By Keith C. Collins

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.

By Keith C. Collins

You are forming a corporation, great! Corporations offer many protections and benefits for entrepreneurs. But corporations are also closely regulated and subject to many restrictions. So, what happens when you want to form a corporation that is based on your passion, and your passion includes more than just profit? You may need a special type of corporation.

A simplistic, and somewhat cynical view of corporations is that they function only to create shareholder wealth. You start a corporation, shareholders invest through the purchase of shares, and, ideally, everyone gets rich. That perspective is reinforced by regulations that require a company to make decisions based on the best interests of shareholders and that interest is often profit. But what happens when you start a corporation with a purpose bigger than profit? For entrepreneurs that want profit with purpose there is a special type of corporation, the benefit corporation.

A benefit corporation differs from a traditional corporation in several significant ways. Notably, a benefit corporation is specifically designed to allow a company to pursue a profit and a public benefit. Investors purchase shares in a benefit corporation with the knowledge that the corporation will consider its stated public benefit when making corporate decisions. Thus, giving the corporation the freedom to enjoy the benefits of a profitable company, while also providing a public good. This unique corporate structure protects the corporation from derivative lawsuits, encourages investment from individuals and groups aligned with the corporation’s public benefit, and provides a unique way to generate revenue while giving back to the community.

If you have a vision for a corporation driven by profit and purpose, contact Shustak Reynolds and Partners for help organizing a corporation appropriate for your specific circumstances.

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.