The trial was over in two days, but the pre-trial maneuvering took years. The Judge took one year to the day to rule against plaintiff on its motion for Summary Judgment. The key to the entire trial was the interpretation of Security and Exchange Commission Rule 144. To expedite the case and hopefully avoid the trial, Judge Richard Matsch ordered that I file a brief of Rule 144. Recognizing that I could win the case on the brief, I got to it and the result is below. It did not win the case then, but did later.
On the first day of trial, my opponent rose and dismissed a count against my client. He gave several reasons, but the Judge said, “No, you read Griffith’s Brief and you know you were wrong.” Well, here it is. I hope it helps someone else along the way.
Brief of Rule 144
The Securities Laws regulate the vast securities industry. Basically, these rules require registration of issues before there is a public sale. The basic concept behind this is that buyers of securities have all relevant and material information required for an informed purchase.However, economic reality allows for exceptions to this general rule.
The exemptions are for certain securities under Rule 3 of the Securities Act of 1933,(Hereinafter,”the act”) and for certain transactions under Rule 4 of the Act.. Exemptions are further allowed for certain dollar amounts and for sales to certain accredited investors.
The subject of this brief is Rule 144, 17 C.F.R.§230.144, provides a method of selling shares in certain limited ways for accredited investors. It must be kept in mind that this is not the
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only way that an accredited investor can make a sale of shares. Rule 144 comes under Rule D of the Securities Act of 1933. 1In promulgating regulations, the SEC adopted a comprehensive scheme for exemptions relating to small issues and small issuers. “Regulation D is designed to simplify and clarify existing exemption, to expand their availability, and achieve uniformity between federal and state exemptions.” These exemptions combine many of the elements Section 3(b)’s qualified exemptions for small issues, Section 4(6)’s, exemption for offerings to accredited investors and Section 4(2)’s exemption for issuer transactions not involving a public offering. It is imperative to keep in mind that regulation D is not a single integrated exemptionbut rather consists of three separate but interrelated exemption.
Regulation D contains definitions that must be understood before proceeding to the examination of Rule 144. These definitions are critical to understanding the rules regarding exemptions.
The definitions are:
“Accredited investor” is also defined in section 2(1)5 of the act, as any person who in fact comes within, or whom the issuer reasonably believes comes within, any of eight categories at the time securities are sold to him or her. This is normally natural person who has considerable net worth or large annual income.
“Affiliate” this is a person who controls, is controlled by, or is under common control ofthe person with whom he or she is affiliated.
“Aggregate offering price” this is important for Sections 504 and 505 which have dollar
1 This opening section borrows heavily from “The Law of Securities Regulation,” Fifth
Edition by Thomas Lee Hazen with focus on pages 182 to 225 of that text.
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“Executive Officer” includes the president. . .and other policy makers of the company.The other terms, “business combination,” and “purchaser representative” are defined but have little relevance here.
The exemptions named above are primarily for issuers. There are, however, exemptions for transactions by persons other than “issuers”, “underwriters”, and “dealers”. Under Section 4(1) and 4(4) deals with unsolicited brokers transactions in this case, registration requirements ofthe 1933 are not limited to offerings by the issuer. Secondary transactions, that is sales by existing shareholders, may also trigger Section 5’s registration and prospectus obligations. Because of the proscription of Section 5, the burden is on the seller of securities, including existing shareholders, to establish an exemption from registration. Sections 4(1), 4(3), and 4(4)of the 1933 act provide the most common exemptions available for secondary transaction.
Section 4(1) of the 1933 act provide a registration exemption for “transactions by any person other than the issuer, underwriter, or dealer.” By its terms, under certain carefully state conditions, section 4(1) exempts transactions by persons who are not issuers, underwriters, or dealers. Section 2(a)4 of the act defines “issuer” to include every person who issues or proposes to issue a security.
The most important definition for the purposes of understanding regulation D and ultimately, Rule 144, is the definition of “underwriter.” Section 2(a)(11) says that an “underwriter” is anyone who purchases a security from the issuer with the view toward distribution of the security, as well as anyone who offers to sell or offers for sale securities for an issuer in connection with a distribution. The most troubling problems of the definition and
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operation arise in the context of persons who, although not been nominated as underwriters in the generic sense of the term, act as conduits for placing the securities in the hands of members of the investing public. In addition to the general definition of “underwriter,” Section 2(a)(11)further provides that anyone who sells securities on behalf of a controlling person of the issuer is deemed an underwriter. There are thus three ways to qualify for underwriter status. 1. purchasing from the issuer with a view toward distribution, 2., direct or indirect participation in an underwriting effort, and 3, selling securities on behalf of a control person. “Underwriter”status not only renders Section 4(1) exemption unavailable, but also provides the basis for liability from misstatements connected with a registered offering.
One key aspect of the part of the statutory definition is that in order to be classified as a statutory underwriter, the participant must have been acting on behalf of or purchasing from an issuer. In this context, however, the statute provides that a control person is considered to be an issuer. Willfully acting as a conduit for distributing shares without registration is sufficient to create “underwriter” status even though the person acting as an underwriter did not intend to act as an underwriter. (see e.g. Geiger v SEC, 363 F.3d. 481, (9th Cir.2004)) Underwriter status thus can follow from playing a central role in the distribution even though the underwriter was not the actual seller. The essence of underwriter status is establishing that the securities were acquired from the issuer or control person with an intent to resell. The Congressional intent was to include as underwriters all persons who might operate as conduits for securities being placed in the hands of the investing public so long as the ultimate purchasers are members of the general public, as opposed to qualified private placement purchasers, as these transaction call for protection of the securities acts registration provisions. Ibid
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In order to provide more guidance by clarifying the answers to the questions “Who is an underwriter?” and, therefore, expanding the scope of statutory exemption under Sections 4(1)and 4(4), the Securities Exchange Commission has promulgated Rule 144. Rule 144 operates asa safe harbor and as such is not the exclusive method by which an affiliate of the issuer may sell restricted securities in reliance upon an exemption. The rule applies to sales of restricted securities by all persons and sales of any securities by affiliates of the issuer.
The case we are dealing with, Driscoll v Dennis et al., concerns a transaction that occurred in 2005. We will, therefore, now look at the version of Rule 144 that was in effect in 2005. Rule 144 is a part of the securities laws that allows exemptions for limited sales of restricted securities.
17 C.F.R. s 230.144 Effective:[See Text Amendments] to August 28, 2005
Code of Federal Regulations
Title 17. Commodity and Securities Exchanges
Chapter II. Securities and Exchange Commission
Part 230. General Rules and Regulations, Securities Act of 1933
General Purpose: § 230.144 Persons deemed not to be engaged in a distribution and
therefore not underwriters.
Preliminary Note: Rule 144 is designed to implement the fundamental purposes of the Act, as
expressed in its preamble, “To provide full and fair disclosure of the character
of the securities sold in interstate commerce and through the mails, and to
prevent fraud in the sale thereof * * *” The rule is designed to prohibit the
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creation of public markets in securities of issuers concerning which adequate
current information is not available to the public. At the same time, where
adequate current information concerning the issuer is available to the public, the
rule permits the public sale in ordinary trading transactions of limited amounts
of securities owned by persons controlling, controlled by or under common control
with the issuer and by persons who have acquired restricted securities of the
Certain basic principles are essential to an understanding of the requirement of
registration in the Act:
1. If any person utilizes the jurisdictional means to sell any nonexempt
security to any other person, the security must be registered unless a statutory
exemption can be found for the transaction.
2. In addition to the exemptions found in Section 3, four exemptions applicable
to transactions in securities are contained in section 4. Three of these section
4 exemptions are clearly not available to anyone acting as an “underwriter” of
securities. (The fourth, found in section 4(4), is available only to those who
act as brokers under certain limited circumstances.) An understanding of the term
“underwriter” is therefore important to anyone who wishes to determine whether or
not an exemption from registration is available for his sale of securities.
