[Federal Register: December 17, 2007 (Volume 72, Number 241)]
[Rules and Regulations]
[Page 71545-71573]
[DOCID:fr17de07-15]

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Part III

Securities and Exchange Commission

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17 CFR Parts 230 and 239

 Revisions to Rules 144 and 145; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

[Release No. 33-8869; File No. S7-11-07]
RIN 3235-AH13

Revisions to Rules 144 and 145

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: Rule 144 under the Securities Act of 1933 creates a safe
harbor for the sale of securities under the exemption set forth in
Section 4(1) of the Securities Act. We are shortening the holding
period requirement under Rule 144 for ``restricted securities'' of
issuers that are subject to the reporting requirements of the
Securities Exchange Act of 1934 to six months. Restricted securities of
issuers that are not subject to the Exchange Act reporting requirements
will continue to be subject to a one-year holding period prior to any
public resale. The amendments also substantially reduce the
restrictions applicable to the resale of securities by non-affiliates.
In addition, the amendments simplify the Preliminary Note to Rule 144,
amend the manner of sale requirements and eliminate them with respect
to debt securities, amend the volume limitations for debt securities,
increase the Form 144 filing thresholds, and codify several staff
interpretive positions that relate to Rule 144. Finally, we are
eliminating the presumptive underwriter provision in Securities Act
Rule 145, except for transactions involving a shell company, and
revising the resale requirements in Rule 145(d). We believe that the
amendments will increase the liquidity of privately sold securities and
decrease the cost of capital for all issuers without compromising
investor protection.

DATES: Effective Date: February 15, 2008. The revised holding periods
and other amendments that we are adopting are applicable to securities
acquired before or after February 15, 2008. Comment Date: Comments
regarding the collection of information requirements within the meaning
of the Paperwork Reduction Act of 1995 should be received on or before
January 16, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml.
);     Send an e-mail to<EMAIL_ADDRESS>Please include

File No. S7-11-07 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/final.shtml). Comments are

also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC 20549. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Katherine Hsu or Raymond A. Be,
Special Counsels in the Office of Rulemaking, Division of Corporation
Finance, at<PHONE_NUMBER>, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
Rule 144,\1\ Rule 145,\2\ Rule 190,\3\ Rule 701,\4\ Rule 903,\5\ and
Form 144 \6\ under the Securities Act of 1933.\7\
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    \1\ 17 CFR 230.144.
    \2\ 17 CFR 230.145.
    \3\ 17 CFR 230.190.
    \4\ 17 CFR 230.701.
    \5\ 17 CFR 230.903.
    \6\ 17 CFR 239.144.
    \7\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Background
II. Discussion of Final Amendments
    A. Simplification of the Preliminary Note and Text of Rule 144
    B. Amendments to Holding Periods for Restricted Securities
    1. Six-Month Rule 144(d) Holding Period Requirement for Exchange
Act Reporting Companies
    2. Significant Reduction of Conditions Applicable to Non-
Affiliates
    3. Tolling Provision
    C. Amendments to the Manner of Sale Requirements Applicable to
Resales by Affiliates
    D. Changes to Rule 144 Conditions Related to Resales of Debt
Securities by Affiliates
    1. Comments Received on Proposed Amendments Relating to Debt
Securities
    2. No Manner of Sale Requirements Regarding Resales of Debt
Securities
    3. Raising Volume Limitations for Debt Securities
    E. Increase of the Thresholds that Trigger the Form 144 Filing
Requirement for Affiliates
    F. Codification of Several Staff Positions
    1. Securities Acquired Under Section 4(6) of the Securities Act
Are Considered ``Restricted Securities'
    2. Tacking of Holding Periods When a Company Reorganizes Into a
Holding Company Structure
    3. Tacking of Holding Periods for Conversions and Exchanges of
Securities
    4. Cashless Exercise of Options and Warrants
    5. Aggregation of Pledged Securities
    6. Treatment of Securities Issued by ``Reporting and Non-
Reporting Shell Companies''
    7. Representations Required From Security Holders Relying on
Exchange Act Rule 10b5-1(c)
    G. Amendments to Rule 145
    H. Conforming and Other Amendments
    1. Regulation S Distribution Compliance Period for Category
Three Issuers
    2. Underlying Securities in Asset-Backed Securities Transactions
    3. Securities Act Rule 701(g)(3)
III. Paperwork Reduction Act
    A. Background
    B. Summary of Amendments
    C. Revised Burden Estimates
    D. Solicitation of Comments
IV. Cost-Benefit Analysis
    A. Background
    B. Description of Amendments
    C. Benefits
    D. Costs
V. Promotion of Efficiency, Competition and Capital Formation
VI. Final Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Amendments
    B. Significant Issues Raised by Comments
    C. Small Entities Subject to the Rule
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Basis and Text of Amendments

I. Background

    The Securities Act of 1933 (``Securities Act'') requires
registration of all offers and sales of securities in interstate
commerce or by use of the U.S. mails, unless an exemption from the
registration requirement is available.\8\ Section 4(1) of the
Securities Act provides such an exemption for transactions by any
person other than an issuer, underwriter or dealer.\9\
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    \8\ See 15 U.S.C. 77e.
    \9\ 15 U.S.C. 77d(1).
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    The definition of the term ``underwriter'' is key to the operation
of the Section 4(1) exemption. Section 2(a)(11) of the Securities Act
defines an

underwriter as ``any person who has purchased from an issuer with a
view to, or offers or sells for an issuer in connection with, the
distribution of any security, or participates or has a direct or
indirect participation in any such undertaking.'' \10\ The Securities
Act does not, however, provide specific criteria for determining when a
person purchases securities ``with a view to * * * the distribution''
of those securities. In 1972, the Commission adopted Rule 144 to
provide a safe harbor from this definition of ``underwriter'' to assist
security holders in determining whether the Section 4(1) exemption is
available for their resale of securities.\11\
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    \10\ 15 U.S.C. 77b(a)(11). Section 2(a)(11) states that the term
``issuer'' shall include, in addition to an issuer, any person
directly or indirectly controlling or controlled by the issuer, or
any person under direct or indirect common control with the issuer.
Therefore, any person who purchased securities from an affiliate of
an issuer is an underwriter under Section 2(a)(11) if that person
purchased with a view to the distribution of the securities.
    \11\ Release No. 33-5223 (Jan. 11, 1972) [37 FR 591].
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    Rule 144 regulates the resale of two categories of securities--
restricted securities and control securities. Restricted securities are
securities acquired pursuant to one of the transactions listed in Rule
144(a)(3).\12\ Although it is not a term defined in Rule 144, ``control
securities'' is used commonly to refer to securities held by an
affiliate of the issuer,\13\ regardless of how the affiliate acquired
the securities.\14\ Therefore, if an affiliate acquires securities in a
transaction that is listed in Rule 144(a)(3), those securities are both
restricted securities and control securities. A person selling
restricted securities, or a person selling restricted or other
securities on behalf of the account of an affiliate, who satisfies all
of Rule 144's applicable conditions in connection with the transaction,
is deemed not to be an ``underwriter,'' as defined in Section 2(a)(11)
of the Securities Act, and therefore may rely on the Section 4(1)
exemption for the resale of the securities.
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    \12\ 17 CFR 230.144(a)(3).
    \13\ An affiliate of the issuer is a person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such issuer. See 17
CFR 230.144(a)(1).
    \14\ See, e.g., Release No. 33-7391 (Feb. 20, 1997) [62 FR
9246].
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    Since its adoption, we have reviewed and revised Rule 144 several
times. We last made major changes in 1997 (``1997 amendments'').\15\ At
that time, we shortened the required holding periods for restricted
securities.\16\ Before the 1997 amendments, security holders could
resell restricted securities under Rule 144, subject to limitation,
after two years, and persons who were not affiliates and had not been
affiliates during the prior three months, could resell restricted
securities without limitation after three years. The 1997 amendments
changed these two-year and three-year periods to one-year and two-year
periods, respectively.
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    \15\ See Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242] (``the
1997 Adopting Release'').
    \16\ We shortened the holding period requirements in paragraphs
(d) and (k) of Rule 144.
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    On the same day that we adopted those changes, we also proposed and
solicited comment on several possible additional changes to Rule 144,
Rule 145 and Form 144, including reducing the holding period further
(``1997 Proposing Release'' and ``1997 proposals'').\17\ We received 38
comment letters on those proposed changes. While some commenters
supported further shortening the holding periods, others suggested that
we monitor the results of the 1997 amendments before making further
changes. We did not take further action to adopt the 1997 proposals.
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    \17\ See the 1997 Proposing Release. In the 1997 Proposing
Release, we proposed to (1) revise the Preliminary Note to Rule 144
to restate the intent and effect of the rule, (2) add a bright-line
test to the Rule 144 definition of ``affiliate,'' (3) eliminate the
Rule 144 manner of sale requirements, (4) increase the Form 144
filing thresholds, (5) include in the definition of ``restricted
securities'' securities issued pursuant to the Securities Act
Section 4(6) exemption, (6) clarify the holding period determination
for securities acquired in certain exchanges with the issuer and in
holding company formations, (7) streamline and simplify several Rule
144 provisions, and (8) eliminate the presumptive underwriter
provisions of Rule 145. We also solicited comment on (1) further
revisions to the Rule 144 holding periods, (2) elimination of the
trading volume tests to determine the amount of securities that can
be resold under Rule 144, and (3) several possible regulatory
approaches with respect to certain hedging activities.
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    Rule 144 states that a selling security holder shall be deemed not
to be engaged in a distribution of securities, and therefore not an
underwriter, with respect to such securities, thus making available the
Section 4(1) exemption from registration, if the resale satisfies
specified conditions. The conditions include the following:
     There must be adequate current public information
available about the issuer;\18\
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    \18\ 17 CFR 230.144(c).
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     If the securities being sold are restricted securities,
the security holder must have held the security for a specified holding
period;\19\
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    \19\ 17 CFR 230.144(d).
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     The resale must be within specified sales volume
limitations;\20\
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    \20\ 17 CFR 230.144(e).
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     The resale must comply with the manner of sale
requirements;\21\ and
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    \21\ 17 CFR 230.144(f) and (g).
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     The selling security holder must file Form 144 if the
amount of securities being sold exceeds specified thresholds.\22\
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    \22\ 17 CFR 230.144(h).

Rule 144, as it existed before today's amendments, permitted a non-
affiliate to publicly resell restricted securities without being
subject to the above limitations if the securities had been held for
two years or more, provided that the security holder was not, and, for
the three months prior to the sale, had not been, an affiliate of the
issuer.\23\
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    \23\ This provision was previously located in Rule 144(k).
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    On July 5, 2007, we again proposed to amend several aspects of Rule
144 and Rule 145, including by further shortening the holding periods
(the ``2007 Proposing Release'').\24\ We proposed to shorten the
holding period requirement in Rule 144(d) for restricted securities of
issuers that are subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'')\25\
to six months. Restricted securities of issuers that are not subject to
Exchange Act reporting requirements would continue to be subject to a
one-year holding period under Rule 144(d). We also proposed to relieve
non-affiliates of reporting issuers from having to comply with all
conditions in Rule 144, except the current public information
requirement, after a six-month holding period. Non-affiliates of non-
reporting issuers would be allowed to resell their securities freely
after a one-year holding period. In addition, we proposed to:
     Simplify the Preliminary Note to Rule 144 and text of Rule
144;
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    \24\ Release No. 33-8813 (June 22, 2007) [72 FR 36822] (Jul. 5,
2007).
    \25\ 15 U.S.C. 78a et seq.
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     Toll the holding period during the time that security
holders engage in certain hedging transactions;
     Eliminate the ``manner of sale'' requirements with respect
to the resale of debt securities;
     Increase the thresholds triggering the requirement to file
Form 144; and
     Codify several staff positions relating to Rule 144.
    We also solicited comment on amending the Form 144 filing deadline
to coincide with the deadline for filing a Form 4 \26\ under Section 16
\27\ of the Exchange Act and permitting persons who are subject to
Section 16 to meet their Form 144 filing requirement by

filing a Form 4.\28\ Finally, we proposed to eliminate the presumptive
underwriter provision in Securities Act Rule 145, except for
transactions involving a shell company, and to harmonize the resale
provisions in Rule 145 with the Rule 144 provisions applicable to
resales of securities of shell companies.
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    \26\ 17 CFR 249.104.
    \27\ 15 U.S.C. 78p.
    \28\ Section 16 applies to every person who is the beneficial
owner of more than 10% of any class of equity securities registered
under Section 12 of the Exchange Act, and each officer and director
(collectively, ``reporting persons'' or ``insiders'') of the issuer
of such security. Section 16(a) of the Exchange Act generally
requires reporting persons to report changes in their beneficial
ownership of all equity securities of the issuer on Form 4 before
the end of the second business day following the day on which the
transaction that caused the change in beneficial ownership was
executed.
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    We received 32 comment letters from 30 commenters on the proposals
in the 2007 Proposing Release.\29\ A majority of the commenters
expressed support for the proposals in general.\30\ Several of these
commenters expressed support for the proposed amendments to shorten the
holding period requirement in Rule 144 for both affiliates and non-
affiliates of Exchange Act reporting issuers.\31\ Two commenters
opposed shortening the holding period, as proposed.\32\
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    \29\ The comment letters on the 2007 Proposing Release are
available on the Commission's public Web site at http://www.sec.gov/comments/s7-11-07/s71107.shtml
.

