Control Stock

Who an Affiliate Is

Rule 144 defines the term in paragraph (a)(1). An affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer. The definition therefore covers three relationships: a person who controls the issuer, a person the issuer controls, and a person under common control with the issuer.

Rule 405 under the Securities Act defines control itself. Control, including the terms controlling, controlled by and under common control with, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. The definition speaks of power over management and policies and does not state an ownership percentage. It names three possible sources of that power: ownership of voting securities, a contract, or otherwise.

Why Resales by Affiliates Are Regulated

Section 4(a)(1) of the Securities Act of 1933 exempts transactions by any person other than an issuer, underwriter, or dealer. The Preliminary Note to Rule 144 describes Section 4(1) in the same terms, as an exemption for a transaction by a person other than an issuer, underwriter, or dealer, so whether a person is an underwriter determines whether that exemption is available for the transaction.

Section 2(a)(11) of the Securities Act defines an underwriter as 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 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 definition excludes a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission.

The same paragraph then widens the word issuer. As used in the definition, the term issuer includes, 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. Read with that widened meaning, the definition reaches a person who has purchased from a person controlling the issuer with a view to the distribution of any security, and a person who offers or sells for a person controlling the issuer in connection with a distribution.

Rule 144 provides a safe harbor from that definition. The Preliminary Note states that Rule 144 creates a safe harbor from the Section 2(a)(11) definition of underwriter. If a sale complies with all of the applicable conditions of the rule, any affiliate or other person who sells restricted securities will be deemed not to be engaged in a distribution and therefore not an underwriter for that transaction. The note applies the same treatment to any person who sells restricted or other securities on behalf of an affiliate of the issuer. It adds that the purchaser in such a transaction will receive securities that are not restricted securities.

The rule is a safe harbor and not the only route. The Preliminary Note states that Rule 144 is not an exclusive safe harbor, and the SEC's bulletin says the rule is not the exclusive means for selling restricted or control securities.

Control Securities and Restricted Securities

The two labels overlap, but they are different tests.

Restricted securities are defined in paragraph (a)(3) of Rule 144. The first category is 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. The paragraph goes on to list other categories, including securities acquired from the issuer that are subject to the resale limitations of Rule 502(d) under Regulation D, securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A, equity securities of domestic issuers acquired in a transaction subject to Regulation S, and securities acquired from the issuer in a transaction subject to an exemption under section 4(5). The SEC's investor material describes restricted securities as securities acquired in an unregistered, private sale from the issuing company or from an affiliate of the issuer, and says they typically bear a restrictive legend.

Control securities, in the SEC bulletin's words, are those held by an affiliate of the issuing company. A person's status therefore decides the label. The bulletin addresses an affiliate who buys in the public market. It states that the holding period only applies to restricted securities, and that because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. It adds that the resale of an affiliate's shares as control securities is subject to the other conditions of the rule.

A holding can fit both labels at once. Securities acquired from the issuer in a transaction not involving a public offering are restricted securities because of how they were acquired, and if the holder is an affiliate they are also control securities because of who holds them. The rule's paragraph (b)(2) reaches any affiliate who sells restricted securities and any person who sells restricted or any other securities for the account of an affiliate.

The Conditions an Affiliate Must Meet

Under paragraph (b)(2), an affiliate of the issuer, or any person who was an affiliate at any time during the 90 days immediately before the sale, who sells restricted securities, and any person who sells restricted or any other securities for the account of an affiliate, is deemed not to be an underwriter of those securities within the meaning of Section 2(a)(11) if all of the conditions of the section are met. The paragraphs that follow set those conditions: current public information, the holding period, the volume limitation, the manner of sale, the meaning of brokers' transactions, and notice of the sale. The rule therefore also reaches a person who ceased to be an affiliate within the 90 days before the sale.

Current Public Information

Paragraph (c) requires that adequate current public information with respect to the issuer of the securities be available. For an issuer that is, and has been for at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, paragraph (c)(1) is met when the issuer has filed all required reports, other than Form 8-K reports, during the 12 months preceding the sale, or for the shorter period the issuer was required to file them. Paragraph (c)(1)(ii) adds that the issuer must have submitted electronically every Interactive Data File required to be submitted during the 12 months preceding the sale, or for the shorter period the issuer was required to submit such files.

