YOU INVESTED IN A PRIVATE OFFERING AND WANT TO SELL YOUR INTEREST – WHAT DO YOU DO?
For all private offerings, restricted and/or controlled securities are issued, thus inhibiting the ability for investors to sell or transfer their interest. For securities purchased in a Regulation D offering, the interest is considered “restricted” and cannot be freely resold to the public. Thus, investors must identify an exemption from the Security and Exchange Commission’s (“SEC”) registration requirements. Rule 144 serves as one such exemption allowing public resale of restricted and control securities if certain conditions are met. This article aims to educate real estate syndication investors on Rule 144, as well as other similarly situated investors, on how they may sell their interest after investing in a restricted offering.
Background on Rule 144
Under the Securities Act of 1933 (“Securities Act”), securities are required to be registered with the SEC prior to being issued to the public. However, some securities such as restricted securities and control securities are not required to be issued. Restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer. These include private placements, Regulation D offerings, and equity compensation. Control securities are those held by an affiliate of the issuing company such as the manager of a syndication, an executive, or a major shareholder. Because restricted and control securities are not required to be registered, they generally may not be freely resold. Rule 144 functions as an exemption to the general rule provided that the following five conditions are met:
- Holding Period: The holding period condition applies only to restricted securities and begins on the date the securities were bought and paid for. The length of time restricted securities are required to be held prior to sale is dependent on whether the issuer is considered a “reporting company” or a “non-reporting company.” A reporting company is one subject to the reporting requirements under the Securities and Exchange Act of 1934 while a non-reporting company is not subject to such requirements. Investors in an issuer considered a reporting company are required to hold the interest for a minimum of six months while investors in an issuer considered a non-reporting company are required to hold the interest for a minimum of one year prior to a public sale. Real estate syndication issuers are generally non-reporting companies and investors are thus required to hold their interest for a minimum of one year.
- Current Public Information: Before any sale of unregistered securities may be made, adequate current information about the issuer must be available. Reporting companies must comply with periodic requirements of the Securities and Exchange Act of 1934 while non-reporting companies must provide company information such as the nature of business, the identity of officers and directors or managers, and financial statements.
- Trading Volume Formula: For affiliates wishing to sell their interest, the number of equity securities sold within a three-month period cannot exceed 1% of all outstanding shares being sold within the same class. This is typically the formula for real estate syndications. For a class listed on a stock exchange, the trading formula is the greater of the above or 1% or average reported weekly trading volume during the four weeks preceding a Form 144 notice of sale.
- Ordinary Brokerage Transactions: Brokers may not receive more than a normal commission and neither sellers nor brokers may solicit the purchase of securities. Instead, if the seller is an affiliate, all securities sales but be within routine trading transactions.
- Filing a Notice of Proposed Sale With the SEC: Affiliates must file a notice with the SEC if the sale involves more than 5,000 shares or the interest is greater than $50,000 in any three month period. The notice filed is on a Form 144 which asks for basic information about the issuer and purchaser, the securities to be sold, and securities sold during the past three months.
Determining How Rule 144 Applies to You
| Affiliate or Non-Affiliate? | Restricted Securities |
| Affiliate: An individual such as an executive officer, director, or large shareholder with the ability to influence or control the issuer company. | · Affiliates must comply with all Rule 144 conditions prior to any proposed sale. This means that even if all of the requirements are met, a Form 144 notice must sill be filed if the sale involves more than 5,000 shares or is greater than $50,000 in any three month period. |
| Non-Affiliate: An individual without the ability to influence or control the issuer. | · For non-affiliates, if the interest is held for over one year, the interest may be sold without regard to Rule 144. If the interest with an issuer considered a “reporting company” is held for over six months but less than a year, the interest may be sold if the current public information condition is satisfied. |
Meeting Rule 144 Conditions Does Not Mean the Interest may be Freely Traded
Despite the safe-harbor provided by Rule 144, satisfying the five conditions does not mean the interest may be freely traded. Restricted securities still may not be resold until the issuer consents and the issuer’s counsel provides an opinion letter to remove the certificate’s restrictive legend. This opinion letter covers a three month period and serves to protect the issuer against securities law violations by certifying that certain requirements are met and the issuer is in compliance.
Ensuring compliance with Rule 144 and related Securities Act rules is imperative to avoid legal and monetary penalties.
By: Kamden Crawford, Securities Attorney