Posted: February 1st, 2023

Effects of Resales of Securities and Safe Harbor

Under section 5 of the Securities Act, the security holders are required to register re-offer and resales of securities. Provided an exemption is available, the requirement of registration. Generally, the security holders rely on section 4(a) (1) or exercise their registration rights for reselling of their securities. However, there are other security holders who do not qualify to rely on this section and have no right to register securities that they want to resell. Therefore, such security holders are required to sort to other exemptions from the registration requirement of the Securities Act in order to resell those securities.

Under the federal securities laws, some securities are deemed as restricted or control securities. Selling of restricted or control securities is a complex process where the offers and the sale of securities should be registered under the Security and Exchange Commission (SEC). These securities may also be eligible for certain exemptions from the registration requirement. When one wants to sell the acquired restricted securities or the control securities held publicly, then one needs to how the sales are exempt from the process of registration.

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Safe harbor is provided under Rule 144 of the Securities Act with regard to the resale of securities. Under Rule 144, resale of restricted or control securities publicly is permitted provided certain conditions are met. It includes the duration of holding the securities, the manner of selling them, and the amount which can be sold at once. However, even after meeting the rule’s conditions, one cannot sell the restricted securities publicly until the transfer agent has removed the legend.

The SEC of the U.S. enforced Rule 144, which is a regulation setting conditions for regulating the sale or resale of restricted, unregistered, and controlled securities. As mentioned earlier, exemption from the registration is provided under Rule 144 for selling securities in the public market by meeting certain conditions. This rule applies to all sorts of sellers, including securities issuers, underwriters, and dealers. Restricted, unregistered, and controlled securities are acquired by selling privately over the counter (OTC) or by constituting a controlling stake in the company that issues the securities. Investors can purchase restricted securities through private placements or other stock incentive schemes made available to corporate personnel.

Resale of restricted, unregistered as well as control securities is prohibited under the SEC. At the same time, resale of those securities is allowed if the same is registered with the SEC before the sale of the securities or are exempted from registration requirements if met with conditions.

Safe harbor is provided by Rule 144 from the definition of the underwriter. An individual other than issuers, underwriters, or dealers may be exempted from the transaction under Section 4(1). By meeting all the requirements under Rule 144, the seller of the securities is no more deemed to be an underwriter. However, even after meeting all the requirements, all such transfer agents and issuers are required to get the opinion of a counsel regarding application Rule 144 before removing legend from the securities.

Understanding Key Terminology
Following key terms are important to understand with regard to understanding Rule 144:

Securities Registration – Before offering the securities for sale in public, the documents must be filed with SEC. The documents must include information regarding the company as well as the securities which are offered. This process of filing is known as securities registration.

Unregistered Securities/Restricted – These are the securities that are not registered with SEC and are known as restricted stock or restricted securities. These securities are issued by private transactions or employee stock benefit plans for certain professional services. Therefore, these are issued to the investors, corporate executives, or employees. As compared to the registered securities, these securities have few protections along with different risks. There is the possibility that these securities can have a legend on the certificate, which indicates that stock is restricted and can be sold subject to the legal opinion.

Control Securities – The company which issues the securities hold the securities through an “affiliate.” As a result, these are referred to as control securities, and they become restricted securities after the affiliate owns them.

Affiliate/Control Person – When an individual or entity has the control of, is being controlled by, or under common control of the company issuing securities. It includes an executive, director, or controlling stockholder of the company issuing.

Underwriter/Dealer – When an individual buys securities for distributing or reselling them is called the underwriter. And the underwriter doesn’t have the right for using rule 144.

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