    \30\ See, e.g., comment letters on the 2007 Proposing Release
from Jesse Brill (dated Aug. 1, 2007) (``Brill 1''); Cleary Gottlieb
Steen & Hamilton LLP (``Cleary Gottlieb''); Feldman Weinstein and
Smith LLP (``Feldman''); Fried, Frank, Harris, Shriver, and Jacobsen
LLP (``Fried Frank''); Barry Gleicher (``Gleicher''); Krieger &
Prager, LLP (``Krieger''); U.S. Securities Lawyers in London
(``London Forum''); Parsons/Burnett LLP (``Parsons''); Pink Sheets,
LLC (``Pink Sheets''); Richardson Patel LLP (``Richardson Patel'');
Roth Capital Partners (``Roth''); Society of Corporate Secretaries &
Governance Professionals (``SCSGP''); Sichenzia Ross Friedman
Ference LLP (``Sichenzia''); Sullivan & Cromwell LLP (``Sullivan'');
Peter J. Weisman (``Weisman''); and Williams Securities Law
(``Williams''); and a joint letter from the Securities Industry and
Financial Markets Association, International Swaps and Derivatives
Association, Inc. and Management Funds Association (``Financial
Associations'').
    \31\ See comment letters on the 2007 Proposing Release from the
Committee on Federal Regulation of Securities of the American Bar
Association (``ABA''); Feldman; Financial Associations; Fried Frank;
London Forum; Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and
Williams.
    \32\ See comment letters on the 2007 Proposing Release from the
North American Securities Administrators Association, Inc.
(``NASAA'') and Marc I. Steinberg (``Steinberg'').
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    Some commenters expressed opposition to the proposed reintroduction
of a provision that would toll, or suspend, for up to six months, the
holding period during any period that a security holder engages in
hedging activities with respect to any equity securities of the same
class as the restricted securities or any securities convertible into
that class (or, in the case of nonconvertible debt, with respect to any
nonconvertible debt securities).\33\ The commenters thought that the
tolling provision could have a negative effect on capital raising
transactions. These commenters provided several recommendations on how
we should modify the tolling provision, if we decide to adopt it. We
received general support for the other aspects of the proposed
amendments, including the proposals relating to Form 144, the
elimination of the manner of sale requirements for debt securities and
the codification of several staff interpretations.
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    \33\ See comment letters on the 2007 Proposing Release from ABA;
Cleary Gottlieb; Feldman; Financial Associations; Richardson Patel;
Sichenzia; and Weisman.
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II. Discussion of Final Amendments

A. Simplification of the Preliminary Note and Text of Rule 144

    In the 2007 Proposing Release, we noted that the current
Preliminary Note is complex and may be confusing to some security
holders. We proposed amendments to simplify and clarify the Preliminary
Note to Rule 144 and to incorporate plain English principles. The
proposed amendments to the Preliminary Note were not intended to alter
the substantive operation of the rule. In addition, we proposed changes
throughout the rule to make the rule less complex and easier to read.
    We received a few comments on the proposed changes to simplify Rule
144 and the Preliminary Note. One commenter believed that the
Preliminary Note to Rule 144 is no longer necessary, because the
purpose and meaning of the rule are well-understood.\34\ Some
commenters recommended that we further explain how Rule 144 can be used
for the resale of control securities.\35\
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    \34\ See comment letter on the 2007 Proposing Release from ABA.
    \35\ See comment letters on the 2007 Proposing Release from ABA;
Bulldog Investors; and Sutherland Asbill & Brennan LLP
(``Sutherland'').
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    We are adopting the amendments to the Preliminary Note with some
modification from the proposed version. The revised Preliminary Note
retains an explanation of the relationship among the exemption in
Section 4(1) of the Securities Act, the Section 2(a)(11) definition of
``underwriter'' and the Rule 144 safe harbor. Consistent with the
proposal, the revised Preliminary Note also clarifies that any person
who sells restricted securities, and any person who sells restricted
securities or other securities on behalf of an affiliate, shall be
deemed not to be engaged in a distribution of such securities and
therefore shall be deemed not to be an underwriter with respect to such
securities if the sale in question is made in accordance with all the
applicable provisions of the rule. The revised Preliminary Note further
states that, although Rule 144 provides a safe harbor for establishing
the availability of the Section 4(1) exemption, it is not the exclusive
means for reselling restricted and control securities. Therefore, Rule
144 does not eliminate or otherwise affect the availability of any
other exemption for resales.\36\ Consistent with a statement that was
included in the original Rule 144 adopting release,\37\ we are adding a
statement to the Preliminary Note that the Rule 144 safe harbor is not
available with respect to any transaction or series of transactions
that, although in technical compliance with the rule, is part of a plan
or scheme to evade the registration requirements of the Securities
Act.\38\ We also are adopting plain English changes throughout the rule
text substantially as proposed.
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    \36\ We are moving the statements indicating that Rule 144 is a
non-exclusive safe harbor from paragraph (j) of the rule, as it
existed prior to the amendments, to the Preliminary Note.
    \37\ Release No. 33-5223. In the original release adopting Rule
144, we stated:
    In view of the objectives and policies underlying the Act, the
rule shall not be available to any individual or entity with respect
to any transaction which, although in technical compliance with the
provisions of the rule, is part of a plan by such individual or
entity to distribute or redistribute securities to the public. In
such case, registration is required.
    \38\ Similar language can also be found in other rules such as
in the Preliminary Note to Securities Act Rule 144A [17 CFR
230.144A].
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B. Amendments to Holding Periods for Restricted Securities

1. Six-Month Rule 144(d) Holding Period Requirement for Exchange Act
Reporting Companies
    As stated above, in 1997, we reduced the Rule 144 holding periods
for restricted securities for both affiliates and non-affiliates.\39\
Before the 1997 amendments, security holders could sell limited amounts
of restricted securities after holding those securities for two years
if they satisfied all other conditions imposed by Rule 144.\40\ Under
Rule 144(k), non-affiliates could sell restricted securities without
being subject to any of the conditions in Rule 144 after holding their
securities for three years. The 1997 amendments to

Rule 144 reduced the two-year Rule 144(d) holding period to one year
and amended the three-year Rule 144(k) holding period to two years.
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    \39\ See the 1997 Adopting Release.
    \40\ These other conditions included the availability of current
public information, the volume of sale limitations, the manner of
sale requirements, and the filing of Form 144. See 17 CFR
230.144(c), (e), (f) and (h).
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    In the 1997 Proposing Release, we solicited comment on whether the
Rule 144(d) holding period should be further reduced for both
affiliates and non-affiliates, and whether restrictions applicable to
sales by non-affiliates also should be reduced. We received numerous
comments on this issue. Twelve commenters recommended that we further
reduce the holding period to six months.\41\ Two other commenters
thought that we should maintain the holding periods that we had just
recently adopted.\42\ Eight commenters recommended that we gain more
experience with the new holding periods before proposing further
amendments to those holding periods.\43\
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    \41\ See comment letters on the 1997 Proposing Release from
American Society of Corporate Secretaries (``ASCS''); Association
for Investment Management & Research (``AIMR''); Association of the
City Bar of New York (``NY City Bar''); Baltimore Gas & Electric
(``BG&E''); Investment Company Institute (``ICI''); Charles
Lilienthal (``Lilienthal''); Loeb &Loeb LLP; New York State Bar
Association (``NY Bar''); Schwartz Investments, LLC (``Schwartz
Investments''); Sullivan; Testa, Hurwitz & Thibeault, LLP (``Testa
Hurwitz''); and Willkie, Farr & Gallagher LLP (``Willkie Farr'').
The comment letters on the 1997 Proposing Release are available on
the Commission's Web site at http://www.sec.gov/rules/proposed/s7797.shtml
 or in the Commission's Public Reference Room, 100 F

Street, NE., Washington, DC 20549. Interested persons should refer
to File No. S7-07-97.
    \42\ See comment letters on the 1997 Proposing Release from
Argent Securities, Inc. (``Argent'') and The Corporate Counsel
(``Corporate Counsel'').
    \43\ See comment letters on the 1997 Proposing Release from ABA;
joint letter from Goldman Sachs & Co., JP Morgan Securities, Inc.,
Morgan Stanley & Co., Inc., and Salomon Brothers Inc. (``Four
Brokers''); Lehman Brothers Inc. (``Lehman Brothers''); Merrill
Lynch & Co., Inc. (``Merrill Lynch''); Morgan Stanley & Co., Inc.
(``Morgan Stanley''); Regional Investment Bankers Association
(``Regional Bankers''); Securities Industry Association (``SIA'');
and Smith Barney Inc. (``Smith Barney'').
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    In the 2007 Proposing Release, we again proposed to shorten the
Rule 144(d) holding period for restricted securities held by affiliates
and non-affiliates.\44\ The proposal would have permitted both
affiliates and non-affiliates to publicly sell restricted securities of
Exchange Act reporting issuers \45\ after holding the securities for
six months, subject to any other applicable condition of Rule 144, if
they had not engaged in hedging transactions with respect to the
securities. Because of our concern that the market does not have
sufficient information and safeguards with respect to non-reporting
issuers, we proposed to retain the one-year holding period for
restricted securities of issuers that are not subject to Exchange Act
Section 13(a) or Section 15(d) reporting obligations for both
affiliates and non-affiliates.
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    \44\ See the 2007 Proposing Release at Section II.B.2.a.
    \45\ Under the 2007 proposals, the six-month holding period
would apply to securities of an issuer that is, and has been for at
least 90 days before the sale, subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act.
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    Several commenters supported the proposal to shorten the holding
period to six months for securities of reporting issuers.\46\ These
commenters noted that the shortened holding period would increase
liquidity for issuers, make capital investment more attractive, and
decrease costs of capital for smaller companies without sacrificing
investor protection.\47\ In this regard, one commenter noted that
today's markets now function at an accelerated pace, and technology,
particularly the Internet, has caused the markets to become more
efficient.\48\ Two commenters advocated an even shorter holding period
requirement than the proposed six-month period, with one commenter
advocating a four-month holding period and the other a three-month
holding period.\49\ Two commenters opposed shortening the holding
period requirement under Rule 144, as proposed.\50\
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    \46\ See comment letters on the 2007 Proposing Release from ABA;
Feldman; Financial Associations; Fried Frank; London Forum;
Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and Williams.
    \47\ See comment letters on the 2007 Proposing Release from
Financial Associations; Pink Sheets; Richardson Patel; and Roth.
    \48\ See comment letter on the 2007 Proposing Release from ABA.
See also letter to John W. White, Director, SEC Division of
Corporation Finance, from Keith F. Higgins, Chair, Committee on
Federal Regulation of Securities, ABA Section of Business Law (Mar.
22, 2007) (``the March 2007 ABA Letter''), available at http://www.sec.gov/comments/s7-11-07/s71107.shtml
.