The term underwriter is broadly defined in section 2(11) of the Act 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, or participates, or
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has a direct or indirect participation in any such undertaking, or participates or
has a participation in the direct or indirect underwriting of any such
undertaking. The interpretation of this definition has traditionally focused on
the words “with a view to” in the phrase “purchased from an issuer with a view to
* * * distribution.” Thus, an investment banking firm which arranges with an
issuer for the public sale of its securities is clearly an “underwriter” under
that section. Individual investors who are not professionals in the securities
business may also be “underwriters” within the meaning of that term as used in the
Act if they act as links in a chain of transactions through which securities move
from an issuer to the public. Since it is difficult to ascertain the mental state
of the purchaser at the time of his acquisition, subsequent acts and circumstances
have been considered to determine whether such person took with a view to
distribution at the time of his acquisition. Emphasis has been placed on factors
such as the length of time the person has held the securities and whether there
has been an unforeseeable change in circumstances of the holder. Experience has
shown, however, that reliance upon such factors as the above has not assured
adequate protection of investors through the maintenance of informed trading
markets and has led to uncertainty in the application of the registration
provisions of the Act.
It should be noted that the statutory language of section 2(11) is in the
disjunctive. Thus, it is insufficient to conclude that a person is not an
underwriter solely because he did not purchase securities from an issuer with a
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view to their distribution. It must also be established that the person is not
offering or selling for an issuer in connection with the distribution of the
securities, does not participate or have a direct or indirect participation in any
such undertaking, and does not participate or have a participation in the direct
or indirect underwriting of such an undertaking.
In determining when a person is deemed not to be engaged in a distribution
several factors must be considered.
First, the purpose and underlying policy of the Act to protect investors
requires that there be adequate current information concerning the issuer, whether
the resales of securities by persons result in a distribution or are effected in
trading transactions. Accordingly, the availability of the rule is conditioned on
the existence of adequate current public information.
Secondly, a holding period prior to resale is essential, among other reasons, to
assure that those persons who buy under a claim of a section 4(2) exemption have
assumed the economic risks of investment, and therefore are not acting as conduits
for sale to the public of unregistered securities, directly or indirectly, on
behalf of an issuer. It should be noted that there is nothing in section 2(11)
which places a time limit on a person’s status as an underwriter. The public has
the same need for protection afforded by registration whether the securities are
distributed shortly after their purchase or after a considerable length of time.
A third factor, which must be considered in determining what is deemed not to
constitute a “distribution”, is the impact of the particular transaction or
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transactions on the trading markets. Section 4(1) was intended to exempt only
routine trading transactions between individual investors with respect to
securities already issued and not to exempt distributions by issuers or acts of
other individuals who engage in steps necessary to such distributions. Therefore,
a person reselling securities under section 4(1) of the Act must sell the
securities in such limited quantities and in such a manner as not to disrupt the
trading markets. The larger the amount of securities involved, the more likely it
is that such resales may involve methods of offering and amounts of compensation
usually associated with a distribution rather than routine trading transactions.
Thus, solicitation of buy orders or the payment of extra compensation are not
permitted by the rule.
In summary, if the sale in question is made in accordance with all of the
provisions of the section as set forth below, any person who sells restricted
securities shall be deemed not to be engaged in a distribution of such securities
and therefore not an underwriter thereof. The rule also provides that any person
who sells restricted or other securities on behalf of a person in a control
relationship with the issuer shall be deemed not to be engaged in a distribution
of such securities and therefore not to be an underwriter thereof, if the sale is
made in accordance with all the conditions of the section.
(a) Definitions. The following definitions shall apply for the purposes of this
(1) An “affiliate” of an issuer is a person that directly, or indirectly
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through one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer.
(2) The term “person” when used with reference to a person for whose account
securities are to be sold in reliance upon this section includes, in addition
to such person, all of the following persons:
(i) Any relative or spouse of such person, or any relative of such spouse, any
one of whom has the same home as such person;
(ii) Any trust or estate in which such person or any of the persons specified
in paragraph (a)(2)(i) of this section collectively own 10 percent or more of
the total beneficial interest or of which any of such persons serve as trustee,
executor or in any similar capacity; and
(iii) Any corporation or other organization (other than the issuer) in which
such person or any of the persons specified in paragraph (a)(2)(i) of this
section are the beneficial owners collectively of 10 percent or more of any
class of equity securities or 10 percent or more of the equity interest.
(3) The term restricted securities means:
(i) Securities acquired directly or indirectly from the issuer, or from an
affiliate of the issuer, in a transaction or chain of transactions not
involving any public offering;
(ii) Securities acquired from the issuer that are subject to the resale
limitations of s 230.502(d) under Regulation D or s 230.701(c);
(iii) Securities acquired in a transaction or chain of transactions meeting the
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requirements of s 230.144A;
(iv) Securities acquired from the issuer in a transaction subject to the
conditions of Regulation CE (s 230.1001);
(v) Equity securities of domestic issuers acquired in a transaction or chain of
transactions subject to the conditions of s 230.901 or s 230.903 under
Regulation S (s 230.901 through s 230.905, and Preliminary Notes);
(vi) Securities acquired in a transaction made under s 230.801 to the same
extent and proportion that the securities held by the security holder of the
class with respect to which the rights offering was made were as of the record
date for the rights offering “restricted securities” within the meaning of this
paragraph (a)(3); and
(vii) Securities acquired in a transaction made under s 230.802 to the same
extent and proportion that the securities that were tendered or exchanged in
the exchange offer or business combination were “restricted securities” within
the meaning of this paragraph (a)(3).
(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.
(c) Current public information. There shall be available adequate current public
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information with respect to the issuer of the securities. Such information shall
be deemed to be available only if either of the following conditions is met:
(1) Filing of reports. The issuer has securities registered pursuant to
section 12 of the Securities Exchange Act of 1934, has been subject to the
reporting requirements of section 13 of that Act for a period of at least 90
days immediately preceding the sale of the securities and has filed all the
reports required to be filed thereunder during the 12 months preceding such
sale (or for such shorter period that the issuer was required to file such
reports), other than Form 8-K reports (s 249.308 of this chapter); or has
securities registered pursuant to the Securities Act of 1933, has been subject
to the reporting requirements of section 15(d) of the Securities Exchange Act
of 1934 for a period of at least 90 days immediately preceding the sale of the
securities and has filed all the reports required to be filed thereunder during
the 12 months preceding such sale (or for such shorter period that the issuer
was required to file such reports), other than Form 8-K reports (s 249.308 of
this chapter). The person for whose account the securities are to be sold
shall be entitled to rely upon a statement in whichever is the most recent
report, quarterly or annual, required to be filed and filed by the issuer that
such issuer has filed all reports required to be filed by section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), other
than Form 8-K reports (s 249.308 of this chapter), and has been subject to such
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filing requirements for the past 90 days, unless he knows or has reason to
believe that the issuer has not complied with such requirements. Such person
shall also be entitled to rely upon a written statement from the issuer that it
has complied with such reporting requirements unless he knows or has reasons to
believe that the issuer has not complied with such requirements.
(2) Other public information. If the issuer is not subject to section 13 or
15(d) of the Securities Exchange Act of 1934, there is publicly available the
information concerning the issuer specified in paragraphs (a)(5)(i) to (xiv),
inclusive, and paragraph (a)(5)(xvi) of Rule 15c2-11 (s 240.15c2-11 of this
chapter) under that Act or, if the issuer is an insurance company, the
information specified in section 12(g)(2)(G)(i) of that Act.
(d) Holding period for restricted securities. If the securities sold are
restricted securities, the following provisions apply:
(1) General rule. A minimum of one year must elapse between the later of the
date of the acquisition of the securities from the issuer or from an affiliate
of the issuer, and any resale of such securities in reliance on this section
for the account of either the acquiror or any subsequent holder of those
securities. If the acquiror takes the securities by purchase, the one-year
period shall not begin until the full purchase price or other consideration is
paid or given by the person acquiring the securities from the issuer or from an
affiliate of the issuer.
