Restricted Securities and Rule 144 Resale
Securities bought in a private offering are restricted securities: investors cannot freely resell them without registration or an exemption. Rule 144 is the most common exemption. It generally requires a holding period of six months for companies that report to the SEC and one year for companies that do not, plus other conditions for affiliates. Operating agreements also limit transfers, so most private fund and syndication interests are effectively illiquid.
What restricted means
Securities acquired directly from the issuer in a private offering, or from an affiliate, carry restrictions on resale. The investor generally signs a representation that they are buying for their own account and not to distribute. The interests usually carry a legend that states they are unregistered and cannot be transferred without compliance. A transferee takes subject to the same restrictions.
Rule 144 basics
| Condition | Non-affiliate | Affiliate |
|---|---|---|
| Holding period, reporting company | Six months | Six months |
| Holding period, non-reporting company | One year | One year |
| Current public information | Required during the first year for reporting companies only | Required |
| Volume limits | None after the holding period | Limited amounts per period |
| Manner of sale and notice | Not required | Required for equity securities of reporting companies, with Form 144 notice above thresholds |
Because most private fund and syndication issuers do not report to the SEC, a one-year holding period usually applies, and there is no public market to sell into.
Private resales
Investors sometimes sell to another person in a private transaction, relying on the exemption sometimes called Section 4(a)(1.5), which borrows from the Section 4(a)(1) and Section 4(a)(2) principles. The buyer should be accredited, buying for investment and given access to information. Many sponsors require an opinion of counsel or other proof that the transfer is exempt before they approve it.
Contract limits matter more
- The operating or partnership agreement usually requires sponsor consent for transfers.
- The agreement may restrict transfers that would harm the fund's tax status or exemption, such as exceeding the 100-owner limit.
- Rights of first refusal and tag-along or drag-along clauses may apply.
- Transfers to family trusts or estate planning entities are often permitted with conditions.
Planning implications
Investors should treat private interests as long-term and illiquid. Sponsors should explain resale limits in the PPM and in the subscription agreement. Include transfer provisions in the governing document that meet both securities laws and the fund's needs. See key terms of the governing agreement and subscription agreements.
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Book Free ConsultationFrequently asked questions
Can an investor sell restricted securities after one year?
Rule 144 may allow it after the holding period, but a private fund interest also needs the sponsor's consent under the governing agreement, and there may be no buyer.
What is a restricted legend?
A statement on the securities or documents that says they are unregistered and cannot be resold without registration or an exemption.
Does Rule 144 apply to LLC interests?
It can, but the practical limits are the transfer provisions in the operating agreement and the lack of a market.
Can I gift restricted securities to my child?
Often, with sponsor consent and compliance with securities law. The gift generally carries the same restrictions.