    \49\ See comment letters on the 2007 Proposing Release from
Feldman and Weisman.
    \50\ See comment letters on the 2007 Proposing Release from
NASAA and Steinberg.
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    The purpose of Rule 144 is to provide objective criteria for
determining that the person selling securities to the public has not
acquired the securities from the issuer for distribution. A holding
period is one criterion established to demonstrate that the selling
security holder did not acquire the securities to be sold under Rule
144 with distributive intent. We do not want the holding period to be
longer than necessary or impose any unnecessary costs or restrictions
on capital formation. After observing the operation of Rule 144 since
the 1997 amendments, we believe that a six-month holding period for
securities of reporting issuers provides a reasonable indication that
an investor has assumed the economic risk of investment in the
securities to be resold under Rule 144. Therefore, we are adopting a
six-month holding period for reporting companies, as proposed.\51\ Most
commenters agreed that shortening the holding period to six months for
restricted securities of reporting issuers will increase the liquidity
of privately sold securities and decrease the cost of capital for
reporting issuers, while still being consistent with investor
protection.\52\ By reducing the holding period for restricted
securities, these amendments are intended to help companies to raise
capital more easily and less expensively. For example, by making
private offerings more attractive, the amendments may allow some
companies to avoid certain types of costly financing structures
involving the issuance of extremely dilutive convertible securities.
Many commenters supported the proposal to maintain the existing one-
year holding period for restricted securities of non-reporting
issuers.\53\
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    \51\ See amendments to Rule 144(d). The amendments do not change
the Rule 144(d) requirement that, if the acquiror takes the
securities by purchase, the holding period will not commence until
the full purchase price is paid.
    \52\ See Section VI. of this release.
    \53\ See comment letters on the 2007 Proposing Release from ABA;
Brill 1; Financial Associations; Gleicher; Weisman; and Williams.
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    Under the amendments that we are adopting, the six-month holding
period requirement will apply to the securities of an issuer that has
been subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act for a period of at least 90 days before the Rule 144
sale.\54\ Restricted securities of a ``non-reporting issuer'' will
continue to be subject to a one-year holding period requirement.\55\ A
non-reporting issuer is one that is not, or has not been for a period
of at least 90 days before the Rule 144 sale, subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.\56\
---------------------------------------------------------------------------

    \54\ See new Rule 144(d)(1)(i). We also are making conforming
amendments to paragraphs (e)(3)(ii), (e)(3)(iii) and (e)(3)(iv) of
Rule 144.
    \55\ However, non-affiliates of non-reporting companies will no
longer be subject to any other resale restrictions after meeting the
one-year holding period. See Section II.B.3 below.
    \56\ See new Rule 144(d)(1)(ii).
---------------------------------------------------------------------------

    We believe that different holding periods for reporting and non-
reporting issuers are appropriate given that reporting issuers have an
obligation to file periodic reports with updated financial information
(including audited financial information in annual filings) that are
publicly available on EDGAR, the Commission's electronic filing system.
Although non-reporting issuers

must make some information publicly available before resales can be
made under Rule 144, this information typically is much more limited in
scope than information included in Exchange Act reports, is not
required to include audited financial information, and is not publicly
available via EDGAR.\57\ For these reasons, we believe that continuing
to require security holders of non-reporting issuers to hold their
securities for one year is not unduly burdensome and is consistent with
investor protection.
---------------------------------------------------------------------------

    \57\ See 17 CFR 240.15c2-11.
---------------------------------------------------------------------------

2. Significant Reduction of Conditions Applicable to Non-Affiliates
    Before adoption of these amendments, both non-affiliates and
affiliates were subject to all other applicable conditions of Rule 144,
in addition to the Rule 144(d) holding period requirement, including
the condition that current information about the issuer of the
securities be publicly available, the limitations on the amount of
securities that may be sold in any three-month period, the manner of
sale requirements and the Form 144 notice requirement. However,
pursuant to paragraph (k) of Rule 144 as it existed prior to the
amendments that we are adopting, a non-affiliate of the issuer at the
time of the Rule 144 sale who had not been an affiliate during the
three months prior to the sale, could sell the securities after holding
them for two years without complying with these other conditions.
    In the 2007 Proposing Release, we proposed to permit non-affiliates
to resell their restricted securities freely after meeting the
applicable holding period requirement (i.e., six months with respect to
a reporting issuer and one year with respect to a non-reporting
issuer), except that non-affiliates of reporting issuers still would be
subject to the current public information requirement in Rule 144(c)
for an additional six months after the end of the initial six-month
holding period.
    In general, commenters supported the proposal to reduce
substantially the requirements for the resale of restricted securities
by non-affiliates under Rule 144.\58\ Noting the importance of the
current public information condition, two commenters expressed support
for the proposed retention of that requirement for the resales of
restricted securities by non-affiliates occurring between six months
and one year after acquisition of the securities.\59\ Some commenters
expressed support for removal of the manner of sale requirements and
the Form 144 notice requirement,\60\ while a few objected to removal of
those requirements.\61\ The commenters objecting to the removal of
those requirements expressed concern about the transparency of Rule 144
transactions and the potential increase in violations of the holding
period requirement if the manner of sale requirements and the Form 144
notice requirement were eliminated.\62\ The two commenters that opposed
shortening the Rule 144(d) holding period also opposed the proposals to
permit non-affiliates to resell without being subject to any other
condition (except the public information requirement, with respect to
resales of securities of reporting companies) after they meet the
holding period.\63\
---------------------------------------------------------------------------

    \58\ See, e.g., comment letters on the 2007 Proposing Release
from Brill 1; Cleary Gottlieb; Pink Sheets; and Weisman.
    \59\ See comment letters on the 2007 Proposing Release from ABA
and Weisman.
    \60\ See, e.g., comment letters on the 2007 Proposing Release
from ABA; BAIS; Cleary Gottlieb; Fried Frank; and SCSGP.
    \61\ See comment letters on the 2007 Proposing Release from
Argus Vickers Stock Research Corp. (``Argus''); Brill 1; and The
Washington Service on the Form 144 requirement (``WS 2'').
    \62\ See comment letters on the 2007 Proposing Release from
Brill 1 and WS 2.
    \63\ See comment letters on the 2007 Proposing Release from
NASAA and Steinberg.
---------------------------------------------------------------------------

    We are adopting the amendments for the sale of restricted
securities by non-affiliates after the holding period, as proposed.\64\
Under the amendments, after the applicable holding period requirement
is met, the resale of restricted securities by a non-affiliate under
Rule 144 will no longer be subject to any other conditions of Rule 144
except that, with regard to the resale of securities of a reporting
issuer, the current public information requirement in Rule 144(c) will
apply for an additional six months after the six-month holding period
requirement is met.\65\ Therefore, a non-affiliate will no longer be
subject to the Rule 144 conditions relating to volume limitations,
manner of sale requirements, and filing Form 144.\66\
---------------------------------------------------------------------------

    \64\ Under the amendments, paragraph (k) of Rule 144 has been
removed. The conditions that non-affiliates are required to meet for
the sale of their securities under Rule 144 are now contained in
paragraph (b)(1) of the rule.
    \65\ Some commenters requested us to state that the Commission
would not object if the restricted securities legend were removed
from securities held by a non-affiliate, after all the applicable
Rule 144 conditions to resale have been met. See comment letters on
the 2007 Proposing Release from Cleary Gottlieb; Financial
Associations; and Weisman. In the past, the staff in the Division of
Corporation Finance has expressed the view that ``it is not
inappropriate for issuers to remove restrictive legends from
securities that may be resold in reliance on Rule 144(k).'' See,
e.g., Toth Aluminum Corporation (Oct. 31, 1988). Under the
amendments that we are adopting, we do not object if issuers remove
restrictive legends from securities held by non-affiliates after all
of the applicable conditions in Rule 144 are satisfied. However, the
removal of a legend is a matter solely in the discretion of the
issuer of the securities. Disputes about the removal of legends are
governed by state law or contractual agreements, rather than federal
law.
    \66\ Although the Rule 144(e) volume limitations will no longer
apply to resales of restricted securities by non-affiliates as a
result of the amendments, an affiliate pledgor, donor, or trust
settlor will be required to aggregate the amount of securities sold
for the account of a pledgee, donee or trust, as applicable, even
when there is no concerted action, in accordance with Rule
144(e)(3)(ii), (iii), and (iv) in order to determine the amount of
securities that is permitted to be sold under Rule 144.
---------------------------------------------------------------------------

    We believe that the complexity of resale restrictions may inhibit
sales by, and imposes costs on, non-affiliates. Because Rule 144 is
relied upon by many individuals to resell their restricted securities,
we believe that it is particularly helpful to streamline and reduce the
complexity of the rule as much as possible while retaining its
integrity. We continue to believe that retaining the current public
information requirement with regard to resales of restricted securities
of reporting issuers for up to one year after the acquisition of the
securities is important to help provide the market with adequate
information regarding the issuer of the securities. In addition, we
generally believe that most abuses in sales of unregistered securities
involve affiliates of issuers \67\ and securities of shell companies.
As discussed below, we are codifying the staff's current interpretive
position that Rule 144 cannot be relied upon for the resale of the
securities of reporting and non-reporting shell companies.\68\
---------------------------------------------------------------------------

    \67\ Pink Sheets also noted in its letter that most of the
abuses in transactions involving unregistered securities involve
sales and purchases by affiliates of the issuers.
    \68\ See Section II.E.6 of this release.
---------------------------------------------------------------------------

    The final conditions applicable to the resale under Rule 144 of
restricted securities held by affiliates and non-affiliates of the
issuer can be summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                                             Non-affiliate (and has not been an
                                    Affiliate or person selling on behalf     affiliate during the prior three
                                               of an affiliate                            months)
----------------------------------------------------------------------------------------------------------------
Restricted Securities of           During six-month holding period--no     During six-month holding period--no
 Reporting Issuers.                 resales under Rule 144 permitted        resales under Rule 144 permitted.
                                   After six-month holding period--may     After six-month holding period but
                                    resell in accordance with all Rule      before one year--unlimited public
                                    144 requirements including:             resales under Rule 144 except that
                                    Current public information,     the current public information
                                    Volume limitations,             requirement still applies.
                                    Manner of sale requirements    After one-year holding period--
                                    for equity securities, and              unlimited public resales under Rule
                                    Filing of Form 144              144; need not comply with any other
                                                                            Rule 144 requirements.
Restricted Securities of Non-      During one-year holding period--no      During one-year holding period--no
 Reporting Issuers.                 resales under Rule 144 permitted        resales under Rule 144 permitted.
                                   After one-year holding period--may      After one-year holding period--
                                    resell in accordance with all Rule      unlimited public resales under Rule
                                    144 requirements including:             144; need not comply with any other
                                    Current public information,     Rule 144 requirements.
                                    Volume limitations,
                                    Manner of sale requirements
                                    for equity securities, and
                                    Filing of Form 144
----------------------------------------------------------------------------------------------------------------

3. Tolling Provision
    In 1990, we eliminated a Rule 144 provision that tolled, or
suspended, the holding period of a security holder maintaining a short
position in, or any put or other option to dispose of, securities
equivalent to the restricted securities owned by the security
holder.\69\ We eliminated this provision in conjunction with an
amendment to broaden a security holder's ability to tack the holding
periods of prior owners to the security holder's own holding
period.\70\
---------------------------------------------------------------------------

    \69\ See Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933].
    \70\ ``Tacking'' the holding period is the ability of the
security holder to include, under certain circumstances, the period
that securities were held by a previous owner as part of his or her
own holding period for the purposes of meeting the holding period
requirement in Rule 144(d). Further discussion about tacking appears
in Section II.E.2 of this release.
---------------------------------------------------------------------------

    We previously have expressed concern regarding the effect of
hedging activities designed to shift the economic risk of investment
away from the security holder with respect to restricted
securities.\71\ In the 1997 Proposing Release, we solicited comment on
several alternatives designed to address these concerns.\72\ Seven
commenters recommended that we adopt measures to eliminate or restrict
hedging activities during the holding period.\73\ Six commenters
recommended maintaining the status quo.\74\ Six other commenters
suggested that we adopt a safe harbor for certain hedging activities
that would be deemed permissible under Rule 144.\75\
---------------------------------------------------------------------------

