control securities, the company’s publicly available information must be current. Control securities are subject to the same holding requirements as restricted securities, that is one year for private companies, and six months for public companies. However, Rule 144(d)(3)(x) does provide an exception for sales associated with cashless exercise transactions. In addition, the sales must be an amount that is less than one percent of the outstanding securities of the class being sold or the average weekly trading volume during the four weeks preceding the transaction and must be sold through an unsolicited broker transaction, directly to a market maker, or in a “riskless principal transaction”. Finally, the sale must be reported to eh SEC on a Form 144 if the shares sold during a three-month period exceed 5,000 shares or have a value in excess of $50,000.
Stock Plan Management Team
The stock plan administrator will most likely not participate directly with a significant portion of the implications of Rule 144. The stock plan management team should work closely with the legal team to ensure that all affiliates are flagged in the stock plan administration system and that all affiliates are educated regarding their status, including how their status may impact their families, trusts, etc. Once affiliates are identified, the stock plan administrator will want to work with any brokers who are known to sell shares for the affiliates (e.g., the captive broker or a broker whit whom the affiliate has a 10b5-1 trading plan) to confirm that the broker knows the affiliate status of the individual and is prepared to help with the Form 144 filing. The most important action a stock plan administrator can take, however, is to ensure that the company’s public filings are up to date. This is the one portion of Rule 144 that is out of the control of the affiliate themselves and is the direct responsibility of the company.
For more information on Rule 144, visit our Rule 144 portal. Rule 144 is also extensively covered in our Fundamentals of Stock Plan Administration course, which is designed to bring professionals who are new to the field up to date will all regulatory requirements as well as administrative best practices. Finally, if you were in New Orleans for our 16th Annual Conference, be sure to review your conference material from the session “New Rule 144: Updates and Issues”. If you weren’t able to attend in person (or you were there but didn’t get to all the sessions you were interested in), it’s not too late. The full conference audio is now available on CD. Order today to listen to the above sessions and all 40+ panels, including sessions addressing performance plans, hold-til-retirement, termination provisions, global stock plans, and much more.
Tags: affiliate, control securities, control stock, insider, restricted securities, Rule 144, safe harbor