For an issuer that is not a reporting company, paragraph (c)(2) requires that there be publicly available the information concerning the issuer specified in the paragraphs of Exchange Act Rule 15c2-11 that the paragraph identifies.

The Holding Period

Paragraph (d) governs how long restricted securities must be held. If the issuer is, and has been for at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, a minimum of six months 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 in reliance on the rule for the account of either the acquirer or any subsequent holder. If the issuer is not, or has not been for at least 90 days, subject to those reporting requirements, the minimum is one year.

The period starts on acquisition, and the rule adds specific provisions. When the securities are bought, the holding period does not begin until the full purchase price or other consideration is paid. Paragraph (d)(2) deals with promissory notes, other obligations and installment contracts given for securities. Paragraph (d)(3) addresses securities that change form or hands. Securities acquired from the issuer as a dividend or pursuant to a stock split, reverse split or recapitalization are deemed acquired at the same time as the securities on which the dividend or split was paid. Securities acquired through conversion or exchange are deemed acquired at the same time as the securities surrendered for conversion or exchange. Securities held by a pledgee are deemed acquired when the pledgor acquired them. Securities given as a gift are deemed acquired by the donee when the donor acquired them, and securities acquired by a trust from the settlor are deemed acquired when the settlor acquired them. The SEC's bulletin states the gift rule for affiliates: for gifts made by an affiliate, the holding period begins when the affiliate acquired the securities and not on the date of the gift.

The Volume Limitation

Paragraph (e) limits how much an affiliate may sell. The rule states that the amount of securities sold for the account of an affiliate of the issuer in reliance on the section is determined as set out in the paragraph. Under paragraph (e)(1), the amount sold, together with all sales of securities of the same class sold for the account of that person within the preceding three months, may not exceed the greatest of three measures.

The first measure is 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. The second is the average weekly reported volume of trading in the 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 the notice required by paragraph (h), or, if no 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 maker. The third is the average weekly volume of trading in the securities reported pursuant to an effective transaction reporting plan or an effective national market system plan during that same four-week period.

For debt securities, paragraph (e)(2) provides a separate limit that refers to ten percent of the principal amount of the tranche.

Aggregation of Sales

The volume limit counts more than one seller's sales. Paragraph (a)(2) states that the term person, when used with reference to a person for whose account securities are to be sold, includes in addition to that person three groups. The first is any relative or spouse of the person, or any relative of the spouse, any one of whom has the same home as the person. The second is any trust or estate in which the person or any of the persons in the first group collectively own 10 percent or more of the total beneficial interest, or of which any of those persons serve as trustee, executor or in any similar capacity. The third is any corporation or other organization, other than the issuer, in which the person or any of the persons in the first group 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.

Paragraph (e)(3) then sets rules on combining sales. Where both convertible securities and securities of the class into which they are convertible are sold, the amount of convertible securities sold is deemed to be the amount of securities of the class into which they are convertible. For a pledgee, or a purchaser of the pledged securities, the amount sold during any period of three months within six months after a default in the obligation secured by the pledge, or within one year if the issuer is not, or has not been for at least 90 days, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, is added to the amount sold during the same three-month period for the account of the pledgor, and the two together may not exceed in the aggregate the amount specified in paragraph (e)(1) or (2). A donee is treated the same way, within six months after the donation, or one year for an issuer that is not a reporting company, with the amount sold for the account of the donor. Paragraph (e)(3) has parallel provisions for securities acquired by a trust from the settlor and for the estate of a deceased person. 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 three-month period are aggregated.

Paragraph (e)(3)(vii) lists sales that need not be included in determining the amount to be sold: securities sold pursuant to an effective registration statement under the Securities Act, securities sold pursuant to an exemption provided by Regulation A, securities sold in a transaction exempt pursuant to section 4 of the Securities Act and not involving any public offering, and securities sold offshore pursuant to Regulation S.

Manner of Sale

Paragraph (f) requires that the securities be sold in one of three manners: in brokers' transactions within the meaning of section 4(4) of the Securities Act, in transactions directly with a market maker as defined in section 3(a)(38) of the Exchange Act, or in riskless principal transactions that meet the conditions the paragraph sets. Under paragraph (f)(2) the person selling the securities may not solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with the transaction. Paragraph (f)(3) lists exclusions, and debt securities are one of them.

Paragraph (g) states what a brokers' transaction is for the purposes of the rule. The term brokers' transactions in section 4(4) of the Act is deemed to include transactions by a broker who does no more than execute the order or orders to sell the securities as agent, receives no more than the usual and customary broker's commission, neither solicits nor arranges for the solicitation of customers' orders to buy the securities in anticipation of or in connection with the transaction, and 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.

Notice of Sale on Form 144

Paragraph (h) requires an affiliate to give notice of the proposed sale. For reporting issuers, a notice on Form 144 must be filed electronically with the SEC if the amount of securities to be sold in reliance on the rule during any period of three months exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000. For issuers that are not subject to the reporting requirements, paragraph (h)(2) uses the same thresholds and provides that three copies of a notice on Form 144 are to be filed with the Commission. Investor.gov describes Form 144 as a notice of the proposed sale of securities in reliance on Rule 144, filed by an affiliate of the issuer, and states that for reporting companies the filing is made on EDGAR starting April 13, 2023. The SEC's compliance guide on the change states that affiliates of non-reporting companies relying on Rule 144 continue to file Form 144 in paper.

Under paragraph (h)(3), the Form 144 is signed by the person for whose account the securities are to be sold, who must have a bona fide intention to sell the securities within a reasonable time after filing the notice. The paragraph also states that the notice is to be transmitted for filing concurrently with either the placing with a broker of an order to execute a sale of securities in reliance on the rule or the execution directly with a market maker of such a sale.

The form itself asks for the information the rule's conditions use. It asks for the person's relationship to the issuer, the date the securities were acquired and the nature of the acquisition transaction, the name and address of each broker through whom the securities are to be offered, the number of shares or other units to be sold, the aggregate market value, the approximate date of sale, and the securities sold during the past three months. It also contains a representation that the person signing does not know any material adverse information in regard to the current and prospective operations of the issuer that has not been publicly disclosed.

Non-Affiliates

Paragraph (b)(1) treats a person who is not an affiliate at the time of the sale, and has not been an affiliate during the preceding three months, differently. For restricted securities of an issuer that has been a reporting company for at least 90 days, the non-affiliate must meet the current public information condition in paragraph (c)(1) and the holding period in paragraph (d), which is six months. The rule provides that the paragraph (c)(1) requirement does not apply once a period of one year has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate. For restricted securities of an issuer that is not a reporting company, the only condition is the holding period of one year in paragraph (d)(1)(ii).

Paragraph (b)(1) names only paragraphs (c)(1) and (d) for a reporting issuer, and only paragraph (d) for an issuer that is not a reporting company. It does not name the volume limitation, manner of sale or notice paragraphs, which are paragraphs (e), (f) and (h).

Shell Companies

Paragraph (i) of Rule 144 is titled unavailability to securities of issuers with no or nominal operations and no or nominal non-cash assets. It provides that the section is not available for the resale of securities initially issued by an issuer of that kind. The rule makes the safe harbor available again when the issuer has ceased to be such an issuer and is subject to Exchange Act reporting, has filed all required reports and other materials during the preceding 12 months, and at least one year has elapsed from the date the issuer filed Form 10 information with the SEC. The Form 10 information is deemed filed when the initial filing is made.

Legends and Transfer Agents

The bulletin explains how the paperwork works in practice. A person who buys restricted securities almost always receives a certificate stamped with a restrictive legend. The bulletin states that the transfer agent will not remove the legend unless the seller has obtained the consent of the issuer, usually in the form of an opinion letter from the issuer's counsel, and that removal of a legend is a matter solely in the discretion of the issuer of the securities. Meeting the conditions of Rule 144 therefore does not by itself remove a legend. The bulletin is dated January 15, 2013.

Related Obligations Under Section 16

Section 16 of the Securities Exchange Act of 1934 is a separate provision from Rule 144. The SEC's page on officers, directors and 10 percent shareholders states that it applies to an SEC reporting company's directors and officers, as well as shareholders who own more than 10 percent of a class of the company's equity securities registered under the Exchange Act. The rules under Section 16 require these insiders to report most of their transactions involving the company's equity securities to the SEC within two business days on Forms 3, 4 or 5. Section 16 also establishes mechanisms for a company to recover short swing profits, or profits an insider realizes from a purchase and sale of the company's security that occur within a six-month period, and it prohibits short selling by insiders of any class of the company's securities, whether or not that class is registered under the Exchange Act.

Section 16 and Rule 144 use different tests and different groups. Section 16 names directors, officers and holders of more than 10 percent. Rule 144 uses the affiliate definition, which turns on control. A person can be in one group, the other, or both.

Insider trading is also a separate subject. FINRA's content outline lists it as its own topic, with items for the definition of insider trading, the definition of material nonpublic information, identifying involved parties, and penalties.

Control Stock in FINRA's Examination Outline

FINRA's Securities Industry Essentials examination content outline carries a 2025 copyright. Under Section 2, Understanding Products and Their Risks, the equity securities topic lists control and restrictions, with SEC Rule 144 given as the example. In the offerings topic, the outline lists Rule 144 in its list of rules under the title Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters. Candidates should check the current outline before the examination.

Common Misunderstandings

One misunderstanding is that control stock means restricted stock. Control securities are those held by an affiliate, and restricted securities are defined by how they were acquired. A person can hold either or both.

A second misunderstanding is that shares an affiliate bought in the public market are free to sell. The SEC's bulletin states that there is no holding period for an affiliate who purchases securities of the issuer in the marketplace, but that the resale of an affiliate's shares as control securities is subject to the other conditions of the rule.

A third misunderstanding is that a fixed percentage of ownership makes someone an affiliate. Rule 405 defines control as the power to direct or cause the direction of the management and policies of a person, through ownership of voting securities, by contract, or otherwise, and states no ownership percentage.

A fourth misunderstanding is that a person stops being an affiliate the day the relationship ends. Paragraph (b)(2) reaches any person who was an affiliate at any time during the 90 days immediately before the sale, and paragraph (b)(1) requires a non-affiliate not to have been an affiliate during the preceding three months.

A fifth misunderstanding is that the holding period alone is enough. For an affiliate, the holding period for restricted securities is one of several conditions, together with current public information, the volume limit, the manner of sale and the notice.

A sixth misunderstanding is that the volume limit looks only at one trade. Paragraph (e)(1) counts all sales of securities of the same class sold for the account of the person within the preceding three months, and persons acting in concert are aggregated.

A seventh misunderstanding is that sales by relatives are counted separately from the affiliate's own. Paragraph (a)(2) includes, in the term person, any relative or spouse of the person, or any relative of the spouse, any one of whom has the same home as the person.

An eighth misunderstanding is that Form 144 is a request for the SEC's approval. Paragraph (h) describes it as a notice, and paragraph (h)(3) provides that it is signed by the person selling, who must have a bona fide intention to sell within a reasonable time after filing.

A ninth misunderstanding is that meeting Rule 144 removes the legend. The SEC's bulletin states that removal of a legend is a matter solely in the discretion of the issuer, and the transfer agent will not remove it unless the issuer consents, usually through an opinion letter from the issuer's counsel.

A tenth misunderstanding is that Rule 144 is the only way to resell. The Preliminary Note states that it is not an exclusive safe harbor.

An eleventh misunderstanding is that Rule 144 is available for any issuer. Paragraph (i) makes the section unavailable for securities initially issued by an issuer with no or nominal operations and no or nominal non-cash assets, unless the rule's conditions for resale are met.

Key Points

Control securities are securities held by an affiliate of the issuer. An affiliate is a person that controls, is controlled by, or is under common control with the issuer, and control means the power to direct or cause the direction of management and policies.

Restricted securities are defined by how they were acquired, mainly from the issuer or an affiliate in a transaction not involving a public offering. Control securities are defined by who holds them, and a person can hold both.

Rule 144 is a safe harbor from the Section 2(a)(11) definition of underwriter. An affiliate must meet current public information, the holding period for restricted securities, the volume limit, the manner of sale, and the Form 144 notice.

The holding period is six months for reporting issuers and one year for non-reporting issuers. The volume limit is the greatest of one percent of the class outstanding or the average weekly trading volume over four calendar weeks, counting sales over three months.

A Form 144 is required when sales in any three months exceed 5,000 shares or units or have an aggregate sale price above $50,000. Reporting companies' notices are filed on EDGAR.

A non-affiliate of a reporting issuer who has held restricted securities for one year does not need to meet the current public information condition.