    \71\ For a discussion on hedging arrangements in prior releases,
see Section IV.B of the 1997 Proposing Release and Section II.A of
Release No. 33-7187 (June 27, 1995) [60 FR 35645].
    \72\ See the 1997 Proposing Release. In that release, we
proposed five different alternatives: (1) make the Rule 144 safe
harbor unavailable to persons who hedge during the restricted
period; (2) independently of Rule 144, promulgate a rule that would
define a sale for purposes of Section 5 to include specified hedging
transactions; (3) adopt a shorter holding period during which
hedging could not occur without losing the safe harbor; (4)
reintroduce a tolling provision in Rule 144 similar to the provision
that was included prior to 1990; or (5) maintain the status quo with
no specific prohibition against hedging.
    \73\ See comment letters on the 1997 Proposing Release from ABA;
AIMR; Argent; ASCS; Constantine Katsoris; Corporate Counsel; and
Schwartz Investments.
    \74\ See comment letters on the 1997 Proposing Release from
Bear, Stearns & Co., Inc.; BG&E Intel Corporation (``Intel'');
PaineWebber Incorporated; Wilkie Farr; and XXI Securities.
    \75\ See comment letters on the 1997 Proposing Release from Four
Brokers; NY Bar; SIA; Merrill Lynch; Citibank; and Lehman Brothers.
---------------------------------------------------------------------------

    In the 2007 Proposing Release, we acknowledged a concern about the
effect of hedging activities in connection with the adoption of a six-
month holding period for securities of reporting issuers. We noted
that, when we eliminated the tolling provision in 1990, the Rule 144
holding periods were longer.\76\ We also expressed the view that the
proposal to shorten the holding period to six months could make the
entry into such hedging arrangements significantly easier and less
costly because these arrangements would cover a much shorter
period.\77\ We therefore proposed to reintroduce a Rule 144 tolling
provision that would have suspended the holding period for restricted
securities of Exchange Act reporting issuers while a security holder
engaged in certain hedging transactions.\78\ However, we proposed that
any suspension due to hedging would not have caused, under any
circumstances, the holding period to extend beyond one year.
---------------------------------------------------------------------------

    \76\ At that time, Rule 144 provided for a two-year holding
period before a security holder could sell limited amounts of
restricted securities, and a three-year period before a non-
affiliate security holder could sell an unlimited amount of the
securities.
    \77\ See the 2007 Proposing Release at Section II.B.2.b.
    \78\ We proposed to exclude from the holding period any period
in which the security holder had a short position or had entered
into a ``put equivalent position,'' as defined by Exchange Act Rule
16a-1(h) [17 CFR 240.16a-1(h)], with respect to the same class of
securities (or, in the case of nonconvertible debt, with respect to
any nonconvertible debt securities of the same issuer).
---------------------------------------------------------------------------

    Because the proposed tolling provision also would have worked in
conjunction with the Rule 144 provisions that permit tacking of holding
periods, a selling security holder would have been required to
determine whether a previous owner of the securities had engaged in
hedging activities with respect to the securities, if the selling
security holder wished to tack the previous owner's holding period to
the holding period of the selling security holder. The proposed
provision would have tolled the holding period during any period in
which the previous owner held a short position or put equivalent
position with respect to the securities, however, there would have been
no tolling of the previous owner's holding period if the security
holder for whose account the securities were to be sold reasonably
believed that no such short or put equivalent position was held by the
previous owner.
    In connection with the proposed tolling provision, we also proposed
other related changes to Rule 144. First, we proposed to require that
information be provided in Form 144 regarding any short or put
equivalent position held with respect to the securities prior to the
resale of the securities. The second proposal related to the manner of
sale requirements in paragraphs (f) and (g) of Rule 144.\79\
---------------------------------------------------------------------------

    \79\ We proposed to amend Note (ii) to Rule 144(g)(3) [17 CFR
230.144(g)(3)] to supplement the reasonable inquiry requirement by
requiring a broker to inquire into the existence and character of
any short position or put equivalent position with regard to the
securities held by the person for whose account the securities are
to be sold, if the securities have been held for less than one year,
whether such person has made inquiries into the existence and
character of any short position or put equivalent position held by
the previous owner of the securities, and the results of such
person's inquiries.

---------------------------------------------------------------------------

    Several commenters objected to the proposed reintroduction of the
tolling provision and suggested modifications to the proposed
provision, if the Commission chose to adopt it.\80\ Commenters
objecting to the proposed tolling provision provided the following
reasons, among others, why the Commission should not adopt the proposed
tolling provision:
---------------------------------------------------------------------------

    \80\ See, e.g., comment letters on the 2007 Proposing Release
from ABA; Cleary Gottlieb; Feldman; Financial Associations;
Richardson Patel; Sichenzia; and Weisman.
---------------------------------------------------------------------------

     Hedging transactions involve costs and risks for the
security holder and do not entirely transfer risk of the economic
investment of the securities;\81\
---------------------------------------------------------------------------

    \81\ See, e.g., comment letters on the 2007 Proposing Release
from Feldman; Financial Associations; and Richardson Patel.
---------------------------------------------------------------------------

     Any concern that the Commission has about hedging
activities immediately after the acquisition is outweighed by the
belief that hedging activities can enhance private placements as a
means of capital formation and should be allowed to continue because
they do not raise substantial concerns about unregistered
distributions;\82\
---------------------------------------------------------------------------

    \82\ See comment letter on the 2007 Proposing Release from ABA.
---------------------------------------------------------------------------

     In the current environment, a security holder may hold
long and short positions across multiple trading desks and complex
financial institutions and positions may change daily or even intra-
day. The task of tracing and processing such positions would
necessitate the development of costly custom software and hardware
systems. Consequently, security holders might ultimately choose to hold
the securities for the default one-year period rather than implement
these costly systems, thereby frustrating the intent of the Commission
in adopting the six-month holding period;\83\
---------------------------------------------------------------------------

    \83\ See, e.g., comment letter on the 2007 Proposing Release
from Financial Associations.
---------------------------------------------------------------------------

     There is a natural ceiling on the amount of hedging
activity in restricted securities because the supply of unrestricted
securities is limited;\84\
---------------------------------------------------------------------------

    \84\ See comment letter on the 2007 Proposing Release from ABA.
---------------------------------------------------------------------------

     The Commission has adequate enforcement tools to address
abuses in hedging with respect to restricted securities;\85\ and
---------------------------------------------------------------------------

    \85\ See, e.g., comment letters on the 2007 Proposing Release
from ABA and Financial Associations.
---------------------------------------------------------------------------

     The Commission's reasoning for eliminating the tolling
provision in 1990 was that a single holding period running from the
date of purchase from the issuer, or an affiliate of the issuer, is
sufficient to prevent unregistered distributions to the public.\86\
This reasoning still applies, even if the holding period is reduced to
six months for securities of reporting issuers.\87\
---------------------------------------------------------------------------

    \86\ See Release No. 33-6862.
    \87\ See comment letter on the 2007 Proposing Release from
Financial Associations.

Some commenters reasoned that if the Commission detects an increase in
abuse after implementation of the revised holding period, as proposed,
the Commission could modify its treatment of hedging activities.\88\
This would be consistent with the approaches taken by the Commission
when it first adopted Rule 144, and in 1997 when commenters recommended
that the Commission gain more experience with the shortened holding
periods before making additional revisions.\89\
---------------------------------------------------------------------------

    \88\ See, e.g., comment letters on the 2007 Proposing Release
from Cleary Gottlieb; Financial Associations; and Sichenzia.
    \89\ See Release No. 33-5223 and Section I of this release.
---------------------------------------------------------------------------

    After considering the comments, we are not adopting the proposed
tolling provision and related amendments. We note, in particular, the
comments asserting that, in the current environment, the tolling
provision would unduly complicate Rule 144 and could require security
holders or brokers to incur significant costs to monitor hedging
positions for purposes of determining whether they have met the holding
period requirement. This would frustrate our primary objectives to
streamline Rule 144 and reduce the costs of capital for issuers. We
will revisit the issue if we observe abuse relating to the hedging
activities of holders of restricted securities.\90\
---------------------------------------------------------------------------

    \90\ The Commission's staff has previously stated that, with
respect to short sales in reliance on the safe harbor of Rule 144
where the borrower closes out using the restricted securities, all
the conditions of Rule 144 must be met at the time of the short
sale. See Questions 80 through 82 of Release No. 33-6099 (Aug. 2,
1979) [44 FR 46752, 46765]. In the Commission's view, the term
``sale'' under the Securities Act includes contract of sale. See
Release No. 33-8591 (July 19, 2005) [70 FR 44722, 44765] and Release
No. 34-56206 (August 6, 2007) [72 FR 45094]. The Commission has
previously indicated that, in a short sale, the sale of securities
occurs at the time the short position is established, rather than
when shares are delivered to close out that short position, for
purposes of Section 5 of the Securities Act. See, e.g., Questions 3
and 5 of Release No. 33-8107 (June 21, 2002) [67 FR 43234] and
Release No. 34-56206 n. 46 (Aug. 6, 2007) [72 FR 45094, 45096].
---------------------------------------------------------------------------

C. Amendments to the Manner of Sale Requirements Applicable to Resales
by Affiliates

    Before today's amendments, the manner of sale requirements in Rule
144(f) required securities to be sold in ``brokers' transactions'' \91\
or in transactions directly with a ``market maker,'' as that term is
defined in Section 3(a)(38) of the Exchange Act.\92\ Additionally, the
rule prohibits a selling security holder from: (1) Soliciting or
arranging for the solicitation of orders to buy the securities in
anticipation of, or in connection with, the Rule 144 transaction; or
(2) making any payment in connection with the offer or sale of the
securities to any person other than the broker who executes the order
to sell the securities.
---------------------------------------------------------------------------

    \91\ Rule 144(g) defines the term for purposes of Rule 144.
    \92\ 15 U.S.C. 78c(a)(38).
---------------------------------------------------------------------------

    In the 1997 Proposing Release, we proposed to eliminate the manner
of sale requirements for the sale of both equity and debt securities
alike, reasoning that the manner of sale requirements are not necessary
to satisfy the purposes of Rule 144 and limit the liquidity of the
security.\93\ Some commenters opposed this proposal, asserting that
brokers help ensure that selling security holders are complying with
the applicable Rule 144 conditions to resale.\94\ As discussed below,
although we proposed to eliminate the manner of sale requirements only
for debt securities and not equity securities in the 2007 Proposing
Release, we requested comment on whether it would be appropriate to
eliminate the manner of sale requirements for the sale of equity
securities as well.
---------------------------------------------------------------------------

    \93\ See Section III.C of the 1997 Proposing Release.
    \94\ See comment letters on the 1997 Proposing Release from
Corporate Counsel; Matthew Crain; Katsoris; Merrill Lynch; Regional
Bankers; SIA; and Smith Barney.
---------------------------------------------------------------------------

    The comments were mixed on this point. One commenter strongly
discouraged the elimination of the manner of sale requirements for
equity securities,\95\ while another supported such a change.\96\ One
commenter did not object to retaining the manner of sale requirements
for resales of equity securities of affiliates, on the grounds that
affiliates generally find the assistance of a broker useful in
navigating compliance with Rule 144 and thus brokers serve a useful
function

that is not unduly burdensome.\97\ Instead of completely eliminating
the manner of sale requirements, some commenters requested that we
consider expanding the methods to sell the securities permitted by the
manner of sale requirements.\98\ For example, two commenters discussed
amending the requirement to permit sales through alternative trading
systems such as electronic venues where the broker's identity is
anonymous prior to trade execution.\99\
---------------------------------------------------------------------------

    \95\ See comment letter on the 2007 Proposing Release from
Barron.
    \96\ See comment letter on the 2007 Proposing Release from
Sullivan.
    \97\ See comment letter on the 2007 Proposing Release from ABA.
    \98\ See, e.g., comment letters on the 2007 Proposing Release
from ABA; Cleary Gottlieb; and Sullivan.
    \99\ See comment letters on the 2007 Proposing Release from ABA
and Sullivan.
---------------------------------------------------------------------------

