SEC Rule 144 is a safe harbor that lets holders of restricted or control securities resell them without registering the sale with the SEC, as long as certain conditions are met. The key condition is a holding period: generally six months for stock of an SEC reporting company and one year for stock of a private, non-reporting company. Affiliates of the issuer, such as officers, directors and major shareholders, face additional limits on how much and how they can sell.
Angel investors, founders and early employees usually receive stock that cannot simply be sold on the open market. When a liquidity opportunity appears, such as a buyer on a secondary platform or an IPO, the first question is often whether Rule 144 applies. Here is how it works and what else matters for private-company stock.
Why Startup Stock Is “Restricted”
Section 5 of the Securities Act of 1933 requires every offer and sale of securities to be registered with the SEC unless an exemption applies. Startups almost always sell stock, SAFEs and convertible notes in private, exempt offerings, such as Regulation D or Section 4(a)(2). (For background, see our post on raising capital without registering with the SEC.) Securities acquired in those offerings, and stock issued to employees under Rule 701, are generally “restricted securities.”
The exemption that covered the company’s original sale does not cover the investor’s later resale. A holder who resells without an exemption risks being treated as an “underwriter,” which can make the resale itself a violation of Section 5. Rule 144 gives sellers a clear path: if they satisfy its conditions, they are deemed not to be underwriters.
Affiliates vs. Non-Affiliates
The Rule 144 conditions depend on whether the seller is an “affiliate,” meaning a person who controls, is controlled by or is under common control with the issuer. Executive officers, directors and large shareholders are commonly treated as affiliates, though the question depends on the facts. Everyone else is a non-affiliate. Status is tested at the time of sale and during the preceding three months.
The Holding Period
Under Rule 144(d), restricted securities must be held for a minimum period, measured from when the securities were acquired and fully paid for:
- Six months if the issuer has been subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 for at least 90 days before the sale.
- One year if the issuer is not a reporting company, which is the case for nearly all startups.
Some practical points:
- Tacking. A buyer who purchases restricted securities from a non-affiliate can generally add the seller’s holding period. Securities received on conversion of other securities of the same issuer, without additional payment, can generally tack to the holding period of the original security.
- Stock options. The holding period for option shares generally starts when the option is exercised and paid for, not on the grant date. A cashless “net” exercise can raise separate questions.
- Shell companies. Rule 144 is generally unavailable for securities of shell companies, with limited exceptions, so the rule does not help with blank-check style issuers.
Conditions for Non-Affiliates
Non-affiliates have the simplest path:
- Reporting company: after six months, a non-affiliate may resell if current public information about the issuer is available. After one year, the non-affiliate may resell without any Rule 144 conditions.
- Non-reporting company: after one year, a non-affiliate may resell without further Rule 144 conditions.
Rule 144(c)’s “current public information” requirement is generally met for reporting companies that are current in their SEC filings. For non-reporting issuers it requires certain basic information about the company to be publicly available, which is one reason the one-year path matters most for private-company holders.
Additional Conditions for Affiliates
Affiliates must satisfy the holding period for restricted securities and also comply with these conditions for every sale, including sales of stock bought on the open market:
- Current public information about the issuer must be available.
- Volume limits. In any three-month period, an affiliate may sell no more than the greater of 1% of the outstanding shares of the class or, for exchange-listed securities, the average weekly trading volume over the prior four calendar weeks.
- Manner of sale. Equity securities must generally be sold in unsolicited brokers’ transactions or with a market maker.
- Form 144. If sales in a three-month period exceed 5,000 shares or $50,000, the affiliate must file a notice on Form 144, which is now filed electronically through EDGAR.
Affiliates of public companies also need to consider insider trading policies, blackout periods, Section 16 reporting and short-swing profit rules and any Rule 10b5-1 trading plan.
Secondary Sales of Private-Company Stock
Satisfying Rule 144 answers the federal securities law question, but it is rarely the only hurdle for a private startup’s stock:
- Transfer restrictions. Bylaws, stock purchase agreements and equity plans commonly include rights of first refusal, board consent requirements and lock-ups. Investor agreements may give investors co-sale rights. See our post on co-sale agreements.
- Legend removal. Share certificates or book entries carry restrictive legends. The company or its transfer agent usually requires a representation letter, and sometimes a legal opinion, before removing a legend.
- Other exemptions. Private resales to accredited investors are often done under Section 4(a)(7), which requires specified information about the issuer, or under the informal “Section 4(a)(1½)” approach. State securities laws, including California’s, may also apply to resales.
- Company policies. Many venture-backed companies restrict or channel secondary sales through company-run tender offers to manage their cap table, 409A valuations and shareholder count.
Frequently Asked Questions
How long do I have to hold restricted stock before selling under Rule 144?
Generally six months if the issuer has been an SEC reporting company for at least 90 days, and one year if it is not a reporting company. The period runs from when you acquired and fully paid for the securities.
Can I sell private startup stock after one year?
If you are a non-affiliate, Rule 144 generally permits resale after one year without further Rule 144 conditions. You still need to comply with transfer restrictions, rights of first refusal and any company consent requirements, and the buyer and company will usually ask for documentation.
Who has to file a Form 144?
Affiliates who sell more than 5,000 shares or more than $50,000 worth of securities in a three-month period under Rule 144 must file a Form 144 notice. Non-affiliates relying on Rule 144 do not file it.
Does Rule 144 apply to stock from exercised options?
Yes. Shares acquired by exercising options in a private company are generally restricted securities. The holding period usually begins when the option is exercised and paid for, not when it was granted.
The Takeaway
Rule 144 is the main route for reselling restricted stock without registration. Non-affiliates of private companies generally need to wait one year; affiliates face volume, manner-of-sale and filing conditions. For private startup stock, contractual transfer restrictions and company policies often matter as much as the securities rules.
How Sutter Law Can Help
Sutter Law advises founders, investors and companies on secondary sales, transfer restrictions and securities exemptions as part of our venture capital and startup law practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