(2) Promissory notes, other obligations or installment contracts. Giving the
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issuer or affiliate of the issuer from whom the securities were purchased a
promissory note or other obligation to pay the purchase price, or entering into
an installment purchase contract with such seller, shall not be deemed full
payment of the purchase price unless the promissory note, obligation or
(i) Provides for full recourse against the purchaser of the securities;
(ii) Is secured by collateral, other than the securities purchased, having a
fair market value at least equal to the purchase price of the securities
(iii) Shall have been discharged by payment in full prior to the sale of the
(3) Determination of holding period. The following provisions shall apply for
the purpose of determining the period securities have been held:
(i) Stock dividends, splits and recapitalizations. Securities acquired from
the issuer as a dividend or pursuant to a stock split, reverse split or
recapitalization shall be deemed to have been acquired at the same time as the
securities on which the dividend or, if more than one, the initial dividend was
paid, the securities involved in the split or reverse split, or the securities
surrendered in connection with the recapitalization;
(ii) Conversions. If the securities sold were acquired from the issuer for a
consideration consisting solely of other securities of the same issuer
surrendered for conversion, the securities so acquired shall be deemed to have
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0 been acquired at the same time as the securities surrendered for conversion;
(iii) Contingent issuance of securities. Securities acquired as a contingent
payment of the purchase price of an equity interest in a business, or the
assets of a business, sold to the issuer or an affiliate of the issuer shall be
deemed to have been acquired at the time of such sale if the issuer or
affiliate was then committed to issue the securities subject only to conditions
other than the payment of further consideration for such securities. An
agreement entered into in connection with any such purchase to remain in the
employment of, or not to compete with, the issuer or affiliate or the rendering
of services pursuant to such agreement shall not be deemed to be the payment of
further consideration for such securities.
(iv) Pledged securities. Securities which are bona-fide pledged by an
affiliate of the issuer when sold by the pledgee, or by a purchaser, after a
default in the obligation secured by the pledge, shall be deemed to have been
acquired when they were acquired by the pledgor, except that if the securities
were pledged without recourse they shall be deemed to have been acquired by the
pledgee at the time of the pledge or by the purchaser at the time of purchase.
(v) Gifts of securities. Securities acquired from an affiliate of the issuer
by gift shall be deemed to have been acquired by the donee when they were
acquired by the donor.
(vi) Trusts. Where a trust settlor is an affiliate of the issuer, securities
acquired from the settlor by the trust, or acquired from the trust by the
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beneficiaries thereof, shall be deemed to have been acquired when such
securities were acquired by the settlor.
(vii) Estates. Where a deceased person was an affiliate of the issuer,
securities held by the estate of such person or acquired from such estate by
the beneficiaries thereof shall be deemed to have been acquired when they were
acquired by the deceased person, except that no holding period is required if
the estate is not an affiliate of the issuer or if the securities are sold by a
beneficiary of the estate who is not such an affiliate.
Note: While there is no holding period or amount limitation for estates and
beneficiaries thereof which are not affiliates of the issuer, paragraphs (c), (h)
and (i) of the rule apply to securities sold by such persons in reliance upon the
(viii) Rule 145(a) transactions. The holding period for securities acquired in a
transaction specified in Rule 145(a) shall be deemed to commence on the date the
securities were acquired by the purchaser in such transaction. This provision
shall not apply, however, to a transaction effected solely for the purpose of
forming a holding company.
(e) Limitation on amount of securities sold. Except as hereinafter provided, the
amount of securities which may be sold in reliance upon this rule shall be
determined as follows:
(1) Sales by affiliates. If restricted or other securities are sold for the
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account of an affiliate of the issuer, the amount of securities sold, together
with all sales of restricted and other securities of the same class for the
account of such person within the preceding three months, shall not exceed the
(i) 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
(ii) The average weekly reported volume of trading in such securities on all
national securities exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the filing of notice required by paragraph (h), or if no such notice
is required the date of receipt of the order to execute the transaction by the
broker or the date of execution of the transaction directly with a market
<Text of subsection (e)(1)(iii) effective until Aug. 29, 2005.>
(iii) The average weekly volume of trading in such securities reported through the
consolidated transaction reporting system contemplated by Rule 11Aa3-1 under the
Securities Exchange Act of 1934 (s 240.11A3-1) during the four-week period
specified in paragraph (e)(1)(ii) of this section.
<Text of subsection (e)(1)(iii) effective Aug. 29, 2005.>
(iii) The average weekly volume of trading in such securities reported pursuant to
an effective transaction reporting plan or an effective national market system
plan as those terms are defined in s 242.600 of this chapter during the four-week
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period specified in paragraph (e)(1)(ii) of this section.
(2) Sales by persons other than affiliates. The amount of restricted securities
sold for the account of any person other than an affiliate of the issuer, together
with all other sales of restricted securities of the same class for the account of
such person within the preceding three months, shall not exceed the amount
specified in paragraphs (e)(1)(i), (1)(ii) or (1)(iii) of this section, whichever
is applicable, unless the conditions of paragraph (k) of this rule are satisfied.
(3) Determination of amount. For the purpose of determining the amount of
securities specified in paragraphs (e)(1) and (2) of this section, the following
provisions shall apply:
(i) Where both convertible securities and securities of the class into which
they are convertible are sold, the amount of convertible securities sold shall
be deemed to be the amount of securities of the class into which they are
convertible for the purpose of determining the aggregate amount of securities
of both classes sold;
(ii) The amount of securities sold for the account of a pledgee thereof, or for
the account of a purchaser of the pledged securities, during any period of
three months within one year after a default in the obligation secured by the
pledge, and the amount of securities sold during the same three-month period
for the account of the pledgor shall not exceed, in the aggregate, the amount
specified in paragraph (e) (1) or (2) of this section, whichever is applicable;
(iii) The amount of securities sold for the account of a donee thereof during
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any period of three months within one year after the donation, and the amount
of securities sold during the same three-month period for the account of the
donor, shall not exceed, in the aggregate, the amount specified in paragraph
(e) (1) or (2) of this section, whichever is applicable;
(iv) Where securities were acquired by a trust from the settlor of the trust,
the amount of such securities sold for the account of the trust during any
period of three months within one year after the acquisition of the securities
by the trust, and the amount of securities sold during the same three-month
period for the account of the settlor, shall not exceed, in the aggregate, the
amount specified in paragraph (e) (1) or (2) of this section, whichever is
(v) The amount of securities sold for the account of the estate of a deceased
person, or for the account of a beneficiary of such estate, during any period
of 3 months and the amount of securities sold during the same period for the
account of the deceased person prior to his death shall not exceed, in the
aggregate, the amount specified in paragraph (e)(1) or (2) of this section,
whichever is applicable: Provided, That no limitation on amount shall apply if
the estate or beneficiary thereof is not an affiliate of the issuer;
(vi) When two or more affiliates or other persons agree to act in concert for
the purpose of selling securities of an issuer, all securities of the same
class sold for the account of all such persons during any period of 3 months
shall be aggregated for the purpose of determining the limitation on the amount
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of securities sold;
(vii) The following sales of securities need not be included in determining the
amount of securities sold in reliance upon this section: securities sold
pursuant to an effective registration statement under the Act; securities sold
pursuant to an exemption provided by Regulation A (s 230.251 through s 230.263)
under the Act; securities sold in a transaction exempt pursuant to Section 4
of the Act (15 U.S.C. 77d) and not involving any public offering; and
securities sold offshore pursuant to Regulation S (s 230.901 through s 230.905,
and Preliminary Notes) under the Act.
