Restricted Securities: Holding Periods, Rule 144, and Resale

The rules for reselling restricted securities live mainly in SEC Rule 144, which lets you sell shares acquired in a private, unregistered transaction once specific conditions are met.¹ What those conditions are depends on two things: how long you’ve held the shares, and whether you’re an affiliate of the company that issued them. Non-affiliates eventually get a clean exit. Affiliates never do.

What Counts as a Restricted Security

Restricted securities are shares or debt instruments you acquired in an unregistered, private transaction from the issuer or one of its affiliates.² The usual sources are private placements (often under Regulation D) and employee compensation plans, including shares issued under Rule 701 at private companies.³

You’ll usually recognize them by the restrictive legend printed on the certificate or noted in the electronic record, warning that the shares can’t be resold publicly without registration or an exemption. But the legend is a marker, not the source of the restriction. If you acquired the shares in a private transaction, they are restricted under federal law whether or not the certificate says so.

How Long You Have to Hold Them First

Before Rule 144 is available at all, you have to sit on the shares for a minimum period, and the length turns on whether the issuer files reports with the SEC:

Six months, if the issuer files 10-K and 10-Q reports under the Securities Exchange Act of 1934.
One year, if the issuer does not file those reports.⁴

The clock only starts when you’ve fully paid for the shares. If you bought them with a promissory note, the holding period doesn’t begin until the debt is paid off, and you’ll need bank records or wire confirmations to prove when that happened.

Tacking a Prior Holder’s Time

In some situations you get credit for time you didn’t personally hold the shares. Receive restricted securities as a gift from an affiliate, and the holding period runs from when the donor originally acquired them.⁵ Buy from a non-affiliate, and the clock doesn’t reset either.

Convertible instruments follow the same logic with a catch. If you swap a convertible note or debenture for common stock of the same issuer and pay no additional cash, the new shares tack back to when you first bought the convertible.⁵ The same applies to a cashless warrant exercise. Pay even a small amount of cash on exercise and tacking breaks; the holding period restarts from the exercise date.⁶ Ordinary employee stock options, which carry no investment risk, are their own case: the holding period starts on exercise, not on grant.

Affiliate or Non-Affiliate: The Split That Matters

Rule 144 draws a sharp line between affiliates and everyone else. An affiliate is someone with the power to direct the issuer’s management and policies through voting shares, contract, or otherwise. The SEC treats executive officers, directors, and large shareholders as typical affiliates.¹ There’s no fixed ownership percentage that automatically pulls you across the line; it’s a facts-and-circumstances question about control.

If you’re a non-affiliate, the path opens up quickly. Once you’ve held restricted securities of a reporting company for six months, you can sell as long as the issuer’s public information is current. After a full year, a non-affiliate can sell without meeting any Rule 144 conditions at all: no volume cap, no manner-of-sale rule, no Form 144.¹ For shares of a non-reporting company, non-affiliates wait the full year, but after that they can sell freely.

Affiliates never age out. Every sale, no matter how long the shares have been held, has to meet the volume limit, manner-of-sale rule, current public information requirement, and Form 144 filing obligation. This applies to any securities held by an affiliate, restricted or not.

The Conditions Affiliates Have to Meet Every Time

Volume Cap

In any three-month period, an affiliate can sell no more than the greatest of:

One percent of the total shares of that class outstanding, based on the issuer’s most recent public report;
The average weekly trading volume on all national exchanges during the four calendar weeks before the Form 144 filing (or before the broker gets the sell order, if no filing is needed); or
The average weekly volume reported under an effective transaction reporting plan during that same four-week window.⁵

Manner of Sale

The trade has to look like an ordinary brokerage transaction. The broker can only take a normal commission, and neither you nor the broker can solicit buy orders for the shares.¹

Current Public Information

Before any Rule 144 sale (other than a non-affiliate selling after the one-year mark), the issuer must have current public information available. Reporting companies satisfy this by staying current on their SEC filings for the preceding twelve months.⁵ For non-reporting companies, basic financial statements and a business description must be publicly accessible. If the issuer has fallen behind on its filings, Rule 144 is off the table for affiliates entirely, and for non-affiliates still inside the one-year window.

Form 144

Affiliates must file Form 144 with the SEC when a proposed sale exceeds 5,000 shares or the total price exceeds $50,000 in any three-month period.⁷ The form identifies you, your broker, and the securities, and it has to be transmitted at the time the sell order is placed. Non-affiliates who’ve cleared the holding period don’t file Form 144.

Since April 2023, Form 144 must be filed electronically through EDGAR for sales of reporting-company securities, and both the seller and issuer need active EDGAR accounts.⁸ If the issuer has no SEC reporting file number in EDGAR, the electronic system won’t accept the filing, which is a practical problem for anyone dealing in non-reporting company shares.

Shares From a Current or Former Shell Company

Rule 144 is generally not available for securities originally issued by a shell company, whether the issuer still is one or used to be. A shell company typically has no meaningful operations and little or no assets beyond cash. If you hold shares from a current or former shell, your only route to resale is usually a registered offering, unless all four of these are true:

The issuer is no longer a shell company.
The issuer is subject to Exchange Act reporting.
The issuer has filed all required reports (other than Form 8-K) during the preceding twelve months.
At least one year has passed since the issuer filed Form 10 information showing it’s no longer a shell.⁹

Even after those conditions are met, every other Rule 144 requirement still applies. Factor that difficulty in from the start if you’re acquiring shares in anything that might qualify as a shell.

Getting the Legend Removed So You Can Actually Sell

Meeting Rule 144’s conditions doesn’t automatically make your shares tradable. The restrictive legend has to come off first, and that happens through the issuer’s transfer agent. You submit a legend removal request along with documentation proving your original purchase and the elapsed holding period.

The transfer agent won’t act without the issuer’s consent, which almost always means a legal opinion letter from issuer’s counsel confirming that Rule 144 is satisfied.² Budget for it. Opinion letters generally run a few hundred dollars, and the transfer agent charges its own processing fee. On smaller positions those costs eat a real percentage of your proceeds.

Once counsel signs off, the transfer agent issues clean shares as new certificates or as electronic entries in your brokerage account, and your broker can execute the trade. The whole process can take several weeks. Don’t expect to go from restricted to sold in a day.

What Happens If You Sell Without Complying

A sale of restricted securities that doesn’t meet Rule 144 is treated as an unregistered sale under Section 5 of the Securities Act of 1933. On the civil side, buyers can sue for rescission and get their money back with interest, or recover damages if they’ve already resold at a loss. Control persons who directed or oversaw the sale can be held jointly and severally liable, so a corporate structure doesn’t shield personal responsibility.

Willful violations of the registration requirements can also draw criminal prosecution, with fines and imprisonment on the table. The SEC can refer cases for enforcement, and the resulting scrutiny can freeze your ability to trade other securities while it plays out. For affiliates, who face these compliance obligations on every sale, the recurring risks are sloppy records and miscalculated volume caps.

1
U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities
2
U.S. Securities and Exchange Commission. Restricted Securities: Removing the Restrictive Legend
3
U.S. Securities and Exchange Commission. Employee Benefit Plans – Rule 701
4
U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities – Section: Holding Period
5
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
6
U.S. Securities and Exchange Commission. Compliance and Disclosure Interpretations – Rule 144
7
eCFR. 17 CFR 239.144 – Form 144 for Notice of Proposed Sale of Securities
8
U.S. Securities and Exchange Commission. File Form 144 Electronically
9
U.S. Securities and Exchange Commission. Revisions to Rules 144 and 145