“Secondary distributions” Liquidity for insiders and private investors Last updated 08 Feb 12

Liquidity (secondary market transactions) Consider liquidity for holders of restricted securities and corporate insiders. Are you worried if they sell into trading markets? What conditions would you impose? Issuer Private purchaser Insider Market Broker

Rule 144 (What does this mean?) (b) Conditions to be met. Any affiliate or other person who sells restricted securities of an issuer for his own account, or any person who sells restricted or any other securities for the account of an affiliate of the issuer of such securities, shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter thereof within the meaning of section 2(11) of the Act if all of the conditions of this section are met.

(b) Conditions to be met. [1] Any affiliate... who sells restricted securities of an issuer for his own account... [2] Any... other person [non-affiliate] who sells restricted securities of an issuer for his own account... [3]... any person who sells restricted... securities for the account of an affiliate of the issuer of such securities, [4]... any person who sells... any other [non- restricted] securities for the account of an affiliate of the issuer of such securities, shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter thereof within the meaning of section 2(11) of the Act if all of the conditions of this section are met.

“Safe harbor” conditions Conditions: holding period for restricted securities - Rule 144(d)Rule 144(d) publicly available information - Rule 144(c) Rule 144(c) trickle into market - Rule 144(e)Rule 144(e) sale in brokers' transactions - Rule 144(f)brokers' transactions Rule 144(f) notice of sale - Rule 144(h)Rule 144(h)

“Safe harbors” Insiders sell “restricted stock” Holding period: –6 months for public company –12 months for private company Information: –Public co current –Private co similar Trickle: 1% of float or avg weekly volume Sale Method: broker tx (after Form 144) Filing: more than 5,000 shs or $50,000 Insiders sell “non-restricted st” Holding period: none Information: –Public co current –Private co similar Trickle: 1% of float or avg weekly volume Sale Method: broker tx (after Form 144) Filing: more than 5,000 shs or $50,000 Non-insiders sell “restricted stock” Holding period: –6 months for public company –12 months for private company Information: –Public co current (prior 12 mos) –Private co need not have current info

Some hypotheticals …

Hypothetical #1 Apex, Inc. is a publicly-traded corporation. It has 18 million common shares issued and outstanding, which are listed on the NYSE. * * * Price bought 10,000 unregistered Apex common shares in a private offering. He signed an investment letter and the share certificates are “legended”. Eight months later, he thinks Apex was a poor investment and he wants to sell. He contacts his broker and proposes to sell at market through the broker. See Rule 144(b)Rule 144(b) Any problems?

Hypothetical #2 Patty bought 10,000 unregistered Apex common shares in an offering under Rule 505. A.It turns out the Rule 505 exemption was not met as there were 40 nonaccredited purchasers. Five months after the offering, Patty wants to sell her shares to a friend. See Rule 144(a)Rule 144(a) B.Patty bought her Apex shares on credit. She gave Apex a full- recourse personal note, with her shares as collateral. One year later Patty pays off the note and wants to sell her shares at market through a broker. See Rule 144(d)Rule 144(d) Any problems?

Hypothetical #3 Carl, the executive VP of Apex, owns 200,000 unregistered Apex common shares that he acquired 10 years ago. The shares are restricted. Carl wants to sell: A.to Sophia, a sophisticated investor. See Securities Act Section 4(1)Section 4(1) B.at market through a broker. See Rule 144(b)Rule 144(b) Any problems?

’33 Act (paraphrased) § 4(1)The registration requirements of the ’33 Act apply only to “transactions by an issuer, underwriter or dealer.” § 2(a)(11) The term underwriter is broadly defined to mean 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,

Hypothetical #4 Carl bought an additional 250,000 Apex shares on the market. A.Two months later, he wants to sell his shares on the market through the same broker. See Rule 144(d)Rule 144(d) B.Average weekly trading volume on the NYSE in Apex stock is 150,000. Carl sells 50,000 shares on each of January 1, February 1, and March 1. He wants to sell 80,000 more on April 1. See Rule 144(e)Rule 144(e) C.Carl's broker Bob & Co. wrote Maker & Co. (which makes an OTC market in Apex stock) asking if it had unfilled buy orders for Apex at the current market price. See Rule 144(f)Rule 144(f) D.Carl arranges with Bob & Co. to sell his Apex stock. Unknown to Bob & Co, Carl has asked ten other brokers to do the same thing. See Rule 144(g)Rule 144(g) Any problems?

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