(f) Manner of sale. The securities shall be sold in “brokers’ transactions”
within the meaning of section 4(4) of the Act or in transactions directly with a
“market maker,” as that term is defined in section 3(a)(38) of the Securities
Exchange Act of 1934, and the person selling the securities shall not (1) solicit
or arrange for the solicitation of orders to buy the securities in anticipation of
or in connection with such transaction, or (2) make any payment in connection with
the offer or sale of the securities to any person other than the broker who
executes an order to sell the securities. The requirements of this paragraph,
however, shall 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 the
estate or beneficiary thereof is not an affiliate of the issuer; nor shall they
apply to securities sold for the account of any person other than an affiliate of
the issuer provided the conditions of paragraph (k) of this rule are satisfied.
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(g) Brokers’ transactions. The term “brokers’ transactions” in section 4(4) of
the Act shall for the purposes of this rule be deemed to include transactions by a
broker in which such broker–:
(1) Does not more than execute the order or orders to sell the securities as
agent for the person for whose account the securities are sold; and receives
no more than the usual and customary broker’s commission;
(2) Neither solicits nor arranges for the solicitation of customers’ orders to
buy the securities in anticipation of or in connection with the transaction;
provided, that the foregoing shall not preclude (i) inquiries by the broker of
other brokers or dealers who have indicated an interest in the securities
within the preceding 60 days, (ii) inquiries by the broker of his customers who
have indicated an unsolicited bona fide interest in the securities within the
preceding 10 business days; or (iii) the publication by the broker of bid and
ask quotations for the security in an inter-dealer quotation system provided
that such quotations are incident to the maintenance of a bona fide
inter-dealer market for the security for the broker’s own account and that the
broker has published bona fide bid and ask quotations for the security in an
inter-dealer quotation system on each of at least twelve days within the
preceding thirty calendar days with no more than four business days in
succession without such two-way quotations;
Note To Paragraph (g)(2)(ii): The broker should obtain and retain in his files
written evidence of indications of bona fide unsolicited interest by his customers
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in the securities at the time such indications are received.
(3) After reasonable inquiry is not aware of circumstances indicating that the
person for whose account the securities are sold is an underwriter with respect to
the securities or that the transaction is a part of a distribution of securities
of the issuer. Without limiting the foregoing, the broker shall be deemed to be
aware of any facts or statements contained in the notice required by paragraph (h)
of this section.
Notes: (i) The broker, for his own protection, should obtain and retain in his
files a copy of the notice required by paragraph (h) of this section.
(ii) The reasonable inquiry required by paragraph (g)(3) of this section should
include, but not necessarily be limited to, inquiry as to the following matters:
(a) The length of time the securities have been held by the person for whose
account they are to be sold. If practicable, the inquiry should include physical
inspection of the securities;
(b) The nature of the transaction in which the securities were acquired by such
(c) The amount of securities of the same class sold during the past 3 months by
all persons whose sales are required to be taken into consideration pursuant to
paragraph (e) of this section;
(d) Whether such person intends to sell additional securities of the same class
through any other means;
(e) Whether such person has solicited or made any arrangement for the
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solicitation of buy orders in connection with the proposed sale of securities;
(f) Whether such person has made any payment to any other person in connection
with the proposed sale of the securities; and
(g) The number of shares or other units of the class outstanding, or the
relevant trading volume.
(h) Notice of proposed sale. If the amount of securities to be sold in reliance
upon the rule during any period of three months exceeds 500 shares or other units
or has an aggregate sale price in excess of $10,000, three copies of a notice on
Form 144 shall be filed with the Commission at its principal office in Washington,
D.C.; and if such securities are admitted to trading on any national securities
exchange, one copy of such notice shall also be transmitted to the principal
exchange on which such securities are so admitted. The Form 144 shall be signed
by the person for whose account the securities are to be sold and shall be
transmitted for filing concurrently with either the placing with a broker of an
order to execute a sale of securities in reliance upon this rule or the execution
directly with a market maker of such a sale. Neither the filing of such notice
nor the failure of the Commission to comment thereon shall be deemed to preclude
the Commission from taking any action it deems necessary or appropriate with
respect to the sale of the securities referred to in such notice. The
requirements of this paragraph, however, shall not apply to securities sold for
the account of any person other than an affiliate of the issuer, provided the
conditions of paragraph (k) of this rule are satisfied.
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(i) Bona fide intention to sell. The person filing the notice required by
paragraph (h) of this section shall have a bona fide intention to sell the
securities referred to therein within a reasonable time after the filing of such
(j) Non-exclusive rule. Although this rule provides a means for reselling
restricted securities and securities held by affiliates without registration, it
is not the exclusive means for reselling such securities in that manner.
Therefore, it does not eliminate or otherwise affect the availability of any
exemption for resales under the Securities Act that a person or entity may be able
to rely upon.
(k) Termination of certain restrictions on sales of restricted securities by
persons other than affiliates. The requirements of paragraphs (c), (e), (f) and
(h) of this section shall not apply to restricted securities sold for the account
of a person who is not an affiliate of the issuer at the time of the sale and has
not been an affiliate during the preceding three months, provided a period of at
least two years has elapsed since the later of the date the securities were
acquired from the issuer or from an affiliate of the issuer. The two-year period
shall be calculated as described in paragraph (d) of this section.
[37 FR 596, Jan. 14, 1972, as amended at 39 FR 6071, Feb. 19, 1974; 39 FR 8914,
March 7, 1974; 43 FR 43711, Sept. 27, 1978; 43 FR 54230, Nov. 21, 1978; 44 FR
15612, March 14, 1979; 45 FR 12391, Feb. 28, 1980; 46 FR 12197, Feb. 12, 1981;
47 FR 11261, March 16, 1982; 48 FR 44771, Sept. 30, 1983; 53 FR 12921, April 20,
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1988; 55 FR 17944, April 30, 1990; 58 FR 67312, Dec. 21, 1993; 61 FR 21359, May
9, 1996; 62 FR 9244, Feb. 28, 1997; 63 FR 9642, Feb. 25, 1998; 64 FR 61400 ,
Nov. 10, 1999; 69 FR 15617, March 25, 2004; 70 FR 37617, June 29, 2005]
SOURCE: 62 FR 24573, May 6, 1997; 63 FR 6384, Feb. 6, 1998; 63 FR 13943, 13984 ,
March 23, 1998; 64 FR 61449, Nov. 10, 1999; 65 FR 47284, Aug. 2, 2000; 66 FR
8896, 9017, Feb. 5, 2001; 67 FR 230, Jan. 2, 2002; 67 FR 13536, March 22, 2002;
67 FR 19673, April 23, 2002; 68 FR 57777, Oct. 6, 2003; 72 FR 20414, April 24,
2007; 72 FR 71566, Dec. 17, 2007; 76 FR 4243, Jan. 25, 2011, unless otherwise
AUTHORITY: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss,
78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28,
80a-29, 80a-30, and 80a-37, unless otherwise noted.; Section 230.151 is also
issued under 15 U.S.C. 77s(a).; Section 230.160 is also issued under Section
104(d) of the Electronic Signatures Act.; Section 230.193 is also issued under
sec. 943, Pub.L. 111-203, 124 Stat. 1376.; Sections 230.400 to 230.499 issued
under 15 U.S.C. 77f, 77h, 77j, 77s, unless otherwise noted.; Section 230.473 is
also issued under 15 U.S.C. 79(t).; Section 230.502 is also issued under 15 U.S.C.
80a-8, 80a-29, 80a-30. 17 C. F. R. s 230.144, 17 CFR s 230.144
Analysis of Rule 144 in effect in 2005.
The Securities Act of 1933, as amended (“Securities Act”) requires an effective
registration statement for any sale of securities, unless an exemption is
available. Rule 144 provides a safe harbor for resale under Section 4(1) by both
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affiliates and non-affiliates of issuers of two (2) categories of securities:
restricted and control. Restricted securities are securities acquired pursuant to
one of the transactions listed in Rule 144(a)(3) and control securities (while not
defined in Rule 144), commonly refer to securities held by an affiliate of the
issuer, regardless of how they were acquired.
