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Amendments Proposed to Rule 144

By Keith C. Collins, Associate Attorney of Shustak Reynolds & Partners, P.C. posted on Tuesday, April 13, 2021.

On December 22, 2020, the Securities and Exchange Commission (“SEC”) voted to propose an amendment to Rule 144 under the Securities Act of 1933.[1] The proposed rule revises the holding period for certain market-adjustable securities. The SEC defines a “market-adjustable security” as “a convertible or exchangeable security that provides for a conversion rate, conversion price, or other terms that, in each case, would have the effect of offsetting, in whole or in part, declines in value of the underlying securities that may occur prior to conversion or exchange.”[2]

The SEC is proposing the rule amendment to abate the risk of unregistered distributions in connection with the sales of market-adjustable securities.[3] Due to the unique features of market-adjustable securities, holders of these securities are not exposed to the typical market risk associated with the holding of a security because of the ability to promptly convert and resell the underlying security. Therefore, “initial purchasers or subsequent holders have an incentive to purchase the market-adjustable securities with a view to distribution.”[4] As the SEC notes, when a holder purchases a security with a view to distribution, they act as an underwriter and should not be eligible for a Section 4(a)(1) exemption.[5]

The SEC opines that some sellers of market-adjustable securities, especially in the case of unlisted issuers, are taking advantage of the features of this type of security in a way that is inconsistent with the purpose of Rule 144.[6] Therefore, the SEC is proposing that Rule 144(d)(3)(ii) be amended to provide “that the holding period for the securities acquired upon conversion or exchange of certain market-adjustable securities issued by unlisted issuers would not begin until conversion or exchange.”[7] This proposed rule is intended to dissuade purchasers of market-adjustable securities from acquiring these securities with a view to an unregistered distribution. The proposed rule would not affect most convertible or variable-rate securities transactions.[8] The proposed rule also makes changes to Form 144 filing requirements, including mandatory electronic filing requirements for the sale of securities of Exchange Act reporting companies.[9]

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Keith C. Collins can be reached in the firm’s San Diego office at (619) 696-9500.

 

 



[1] SEC Proposes Amendments to Rule 144 and Form 144, U.S. Sec. & Exchange Commission, (Dec. 2020), https://www.sec.gov/news/press-release/2020-336.

[2] Rule 144 Holding Period and Form 144 Filings, U.S. Sec. & Exchange Commission, Release Nos. 33-10911; 34-90773; File No. S7-24-20, (Dec. 2020), 4-5, https://www.sec.gov/rules/proposed/2020/33-10911.pdf.

[3] Id. at 5.

[4] Id. at 11.

[5] Id. at 12.

[6] Id. at 13.

[7] Id.

[8] Id. at 14.

[9] Id. at 18-19.

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