    In response to comments, we are adopting amendments to the manner
of sale requirements that apply to resales of equity securities of
affiliates.\100\ We last made substantive amendments to the manner of
sale requirements in 1978.\101\ Since then, the growth of technological
and other developments directed at meeting the investment needs of the
public and reducing the cost of capital for companies have led us to
refine the rules governing the trading of securities.\102\ We believe
that it is appropriate now to adopt two amendments to the manner of
sale requirements so that the restrictions better reflect current
trading practices and venues.
---------------------------------------------------------------------------

    \100\ Only affiliates are required to comply with the manner of
sale requirements under the amendments that we are adopting.
    \101\ See Release No. 33-5979 (Sept. 19, 1978) [43 FR 43709]
(Sept. 27, 1978) (the Commission amended Rule 144(f) to permit sales
under the rule to be made directly to a market maker in lieu of
selling through a broker).
    \102\ For example, in the second quarter of 2007, alternative
trading systems handled approximately $1.3 trillion in volume of
matched orders. (These amounts do not include orders that flow
through a system, but are ultimately executed elsewhere). We
obtained this data from information provided in Form ATS-R Quarterly
Reports.
---------------------------------------------------------------------------

    First, we are adopting a change to Rule 144(f) to permit the resale
of securities through riskless principal transactions in which trades
are executed at the same price, exclusive of any explicitly disclosed
markup or markdown, commission equivalent, or other fee, and the rules
of a self-regulatory organization permit the transaction to be reported
as riskless.\103\ We believe that these riskless principal transactions
are equivalent to agency trades.\104\ As with agency trades, in order
to qualify as a permissible manner of sale under the revised rule, the
broker or dealer conducting the riskless principal transaction must
meet all the requirements of a brokers' transaction, as defined by Rule
144(g), except the requirement that the broker does no more than
execute the order or orders to sell the securities as agent for the
person for whose account the securities are sold. The broker or dealer
must neither solicit nor arrange for the solicitation of customers'
orders to buy the securities in anticipation of or, in connection with,
the transaction, must receive no more than the usual and customary
markup or markdown, commission equivalent, or other fee, and must
conduct a reasonable inquiry regarding the underwriter status of the
person for whose account the securities are to be sold.
---------------------------------------------------------------------------

    \103\ See new Rule 144(f)(1)(iii). A ``riskless principal
transaction'' is defined as a principal transaction where, after
having received from a customer an order to buy, a broker or dealer
purchases the security as principal in the market to satisfy the
order to buy or, after having received from a customer an order to
sell, sells the security as principal to the market to satisfy the
order to sell. See new Note to Rule 144(f)(1).
    \104\ See also, e.g., SEC Interpretation: Commission Guidance on
the Scope of Section 28(e) of the Exchange Act, Interpretive Release
No. 34-45194 (Dec. 27, 2001) [67 FR 6]. This treatment is also
consistent with NASD Rules 4632(d)(3)(B), 4642(d)(3)(B), and
6420(d)(3)(B).
---------------------------------------------------------------------------

    Second, we are amending Rule 144(g) which defines ``brokers'
transactions' for purposes of the manner of sale requirements. Under
the definition of brokers' transactions, a broker must neither solicit
nor arrange for the solicitation of customers' orders to buy the
securities in anticipation of, or in connection with, the transaction.
However, certain activities specified in three subparagraphs of Rule
144(g)(2) are deemed not to be a solicitation.\105\ We are adding
another subparagraph covering the posting of bid and ask quotations in
alternative trading systems that will also be deemed not to be a
solicitation. This new provision permits a broker to insert bid and ask
quotations for the security in an alternative trading system, as
defined in Rule 300 of Regulation ATS,\106\ provided that the broker
has published bona fide bid and ask quotations for the security in the
alternative trading system on each of the last 12 business days.\107\
---------------------------------------------------------------------------

    \105\ See Release No. 34-5452 (Feb. 1, 1974; amended Feb. 21,
1974). These subparagraphs, as amended, are contained in paragraphs
(g)(3)(i), (g)(3)(ii), and (g)(3)(iii) of Rule 144. Under the
amendments, the previous paragraph (g)(2) has been redesignated as
paragraph (g)(3), and the previous paragraph (g)(3) has been
redesignated as paragraph (g)(4).
    \106\ 17 CFR 242.300.
    \107\ See new Rule 144(g)(3)(iv).
---------------------------------------------------------------------------

D. Changes to Rule 144 Conditions Related to Resales of Debt Securities
by Affiliates

1. Comments Received on Proposed Amendments Relating to Debt Securities
    In the 2007 Proposing Release, we proposed to eliminate the manner
of sale requirements in Rule 144 with regard to sales of debt
securities by affiliates.\108\ We also requested comment on whether
there were any other conditions in Rule 144, such as the volume
limitations, to which debt securities should not be subject. In the
2007 Proposing Release, we included preferred stock and asset-backed
securities in the ``debt securities'' category for purposes of the
proposed elimination of the manner of sale requirements.
---------------------------------------------------------------------------

    \108\ As noted in Section II.B.3 above, under the amendments
that we are adopting in this release, the manner of sale
requirements do not apply to the resale of securities of a non-
affiliate under Rule 144. The manner of sale requirements also do
not apply to securities sold for the account of the estate of a
deceased person or for the account of a beneficiary of such estate,
provided that the estate or beneficiary is not an affiliate of the
issuer.
---------------------------------------------------------------------------

    Four commenters expressly supported the proposal to eliminate the
manner of sale requirements for resales of debt securities,\109\ and we
did not receive any comments objecting to the proposal. We also did not
receive any comments objecting to the proposed inclusion of preferred
stock and asset-backed securities in the definition of debt securities.
We received a few comments that we should expand the definition of debt
securities for the purposes of proposed changes to the manner of sale
requirements.\110\
---------------------------------------------------------------------------

    \109\ See comment letters on the 2007 Proposing Release from
ABA; Cleary Gottlieb; Financial Associations; and Sullivan.
    \110\ See comment letter on the 2007 Proposing Release from ABA
stating that the definition of debt should exclude any requirement
that the preferred stock have a liquidation preference in excess of
par.
---------------------------------------------------------------------------

2. No Manner of Sale Requirements Regarding Resales of Debt Securities
    We are adopting the amendments to eliminate the manner of sale
requirements for resales of debt securities held by affiliates, as
proposed.\111\ We agree that, as financial intermediaries, brokers
serve an important function as gatekeepers for promoting compliance
with Rule 144,\112\ and we are concerned that eliminating the manner of
sale requirements for

equity securities would lead to abuse. However, we do not believe that
the fixed income securities market raises the same concerns about
abuse,\113\ and are persuaded that the manner of sale requirements may
place an unnecessary burden on the resale of fixed income
securities.\114\ Combined with the changes that we are making to the
Rule 144(e) volume limitations, these amendments will permit holders of
debt securities to rely on the Rule 144 to resell their debt securities
in a way and amount that was not possible previously.
---------------------------------------------------------------------------

    \111\ See 17 CFR 230.144(f). As discussed above, we also are
eliminating the manner of sale requirements for resales of equity
and debt securities by non-affiliates.
    \112\ Brokers also must comply with the criteria set forth in
Rule 144(g) in order to claim the ``brokers'' transactions'
exemption under Section 4(4) of the Securities Act.
    \113\ We distinguish between debt and equity in the same way we
distinguished debt and equity markets when we last amended
Regulation S. There, we did not believe that the procedures and
restrictions applicable to offerings of equity securities under
Regulation S should be applicable to offerings of nonconvertible
debt securities, reasoning that the nature of the trading markets
for debt securities appears not to have facilitated similar abusive
practices as the markets for equity securities. See Offshore Offers
and Sales, Release No. 33-7505 (Feb. 17, 1998) [63 FR 9631].
    \114\ The March 2007 ABA Letter noted that debt securities
generally are traded in dealer transactions in which the dealer
seeks buyers for securities to fill sell orders instead of through
the means prescribed in Rule 144(f).
---------------------------------------------------------------------------

    As proposed, our definition of debt securities in Rule 144 includes
non-participatory preferred stock (which has debt-like characteristics)
\115\ and asset-backed securities (where the predominant purchasers are
institutional investors including financial institutions, pension
funds, insurance companies, mutual funds and money managers) \116\ in
addition to other types of nonconvertible debt securities. This
definition of debt securities is consistent with the treatment of such
securities under Regulation S.\117\
---------------------------------------------------------------------------

    \115\ The definition of debt securities appears in amended Rule
144(a). ``Non-participatory preferred stock'' is defined as non-
convertible capital stock, the holders of which are entitled to a
preference in payment of dividends and in distribution of assets on
liquidation, dissolution, or winding up of the issuer, but are not
entitled to participate in residual earnings or assets of the
issuer.
    \116\ See Release No. 33-8518 (Dec. 22, 2004) [70 FR 1506].
    \117\ See 17 CFR 230.901 through 230.905 and Release No. 33-
7505.
---------------------------------------------------------------------------

3. Raising Volume Limitations for Debt Securities
    We also are adopting amendments to raise the Rule 144(e) volume
limitations for debt securities. Before the amendments that we are
adopting, under Rule 144(e), the amount of securities sold in a three-
month period could not exceed the greater of: (1) One percent of the
shares or other units of the class outstanding as shown by the most
recent report or statement published by the issuer, or (2) the average
weekly volume of trading in such securities, as calculated pursuant to
provisions in the rule.\118\ In response to our request for comment
regarding whether we should eliminate or revise any other conditions in
Rule 144 with regard to debt securities, three commenters noted that
the Rule 144(e) volume limitations effectively precluded resales of
debt securities by affiliates.\119\
---------------------------------------------------------------------------

    \118\ See 17 CFR 230.144(e)(1)(i), (ii), and (iii).
    \119\ See comment letters on the 2007 Proposing Release from
ABA; Cleary Gottlieb; and Sullivan.
---------------------------------------------------------------------------

    Debt securities generally are issued in tranches.\120\ We agree
that, prior to our amendments, the volume limitations in Rule 144
constrained the ability of debt holders to rely on Rule 144 for the
resales of their securities. For the same reasons that we are
eliminating the manner of sale requirements for debt securities, we
believe that it is appropriate to adopt an alternative volume
limitation that is specifically applicable to the resale of debt
securities. We are amending Rule 144(e) to permit the resale of debt
securities in an amount that does not exceed ten percent of a tranche
(or class when the securities are non-participatory preferred stock),
together with all sales of securities of the same tranche sold for the
account of the selling security holder within a three-month
period.\121\ We believe that this new ten percent limitation provision
will permit a more reasonable amount of trading in debt securities than
the one percent limitation has permitted.\122\ These revised volume
limitations also apply to resales of non-participatory preferred stock
or asset-backed securities, which are defined as debt securities for
purposes of Rule 144.
---------------------------------------------------------------------------

    \120\ The term ``tranche'' is also used in the definition of
``distribution compliance period'' in Rule 902(f) of Regulation S.
17 CFR 230.902(f).
    \121\ See newly revised Rule 144(e)(2).
    \122\ Generally, because of the absence of an active trading
market in debt securities, debt holders do not rely on the average
daily trading volume test to sell their securities under Rule 144.
---------------------------------------------------------------------------

E. Increase of the Thresholds That Trigger the Form 144 Filing
Requirement for Affiliates

    Before today's amendments, Rule 144(h) required a selling security
holder to file a notice on Form 144 if the security holder's intended
sale exceeded either 500 shares or $10,000 within a three-month
period.\123\ These filing thresholds had not been modified since
1972.\124\ In the 1997 Proposing Release, we proposed to increase the
filing thresholds to 1,000 shares or $40,000. Thirteen commenters
supported raising the filing threshold and no commenters opposed the
idea.\125\ Some commenters suggested that we eliminate Form 144
altogether.\126\ One commenter suggested raising the threshold to
$100,000.\127\ Another commenter suggested raising it to $250,000.\128\
---------------------------------------------------------------------------