Overview of the Rule 144 Safe Harbor
A. Rule 144 addresses the resale of restricted securities by affiliates and non-affiliates of both 1934 Act reporting companies and non-reporting companies.
B. Under Rule 144(d)(1) sales of securities are permitted after a one (1) year holding period. solong as all of the following conditions are met:
1. Adequate current information regarding the issuer is publicly available.
2. The amount of securities sold during any three (3) month period does not
exceed specified volume limitations set for equity and debt securities (Rule
3. all resales are made in ordinary brokers’ transactions, riskless principal
transactions or transactions directly with a market maker (Rule 144(f) and
4. A Form 144 is filed with the SEC (and the principal national exchange on
which the securities are admitted for trading) for all resales that involve in
excess of 5,000 shares or with an aggregate sales price of more than $50,000
within a three (3) month period.
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Key Rule 144 Definitions —Rule 144(a)
A. “Affiliate” is broadly defined to include: any person who directly, or indirectly through one(1) or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.
B. “Person” is also broadly defined for purposes of Rule 144. In addition to a person for whose account securities are to be sold in reliance upon this rule, the term “person” includes all of the following:
1. any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person;
2. any trust or estate in which such person or any of the persons specified in paragraph B(1)above collectively own ten percent (10%) or more of the total beneficial interest or of which any of such persons serve as a trustee, executor or in any similar capacity; and
3. any corporation or other organization (other than the issuer), in which such person or any of the persons specified in paragraph B(1) above are the beneficial owners collectively of ten percent (10%) or more of any class of equity securities or ten percent (10%) or more of the equity interest.
C. “Restricted Securities” are defined to include:
1. securities acquired directly or indirectly from the issuer, or an affiliate, in a transaction or chain of transactions not involving any public offering;
2. securities acquired from the issuer that are subject to the resale limitations of Regulation D under the Securities Act;
3. securities acquired in a transaction or chain of transactions meeting the requirements of
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4. securities issued exclusively in an exchange with existing securities holders (such as rights offerings and certain business combinations);
5. securities acquired from the issuer, subject to the resale limitations of Regulation CE;
6. equity securities of domestic issuers acquired in a transaction or chain of transactions subject to Regulation S (offshore sales), and
7. securities acquired from the issuer in a transaction that is exempt from Section 4(6).
Review of Rule 144 Limitations
A. Availability of Public Information: Rule 144 (c) requires that, at the time of sale, the issuer must have been subject to the periodic reporting requirements of the Exchange Act of 1934 for at least ninety (90) days and be current in filing required reports with the SEC. Persons can rely on a statement alleging reporting compliance that appears on the issuer’s most recent annual
report on Form 10-K or quarterly report on Form 10-Q or on a written statement from the issuer(unless such person knows or has reason to believe that such statement is not accurate). If the issuer is not subject to the reporting requirements of the 1934 Act, then information similar to what is required there under must be publicly available.
B. Holding Periods for Restricted Securities: Rule 144(d) requires a minimum of one (1) year between the later of the date of acquisition of the securities from the issuer or an affiliate of the issuer.
C. Calculating the Limit on the Amount of Securities Sold (Rule 144(e)):
1. Rule 144(e), imposes specific limits on resales of equity and debt securities, respectively:
The amount of equity securities to be sold (whether or not restricted), together with securities
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of the same class sold for the seller’s account within the preceding three (3) months, may not exceed the greater of:
(a) one percent (1%) of the shares of that class of stock outstanding as shown by the most recent report or statement published; or
(b) the average reported weekly volume of trading in such securities on all national securities exchanges and/or reported through the NASDAQ or consolidated transaction reporting system during the four (4) calendar weeks preceding the filing of Form 144 (described below) or, if no Form 144 is required, the date of receipt of the order to execute the sale by the broker or date of execution of the sale directly with the market maker.
2. Rule 144(e)(3) provides that sales of securities will be aggregated in, among others, the following situations:
(a) sales in which both convertible securities (the amount of convertible securities sold is the amount of securities they are convertible into) and their underlying securities are sold by the same person;
(b) two (2) or more affiliates (or other persons) act in concert for the purpose of selling securities in accordance with Rule 144; and
(c) donor and donee resales of the issuer’s securities where there are sales by the donee within one (1) year of the gift.
However, under Rule 144(e)(3)(vii) sales of the following securities are excluded from the calculation of the three (3) month volume limitation:
(a) securities sold pursuant to an effective registration statement; and
(b) securities sold pursuant to exemptions under Reg. A, Reg. S, and Section
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4 of the Securities Act (not involving a public offering).
D. Manner of Sale: Rules 144(f) and (g) require that the securities be sold only in “brokers’transactions,” in transactions directly with a “market maker.”
E. Notice of Proposed Sale: Form 144 must be filed with the SEC (with a copy to the principal exchange on which the securities are traded), if the proposed securities to be sold in any three (3)month period exceed 5000 shares or have an aggregate sales price in excess of $50,000. Form 144 must be filed at the time an order to sell is placed with a broker or a sale is executed directly
with a market maker. (See Rule 144(h)).
Note: The Form 144 filing requirement applies to any securities held by an affiliate, regardless of whether or not the securities are restricted securities.
F. The Non-Exclusivity of Rule 144
As noted above, Rule 144 operates as a safe harbor and is not the exclusive exemption from the registration provisions of the Securities Act. Depending on the circumstances, other exemptions(such as under Section 4(1) or the so called “Section 4(1-1/2) exemption”), may be available.Rule 144 does not eliminate or otherwise affect the availability of any other exemption forresales under the Securities Act. Rule 144(j)
G. Finally, Rule 144(k) ends restrictions on sales of shares by a person who is not an affiliate of the company and has not been an affiliate for the preceding three months, provided that at least two years have elapsed since the shares were acquired from the issuer or from an affiliate of the issuer.
The version of Rule 144 that was in effect in August 2005 and until early 2008, must be relied on to properly analyze the facts of this case. The Rule was amended effective at the
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beginning of 2008. The transaction that occurred between defendant Dennis and Chris Miklatcher followed proper Rule 144 protocols as understood by the escrow agent, company securities lawyer, and the transfer agent. However, subsequent disclosures raise issues as to whether those protocols were, in fact, properly followed.
Analysis of cases interpreting violations of Rule 144 or related exemptions.
Cases interpreting Rule 144 violations focus on the departures from the precise protocols that must be followed to properly sell restricted shares, therefore, the cases involve a scheme or device that improperly describes the facts that are presented to the transfer agent in an effort to have the restrictive legend removed to make the shares free trading.
These cases can include intentional misinterpretations of Rule 144 or Rule 4(1) and by submitting fraudulent documents to the SEC or to lawyers who write opinion letters.
In Securities Exchange Commission v. Drucker, Fed. Sec. L. Rep. P,99,529, 1983 WL1369-9 (S.D.N.Y.), in this unreported case, defendant Drucker was found guilty of violations of Rule 144 in that he unsuccessfully attempted to sell 58, 600 shares of unregistered Beneficial stock in violation of the Security Acts registration provisions. While these shares were ostensibly sold pursuant to Rule 144, they were, in reality, not in compliance with either the requirement or intentions of such rule (or any other exemption), and were therefor in violation of 5( c) of the Securities Act. Moreover, in connection with these attempted transactions, the defendant engagesin various acts and practices which were also in violation of Section 17(a) if the Securities Act.
The aborted Rule 144 sales were part of a scheme whereby Drucker would acquired Beneficial Stock at an inexpensive price and then sell it to the public at the soon to be artificially inflated prices. The method Drucker attempted to use was to have various owners of unregistered
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Beneficial stock sell their stock to an account controlled by Drucker at the Castle Bank in the Bahamas. The holders of this stock were all individuals who, at least at one time, were associated with Beneficial and, as result of such association, acquired their stock in private placements from the issuer. Drucker, Findings of Fact, 3.
