Who Is Subject to Rule 144: Affiliates and Non-Affiliates

Two groups of people are subject to Rule 144: anyone who holds restricted securities, and anyone who qualifies as an affiliate of the company that issued the stock. If you fall into either category, you cannot freely resell your shares on the open market without meeting specific SEC conditions. The rule works as a safe harbor. Follow its requirements and your sale is protected from claims that you conducted an illegal unregistered distribution of securities. Ignore them and you lose that protection, even if you would have qualified had you filed the right form or waited the right number of months.

The two categories can overlap, and the overlap matters. A founder who received early shares in a private placement is both an affiliate and a holder of restricted securities. A retail investor who bought stock through a broker is neither. An outside investor who participated in a private placement but has no role at the company holds restricted securities without being an affiliate. Each combination carries a different set of conditions.

Who Counts as an Affiliate

An affiliate is any person who directly or indirectly controls, is controlled by, or is under common control with the issuer.¹ In practice, that sweeps in executive officers, directors, and large shareholders whose ownership gives them meaningful influence over corporate decisions. Directors and officers are almost always affiliates. Shareholders who own 10% or more of a company’s voting stock are generally presumed to be affiliates, though the presumption can be rebutted if the shareholder can show they don’t actually exercise control over management or policies.

Affiliate status attaches to the person, not the shares. That means an affiliate’s restrictions follow them even to shares they bought on the open market at full price. Those shares become “control securities” in their hands. So while an ordinary investor who buys stock through a broker owns freely tradeable shares, an executive who makes the exact same purchase holds shares that are subject to Rule 144’s volume limits, manner-of-sale rules, and filing obligations whenever they want to sell.

What Makes Securities Restricted

Restricted securities are shares acquired from an issuer or an affiliate in a transaction that wasn’t registered with the SEC. The most common path is a private placement conducted under Regulation D or the Section 4(a)(2) exemption.² Employees frequently receive restricted shares through compensation packages, stock option exercises, or equity incentive plans. Early-stage investors in startups typically receive restricted stock as well. The certificates carry a restrictive legend stating the shares cannot be resold without registration or an applicable exemption.

The restricted label has nothing to do with your role at the company. You could be a passive investor with no involvement in operations. What matters is how the shares reached you. Because the original sale was never registered, the SEC treats any resale as a potential unregistered distribution unless the seller can demonstrate compliance with Rule 144 or another exemption.¹

What Affiliates Must Do to Sell

Affiliates face the full set of Rule 144 conditions every time they sell, no matter how long they’ve held their shares and no matter whether those shares are restricted or were bought on the open market. Five requirements apply: the holding period (for restricted shares), current public information, volume limits, manner-of-sale restrictions, and Form 144 filing.

Holding Period

Before restricted securities can be sold, the affiliate must hold them for a minimum period that starts when the shares are fully paid for. For companies that file reports with the SEC under Section 13 or 15(d) of the Exchange Act, the holding period is six months. For companies that do not file regular SEC reports, it is one full year.¹ The clock runs from acquisition, not the date you decided to sell. If shares came through a cashless option exercise, the clock starts on the exercise date. If you paid in installments, it starts on the final payment.

Shares received as gifts or from a trust can tack the donor’s or settlor’s holding period onto the recipient’s. If a founder gifts shares after holding them for eight months, the recipient can sell right away rather than restart the six-month or one-year count.

Current Public Information

The issuer must have adequate public information available. For reporting companies, that means being current on filings including Form 10-K annual reports and Form 10-Q quarterly reports. If the company falls behind, affiliates are locked out of Rule 144 until it catches up.³ For non-reporting companies, information about the business, officers, financial statements, and capitalization must be available.

Volume Limits

Rule 144 caps the number of shares an affiliate can sell in any rolling three-month period. The limit is the greater of two benchmarks:

1% of the total outstanding shares of the same class, based on the company’s most recent quarterly or annual filing.
The average weekly trading volume reported across all exchanges during the four calendar weeks before the Form 144 filing date or the trade execution date.

For debt securities, an alternative allows up to 10% of the principal amount of the tranche, together with all sales of the same tranche in the preceding three months.⁴ For thinly traded stocks, the 1% rule usually produces a larger allowance. For heavily traded stocks, the volume-based figure usually wins.

Manner-of-Sale Restrictions

Affiliates cannot arrange a private sale to a buyer they’ve lined up. Under Rule 144(f), sales must go through a standard broker’s transaction, a trade directly with a market maker, or a riskless principal transaction. The seller cannot solicit buy orders or pay anyone to drum up demand, and the only person who can be compensated in connection with the sale is the executing broker.¹ Sales by an estate (where neither the estate nor the beneficiary is an affiliate) and sales of debt securities are exempt from these restrictions.

