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Securities and Exchange Commission Shortens Holding Periods for Restricted Securities

March 21, 1997


The Securities and Exchange Commission has recently adopted amendments to Rules 144 and 145 of the Securities Act of 1933 to shorten the periods that restricted securities must be held before they can be resold in the public markets. Restricted securities are unregistered shares typically issued by public companies to insiders, consultants, investors (including venture capitalists) and sellers in connection with acquisitions. Under the amendments to Rule 144, which will be effective April 29, 1997, limited resales of restricted securities by affiliates and non-affiliates will be permitted after a one-year holding period and unlimited resales of such securities by non-affiliates will be permitted after a two-year holding period, thereby shortening by one year the existing required holding periods. A similar reduction has been put into effect under Rule 145 for restricted securities received in connection with mergers, consolidations, reclassifications and asset transfers. The new holding periods will apply to restricted securities acquired before or after this amendment.

According to the SEC, the primary purpose for the amendments is to reduce capital raising costs for businesses that sell securities in private placements. Reduced holding period requirements are expected to lower the discount generally applied to securities issued on a private, unregistered basis. Investors will now generally enjoy liquidity after holding their shares for only one year, the same holding period required for capital gains treatment. This should be particularly beneficial to smaller public companies that typically have less resources and often seek to sell securities in private transactions. Lower discounts on restricted securities will also effect considerations relating to tax and compensation planning. An additional effect of the holding period changes will be to increase, over the near term, the amount of securities that will be eligible for resale under the Rule 144 safeharbor. This may create downward pressure on the market for certain companies with a significant number of stockholders who decide to sell their newly marketable securities in the public market. Such stockholders should carefully consider the effects of these changes on their tax and estate plans.

Volume and manner of sale restrictions for affiliates, and for non-affiliates prior to the end of the two-year holding period, remain in effect. However, the SEC is now seeking comment on additional amendments that could effect certain of the volume and manner of sale restrictions and could further shorten the holding periods required under Rule 144.

The reduced holding period requirements of Rules 144 and 145 have been long awaited and are expected to create additional opportunities for businesses to raise capital and for stockholders to realize more immediate liquidity in their investments. New corporate and individual strategies and planning considerations should be considered to maximize the opportunities and minimize the disruption to trading markets. Public companies and individuals holding restricted stock should consult with their advisors to learn more about these changes, their consequences and planning opportunities.


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.