This stock manipulation or attempted laundering of restrict shares through the Bahamian Bank, is explained in paragraph 12 of the Conclusions of Law. “
Drucker’s offer for sale of 58,600 shares of Beneficial common stock pursuant to Rule 144 was a wilful violation of Section 17(a) of the securities act was in willful violation of the securities act.
(e) “The fact that the Rule 144 offering had been engineered and controlled by the defendant, and that the unregistered stock was to be purchased by him through the Castle Bank, was not disclosed to: The “innocent” Rule 144 sellers (Stanley Goldstein and Bernard and Helen Nathanson, the attorneys who prepared the 144 opinion letters, Beneficial’s transfer agent, the broker dealer approached to transact the sale, purchasers of beneficial stock on the over-the counter market, nor Plaintiff Commission.
In this case, the failure of the parties to properly inform the company’s lawyers who wrote the opinion letter or the transfer agent who issued free trading shares worked a fraud upon the seller, the buyers, and the Commission. This case is important for the reason stated above.
SEC v. Richard S. Kern et. al., 425 F 3d 143, (2d Cir. 2005) examines the issue of underwriter status of sellers. As seen above, the exemptions in Rule 144 and Rule 4(1) is available only to those who are not underwriters. Rule 144 provides a safe harbor for limited sales whereby the sellers are determined to be non-underwriters for the purposes of the act.
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The background of the case is as follows: Securities and Exchange Commission (SEC)brought action against persons who sold unregistered securities alleging violation of registration
requirements of Securities Act of 1933. The United States District Court for the SouthernDistrict of New York, Sidney H. Stein, J., granted judgment for SEC, 200 F.Supp.2d 384 and 281 F.Supp.2d 726. Defendants appealed.
The Court of Appeals, Pooler, Circuit Judge, held that:
(1) sellers were “affiliates” of underwriters, ineligible for regulatory
protection from securities registration requirements;
(2) subsequent market sales did not qualify for exemption from registration
(3) sellers were aware of fraudulent, market-manipulating nature of their acts. Kern, p 157.
The court examined the regulatory system for selling restricted shares and found that no exemption applied to the facts of the case. The “Regime” is described as follows.
I. Statutory and Regulatory Regime
 Section 5 of the Act provides that securities must be registered with the
Commission before any person may sell or offer to sell such securities. 15
U.S.C. s 77e. Section 4 of the Act creates a number of exemptions from this
general rule. Id. s 77d. The exemption primarily at issue in this case is
found in Section 4(1), which exempts “transactions by any person other than an
issuer, underwriter, or dealer.” Id. s 77d(1). An underwriter is defined in
relevant part in Section 2(a)(11) as “any person who has purchased from an issuer
with a view to, or offers or sells for an issuer in connection with, the
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distribution of any security, or participates or has a direct or indirect
participation in any such undertaking, or participates or has a participation
in the direct or indirect underwriting of any such undertaking.” Id. s
77b(a)(11). For purposes of the underwriter definition only, an issuer includes
any person controlling, controlled by, or under common control with the issuer of
the securities. Id. In light of the purpose of the Act, exemptions generally are
to be interpreted to promote full disclosure of information necessary to protect
the investing public. Kern, p. 148 citing SEC v. Ralston Purina Co., 346 U.S. 119, 124-25, 73S.Ct.981, 97 L.Ed. 1494 (1953).
In order to provide greater certainty and security to issuers and investors,
the Commission has limited the definition of “underwriter” to exclude any person
who meets the requirements of the Rule 144 safe harbor. Id. s 230.144(b). This
consequence is precisely limited to its terms. A person who fails to comply with
Rule 144 does not benefit from the safe harbor, but can still avoid underwriter
status if he does not meet the statutory definition of an underwriter. Id. s
230.144(j). Similarly, a person who complies with Rule 144 must still show that
he is neither an issuer nor a dealer to qualify for the 4(1) exemption. See 15
U.S.C. s 77d(1); Notice of Adoption of Rule 144 Relating to the Definition of the
Terms “Underwriter” in Sections 4(1) and 2(11) and “Brokers’ Transactions” in
Section 4(4) of the Securities Act of 1933, Adoption of Form 144, and Rescission
of Rules 154 and 155 Under that Act, Securities Act Release No. 5223, 37 Fed.Reg.
591, 592 (Jan 11, 1972) (hereinafter “Adoption of Rule 144”).
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Rule 144 generally affects only “restricted securities,” or those securities
that have never been publicly sold. 17 C.F.R. s 230.144(b), (a)(3); To comply with Rule 144, a person ordinarily must meet numerous requirements concerning public information, holding periods, number of shares, manner of sales, and notice to the Commission. Id. s 230.144(c)-(h).
However, under subsection (k) of the Rule, if a person is not now and has not been an affiliate of the issuer within the last three months, and at least two years have elapsed since the securities to be sold were last acquired from an issuer or affiliate of the issuer, then that person need not comply with the other Rule 144 requirements. Id. s 230.144(k). An “affiliate” is in turn defined as “a person that directly, or indirectly … controls, or is controlled by, or is under
common control with [the] issuer.” Id. s 230.144(a)(1).
 It is undisputed that none of the securities sold here were registered.
To avoid liability, the Sellers must therefore demonstrate that they qualify for
an exemption from the registration requirement of Section 5. On appeal, the
Sellers argue only that the Polus and Citron transactions were exempt under Rule
144(k), and that the ETA transactions were exempt under Section 4(1).
Furthermore, appellants argue on appeal only the legality of the January and
February 1999 sales, which essentially correspond to the Market Sales. We
therefore take it as conceded that the pre-1999 sales were illegal, that all
defendants-appellants are liable if all the Sellers are liable, that the Polus and
Citron transactions are exempt under Section 4(1) only if they qualify for the
Rule 144 safe harbor under subsection (k), and that the ETA transactions are not
protected by Rule 144 at all. Id p148
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The term underwriter is defined in Section 2 of the Securities Act of 1933. “The term underwriter means any person who has purchased from an issuer with a view to, or offers to sell for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking or participates or has a participation in the indirect or indirect underwriting of any such undertaking. As used in this paragraph, 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. 15 U.S.C.S.§77b(11) . Kern op. cit. p. 149
Section 4(1) of the Securities Act of 1933, 15 U.S.C.S. § 77(d)1 exempts transactions by any person other than an issuer, underwriter, or dealer from the registration requirements of
§ 5 of the Securities Act of 1933. Ibid.
To aid in the interpretation of the term underwriter, the securities and exchange
Commission promulgated 17 C.F.R. §230.144, which creates a safe harbor by identifying certain conditions under which a person will deemed not to be a statutory underwriter. 17 C.F. R. §230.144 (b) These circumstances are listed in the full text of the Rule 144 as set out above.
In Horner, the court also found that “the exemption found in Section 4(1) was not available because the sellers were underwriters under Section 2(11) because they sold securities with a view to distribution and alternatively they sold securities for an issuer in connection with a distribution.” Id p.152
The court goes on to say “We therefore conclude that as a matter of law, the 1999 Market Sales are part of the transaction as the 1998 sales. Because the earlier sales indisputedly involved underwriters, the entire offering is not exempt under Section 4(1). Kern p.153
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Securities and Exchange Commission, Plaintiff-Appellee, v. M & A West Inc.; et. al. and Stanley R. Medley, Defendant-Appellant, 538 F.3d 1043, Fed. Sec. L. Rep. P 94,803, 08 Cal.Daily Op. Serv. 10,476, 2008 Daily Journal D.A.R. 12,599, 9th Circuit. 1986, On September 6,2001, the SEC filed a complaint in the United States District Court for the Northern District of California alleging that Medley violated Sections 5(a) and 5(c) of the Securities Act (selling unregistered securities), and Section 15(a) of the Exchange Act (acting as a broker without registering as a broker). On May 12, 2005, the SEC filed a Motion for Partial Summary Judgment regarding Medley’s liability for these violations. On June 20, 2005, the district court granted the motion in part, finding that Medley violated Section 5 when he sold unregistered shares of Virtual Lender, M & A West, and Digital Bridge to the public. The district court found that Medley was an “underwriter” under Section 2(11) because he purchased stock from persons who were controlling persons-affiliates-of the shell companies as of the dates the transactions were agreed to. The court rejected Medley’s argument that he qualified for the Rule
144(k) safe harbor because the selling shareholders were no longer affiliates on
the dates they delivered securities to Medley.
