|
 |
|
You need to know the rules to resell securities if:
A basic principle of securities laws is that securities cannot be sold without either a registration with the Securities and Exchange Commission (the "SEC") or an exemption from registration. For determining whether securities can be resold, the world is divided into two basic types of securities: restricted securities and unrestricted securities. Restricted securities are securities that have been acquired from the company that issues the securities without a registration, or from an officer, director or other affiliates of the issuer. Unrestricted securities can be resold without restrictions except by affiliates. Registration the securities, A common misperception about securities is that after a company conducts its IPO, all its shares are registered. Generally, this is not the case. In most IPOs, the company registers new shares and does not register any, or only a small percentage of, the shares held by its officers, directors and pre-IPO investors. Consequently, the IPO does not allow the company's shareholders to sell all their shares. Investors often have contractual rights (negotiated at the time of their investment) to require a company to register their shares, but officers, directors and employees generally do not have registration rights. Employees who have been granted stock options generally have their shares registered for resale by their employer utilizing a registration statement on Form S-8, which is a short form of registration statement that can be completed quickly and less expensively than other registration statements. Resales of registered stock by employees other than officers and directors of the issuer can be made freely without restriction.
Rule 144 is the most common exemption from registration used for resales by officers, directors and purchasers of shares in private placements. Under Rule 144, some shares can be sold 90 days after the company's IPO if the shares have been owned by the seller for at least one year. Sales are subject to a volume limitation so that in any calendar quarter a shareholder may not sell more than 1% of the outstanding shares owned by all shareholders of the company. Selling pursuant to Rule 144 can delay a sale because of the paperwork involved, including a filing with the SEC. You should, therefore, contact your broker in advance. Also, the broker often charges a higher commission to compensate for the extra paperwork. Rule 701 allows resales of shares granted to employees before the company's IPO. The number of shares a company can issue to employees is limited as stated in Rule 701. Resales by officers, directors and other affiliates of the company are subject to the 1% volume limitations of Rule 144, but are not subject to the holding period requirements of Rule 144. This relief from the holding period requirement allows resales of stock acquired upon exercise of stock options without holding the underlying stock for a year after exercise of the stock option, which otherwise would be required in a Rule 144 resale. When a company acquires another company by exchanging shares of stock, the acquiring company can register the shares on Form S-4. If no registration is made by the issuer, Rule 145 allows former shareholders of the acquired company to sell shares by complying with Rule 144 (including the volume limitation) but without the usual one-year holding period. Lock Ups In addition to the securities law restrictions on resales of securities discussed above, officers, directors and other holders of large blocks of stock are usually required by investment bankers to sign agreements (called Lockup Agreements) not to resell their stock for an agreed period of time after the company's IPO. The shares are usually "locked up" for a period of 180 days after completion of the IPO. If, however, the investment bankers believe a company is at a very early stage and presents a higher risk profile for investors, the lockup period may last as long as two years. Lockups serve two purposes. First, the standard 180-day lockup period protects the underwriters against new shares flooding the public markets and lowering the market price during a period in which the underwriters may be purchasing and selling shares to stabilize the market. Second, longer lockups of a year or two are designed to reassure investors that insiders will not immediately dump their shares and walk away from the company before the company achieves certain growth goals. Investors are reassured that they can give the company up to two years to perform and still cash out before the insiders can sell their shares. Other Restrictions: Other securities law restrictions on the resale of securities include:
In summary, there are many impediments to turning securities into cash. Companies, officers, directors, investors and employees should consult with their legal and financial advisors to develop a plan to allow them to sell securities in compliance with securities laws, while at the same time addressing their tax, estate planning, asset protection, and other related objectives. Addressing these issues the day before you want to cash out may be too late. Advanced planning with professionals is usually required to achieve your goals. |
