Tracing the history and ownership of securities presents problems for companies in the private and public markets because SEC Rule 144 stipulates that certain conditions need to be met in order to sell securities. As a result, tracking the flow of security issuances is essential for all private companies looking to enter the public marketplace to avoid compliance issues with the SEC and delays during the due diligence review.
What is Rule 144 of the securities act?
Rule 144 is an exemption to the Securities Act of 1933 that allows the sale of restricted and control securities in the public marketplace if certain conditions are met. According to the SEC, these securities are “acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer,” which may include stock benefit plans to employees, preferred issuances from capital contributions and transfer agreements between stakeholders.
The Rule 144 date problem
An important hurdle to qualifying for this exemption is complying with the Rule 144 holding period for each issuance before the resale of the security. If the issuing company is a reporting company with regards to the Securities Exchange Act of 1934, the qualifying holding period is six months. If the company is not a reporting company, the qualifying holding period is one year. The Rule 144 holding period begins from the security’s original date of issuance regardless of resale or conversion. Many private companies do not currently track this metric on their capitalization tables, and if there have been several secondary transactions such as transfers or tender offers, identifying the correct date can be a difficult task.
Carta can help alleviate issues that arise with Rule 144 compliance and establish a framework to position a company for future regulatory success.
The Carta solution for SEC Rule 144
With Carta, the original Rule 144 date will be attached to issuances of common and preferred stock certificates. In most instances, the date will be attached to the shares as they are transferred, converted, or sold, allowing companies to automatically track this regulatory requirement. Transfers and repurchases completed on the platform require the Rule 144 date to be included before the transaction can be processed, ensuring this information is always attached to the correct issuance.
Although there are other requirements and stipulations associated with Rule 144, tracking this information through Carta helps private companies with regulatory requirements at all stages of the corporate lifecycle, from Series Seed through IPO.
The earlier companies establish a single-source of truth for equity management the better, and the greater likelihood they’ll be able to move through a due diligence process unscathed.
There are a litany of additional online resources related to SEC Rule 144 and restricted and control securities; here are three:
