Corporate Governance

How changes to SEC Rule 144 affect institutional investors

By Josh Silverman

Seemingly innocuous SEC rule changes can have dramatic effects on markets. Many professional traders attribute the speed of the recent meltdown to the SEC?s decision last year to eliminate the ?downtick rule? for short sales.

On February 15, 2008, SEC Rule 144, which governs the sale of restricted stock, was significantly relaxed (see PDF).   The change will affect institutions and investment managers that invest in smallcap or microcap stocks, especially through PIPE transactions.

Before the rule change, restricted stock had to be held for at least one year before sale, and then could only be sold in small amounts at a time. Under the new Rule 144, for stocks of companies that: (1) have sales of less than $700 million; (2) are fully reporting; and (3) are current in their SEC filings (in other words most smallcap and microcap stocks), restricted stock can be sold after only a six month holding period and, critically, the sales are no longer subject to volume restrictions.

For institutional investors, the rule change may make PIPE transactions more attractive.  On the other hand, those who purchase in the open market are now more vulnerable to overhangs from private placements.  Sellers will be able to dump sizable positions on the market all at once, instead of dribbling them out over the course of months or years. 

Full post as published by PomTalk on March 02, 2008 (boomark / email).