Rule 144: Selling Restricted and Control Shares

Rule 144 permits certain holders to resell securities that are otherwise restricted from public trading—without having to register them with the SEC—if they meet strict conditions on holding period, volume, manner of sale, and public-information availability. The two main categories are restricted securities (those issued privately or under limited authorization) and control securities (those owned by directors, officers, or major shareholders). Each has different timing and mechanics, but all sales under Rule 144 require an Form 144 filing.

Why Rule 144 Exists

Securities issued outside a public initial public offering (IPO) or secondary offering are called restricted securities. They cannot be resold without registration unless an exemption applies. Rule 144 is the main exemption that allows holders of restricted stock—early employees, angel investors, private-equity buyers, founders—to eventually sell without going through the expensive, time-consuming registration process.

Additionally, control securities are shares held by people in control of the company: directors, officers, and holders of more than 10% of the outstanding stock. These people have access to material non-public information and an incentive to sell at moments that might benefit them at the expense of other shareholders. Rule 144 restricts their sales even after they hold registered shares, because control gives them an unfair advantage.

Rule 144 is SEC’s way of saying: Yes, you can eventually resell, but only under conditions that prevent flooding the market, ensure fair information is available, and limit the insider-trading advantage.

Restricted Securities: The 6-Month (or 1-Year) Path

Restricted securities are shares acquired outside registration—typically from a founder, a private equity buyer, an employee stock option, or a private placement.

For public companies (those filing SEC reports), the restricted-securities holding period is 6 months, measured from the date the securities were acquired. After 6 months, provided all other Rule 144 conditions are met, the holder can resell without registration.

For non-reporting companies (private companies that do not file with the SEC), the holding period is 1 year. This longer period accounts for the fact that there is less public information about private companies, so investors need more time to ensure they are not selling on material non-public information.

The clock starts on the date of acquisition, not the date of issue. If you received 10,000 restricted shares as an early employee on January 15, 2022, your 6-month (or 1-year) holding period begins on that date. On July 15, 2022 (or January 15, 2023), you are eligible to sell under Rule 144.

Control Securities: No Holding Period, But Volume and Manner Rules

Control securities are shares owned by directors, officers, or 10%+ shareholders. These people are “affiliates” of the company.

Interestingly, there is no holding-period requirement for control securities if they are already registered (publicly tradable). A director or officer can resell immediately, without waiting months. However, they must comply with volume limits and manner-of-sale restrictions, which effectively throttle their selling even if they own registered stock.

The idea: We trust that insiders will not want to break the law or tank the stock, but we regulate how much they can sell at once to prevent dumping.

Public-Information Requirement

Before any sale under Rule 144, the company must have filed periodic reports with the SEC (10-K annual reports, 10-Q quarterly reports) for at least 90 days. This ensures there is publicly available information about the company’s business, financials, and risk factors, so the seller is not trading on material non-public information.

If the company does not file with the SEC (a private company), there is no rule-compliant way to use Rule 144 unless the company has made other disclosures to investors. This requirement is a significant barrier for restricted-stock holders of private companies: they must wait for an IPO or a major disclosure event to create public information.

Volume Limits for Affiliates

If the seller is an affiliate (director, officer, or 10%+ owner), their Rule 144 sale is subject to a volume limit:

The number of shares sold cannot exceed the greater of 1% of outstanding shares or the average trading volume over the preceding four weeks.

Example: Company XYZ has 10 million shares outstanding. Average 4-week trading volume is 50,000 shares per week, or 200,000 shares per month. One percent of outstanding is 100,000 shares.

The volume limit is max(100,000, 200,000) = 200,000 shares.

An insider can sell up to 200,000 shares in a 90-day period under this rule. If the insider wants to sell more, they must wait 90 days and file a new Form 144.

Non-affiliates (people who are not directors, officers, or 10%+ holders) are not subject to volume limits once they meet the holding period. They can sell the entire position at once.

Manner of Sale: Broker Transactions Only

Rule 144 sales must be executed as unsolicited broker transactions. This means:

• The sale must be done through a broker (not a direct private sale).
• The broker must treat the trade as an unsolicited order from the customer, not a negotiated, solicited transaction.
• The broker cannot push or encourage the seller to dump shares; the customer must initiate.

This requirement prevents insiders from cutting private deals to offload large blocks at above-market prices. All Rule 144 sales must go through the open market at prevailing prices.

Form 144 Filing

Before (or on the day of) sale, the seller must file a Form 144 with the SEC and the issuer. The form discloses:

• The number of shares to be sold
• The estimated proceeds
• The relationship to the company (affiliate, founder, etc.)
• Intended manner of sale

Form 144 is publicly available within one business day of filing, so the market can see that an insider or restricted-stock holder is about to sell. This transparency serves the same purpose as other insider-trading disclosures: it alerts other investors to potential conflicts of interest.

Filing is not optional. Failure to file Form 144 for a Rule 144 sale can be a violation of securities law.

A Worked Example

Alice is a cofounder of a private software company. In 2020, she received 100,000 restricted shares as part of the founding agreement. The company remained private.

In 2021, the company still does not file with the SEC and remains non-reporting. Alice cannot sell under Rule 144 yet because she has not met the 1-year holding period and the company lacks public information. Even after 1 year, without SEC filings, Rule 144 is not available.

In 2022, the company goes public via IPO. Now it is filing 10-Ks, 10-Qs, and other reports. Alice has met the 1-year requirement. She can now sell her 100,000 shares under Rule 144, subject to:

• Volume limits if she is an affiliate (still a cofounder/director).
• Form 144 filing.
• Broker transaction only.

If Alice is still on the board, she can sell no more than the greater of 1% of outstanding shares or 4-week average trading volume in any 90-day period. If she steps down from the board, the volume limits drop away.

Practical Impact

Rule 144 is critical for early-stage employees and investors. Without it, restricted stock would be nearly illiquid until registration, because private sales are hard to value fairly and are legally risky.

With Rule 144, a founder or early employee can take a more liquid position over time after the company goes public. The holding period and volume limits mean they cannot immediately sell everything—protecting other shareholders from a sudden flood. But they can eventually exit, diversify, or raise money.

For public-company insiders (directors, officers, 10%+ owners), Rule 144 is less relevant to holding period (they already own registered shares) but critical for volume and manner rules. Insiders who want to sell beyond the Rule 144 volume limit can use a Rule 10b5-1 plan, a pre-established schedule that allows automatic sales over time, or seek a registration statement for a secondary offering.

Differences from Other Exemptions

Rule 144 is not the only path to resale. Other exemptions include:

• Regulation D, Rule 144A: Allows resale to qualified institutional buyers without SEC registration; typically used for private placements.
• Regulation S: Allows foreign investors to resell securities outside the U.S. without registration.
• Section 4(a)(1): Exempts broker transactions in secondary markets if they are not “distributions” (i.e., not on behalf of the issuer or significant insiders).

Rule 144 is the most common path for ordinary employees and founders seeking to liquidate restricted equity after a company goes public.

See also