SEC Proposes Amendments to Rule 144, Form 144, and Forms 4 and 5

Capital Markets

On December 22, 2020, the Securities and Exchange Commission (“SEC”) proposed a series of amendments to Rule 144, Form 144, and Forms 4 and 5.  This article highlights some of the recently proposed amendments.

I. Amendment to Rule 144(d)(3)(ii) – Elimination of “Tacking” for Securities Acquired Upon the Conversion of Certain Market-Adjustable Securities

Arguably the most consequential aspect of the recent proposals by the SEC, is the proposal to amend Rule 144(d)(3)(ii) to eliminate “tacking” for the conversion of certain market-adjustable securities.  By way of background, Rule 144 provides a non-exclusive safe harbor for holders of restricted securities who wish to sell them to the public.  In order to sell securities pursuant to the Rule 144 safe harbor, a series of objective conditions must be met by the reseller.  One such condition is the Rule 144 holding period, which requires that the restricted securities be held for a certain amount of statutorily prescribed time until they may be resold.  The idea behind this holding period is that it subjects the holder of the restricted security to the full economic risks of the investment.

Rule 144 currently deems securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange, including market-adjustable securities, which have discounted conversion or exchange features that provide holders with protection against declines in the market value of the underlying securities prior to conversion or exchange.  This provision, known as “tacking”, has historically allowed holders of market-adjustable securities to wait for the applicable Rule 144 holding period to pass, and then convert and immediately sell the underlying securities into the public market without having to hold such underlying securities for any prescribed period of time.

Ultimately, the SEC determined that this “tacking” provision provides an incentive for persons to purchase market-adjustable securities with a view to distribution of the underlying securities without ever being subject to the full economic risks of the investment because tacking allows them to immediately sell such underlying securities. Therefore, the SEC has proposed an amendment to Rule 144(d)(3)(ii) to eliminate “tacking” for certain market-adjustable securities.

It is important to note that the proposed amendment to Rule 144(d)(3)(ii) would only apply to market-adjustable securities transactions in which:

  • The newly acquired securities were acquired from an issuer that, at the time of the conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange registered pursuant to Section 6 of the Exchange Act[1]; and
  • The convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock split, dividends, or other issuer-initiated changes in its capitalization.
II. Electronic Filing of Form 144 and Adjustment of Filing Deadline

The SEC also proposed amendments to the process for the filing of Form 144s in an effort to streamline the filing process.  Currently, a Form 144 may be filed on paper or electronically, however, the SEC has proposed amending Rules 101(a) and 101(b) of Regulation S-T to mandate the electronic filing of all Form 144 filings relating to securities of Exchange Act reporting companies.  Further, the proposed amendment would eliminate, altogether, Form 144 reporting for securities of non-reporting companies.

Additionally, the SEC has proposed amending Rule 144(h)(1) to eliminate the requirement to mail additional copies of Form 144 to the exchange on which the securities trade as electronic filings would render this practice unnecessary.  In connection with these amendments, the SEC intends to provide an online, fillable version of Form 144.  For filers who do not already have codes to make filings on EDGAR, the SEC has proposed a six-month transition period after the adoption of these amendments to allow for such filers to obtain the required filing codes.

The SEC has also proposed amending Rule 144(h)(2) to align the filing deadlines of Form 144 and Form 4, requiring that Forms 144 be filed before the end of the second business day following the day on which the sale of securities occurred.  This new filing timeline applies regardless of whether the transaction requires the filing of a Form 4.

III. Amendments to Form 4 and 5

Lastly, in an effort to allow for efficient disclosure of information, the SEC has proposed amending Forms 4 and 5 to add a box that gives filers the option to indicate that a reported transaction was made pursuant to a Rule 10b5-1 Trading Plan.

The public comment period for the proposed amendments will remain open for 60 days from the publication date of the proposing release in the Federal Register.

[1] According to the SEC, as of the end of 2019, there were approximately 2,760 unlisted reporting issuers.

Lorna Knick and Blake Leger are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.