In this case, the district court held that Defendant Medley was an underwriter under Section 2(11) of the act, 15 U.S.C.S. §77 and as such, not exempt from Section 5’s registration requirements under section 4(1). Medley acquired the securities from persons who were affiliates at the time of transfer, we affirm the district court’s grant of summary judgment with respect to the Section 5 violations. Medley p. 1051
Defendant Medley sold unregistered shares obtained from affiliates of shell corporations
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to the public. The District Court found that Medley was an “underwriter” under Section 2(11)because he purchased stock from persons who were controlling persons–affiliates–of the shell companies as of the date the transactions were agreed to. The court rejected the argument that he qualified for the Rule 144(k) safe harbor because the selling shareholders were no longer affiliates of the dates they delivered securities to Medley. Medley,538 F. 3d 1043, (9th Cir. 2008),
In Securities Exchange Commission v. Sierra Brokerage Services Inc, et. al., 608 F.Sup.2d 923 (SD Ohio 2009), Judge Algenon L. Marbley granted summary judgement on the SEC’s claim for violating Section 5 of the Securities Act of 1933 and granted summary judgment on two other counts. This case centers on Defendant Tsai’s creation of MAS Acquisition XI Corporation (“MAS XI”), a “shell” company that ultimately merged with Bluepoint and sold shares to the public on the Over-the-Counter Bulletin Board in March of 2000. The SECmaintains that the Defendants’ conduct relating to that process repeatedly violated the federalsecurities laws. The case was about unregistered sales of securities and Defendant’s sought summary judgment claiming that their sales fit into exemptions 4(1) and Rule 144(k) to the registration requirement. The court states that Defendants argue that they are entitled tosummary judgment because their unregistered sales of securities fit into exemptions 4(1) and Rule 144(k) to the registration requirement. The Securities Act contains several enumerated exceptions to the registration requirement. The Defendants bear the burden of establishing their transfers fall within one of the enumerated exemptions from registration. Ralston Purina Co.,346 U.S. at 126, 73 S.Ct. 981; Cavanagh II, 155 F.3d at 133. “Registration exemptions are construed strictly to promote full disclosure of information for the protection of the investing public.” SEC v. Cavanagh, 445 F.3d 105, 115 (2d Cir.2006) (hereinafter Cavanagh IV ).
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Section 4(1) of the Securities Act exempts “transactions by any person other than an issuer,underwriter, or dealer” from Section 5’s registration requirement. 15 U.S.C. § 77d(1). To clarify the definition of the term “underwriter” the SEC drafted Rule 144. The Rule creates a “safe harbor” by limiting the definition of the term to exclude those who meet the requirements of the Rule. SEC v. M & A West Inc., 538 F.3d 1043, 1050 (9th Cir.2008). Rule 144(k) on which Defendants rely, creates a “safe harbor” for unregistered sales of restricted securities if: (1) the seller has not been an affiliate of the issuer for the preceding three months, and (2) at least two years have elapsed since the securities were last acquired from an issuer or affiliate of the issuer.FN19 17 C.F.R. § 230.144(k). A defendant who does not satisfy the requirements of Rule 144 can still avoid liability if he does not meet the statutory definition of an underwriter. SEC v.Kern, 425 F.3d 143, 148 (2d Cir.2005). Conversely, a person who satisfies Rule 144 must still demonstrate that he is neither an issuer nor a dealer to qualify for the 4(1) exemption. Id.
Defendants argue that the February 2000 sale of the MAS XI shareholders shares to the Promoter Defendants was exempt under Rule 144(k). They also claim that Tsai’s 1997 and 1999 sales and the Promoter Defendants’ sales of shares to the public are exempt from registration under Section 4(1) of the Securities act. The SEC contends that no exemptions apply to the sales and that it is entitled to summary judgment on the Section 5 violations.
a. Rule 144(k) Safe Harbor
The Rule 144(K) requires both (1) that a person wait 90 days after ceasing to be anaffiliate before selling securities, and (2) that two years have elapsed between the time thesecurities were acquired from an affiliate or issuer and when they are resold. An affiliate is “a person that directly, or indirectly … controls, or is controlled by, or is under common control
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with [the] issuer.” 17 C.F.R. § 230.144(a)(1) (emphasis added). Under that definition,shareholders who are controlled by the same person that controls the issuer are affiliates. SEC v.Kern, 425 F.3d 143, 149 (2d Cir.2005). In early February 2000, the Promoter Defendants bought their shares from the 33 MAS XI Shareholders and resold them less than a month later when public trading of Bluepoint shares began. The shareholders acquired their shares from Tsai in 1997 (for the five former director shareholders) and from the existing shareholders at Tsai’s direction in 1999 (for the additional 28 shareholders). The Defendants concede that Tsai was an affiliate of MAS XI, the issuer. Thus, the Defendants can only rely on Rule 144(k)’s safe harbor if the MAS XI Shareholders were not affiliates and held their shares for two years.
The Promoter Defendants argue that the MAS XI shareholders were not affiliates because they did not have the power to cause MAS XI to prepare and file a registration statement. The SEC counters that Tsai exerted sufficient control over the MAS XI shareholders to render them affiliates. In SEC v. Kern, the Second Circuit analyzed whether shareholders were affiliates in a business transaction similar to the case sub judice. 425 F.3d at 149.
Three of the Kern defendants were in the business of creating shell companies. Id. at 146.Those defendants purchased or incorporated three shell companies, which were the subject of the suit. Id. They distributed stock in each company as gifts to their friends and family. The shareholders were not involved in any of the shell companies’ decision-making, even though several of the share holders supposedly served as corporate officers. Id. Instead, the defendants controlled the shell companies and made business decisions.
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The defendants argued that their unregistered sales were exempt under Rule 144(k). Id. at 148.The Court held that the defendants could not rely on Rule 144(k) because the friend and family shareholders were affiliates under the Rule. Id. at 150. The Court explained that the shareholders were affiliates because they were “under common control with” the shell company issuers, i.e.,the defendants controlled both the shell companies and the shareholders. Id. at 149. The Court reasoned that the defendants controlled the issuer shell companies because they orchestrated the merger, had the power to distribute stock, served as corporate officers, and ignored corporate formalities. Id. They also controlled the shareholders because they were able to gather more than 90% of the shell companies’ stock from the shareholders at a fraction of the price at which it was sold to the other defendant in the merger proceeding. Id. at 150.
This Court concludes that Tsai controlled MAS XI and the MAS XI Shareholders.Consequently, the MAS XI Shareholders were “under common control with” the issuer and were affiliates, so Rule 144(k) does not apply. The Defendants advance several arguments to avoidthis conclusion, none of them compelling. Sierra, p 947
In Christopher H. ZACHARIAS, Petitioner v. SECURITIES and EXCHANGE COMMISSION, Respondent.584 F.3d 1073, 388 U.S.App.D.C. 241 (2009)
Officer and director of issuer and associate of registered broker-dealer petitioned for review of order of Securities and Exchange Commission(SEC), 2008 WL 268598 and 2008 WL 4291978,determining that they violated Securities Act by participating in sales of unregistered securities by swap scheme and that officers violated anti-fraud and reporting provisions of Securities Act
and Securities Exchange Act, and ordering substantial monetary disgorgement and
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Holdings: The Court of Appeals held that:
(1) defendants’ sales of securities were not exempt from registration requirements
as swap scheme involved underwriter;
(2) broker-dealer’s associate was not deprived of due process and fair trial by
denial of severance;
(3) remand was warranted regarding securities fraud and reporting violations;
(4) disgorgement order against associate for half of total commissions was
(5) civil penalty against associate was appropriate;
(6) disgorgement order against officers was not time-barred civil penalty.
