Rule 144

Restricted securities are best defined as securities that:

1. A.Are issued by companies whose credit ratings are below investment gradeConfuses a resale restriction with credit quality; the two are unrelated.
2. B.Were acquired in an unregistered transaction and may not be freely resold to the public until an exemption's conditions are metCorrect. This captures both how they were acquired and how they may be resold.
3. C.Are restricted to purchase in round lots of 100 sharesInvents a trading convention that has nothing to do with restricted securities.
4. D.May be sold only back to the issuer, never to another investorRule 144 permits resale into the market once its conditions are satisfied.

Why: Restricted securities are acquired in unregistered, private transactions and may not be freely resold to the public until the conditions of an exemption such as Rule 144 are satisfied.

Under SEC Rule 144, restricted stock must generally be:

1. A.Held for a required period before public resaleCorrect - the Rule 144 holding period.
2. B.Converted to bonds firstRule 144 never changes the security into something else. It governs when and in what quantity restricted shares may be resold, and they are resold as the same stock.
3. C.Sold immediately with no limitsThis describes freely tradable registered shares. Restricted stock came into the holder's hands through an unregistered sale, which is exactly why a holding period must run before public resale, with volume limits on top for affiliates.
4. D.Never soldThis overcorrects a real restriction into a permanent ban. Rule 144 is a safe harbor whose purpose is to make resale possible once its conditions have been satisfied.

Why: Rule 144 requires a holding period before restricted securities can be resold publicly, plus volume limits for affiliates.

A reporting company sells newly issued common stock at a negotiated discount to a small group of institutions and agrees to file a resale registration statement afterwards. What is this transaction, and what is the buyers position before that registration is effective?

1. A.A secondary offering, and the buyers receive freely tradeable shares because the class is already registered.Wrong. Registration of a class does not register newly issued shares, and a secondary offering sells existing holders shares.
2. B.A PIPE, and the buyers hold restricted securities until the resale registration statement is effective.Correct. The issuer is public but these particular shares were sold unregistered.
3. C.A Regulation A offering, and the buyers may resell as soon as the offering statement is qualified.Wrong. Regulation A is a qualified public offering route, not a negotiated private sale to selected institutions.
4. D.A shelf takedown, and the buyers receive registered shares priced off the existing shelf.Wrong. A shelf takedown is a registered sale, which is the very thing this transaction avoids.

Why: This is a private investment in public equity, a PIPE: an unregistered sale by an issuer whose shares already trade, usually priced below the market and usually accompanied by a contractual promise to register the shares for resale. Until that resale registration is effective the buyers hold restricted securities and cannot sell them into the public market except under registration or a resale exemption. The discount is compensation for exactly that illiquidity and for the price risk of holding while the registration is prepared. Were the issuer to fail to get the registration declared effective, the buyers exit would fall back on Rule 144.

Devon is the chief financial officer of Anchorline Corp. He buys 3,000 Anchorline shares through his personal brokerage account in the open market. Those shares are best described as:

1. A.Treasury stock, because an officer holdings are treated as company property.Treasury stock is stock the CORPORATION has repurchased and holds itself. Shares owned personally by an officer are outstanding shares.
2. B.Restricted stock, which he must hold for six months before any sale.The holding period applies to stock acquired in an unregistered private transaction. Devon bought registered shares on the open market.
3. C.Unrestricted stock that Devon may resell at any time without conditions, because he bought it in the open market.This is the common misconception. The manner of purchase does not erase his affiliate status or the resale conditions that come with it.
4. D.Control stock, which was acquired freely but is subject to Rule 144 conditions on resale because Devon is an affiliate.Correct. Control stock is registered stock in the hands of an affiliate, and Rule 144 governs how much may be sold and how.

Why: How the shares were ACQUIRED determines whether they are restricted; WHO holds them determines whether they are control stock. Devon bought registered shares in the open market, so nothing about the purchase is restricted. But as an officer he is an affiliate, so his resale runs through Rule 144 conditions such as volume limits. Review Rule 144 and the definitions of restricted and control stock.