    \123\ 17 CFR 230.144(h).
    \124\ We note, however, that in 1978, the Commission shortened
the relevant time period in Rule 144(e) for calculating the amount
of securities to be sold under Rule 144 from six months to three
months and made conforming changes to the Form 144 filing
requirement. Release No. 33-5995 (Nov. 8, 1978) [43 FR 54229].
    \125\ See comment letters on the 1997 Proposing Release from
ABA; ASCS; AT&T Corp. (``AT&T''); BG&E Corporate Counsel; Merrill
Lynch; Morgan Stanley; NY Bar; NY City Bar; Regional Bankers; SIA;
Smith Barney; and Sullivan.
    \126\ See comment letters on the 1997 Proposing Release from
ABA; Benesch, Friedlander, Coplan & Aronoff, LLP; NY Bar; NY City
Bar; and Sullivan.
    \127\ See comment letter on the 1997 Proposing Release from ABA.
    \128\ See comment letter on the 1997 Proposing Release from NY
Bar.
---------------------------------------------------------------------------

    In the 2007 Proposing Release, we proposed to increase the Form 144
filing thresholds to cover sales of 1,000 shares or $50,000 within a
three-month period.\129\ Some commenters specifically expressed support
for raising the Form 144 filing thresholds.\130\ One of these
commenters recommended filing thresholds of 10,000 shares or $100,000,
if the Commission chose to retain a Form 144 filing requirement for
affiliates.\131\
---------------------------------------------------------------------------

    \129\ Only affiliates of the issuer are required to file a
notice of proposed sale on Form 144 when relying on Rule 144 under
the amendments that we are adopting.
    \130\ See, e.g., comment letters on the 2007 Proposing Release
from ABA; Financial Associations; and SCSGP.
    \131\ See comment letter on the 2007 Proposing Release from ABA.
ABA supported elimination of Form 144 but recommended these filing
thresholds, if the Commission chose to retain it.
---------------------------------------------------------------------------

    We are adopting the increased Form 144 filing thresholds with some
modification. As proposed, we are raising the dollar threshold to
$50,000 to adjust for inflation since 1972.\132\ After considering the
comments, we are raising the share threshold to 5,000 shares, rather
than the proposed 1,000 shares. We believe that the 5,000 share
threshold is an appropriate alternate threshold for trades in amounts
that may not reach the $50,000 dollar threshold, but that merit notice
to the market.
---------------------------------------------------------------------------

    \132\ The adjustment would be approximately $42,000 if based on
the Personal Consumption Expenditures Chain-Type Price Index, as
published by the Department of Commerce. In addition, if based on
the Consumer Price Index, the adjustment would be approximately
$50,000. To achieve a round number, we proposed to raise the filing
threshold to $50,000.
---------------------------------------------------------------------------

    In the 2007 Proposing Release, we also solicited comment on whether
we should coordinate the Form 144 filing requirements with Form 4
filing

requirements. Many commenters supported a combination of the two
forms.\133\ Although we are not adopting those changes today, we expect
to issue a separate release in the future to provide affiliates that
are subject to both the Form 4 and Form 144 filing requirements with
greater flexibility in satisfying their requirements.
---------------------------------------------------------------------------

    \133\ See, e.g., comment letters on the 2007 Proposing Release
from ABA; BAIS; Brill 1; Fried Frank; Pink Sheets; Sichenzia; SCSGP;
and Sullivan. The comment letters from ABA, BAIS, SCSGP and Sullivan
advocated that the Commission should eliminate the Form 144 filing
requirement; however, to the extent that we determine to retain any
items required by Form 144, they provided suggestions regarding the
proposal to combine Form 144 with Form 4.
---------------------------------------------------------------------------

F. Codification of Several Staff Positions

    In the 2007 Proposing Release, we proposed to codify several
interpretive positions issued by the staff of the Division of
Corporation Finance. We proposed to codify the first three staff
positions listed below in both the 1997 Proposing Release and the 2007
Proposing Release, but we proposed to codify the last four staff
positions listed below only in the 2007 Proposing Release.
    Some commenters expressed general support for the proposed
codifications of staff interpretations relating to Rule 144.\134\ One
commenter specifically expressed the view that the action should help
to resolve any lingering confusion regarding the calculation of holding
periods in the circumstances addressed by the interpretations.\135\ We
are adopting all of the codifications substantially as proposed. The
codifications should make these interpretations more transparent and
readily available to the public.
---------------------------------------------------------------------------

    \134\ See comment letters on the 2007 Proposing Release from
ABA; Cleary Gottlieb; Financial Associations; Fried Frank; and
Richardson Patel.
    \135\ See comment letter on the 2007 Proposing Release from
Financial Associations.
---------------------------------------------------------------------------

1. Securities Acquired Under Section 4(6) of the Securities Act Are
Considered ``Restricted Securities''
    In 1997, we first proposed to codify the Division of Corporation
Finance's interpretive position that securities acquired from the
issuer pursuant to an exemption from registration under Section 4(6) of
the Securities Act \136\ are considered ``restricted securities'' under
Rule 144(a)(3).\137\ We did not receive any comments on this proposal
at the time. In the 2007 Proposing Release, we again proposed to codify
this position. We did not receive any comments.
---------------------------------------------------------------------------

    \136\ 15 U.S.C. 77d(6). Section 4(6) was included in the
Securities Act pursuant to the Small Business Investment Incentive
Act of 1980 [Pub. L. No. 96-477 (Oct. 21, 1980)].
    \137\ 17 CFR 230.144(a)(3). See the Division of Corporation
Finance's Compliance and Disclosure Interpretations on Rule 144
(Updated April 2, 2007), at Section 104 (Rule 144(a)(3)), Question
No. 104.03.
---------------------------------------------------------------------------

    Section 4(6) provides for an exemption from registration for an
offering that does not exceed $5,000,000 that is made only to
accredited investors, that does not involve any advertising or public
solicitation by the issuer or anyone acting on the issuer's behalf and
for which a Form D has been filed.\138\ Because the resale status of
securities acquired in Section 4(6) exempt transactions should be the
same as securities received in other non-public offerings that are
included in the definition of restricted securities, we are of the view
that securities acquired under Section 4(6) should be defined as
restricted securities for purposes of Rule 144. Therefore, we are
adopting an amendment to add securities acquired under Section 4(6) of
the Securities Act to the definition of restricted securities, as
proposed.\139\
---------------------------------------------------------------------------

    \138\ See 15 U.S.C. 77d(6).
    \139\ See amendments to Rule 144(a)(3).
---------------------------------------------------------------------------

2. Tacking of Holding Periods When a Company Reorganizes Into a Holding
Company Structure
    In 1997, we also proposed to codify the Division of Corporation
Finance's interpretive position that holders may tack the Rule 144
holding period in connection with transactions made solely to form a
holding company.\140\ When ``tacking,'' holders may count the period
during which they held the restricted securities of the predecessor
company before the predecessor company reorganized into a holding
company structure when calculating the holding period of the restricted
securities of the holding company received in the reorganization. We
did not receive any comments on this proposal.
---------------------------------------------------------------------------

    \140\ See the Division of Corporation Finance's letter to
Morgan, Olmstead, Kennedy & Gardner Capital Corporation (Jan. 8,
1988).
---------------------------------------------------------------------------

    We again proposed to codify this interpretive position in the 2007
Proposing Release. Two commenters recommended codification of the staff
interpretive position covering tacking, in certain circumstances, in
connection with the reincorporation of the issuer in a different
state.\141\ We did not receive any comments opposing this proposal.
---------------------------------------------------------------------------

    \141\ See comment letters on the 2007 Proposing Release from
Sichenzia and Sullivan.
---------------------------------------------------------------------------

    We are adopting this amendment to Rule 144(d), as proposed.\142\
This provision will permit tacking of the holding period if the
following three conditions are satisfied:
---------------------------------------------------------------------------

    \142\ See new Rule 144(d)(3)(ix).
---------------------------------------------------------------------------

     The newly formed holding company's securities were issued
solely in exchange for the securities of the predecessor company as
part of a reorganization of the predecessor company into a holding
company structure;
     Security holders received securities of the same class
evidencing the same proportional interest in the holding company as
they held in the predecessor company, and the rights and interests of
the holders of such securities are substantially the same as those they
possessed as holders of the predecessor company's securities; and
     Immediately following the transaction, the holding company
had no significant assets other than securities of the predecessor and
its existing subsidiaries and had substantially the same assets and
liabilities on a consolidated basis as the predecessor had before the
transaction.

In such transactions, tacking is appropriate because the securities
being exchanged are substantially equivalent, and there is no
significant change in the economic risk of the investment in the
restricted securities. The amendment that we are adopting does not
change the staff interpretive position that permits tacking in
connection with the reincorporation of the issuer in a different state
in certain situations.
3. Tacking of Holding Periods for Conversions and Exchanges of
Securities
    The 1997 Proposing Release proposed codifying the Division of
Corporation Finance's position that, if the securities to be sold were
acquired from the issuer solely in exchange for other securities of the
same issuer, the newly acquired securities shall be deemed to have been
acquired at the same time as the securities surrendered for conversion
or exchange, even if the securities surrendered were not convertible or
exchangeable by their terms.\143\ As noted in the 1997 release, Rule
144 does not state whether the surrendered securities must have been
convertible by their terms in order for tacking to be permitted, which
led to some confusion on how to calculate the Rule 144 holding period.
We did not receive any comments on this proposal.
---------------------------------------------------------------------------

    \143\ See the Division of Corporation Finance's letter to
Planning Research Corp. (Dec. 8, 1980).
---------------------------------------------------------------------------

    We again proposed this amendment to Rule 144(d)(3)(ii) in the 2007
Proposing Release. In addition, we proposed a note to this provision
that clarifies the Division's position that if:

     The original securities do not permit cashless conversion
or exchange by their terms;
     The parties amend the original securities to allow for
cashless conversion or exchange; and
     The security holder provides consideration, other than
solely securities of the issuer, for that amendment,

then the newly acquired securities will be deemed to have been acquired
on the date that the original securities were so amended.\144\
---------------------------------------------------------------------------

    \144\ See the Division of Corporation Finance's letter to Morgan
Stanley & Co., Inc. (June 30, 1993).
---------------------------------------------------------------------------

    One commenter expressed support for this proposed amendment.\145\
Another commenter provided a suggestion for a technical change to the
proposed note, that the phrase ``so long as the conversion or exchange
itself meets the conditions of this section,'' be deleted.\146\ We are
adopting the changes to Rule 144(d), substantially as proposed.\147\ In
response to comment, we are further clarifying the note to Rule
144(d)(3)(ii) to clarify that the newly acquired securities shall be
deemed to have been acquired at the same time as the amendment to the
surrendered securities, so long as, in the conversion or exchange, the
securities to be sold were acquired from the issuer solely in exchange
for other securities of the same issuer.
---------------------------------------------------------------------------

    \145\ See comment letter on the 2007 Proposing Release from
Feldman.
    \146\ See comment letter on the 2007 Proposing Release from
Sullivan.
    \147\ See amendments to Rule 144(d)(3)(ii).
---------------------------------------------------------------------------

4. Cashless Exercise of Options and Warrants
    Several commenters responding to the 1997 Proposing Release
suggested that we codify the Division of Corporation Finance's position
that, upon a cashless exercise of options or warrants, the newly
acquired underlying securities are deemed to have been acquired when
the corresponding options or warrants were acquired, even if the
options or warrants originally did not provide for cashless exercise by
their terms.\148\
---------------------------------------------------------------------------

    \148\ See the Division of Corporation Finance's Compliance and
Disclosure Interpretations on Rule 144 (Updated April 2, 2007), at
Section 212 (Rule 144(d)(3)), Interpretation No. 212.01.
---------------------------------------------------------------------------

    In the 2007 Proposing Release, we proposed to revise Rule 144 to
codify that position. We also proposed to add two notes to this new
paragraph. As proposed, the first note would codify the Division's
position that if:
     The original options or warrants do not permit cashless
exercise by their terms; and
     The holder provides consideration, other than solely
securities of the issuer, to amend the options or warrants to allow for
cashless exercise,

then the amended options or warrants would be deemed to have been
acquired on the date that the original options or warrants were so
amended.\149\ This treatment is analogous to our treatment of
conversions and exchanges.
---------------------------------------------------------------------------

