On December 22, 2020, the Securities and Exchange Commission (the “SEC") proposed and published for comment amendments to Rule 144, Form 144, Form 4, Form 5 and Rule 101 of Regulation S-T. These amendments primarily seek to (a) mitigate the risk of unregistered distributions in connection with sales of market-adjustable securities under the current Rule 144 safe harbor by revising the holding period for such securities to begin upon the conversion or exchange of such securities, and (b) update and streamline Form 144 by mandating electronic filing and eliminating the Form 144 filing requirement with respect to non-reporting issuers. Comments on the proposed rules will be due 60 days after publication of the proposal in the Federal Register and may be submitted electronically using the SEC's internet comment form (http://www.sec.gov/rules/submitcomments.htm) or by mail to the following address: Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-24-20.
Rule 144 – Holding Period for Certain Conversions and Exchanges
The proposed amendments to Rule 144(d)(3)(ii) would eliminate the ability to tack the holding period of securities acquired upon the conversion or exchange of certain market-adjustable securities (also referred to as floating rate convertibles or future-priced convertibles) issued by an unlisted issuer. Rule 144 currently provides that the holding period for such securities can be tacked back to when the securities surrendered for conversion or exchange were acquired. If adopted, the holding period for affected securities would begin when the conversion or exchange of the market-adjustable security was complete.
The adopting release emphasizes that Rule 144 would remain unaffected for most convertible and variable-rate securities transactions. The changes would only apply to if both:
- if the issuer is an unlisted issuer (i.e., an issuer without a class of securities listed, or approved for listing, on a national exchange) at the time of the conversion or exchange; and
- the securities surrendered are “market-adjustable securities", by which the Commission means securities that contain terms, such as conversion rate or price adjustments, that offset declines in market value of the underlying securities.
Securities containing price protection (otherwise known as “ratchet") provisions would be “market-adjustable securities." However, convertible or exchangeable securities containing standard anti-dilution provisions, including adjustments for stock splits, dividends and other issuer-initiated changes in capitalization, would not be “market-adjustable securities."
Form 144 – Mandatory Electronic Filing
The proposed amendments seek to update and simplify Form 144, a notice form that must be filed with the SEC by an affiliate of an issuer who intends to resell restricted or control securities of such issuer in reliance upon Rule 144, by making the following revisions to the form:
Form 4 and Form 5 – Rule 10b5-1(c) Disclosure
- mandating electronic filing of Form 144 for securities issued by companies subject to reporting requirements of Section 13 or 15(d) of the Exchange Act;
- eliminate the requirement to file Form 144 for securities of companies that are not subject to such Exchange Act reporting requirements;
- eliminating certain information required under the current Form 144;
- extending the filing deadline for all Forms 144 to coincide with the Form 4 filing deadline (the end of the second business day following the day on which the sale of securities has been executed or the deemed date of execution); and
- create a process to filers to file both Form 4 and Form 144 through a single user interface.
The proposed amendments would add a check box option permitting Form 4 and Form 5 filers, at their discretion, to indicate that a reported acquisition or disposition was made pursuant to a Rule 10b5-1 plan. Filers would continue to be permitted to provide additional information, including the date of a Rule 10b5-1 plan, in the “Explanation of Responses" section of their filings.
Special thank you to Jordan Fricks, associate in the New York office, for his assistance with this article.