Form 144 Filing

If the intended sale exceeds 5,000 shares or an aggregate value above $50,000 in any three-month period, Form 144 must be filed with the SEC at or before the time the sell order is placed with the broker.⁵ The form asks when the shares were acquired, how they were paid for, and how many will be sold. Missing this filing strips the safe harbor and turns the transaction into a potential violation of the Securities Act’s registration requirements.

What Non-Affiliates Must Do to Sell

Non-affiliates get a much easier path. Once a non-affiliate has satisfied the applicable holding period, the volume limits, manner-of-sale rules, and Form 144 filing all fall away. For restricted shares in a reporting company, a non-affiliate who has held for at least six months only needs to confirm that current public information about the company is available. After one full year of holding, even the public information requirement disappears, and the shares can be sold with no Rule 144 conditions at all.¹

For non-reporting companies, a non-affiliate must wait the full one-year holding period, and the public information requirement continues to apply indefinitely. A rank-and-file employee at a publicly traded company who received restricted stock as compensation can often sell six months after vesting with minimal friction. Someone holding shares in a private company that doesn’t file with the SEC faces a longer wait and an ongoing information hurdle.

Aggregation Across Related Parties

Volume limits aren’t calculated in isolation. Rule 144 aggregates sales across related parties in the same three-month window so that affiliates can’t evade the caps by spreading sales among family, trusts, or pledgees:

If an affiliate donates restricted shares, sales by the donee during the six months (or one year for non-reporting companies) after the gift combine with the donor’s sales for volume purposes.
When an affiliate transfers shares to a trust, sales by the trust in the same window combine with the settlor’s personal sales.
If a pledgee sells after a default, those sales combine with the pledgor’s sales in the same three-month period.
Sales by an estate or beneficiary combine with any sales the deceased made before death in the same three-month window.
When two or more affiliates agree to act together, all their sales of the same class combine for the volume calculation.

The concerted-action provision is the broadest. It catches informal coordinated selling arrangements and collapses everyone’s sales into a single figure against the volume cap.¹

When Rule 144 Isn’t Available At All

Rule 144 is unavailable for securities initially issued by shell companies (entities with no or minimal operations and essentially no assets beyond cash). If a company was ever a shell at any point in its history, an additional set of hurdles applies before Rule 144 can be used. The former shell must have ceased being a shell, filed comprehensive “Form 10 information” with the SEC reflecting operating-company status with at least one year having passed since that filing, filed all required reports (other than Form 8-K) during the 12 months preceding the sale, and remained subject to Exchange Act reporting.¹

The one-year clock for former shells runs from the date the Form 10 information was filed, not from the date the company stopped being a shell. That is a real trap for investors in companies that went through reverse mergers or blank-check acquisitions.

Legend Removal Is Its Own Step

Being eligible to sell under Rule 144 isn’t the same as being able to execute the trade. Restricted securities carry a legend on the certificate (or an electronic notation in book-entry form) stating that the shares cannot be sold without registration or an exemption. Only the company’s transfer agent can remove that legend, and the transfer agent won’t act without the issuer’s consent.⁶

The typical process: you or your broker contacts the transfer agent and requests legend removal. The transfer agent then asks the issuing company for approval, usually in the form of a legal opinion letter from company counsel confirming that the sale qualifies for an exemption. If the company refuses to provide consent, you’re stuck. The SEC generally does not intervene in disputes between shareholders and issuers over legend removal.⁷ Attorney fees for the opinion letter vary, and the process can take weeks rather than days.

Rule 144 Doesn’t Govern What You Owe in Tax

Whether you’re allowed to sell is a Rule 144 question. What you owe when you do is a tax question, and the two regimes run independently. Under Section 83 of the Internal Revenue Code, restricted stock transferred in connection with services is generally taxed as ordinary income when it vests, based on fair market value at vesting minus what you paid.⁸ A Section 83(b) election shifts the taxable event to the grant date, but it must be filed with the IRS within 30 days of transfer and cannot be revoked.⁹ The capital gains holding period and the Rule 144 holding period overlap but are not the same calculation. Clearing one doesn’t automatically clear the other.

1
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
2
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
3
eCFR. 17 CFR 230.144(c)
4
eCFR. 17 CFR 230.144(e)
5
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters – Section: (h) Notice of Proposed Sale
6
U.S. Securities and Exchange Commission. Restricted Securities: Removing the Restrictive Legend
7
U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities
8
Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
9
Internal Revenue Service. Section 83(b) Election – Form 15620