    \149\ See the Division of Corporation Finance's letter to Morgan
Stanley & Co., Inc. (June 30, 1993).
---------------------------------------------------------------------------

    The second note would codify the Division's position that the grant
of certain options or warrants that are not purchased for cash or
property does not create an investment risk in a manner that would
justify tacking the holding period for the options or warrants to the
holding period for the securities received upon exercise of the options
or warrants.\150\ This is the case for options granted under an
employee benefit plan. The note would clarify that, in such instances,
the holder would not be allowed to tack the holding period of the
option or warrant and would be deemed to have acquired the underlying
securities on the date the option or warrant was exercised, if the
conditions of Rule 144(d)(1) and Rule 144(d)(2) are met at the time of
exercise.
---------------------------------------------------------------------------

    \150\ See the Division of Corporation Finance's letters to
Morgan Stanley & Co., Inc. (June 30, 1993) and Malden Trust
Corporation (Feb. 21, 1989).
---------------------------------------------------------------------------

    Three commenters supported the codification of the staff
interpretation relating to the cashless exercise of options and
warrants.\151\ Some commenters believed that the proposed rule should
be expanded,\152\ such as to include warrants and options that have
only a de minimis exercise price.\153\ One commenter suggested that we
delete the phrase ``so long as the conditions of Rule 144(d)(1) and
Rule 144(d)(2) are met at the time of exercise,'' in the second
proposed note.\154\
---------------------------------------------------------------------------

    \151\ See comment letters on the 2007 Proposing Release from
Cleary Gottlieb; Feldman; and Richardson Patel.
    \152\ See comment letters on the 2007 Proposing Release from
Cleary Gottlieb; Financial Associations; Richardson Patel; and
Weisman.
    \153\ See comment letters on the 2007 Proposing Release from
Cleary Gottlieb and Financial Associations.
    \154\ See comment letter on the 2007 Proposing Release from
Sullivan.
---------------------------------------------------------------------------

    We are adopting the amendments, substantially as proposed.\155\ In
response to comment, we have further clarified the second note to Rule
144 to make it clear that the newly acquired securities shall be deemed
to have been acquired at the same time as the amendment to the options
or warrants so long as the exercise itself was cashless.\156\
---------------------------------------------------------------------------

    \155\ See new Rule 144(d)(3)(x) and related notes.
    \156\ See Note 2 to Rule 144(d)(3)(x).
---------------------------------------------------------------------------

5. Aggregation of Pledged Securities
    In response to suggestions from commenters on the 1997 proposals,
we proposed in the 2007 Proposing Release to add a note that would
address how a pledgee of securities should calculate the Rule 144(e)
volume limitation condition.\157\ The note would codify the Division of
Corporation Finance's position that, so long as the pledgees are not
the same ``person'' under Rule 144(a)(2), a pledgee of securities may
sell the pledged securities without having to aggregate the sale with
sales by other pledgees of the same securities from the same pledgor,
as long as there is no concerted action by those pledgees.\158\ As an
example, assume that a security holder (the pledgor) pledges the
securities he owns in Company A to two banks, Bank X and Bank Y (the
pledgees). If the pledgor defaults:
---------------------------------------------------------------------------

    \157\ Under the amendments that we are adopting, the volume
limitations in Rule 144(e) would apply only to affiliates.
    \158\ See the Division of Corporation Finance's Compliance and
Disclosure Interpretations on Rule 144 (Updated April 2, 2007), at
Section 216 (Rule 144(e)(3)), Interpretation No. 216.01. See also
the Division of Corporation Finance's letter to Standard Chartered
Bank (June 22, 1987).
---------------------------------------------------------------------------

     Upon default, Bank X does not have to aggregate its sales
of Company A securities with Bank Y's sales of Company A securities
unless Bank X and Bank Y are acting in concert, but
     Bank X individually still must aggregate its sales with
the pledgor's sales, and
     Bank Y individually still must aggregate its sales with
the pledgor's sales.
    Provided that the loans and pledges are bona fide transactions and
there is no concerted action among pledgees and no other aggregation
provisions under Rule 144(e) apply, we do not believe that extra
burdens on pledgees to track and coordinate resales by other pledgees
are warranted.
    We received no comments on this proposal, and we are adopting the
amendment to Rule 144(e), as proposed.\159\
---------------------------------------------------------------------------

    \159\ See amendments to Rule 144(e)(3)(ii).
---------------------------------------------------------------------------

6. Treatment of Securities Issued by ``Reporting and Non-Reporting
Shell Companies''
    A blank check company is a company that:
     Is in the development stage;
     Has no specific business plan or purpose, or has indicated
that its business plan is to merge with or acquire an unidentified
third party; and
     Issues penny stock.\160\
---------------------------------------------------------------------------

    \160\ 17 CFR 230.419. The term ``penny stock'' is defined in
Exchange Act Rule 3a51-1 [17 CFR 240.3a51-1].

---------------------------------------------------------------------------

Such companies historically have provided opportunity for abuse of the
federal securities laws, particularly by serving as vehicles to avoid
the registration requirements of the securities laws.\161\ Rule 419
under the Securities Act \162\ was adopted in 1992 to control the
extent to which such companies are able to access funds from a public
offering.
---------------------------------------------------------------------------

    \161\ See Release No. 33-6932 (Apr. 28, 1992) [57 FR 18037].
    \162\ 17 CFR 230.419.
---------------------------------------------------------------------------

    In 2005, we amended Securities Act Rule 405 \163\ to define a
``shell company'' to mean a registrant, other than an asset-backed
issuer, that has:
---------------------------------------------------------------------------

    \163\ 17 CFR 230.405.
---------------------------------------------------------------------------

    (1) No or nominal operations; and
    (2) Either:
     No or nominal assets;
     Assets consisting solely of cash and cash equivalents; or
     Assets consisting of any amount of cash and cash
equivalents and nominal other assets.\164\
---------------------------------------------------------------------------

    \164\ See Release No. 33-8587 (Jul. 15, 2005) [70 FR 42234].
---------------------------------------------------------------------------

    On January 21, 2000, the Division of Corporation Finance concluded
in a letter to NASD Regulation, Inc. that Rule 144 is not available for
the resale of securities initially issued by companies that are, or
previously were, blank check companies.\165\ In an effort to curtail
misuse of Rule 144 by security holders through transactions in the
securities of blank check companies, we proposed to codify this
position with some modifications. First, we proposed to modify the
staff interpretation to address securities of all companies, other than
asset-backed issuers, that meet the definition of a shell company,
including blank check companies. The category of companies to whom the
staff interpretation was proposed to apply is broader than the Rule 405
definition of a ``shell company,'' however, as it would apply to any
``issuer'' meeting that standard, whereas the Rule 405 definition
refers only to ``registrants.'' For purposes of the discussion in this
release only, we call these companies, ``reporting and non-reporting
shell companies.'' Under the proposed rule, a person who wishes to
resell securities of a company that is, or was, a reporting or a non-
reporting shell company, other than a business combination related
shell company,\166\ would not be able to rely on Rule 144 to sell the
securities.
---------------------------------------------------------------------------

    \165\ See the Division of Corporation Finance's letter to Ken
Worm, NASD Regulation, Inc. (Jan. 21, 2000). In that letter, the
Division stated that ``transactions in blank check company
securities by their promoters or affiliates . . . are not the kind
of ordinary trading transactions between individual investors of
securities already issued that Section 4(1) [of the Securities Act]
was designed to exempt.'' The Division stated its view that ``both
before and after the business combination or transaction with an
operating entity or other person, the promoters or affiliates of
blank check companies, as well as their transferees, are
`underwriters' of the securities issued. . . . Rule 144 would not be
available for resale transactions in this situation, regardless of
technical compliance with that rule, because these resale
transactions appear to be designed to distribute or redistribute
securities to the public without compliance with the registration
requirements of the Securities Act.''
    \166\ A ``business combination related shell company'' is
defined in Securities Act Rule 405 as a shell company that is (1)
formed by an entity that is not a shell company solely for the
purpose of changing the corporate domicile of that entity solely
within the United States; or (2) formed by an entity that is not a
shell company solely for the purpose of completing a business
combination transaction (as defined in Sec.  230.165(f)) among one
or more entities other than the shell company, none of which is a
shell company.
---------------------------------------------------------------------------

    Several commenters provided comments on the proposal to codify this
staff interpretation with some modification. Some commenters expressed
support for the proposed codification,\167\ with one commenter noting
that most micro-cap frauds result from the purchase and sale of
securities issued by shell companies.\168\ Two commenters expressed
concern that expanding the staff interpretation to shell companies
would prohibit reliance on Rule 144 by security holders of businesses
attempting to implement real business plans that technically meet the
definition of a shell company, but are not blank check companies.\169\
One commenter recommended that the Commission only preclude reliance on
Rule 144 for the resale of securities if they were issued at the time
the issuer was a shell company.\170\
---------------------------------------------------------------------------

    \167\ See, e.g., comment letters on the 2007 Proposing Release
from Feldman; Financial Associations; Parsons; Pink Sheets; and
Williams.
    \168\ See comment letter on the 2007 Proposing Release from Pink
Sheets.
    \169\ See comment letters on the 2007 Proposing Release from
Sichenzia and Williams.
    \170\ See comment letter on the 2007 Proposing Release from
Sichenzia.
---------------------------------------------------------------------------

    We are adopting, as proposed, the amendment to prohibit reliance on
Rule 144 for the resale of securities of a company that is a reporting
or a non-reporting shell company.\171\ Under the amended rules, Rule
144 will not be available for the resale of securities initially issued
by either a reporting or non-reporting shell company (other than a
business combination related shell company) or an issuer that has been
at any time previously a reporting or non-reporting shell company,
unless the issuer is a former shell company that meets all of the
conditions discussed below.\172\
---------------------------------------------------------------------------

    \171\ See new Rule 144(i).
    \172\ Rule 144(i) does not prohibit the resale of securities
under Rule 144 that were not initially issued by a reporting or non-
reporting shell company or an issuer that has been at any time
previously such a company, even when the issuer is a reporting or
non-reporting shell company at the time of sale. Contrary to
commenters' concerns, Rule 144(i)(1)(i) is not intended to capture a
``startup company,'' or, in other words, a company with a limited
operating history, in the definition of a reporting or non-reporting
shell company, as we believe that such a company does not meet the
condition of having ``no or nominal operations.''
---------------------------------------------------------------------------

    In another part of our proposal regarding the resale of securities
of reporting and non-reporting shell companies, we proposed to modify
the staff interpretation to make Rule 144 available for resales of
securities of companies that were formerly shell companies under
provisions that are similar to other provisions that permit the use of
a Securities Act Form S-8\173\ registration statement by reporting
companies that were former shell companies.\174\ Under the proposal,
despite the general prohibition against reliance on Rule 144 with
respect to securities acquired by shell companies or former shell
companies, a security holder would have been able to resell securities
subject to Rule 144 conditions if the issuer:
---------------------------------------------------------------------------

    \173\ 17 CFR 239.16b.
    \174\ See Release No. 33-8587. These provisions are consistent
with the Form S-8 provisions for shell companies, except that Form
S-8 requires a former shell company to wait 60 days, rather than 90
days, before it is able to use the form to register securities.
---------------------------------------------------------------------------

     Had ceased to be a shell company;
     Is subject to Exchange Act reporting obligations;
     Has filed all required Exchange Act reports during the
preceding twelve months; and
     At least 90 days have elapsed from the time the issuer
files ``Form 10 information'' reflecting the fact that it had ceased to
be a shell company before any securities were sold under Rule 144.

``Form 10 information'' is equivalent to information that a company
would be required to file if it were registering a class of securities
on Form 10 or Form 20-F under the Exchange Act.\175\ This information
is ordinarily included in a Form 8-K if the former shell company has
been filing Exchange Act reports.\176\ As proposed, the Rule 144(d)
holding period for restricted securities sold under this provision
would have

commenced at the time that the Form 10 information was filed.
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    \175\ 17 CFR 249.210 and 17 CFR 249.220f. In another Commission
release, we are rescinding Form 10-SB [17 CFR 249.210b]. See SEC
Press Release No. 2007-233 (Nov. 15, 2007), available at http://www.sec.gov/news/press/2007/2007-233.htm
.

