Navigating Rule 144: When and How Restricted Securities Can Be Resold Without SEC Registration

Liquidity Options for Private Company Stakeholders

For founders, early investors, and employees of private companies, equity can represent the lion’s share of personal wealth. Yet turning that equity into liquid assets isn’t always straightforward, especially when the securities in question are “restricted” under federal securities laws. Fortunately, Rule 144 of the Securities Act of 1933 provides a safe harbor that allows the resale of restricted and control securities without having to register with the SEC.

Understanding Rule 144 is essential for Florida-based entrepreneurs, private equity investors, and anyone involved in early-stage or privately held companies. This blog explores when and how restricted securities can be sold under Rule 144, including a breakdown of key concepts such as holding periods, affiliate status, volume limitations, and manner-of-sale requirements.

What Is Rule 144?

Rule 144 offers a legal pathway to resell restricted or control securities in the public market without filing a full registration statement with the SEC. It’s designed to strike a balance between allowing liquidity and protecting investors from unregistered distributions that could be misleading or abusive.

Restricted securities are typically acquired in private transactions, such as through Regulation D offerings, stock option plans, or founder shares. They are not registered with the SEC and carry a legend that limits resale unless certain conditions are met.

Control securities, by contrast, are any securities held by an affiliate of the issuing company, regardless of how the securities were acquired. Affiliates are individuals or entities, such as officers, directors, or large shareholders, with the power to influence company policies and decisions.

Holding Period Requirements

The first—and often most misunderstood—element of Rule 144 is the holding period. For restricted securities, the required holding period depends on whether the company is a reporting or non-reporting issuer under the Securities Exchange Act of 1934.

• If the company is subject to SEC reporting requirements (i.e., files Form 10-Ks and 10-Qs), the holding period is six months.
• If the company is not subject to SEC reporting (which includes most private companies and many Florida-based startups), the holding period is one year.

The holding period begins on the date the securities were acquired from the issuer or an affiliate in a private transaction. If the securities were acquired through conversion (e.g., preferred stock to common stock), the holding period tacks back to the original acquisition date, assuming no additional consideration was paid.

Affiliate vs. Non-Affiliate: Why It Matters

Whether the seller is an affiliate of the issuer at the time of the sale has a profound impact on what conditions must be met under Rule 144.

Non-affiliates who have held their securities for the required holding period face far fewer restrictions. If the issuer is subject to SEC reporting, and the seller has not been an affiliate for at least three months, they can resell their shares freely after six months—though they must ensure that current public information is available about the issuer. After one year, even that condition falls away for non-affiliates.

Affiliates, on the other hand, are always subject to additional restrictions, even after the holding period has lapsed. These include:

• Current public information: Adequate information must be publicly available about the issuer, including financial statements and business descriptions, typically through SEC filings.
• Volume limitations: In any three-month period, affiliates may only sell the greater of 1% of the company’s outstanding shares or the average weekly trading volume over the previous four weeks.
• Manner of sale: Equity securities must be sold in “brokers’ transactions,” meaning ordinary trading activity without solicitation or special compensation. Certain exceptions apply to debt securities.
• Filing a Form 144: If the sale involves more than 5,000 shares or the aggregate sales price exceeds $50,000 in any three-month period, the seller must file Form 144 with the SEC prior to the sale.

Practical Considerations for Founders and Private Investors

For Florida founders or early employees looking to monetize their equity after an exit or IPO, Rule 144 provides a predictable roadmap—but one that must be carefully navigated. Common mistakes include selling before the holding period is up, failing to confirm affiliate status, or not ensuring current public information is available. These missteps can result in the sale being deemed illegal, leading to liability or rescission rights for the buyer.

Moreover, while Rule 144 provides a federal safe harbor, state “blue sky” laws may still apply. Florida exempts many secondary sales under its own statutes (see Chapter 517, Florida Statutes), but sellers should verify that the exemption holds, especially in cross-border transactions.

Companies themselves should also take care when issuing restricted stock to ensure proper legends are affixed and that recipients are advised of resale limitations. Educating employees and investors on Rule 144 mechanics early on can prevent costly missteps down the line.

Unlocking Liquidity After a Private Offering or IPO

In Florida’s dynamic private investment ecosystem, where Reg D and Reg A offerings are common, Rule 144 provides a vital liquidity bridge. Investors and founders in companies that go public through traditional IPOs or reverse mergers often rely on Rule 144 to exit their positions responsibly.

Sellers should work closely with legal counsel and broker-dealers familiar with Rule 144 to ensure all conditions are met and that documentation, such as holding period verification, affiliate status analysis, and Form 144 filings, is in order. In many cases, an opinion letter from legal counsel is required before transfer agents will remove the restrictive legend from share certificates.

Contact The Law Offices of Clifford J. Hunt, P.A.

Whether you’re a founder, investor, or corporate officer, understanding how to navigate Rule 144 is essential for unlocking the value of your equity in a compliant manner. The Law Offices of Clifford J. Hunt, P.A., has over 35 years of experience advising Florida businesses and stakeholders on securities compliance, private offerings, and secondary sales. Our firm can assist with Rule 144 planning, opinion letters, affiliate analysis, and post-offering strategies to ensure your transactions are secure and legally sound.

To learn how we can support your business or investment goals, contact us today at www.huntlawgrp.com or schedule a consultation.

Sources:

sec.gov/about/reports-publications/investorpubsrule144

leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0500-0599/0517/0517.html