New Rule 144 And Rule 145 Amendments Effective February 15, 2008

The previously announced amendments to Rule 144 and Rule 145 were effective February 15, 2008.

Under the new rules, restricted securities of public reporting companies held by non-affiliates can be resold after a holding period of 6 months as long as the company is in compliance with Rule 144(c) (the public company reporting requirement). After one year, non-affiliates can sell their shares without any restrictions.

For a more extensive summary of the new rules, here is a link to the Client Update we sent in December:

http://www.hellerehrman.com/en/news/industry/industry_3476.html

Immediate Impact and Practical Implications

Here are some important considerations that you should be aware of with respect to the new rules.

• Retroactive Effect: The new rules are effective for all resales under Rule 144 and Rule 145 made on or after February 15, 2008, including resales of shares that were issued before the effective date of the new rules.  That means, for example, that a non-affiliate holder of public company restricted securities purchased in May 2007, who had to wait one year before selling under the old version of Rule 144, is now free to resell under Rule 144 as long as the company is current in its periodic reporting.  Depending on the composition of its shareholder group, over the next few weeks, companies may be faced with a sudden influx of Rule 144 sales as shareholders realize they are able to sell under the new rules.
• Legend Removal under new Rule 144(b):  Under the old rules, shareholders who had to wait 2 years to remove legends will now be able to request legend removal after one year.  Note that the substantive requirements of old Rule 144(k) now appear in amended Rule 144(b).
• No Real Change for Resales by Affiliates:  Resales by affiliates (directors, officers and significant shareholders) are still subject to the restrictions in Rule 144 (c), (d), (e), (f), (g) and (h).  The only items that have changed from the old rules, with respect to affiliates, are a shorter initial holding period (from one year to 6 months) and a higher de minimis threshold for the filing of Form 144. 
• Sales by Donees Count Against Affiliate Donor Volume Limit for 6 Months Following Donation: Recipients of shares donated as a gift by an affiliate are able to "tack" the holding period of the original holder under Rule 144(d).   However, for a period of 6 months after a gift of public company stock, sales by the donee will count against the donor's volume limitation.  This restriction is one-way, i.e., the donee can sell shares without restriction, but the donor will have to include donee sales in determining whether a prospective sale by the donor will exceed the Rule 144(e) volume limitation.  The volume limitation of Rule 144(e) is relatively generous (1% of outstanding shares may be sold every 90 days), so as a practical matter this rule will affect only a few large shareholders.  However, if an affiliate holding 1% or more of the stock gifts shares (e.g., as a charitable donation), the affiliate will have to make arrangements with the recipient to be notified when shares are sold.  Similar rules apply to shares received in a pledge or trust situation involving an affiliate.
• Rule 144 not available to shell companies or companies that have recently been shell companies:  New Rule 144(i) confirms the Staff's existing interpretive position that companies that are "shell companies" as defined in Rule 405 are not eligible to use Rule 144 until 12 months after they have filed Form 10 level information (e.g., under Item 5.05 of Form 8-K).
• Presumptive Underwriter Doctrine of Rule 145 eliminated: The "presumptive underwriter" doctrine of Rule 145(c) has been eliminated, except with respect to transactions involving a shell company.  Since amended Rule 145 also applies to previously-issued shares, affiliates of "target" companies in Rule 145 transactions who are not also affiliates of the acquiring company may now request the removal of Rule 145 legends.