    \176\ 17 CFR 249.308. Items 2.01(f) and 5.01(a)(8) of Form 8-K
require a company in a transaction where the company ceases being a
shell company to file a current report on Form 8-K containing the
information (or identifying the previous filing in which the
information is included) that would be required in a registration
statement on Form 10 or Form 10-SB to register a class of securities
under Section 12 of the Exchange Act.
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    We are adopting this part of the amendments, with some
modification.\177\ We have modified the proposal to require at least
one year to elapse after Form 10 information is filed with Commission
before a security holder can resell any securities of an issuer that
was formerly a shell company subject to Rule 144 conditions. We believe
that the one-year period is necessary for investor protection given the
comments relating to the abuse and micro-cap fraud occurring in
connection with the securities of shell companies. Both restricted
securities and unrestricted securities will be subject to the same one-
year waiting period. Thus, under the amendments that we are adopting,
Rule 144 is available for the resale of restricted or unrestricted
securities that were initially issued by a reporting or non-reporting
shell company or an issuer that has been at any time previously a
reporting or non-reporting shell company, only if the following
conditions are met:
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    \177\ See new Rule 144(i)(2).
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     The issuer of the securities that was formerly a reporting
or non-reporting shell company has ceased to be a shell company;
     The issuer of the securities is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act;
     The issuer of the securities has filed all reports and
material required to be filed under Section 13 or 15(d) of the Exchange
Act, as applicable, during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports and
materials), other than Form 8-K reports (Sec.  249.308 of this
chapter); and
     At least one year has elapsed from the time that the
issuer filed current Form 10 type information with the Commission
reflecting its status as an entity that is not a shell company.

One commenter requested clarification on when a Form 10 is deemed
filed, if the staff is undertaking a review of the filing, and
recommended that the Form 10 should be deemed filed when the
information is filed initially with the Commission.\178\ To promote
consistency and to provide a date that security holders can rely upon,
the Form 10 information will be deemed filed when the initial filing is
made with the Commission, rather than when the staff of the Division of
Corporation Finance has completed its review of the filing or an
amendment is made in response to staff comments, for purposes of the
amendments.\179\
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    \178\ See comment letter on the 2007 Proposing Release from
Sichenzia.
    \179\ See new Rule 144(i)(3).
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    Some commenters recommended that we permit security holders of non-
reporting companies that have merged with a private operating company
and therefore have ceased to be shell companies to be able to rely on
Rule 144.\180\ We are not adopting a provision to permit this, because
we believe that Form 10 type information and Exchange Act reporting
requirements are important in protecting against potential abuse.
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    \180\ See, e.g., comment letters on the 2007 Proposing Release
from Charles Nelson; Tom Russell; and Williams.
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7. Representations Required From Security Holders Relying on Exchange
Act Rule 10b5-1(c)
    Rule 10b5-1\181\ under the Exchange Act defines when a purchase or
sale constitutes trading ``on the basis of'' material nonpublic
information in insider trading cases brought under Exchange Act Section
10(b)\182\ and Rule 10b-5.\183\ Specifically, a purchase or sale of a
security of an issuer is ``on the basis of'' material nonpublic
information about that security or issuer if the person making the
purchase or sale was aware of the material nonpublic information when
the person made the purchase or sale. However, Rule 10b5-1(c) provides
an affirmative defense that a person's purchase or sale was not ``on
the basis of'' material nonpublic information. For this defense to be
available, the person must demonstrate that:
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    \181\ 17 CFR 240.10b5-1.
    \182\ 15 U.S.C. 78j(b).
    \183\ 17 CFR 240.10b-5. As stated in Rule 10b5-1(a), the
``manipulative and deceptive devices'' prohibited by Section 10(b)
and Rule 10b-5 include, among other things, the purchase or sale of
a security of any issuer, on the basis of material nonpublic
information about that security or issuer, in breach of a duty of
trust or confidence that is owed directly, indirectly, or
derivatively, to the issuer of that security or the shareholders of
that issuer, or to any other person who is the source of the
material nonpublic information.
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     Before becoming aware of the material nonpublic
information, he or she had entered into a binding contract to purchase
or sell the securities, provided instructions to another person to
execute the trade for the instructing person's account, or adopted a
written plan for trading the securities;
     The contract, instructions or written trading plan satisfy
the conditions of Rule 10b5-1(c); and
     The purchase or sale that occurred was pursuant to the
contract, instruction, or plan.
    Form 144 requires a selling security holder to represent, as of the
date that the form is signed, that he or she ``does not know any
material adverse information in regard to the current and prospective
operations of the issuer of the securities to be sold which has not
been publicly disclosed.'' The Division of Corporation Finance has
indicated that a selling security holder who satisfies Rule 10b5-1(c)
may modify the Form 144 representation to indicate that he or she had
no knowledge of material adverse information about the issuer as of the
date on which the holder adopted the written trading plan or gave the
trading instructions. In this case, the security holder must specify
that date and indicate that the representation speaks as of that
date.\184\
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    \184\ See the Division of Corporation Finance's Manual of
Publicly Available Telephone Interpretations, Fourth Supplement (May
30, 2001), at Rule 10b5-1; Form 144, Interpretation No. 2.
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    In order to reconcile the Form 144 representation with Rule 10b5-1,
we proposed to codify this interpretive position. Under the proposed
amendments, Form 144 filers would be able to make the required
representation as of the date that they adopted written trading plans
or gave trading instructions that satisfied Rule 10b5-1(c). We did not
receive any comments specifically on this proposal. We are adopting
this amendment, as proposed.\185\
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    \185\ See amendments to Form 144.
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G. Amendments to Rule 145

    Securities Act Rule 145 \186\ provides that exchanges of securities
in connection with reclassifications of securities, mergers or
consolidations or transfers of assets that are subject to shareholder
vote constitute sales of those securities. Unless an exemption from the
registration requirement is available, Rule 145(a) requires the
registration of these sales. Rule 145(c) deems persons who were parties
to such a transaction, other than the issuer, or affiliates of such
parties to be underwriters. Rule 145(d) permits the resale, subject to
specified conditions, of securities received in such transactions by
persons deemed underwriters. In the 1997 Proposing Release, we proposed
to eliminate the presumed underwriter and resale provisions in Rule
145(c) and (d). Many commenters supported the 1997 proposal.\187\
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    \186\ 17 CFR 230.145.
    \187\ See comment letters on the 1997 Proposing Release from
ABA; ASCS; AT&T BG&E Brobeck, Phleger & Harrison, LLP
(``Brobeck''); Corporate Counsel; Intel; NY Bar; NY City Bar; SIA;
Smith Barney; Sullivan; and Testa Hurwitz.
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    In the 2007 Proposing Release, we proposed amendments to Rule
145(c) and (d) that would:

     Eliminate the presumed underwriter provision in Rule
145(c), except with regard to Rule 145(a) transactions that involve a
shell company (other than a business combination related shell
company); \188\ and
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    \188\ The terms ``shell company'' and ``business combination
related shell company'' are defined in Securities Act Rule 405. See
also Release No. 33-8587 (Jul. 15, 2005) [70 FR 42233].
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     Harmonize the requirements in Rule 145(d) with the
proposed provisions in Rule 144 that would apply to securities of shell
companies.

Under the proposed rule, where a party to a Rule 145(a) transaction,
other than the issuer, is a shell company (other than a business
combination related shell company), the party and its affiliates could
resell securities acquired in connection with the transaction only in
accordance with Rule 145(d).
    Five commenters expressly supported the proposed changes to Rule
145.\189\ Two commenters requested that we reassess the impact of the
proposed Rule 145 amendments on the staff's position that stock
received in a reorganization that is exempt from registration pursuant
to Section 3(a)(10) of the Securities Act \190\ could be publicly
resold pursuant to Rule 145(d)(2).\191\
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    \189\ See comment letters on the 2007 Proposing Release from
ABA; Cleary Gottlieb; Fried Frank; Financial Associations; and
SCSGP.
    \190\ 15 U.S.C. 77c(a)(10).
    \191\ See comment letters on the 2007 Proposing Release from
Barron and Fried Frank.
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    After considering the comments, we believe that it is appropriate
to adopt the amendments to Rule 145, as proposed. The presumptive
underwriter provision in Rule 145 is no longer necessary in most
circumstances. However, based on our experience with transactions
involving shell companies that have resulted in abusive sales of
securities, we believe that there continues to be a need to apply the
presumptive underwriter provision to reporting and non-reporting shell
companies and their affiliates and promoters. We are amending Rule 145
to eliminate the presumptive underwriter provision except when a party
to the Rule 145(a) transaction is a shell company.\192\
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    \192\ With respect to a transaction that is exempt from
registration pursuant to Section 3(a)(10) of the Securities Act that
falls within Rule 145(a), if any party to the transaction is a shell
company, then any party to the transaction, other than the issuer,
and its affiliates will be permitted to resell their securities in
accordance with the restrictions of Rule 145(d). Also, the staff
intends to issue a revised Staff Legal Bulletin No. 3 concurrently
with the effective date of the amendments that we are adopting that
will address the treatment of parties to a transaction and their
affiliates that have acquired securities in a transaction exempt
from registration pursuant to Section 3(a)(10) of the Securities
Act.
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    Rule 145(c) now provides that any party, other than the issuer, to
a Rule 145(a) transaction involving a shell company (but not a business
combination related shell company), including any affiliate of such
party, who publicly offers or sells securities of the issuer acquired
in connection with the transaction, will continue to be deemed an
underwriter.\193\
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    \193\ We are also adding the definition of ``affiliate'' to
paragraph (e) and transferring the definition of ``party'' from
paragraph (c) to paragraph (e).
---------------------------------------------------------------------------

    Under the amendments to Rule 145 that we are adopting, if the
issuer has met the requirements of new paragraph (i)(2) of Rule
144,\194\ the persons and parties deemed underwriters will be able to
resell their securities subject to paragraphs (c), (e), (f), and (g) of
Rule 144 after at least 90 days have elapsed since the securities were
acquired in the transaction. After six months have elapsed since the
securities were acquired in the Rule 145(a) transaction, the persons
and parties will be permitted to resell their securities, subject only
to the Rule 144(c) current public information condition, provided that
the sellers are not affiliates of the issuer at the time of sale and
have not been affiliates during the three months before the sale. After
one year has elapsed since the securities were acquired in the
transaction, the persons and parties will be permitted to resell their
securities without any limitations under Rule 145(d), provided that
they are non-affiliates at the time of sale and have not been
affiliates during the three months before the sale.
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    \194\ The requirement in the newly added Rule 144(i)(2) that
Form 10 information be filed reflecting a company's status as no
longer a shell company is fulfilled with respect to a Rule 145(a)
transaction through the filing of the registration statement.
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    In addition, we are adopting, as proposed, a note to paragraphs (c)
and (d) of Rule 145 that paragraph (d) is not available with respect to
any transaction or series of transactions that, although in technical
compliance with the rule, is part of a plan or scheme to evade the
registration requirements of the Securities Act. \195\ We have included
a similar statement in the Preliminary Note to Rule 144. We also are
adopting, as proposed, the clarification to the language in Rule 145(d)
regarding the securities that were acquired in a transaction specified
in Rule 145(a). \196\
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    \195\ See new Note to Rule 145(c) and (d).
    \196\ See amendments to Rule 145(d) relating to ``securities
acquired in a transaction specified in paragraph (a) that was
registered under the Act.''
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H. Conforming and Other Amendments

1. Regulation S Distribution Compliance Period for Category Three
Issuers
    The purpose of the distribution compliance period in Regulation S
\197\ is to ensure that during the offering period and in the
subsequent aftermarket trading that takes place offshore, the persons
complying with the Rule 903 \198\ safe harbor (issuers, distributors
and their affiliates) are not engaged in an unregistered, non-exempt
distribution of securities into the United States capital markets.
\199\ In the 2007 Proposing Release, we requested comment on whether to
amend Regulation S to conform the one-year distribution compliance
period in Rule 903(b)(3)(iii) for Category 3 issuers (U.S. reporting