After you purchase shares of a public company, you might sell or transfer them at some point. Transferring shares is covered by Section 4 of the Securities Act of 1933. This statute provides two exemptions from registering with the Securities and Exchange Commission for private sales. To publicly trade shares, you must qualify for an SEC Rule 144 exemption or be registered.
Understanding Section 4 of the Securities Act of 1933
If you’re an issuer, it’s crucial to know Section 4 of the Securities Act of 1933 and whether an exemption is available. Specifically, Section 4 (a)(2) allows an issuer to sell securities privately without registration of that security with the Securities and Exchange Commission. This exemption only applies to the issuer and not those who acquired securities from them and are looking to resell.
Section 4 (a)(1) provides an exemption from registration for “transactions by any person other than an issuer, underwriter, or dealer.” Someone who is not the issuer or a dealer in securities can transfer securities through private sale as long as the holder does not meet the definition of an “underwriter.” As set forth under Section 2 (a)(11), an underwriter is defined as someone who has acquired securities from an issuer looking to “distribute” or participate in a “distribution.” In such cases, an offering rarely constitutes a private offering.
SEC Rule 144: Transferring and Selling Restricted and Control Securities
SEC Rule 144 provides a safe harbor allowing for the public resale of restricted securities and control securities. While restricted securities are defined as those acquired in an unregistered, private sale from the issuer, control securities refer to those held by an affiliate of the issuer. 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. If you have acquired either of these, you may identify an exemption from the SEC’s registration requirements to sell them in a public marketplace.
To sell restricted or control securities publicly, several conditions must be met. These requirements apply to each sale:
- Holding Period — Before selling restricted securities in the marketplace, they must be held for a certain amount of time. A six-month holding period is imposed for restricted securities if a reporting company issued the securities and the holder wishes to sell the securities. There is a one-year holding period for restricted securities if the reporting requirements do not apply to the issuing company, but “current information” is being provided.
- Public Information — Before the sale transaction, there must be adequate current information about the company made publicly available. Current information is a concept in flux at the moment, so if the issuer you are holding the shares of is not a reporting company under the Securities Exchange Act of 1934, you should check with an attorney.
Additional Special Rules for Affiliates
- Trading Volume Formula — There is a limit on the securities that can be sold in a three-month period for affiliates. Critically, the amount cannot exceed 1% of the outstanding shares of the same class being sold or the reported average weekly trading volume in the four weeks before filing a notice of sale.
- Ordinary Brokerage Transactions — For affiliates, sales must be unsolicited and handled in the same manners as routine trading transactions. In addition, brokers may not receive more than a typical commission.
- Filing a Notice of Proposed Sale with the SEC — Affiliates must file a notice of proposed sale with the SEC in the event that over 5,000 shares are involved or the total dollar amount is more than $50,000 within a three-month period.
Even if the above requirements are satisfied, restricted securities cannot be sold to the public until the legend has been removed from the stock certificate. This must be done by a transfer agent and with the consent of the issuer.
Learn More About How to Transfer Shares of a Public Company
If you’d like to learn more about how to transfer shares of a public company, best to consult with an experienced attorney. Brinen & Associates offers comprehensive legal services to clients for a wide range of securities and corporate matters, developing a tailored strategy in every case to help ensure your objectives are met. Call (212) 330-8151 to schedule a consultation.