In a dramatic move that will enhance liquidity for public and private companies, the Securities and Exchange Commission ("SEC") recently adopted amendments to Rule 144 and Rule 145, which become effective February 15, 2008.

These amendments to Rules 144 and 145 will enhance liquidity for affiliate and non-affiliate holders of restricted securities. The holding period for restricted securities of companies that report to the SEC under the Securities Exchange Act of 1934 (the "Exchange Act") will be shortened to six months, after which securities held by non-affiliates will, in most cases, be freely saleable, and those held by affiliates will be saleable subject to the requirements of Rule 144. The amendments also substantially eliminate the presumptive underwriter provisions of Rule 145, thereby facilitating the resale of restricted securities received in business combination transactions. The codification of several staff interpretative positions will provide more accurate guidance to security holders.

The Amendments to Rule 144:

• Shorten the holding period for restricted securities of reporting companies to six months from one year;
• Allow non-affiliates of reporting companies to freely resell restricted securities:
• For resales made after the six-month holding period if the issuer satisfies the Rule's public information condition, and
• Without complying with any Rule 144 conditions for resales after a 12-month holding period, rather than two years;
• Allow non-affiliates of non-reporting companies to freely resell restricted securities without complying with any Rule 144 conditions after a 12-month holding period, rather than two years;
• Revise the "manner of sale" requirements for equity securities, applicable to resales by affiliates, by permitting resale of these securities through certain "riskless principal transactions"¹ and brokers' transactions in which the broker has published bid and ask quotations in an alternative trading system;
• Eliminate the "manner of sale" requirement and ease the volume limitations for resales of debt securities by affiliates; and
• Revise the thresholds that trigger Form 144 filing requirements for sales by affiliates to 5,000 shares or $50,000 over a three-month period, from 500 shares or $10,000.

If the seller is an affiliate of a reporting company, the seller may resell the securities after satisfying the six-month holding period, provided the other requirements of Rule 144 are met. These criteria include:

• Certain information about the issuer must be publicly available;
• The number of securities to be resold must fall within specified volume limitations;
• The resale must comply with the revised "manner of sale" conditions; and
• The seller may be required to file a Form 144 reporting the sale (or proposed sale), subject to the new reporting threshold.

The chart below helps clarify the new rules.

	Affiliate or Person Selling on Behalf of an Affiliate	Non-Affiliate (And Has Not Been an Affiliate During the Prior Three Months)
Restricted Securities of Reporting Issuers	During six-month holding period - no resale under Rule 144 permitted. After six-month holding period - may resell in accordance with all Rule 144 requirements, including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filing of Form 144.	During six-month holding period - no resale under Rule 144 permitted. After six-month holding period but before one year - unlimited public resale under Rule 144 except that the current public information requirement still applies. After one-year holding period - unlimited public resale under Rule 144; need not comply with any other Rule 144 requirements.
Restricted Securities of Non-Reporting Issuers	During one-year holding period - no resale under Rule 144 permitted. After one-year holding period - may resell in accordance with all Rule 144 requirements, including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filing of Form 144.	During one-year holding period - no resale under Rule 144 permitted. After one-year holding period - unlimited public resale under Rule 144; need not comply with any other Rule 144 requirements.

The Amendments to Rule 145:

• Eliminate the presumptive underwriter provision of Rule 145 except with respect to transactions involving "blank check" or "shell" companies. Under the current doctrine, persons who are parties to, or affiliates of parties to, a Rule 145(a) business combination transaction are deemed to be underwriters with respect to public offers and sales of shares received in that transaction. As a result, even if the acquiring company in a Rule 145(a) transaction registers the issuance of its shares, affiliates of the target company would not be able to publicly sell the shares they receive unless they are sold pursuant to a resale registration statement or in compliance with certain provisions of Rule 144. Under the amendments, affiliates of the target company will generally no longer be subject to these resale restrictions.
• Revise the resale provisions of Rule 145(d) by conforming these resale restrictions to certain of the approved amendments to Rule 144 that were also adopted.

In a departure from the proposed amendments, the holding period for restricted securities will not be "tolled" for the period the holder of restricted securities engaged in hedging transactions.

Codification of SEC Staff Interpretations

The amendments also codify a number of SEC staff interpretations as proposed, including the following:

• Stating that securities acquired pursuant to Section 4(6) of the Securities Act of 1933 (which permits offerings under $5,000,000 to accredited investors without a registration statement) are considered restricted securities.
• Deeming the acquisition dates for securities acquired pursuant to the cashless exercise of options and warrants as the dates the options or warrants were acquired. Tacking of the Rule 144 holding period is permitted upon a cashless exercise of options or warrants for securities of the same issuer - even if the options or warrants did not originally permit cashless exercise. However, if (i) the original options or warrants did not permit cashless exercise, (ii) the parties amended them to permit cashless exercise, and (iii) the holder provided consideration for that amendment, then a new holding period begins on the date of the amendment.
• Permitting the Form 144 representations required from security holders relying on Exchange Act Rule 10b5-1 to be made as of the date the holder adopted a trading plan or gave trading instructions.

Conclusion

These amendments shorten the holding period for purchasers of restricted securities in private placements and recipients of these securities in mergers and other business combinations. In addition, such purchasers or recipients will be subject to fewer technical restrictions upon resale of the securities. As a result, the cost of capital for issuers of restricted securities will decrease by reducing the liquidity discount typically associated with those securities, and by reducing the need for issuers to agree to file and maintain the effectiveness of resale registration statements for the benefit of investors who purchase restricted securities. This resulting greater access to capital may portend an increased attractiveness of restricted securities as a form of acquisition currency.

For Further Information

If you have any questions about this Alert or would like more information, please contact any member of the Securities Law Practice Group or the attorney in the firm with whom you are regularly in contact.

Footnote

1. A "riskless principal transaction" is a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell.

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