Security and Exchange Commission’s (SEC) conclusion, in determining that
issuer’s officers and broker-dealer’s associate violated Securities Act by
participating as substantial factors in sales of unregistered securities by
exercising options to acquire shares to replace foreign shareholders’ warrant
shares in swap scheme, that foreign shareholders were statutory “underwriters,”
precluding exemption from registration requirement due to purchase of common stock
on exercise of warrants with view to distribution of shares to public of which
officers knew or should have known, was supported by substantial evidence
including that foreign shareholders exercised warrants and soon sold shares to
public along with their remaining original stock, and that swap scheme was only
reason warrants were exercisable as they would have expired completely worthless
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without issuer’s time extension to effectuate scheme of connected sales in chain
of transactions according to pre-existing plan of which officers’ knowledge was
readily inferred and in which their option sales were necessary and critical step
in overall distribution. Securities Act of 1933, ss 2(a)(11), 4(1), 5(a, c), 15
U.S.C.A. ss 77b(a)(11), 77d(1), 77e(a, c); 17 C.F.R. ss 230.144(a)(3)(i),
230.144(b)(1)(i), 230.901 et seq.
Zaharias headnote 7
In the case of United States of America v. Benjamin G. Sprecher, et.al. 783 F.Supp.133(SD NY 1992) An attorney was charged with conspiring to defraud the United States, making false statements to government agency, committing perjury, and obstructing justice. The District Court, Cedarbaum, J., held that: (1) attorney conspired to defraud United States and Internal Revenue Service (IRS) and to commit offense against United States; (2) attorney aided and abetted false statement within jurisdiction of IRS; (3) attorney conspired to sell unregistered securities in market and to make false statements in matter within jurisdiction of Securities and Exchange Commission (SEC); and (4) attorney committed perjury and obstructed justice.
The court relied on 18 U.S.C.A. § 1001 that says that statute criminalizing false statement within jurisdiction of any department or agency of United States does not require showing that statement was actually submitted to department or agency of United States , it only requires that it was contemplated that statement was to be utilized in matter within jurisdiction of department or agency. Preamble to case, 783 F. Supp. 133 Count three of the indictment charges that Sprecher conspired with others to violate 15 U.S.C. §§ 77e and 77x by selling unregistered securities illegally in the market and to violate 18 U.S.C. § 1001 by making false statements in a
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matter within the jurisdiction of the SEC. Rule 144 promulgated by the SEC under the Act defines a class of persons deemed not to be engaged in a distribution of securities and therefore not underwriters, that is, persons whose sale of securities is exempt from the general registration requirements of the 1933 Act pursuant to 15 U.S.C. § 77d. Subdivision k of Rule 144 implements the section 77d exception from the registration requirements of the 1933 Act for restricted securities sold for the account of a person who is not an affiliate of the issuer at the time of the sale and has not been an affiliate during the preceding three months, provided aperiod of at least three years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. Sprecher p.142, 17 C.F.R. § 230.144(k).Securities that are acquired directly or indirectly from the issuer, or from an affiliate of theissuer, in a transaction or chain of transactions not involving any public offering are restricted securities. 17 C.F.R. § 230.144(a)(3)(i).
The conspiracy to sell unregistered securities and make false statements to the SEC
The evidence is overwhelming that Sprecher participated in a conspiracy with Roth, Foti, and Hastings to sell unregistered World Wide stock illegally in the market and to make false statements in a matter within the jurisdiction of the SEC. To facilitate the illegal public sale ofthe unregistered World Wide stock, Sprecher met with Foti and Hastings on a regular basis from February through May of 1988. During the same period, Sprecher was in communication with Roth and represented Roth in the World Wide negotiations. The defendant also created and backdated corporate documents for submission to the SEC so that it would appear that Roth was no longer either an officer or a majority shareholder—and thus no longer an affiliate—of World Wide as of December 16, 1987, and that the requirements of Rule 144(k) had been met. Sprecher
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In fact, Roth remained an affiliate of World Wide at least through March 30, 1988 because he did not resign until after the March 30 meeting, and because he owned the majority of outstanding shares of World Wide until Hastings was issued the 46,377,000 shares following the March 30 meeting. That is, Roth did not relinquish control of World Wide until March 31 atthe earliest. Ibid
Sprecher, too, was an affiliate of World Wide both by virtue of his relationship to Roth and by virtue of his central role in the plans to effect a merger. The tape-recorded meetings he conducted in his office demonstrate that Sprecher dominated the discussion and passed on the merits of potential deals. It was Sprecher who created and submitted the false corporate records for World Wide to the SEC to facilitate the merger plan and directed the distribution of the Roth shares so that he and his co-conspirators, Roth, Foti, and Hastings, each controlled a portion of the newly freed-up stock. There is no doubt that Sprecher was not acting merely as an attorney,but was an active participant in and major influence on the “management and policies” of World Wide until it was acquired by House. Ibid.
Here, there was an agreement to profit by selling unregistered shares of World Widestock in the market. That Sprecher and Roth were later joined in their plan by Foti and Hastings does not negate the existence of a single conspiracy. Sprecher, Roth, Foti, and Hastings allmutually depended upon and assisted each other in pursuing their common goal.
In sum, I find the defendant guilty under 18 U.S.C. § 371 of conspiring to sell un-registered securities in the market in violation of 15 U.S.C. §§ 77e and 77x, and of conspiring to make false
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statements in a matter within the jurisdiction of a government agency in violation of § 1001, ascharged in count three. Specher, p. 161
The Sprecher court also finds defendants guilty of other claims of submitting untrue statements to the SEC. In his defense, “ Sprecher relies on Basic, Inc. v. Levinson, 485 U.S. 224,108 S.Ct. 978, 99 L.Ed.2d 194 (1988), in which the Supreme Court set the materiality standardfor disclosure of merger negotiations for purposes of the Securities Exchange Act of 1934 andRule 10b–5 thereunder. The teaching of Basic is inapplicable to a section 1001 violation,however, where materiality is not an element and the crucial question is not whether a statement denying merger prospects constitutes securities fraud but, rather, was it a knowing falsehood in a matter within the jurisdiction of a federal agency.” Sprecher p. 161
This brief of Rule 144 is relevant in the Driscoll v. Dennis et. al. case because that case deals with a securities transaction that was conducted under Rule 144. This is because the seller in the one transaction that occurred was a former affiliate of Lifeline Therapeutics, Inc. and the plaintiff in this case is an affiliate and control person due to her husband’s position as founder and president of the company and the total of his (their) security holdings at the time.
The central issue here is which transaction took place. The one that found Chris Miklatcher and his wife, Nancy sending a letter to the company asking to have restrictive legends removed from certain certificates and free trading certificates issued to defendant Dennis. The Plaintiff’s view is that that Miklatcher obtained restricted shares from Plaintiff Rosemary Driscoll, an affiliate, and that those shares were on the certificates sent to the escrow agent, company and its lawyers and then to the transfer agent. Central to the proper
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determination of this case is an examination of the status of the various parties involved. This requires an examination of the definitions of Affiliate, Control Person, and, very importantly,Underwriter and applying these definitions to the facts and relevant law in this case.
The cases shown above describe the issues in this matter. Central is the determination of affiliate and underwriter status that can deny an otherwise legitimate user of the Rule 144 safe harbor because they are acting as a statutory underwriter. Cases also show that the use of fraudulent documents is a fraud and is actionable at law.
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