Written by: Eliana Cotton and Peter Dzuba Esq.
Part I of a two-part series breaking down Rule 144 and explaining how restricted stockholders—including founders, employees, and early investors—can navigate the core legal requirements before pursuing a resale.part series breaking down Rule 144 and explaining how restricted
For many startups, growth depends on raising capital through founder issuances, equity grants to employees and consultants, and private placements to investors. These early issuances usually involve “restricted securities”: shares that cannot be free traded. As the startup matures, founders, employees, and early investors inevitably ask, “When can I sell my shares?” Answering this requires understanding Section 4(a)(1) of the Securities Act of 1933 (“Securities Act”) and the safe harbor of Rule 144 (17 C.F.R. § 230.144), which provides the clearest path for such holders of restricted securities to resell their shares without registration.
Note: This post addresses the most common situation: private, non-reporting startups. Once a company becomes subject to the reporting requirements of the Securities Exchange Act of 1934, different Rule 144 conditions apply.
I. Section 4(a)(1) and Why “Underwriter” Status Matters
Section 5 of the Securities Act requires that any sale of a security must be registered with the SEC unless an exemption applies. For founders, employees, and early investors, the relevant exemption is Section 4(a)(1), which exempts transactions “by any person other than an issue, underwriter, or dealer.” These holders are clearly not “issuers” or “dealers.” The key question becomes: Does the seller fall within the definition of an “underwriter”? Under Section §2(a)(11) of the Securities Act, an underwriter is anyone who acquires securities from an issuer “with a view…to distribution.” This concept is notoriously broad, and historically sellers struggled to determine whether their resale would be treated as an underwritten distribution. Rule 144 was adopted to solve exactly this problem. If its conditions are met, the seller is not deemed an underwriter, and the resale falls within the Section 4(a)(1) exemption.
II. Affiliate vs. Non-Affiliate Holders
To set the stage, below is a comparison of Rule 144 requirements for non-reporting companies (i.e., typical startups), showing how the rule distinguishes between different types of holders:
| Condition | Affiliate |
Non-Affiliate (not an affiliate for ≥3 months) |
| Holding period | 1 year | 1 year |
| Current public information required? | Yes | No |
| Volume limitations | Yes | No |
| Manner-of-sale restrictions | Yes | No |
| Form 144 filing? | Yes (if >5,000 shares or >$50,000) | No |
As the table illustrates, Rule 144 applies differently depending on whether a holder is an affiliate or a non-affiliate. Affiliates are people who control the company. “Control” generally means the power to direct management or policies, whether through ownership, position, or contract. This typically includes founders, executive officers, director, and large shareholders with influence. Non-affiliates, on the other hand, refers to every other type of holder, including employees with standard equity grants, investors without control rights (i.e., seed, angel, VC, etc.), and former executives who ceased being affiliates greater than 3 months ago.
III. Rule 144 Requirements for Affiliates
If the seller is an affiliate, all conditions of Rule 144 apply. See 17 C.F.R. § 230.144(b)(2) (“Any affiliate of the issuer… who sells restricted securities…shall be deemed not to be an underwriter…if all of the conditions of this section are met.”) The conditions include:
- One-Year Holding Period (Rule 144(d))
For non-reporting private companies, restricted securities must be held for at least one year. The clock begins when the securities are purchased, fully paid for, and issued. Accurate cap table records are essential for determining when the Rule 144 holding period expires.
2. Current Public Information (Rule 144(c))
This rule ensures that potential buyers have access to reliable, current information. For non-reporting issuers, the information is roughly equivalent to Rule 15c2-11 disclosures, which require business description, information on officers and directors, and financial statements generally dated within 12 months. For private companies, “publicly available” information often means it is available to prospective buyers or intermediaries, not necessarily posted online.
3. Volume Limitations (Rule 144(e))
In a three-month period, an affiliate may sell no more than the greater of (a) 1% of the outstanding shares of that class or (b) the average weekly trading volume over the preceding four weeks (with this second option not applicable to privately held companies). For private startups, the 1% limit is the operative rule.
4. Manner of Sale (Rule 144(f)-(g))
Affiliate sales must be (a) routine trading transactions, (b) through a broker or market maker, (c) without solicitation or special promotion, or (d) with only ordinary commissions. These requirements prevent sales from becoming unregistered distributions.
5. Form 144 Filing (Rule 144(h))
The filing of Form 144 with the SEC is required if, during any three-month period, the affiliate proposes to sell (a) more than 5,000 shares, or (b) securities worth more than $50,000. This filing gives the market notice and helps the SEC monitor compliance with Rule 144’s resale conditions.
IV. Requirements for Non-Affiliates
If the holder has not been an affiliate for the last three months and holds restricted securities of a non-reporting company, then only one condition applies: the 1 year holding period under Rule 144(b)(1)(ii). After one year, such seller is not deemed an underwriter, and the resale falls within the Section 4(a)(1) exemption. This is why most secondary sales by employees and small investors are relatively straightforward, in theory.
Peter Dzuba is an attorney at Barakat + Bossa PLLC. He advises clients on complex corporate transactions, including mergers and acquisitions, financings, fund formations, and regulatory compliance. Peter brings a multifaceted background in corporate law, immigration, and cross-border investments. He may be reached at pdzuba@b2b.legal.
Eliana Cotton is a law clerk at Barakat + Bossa PLLC and a third-year law student at the University of Miami School of Law. Her interests lie at the intersection of business, real estate, and emerging regulatory frameworks, with a focus on securities regulation, cryptocurrency, and fashion law. She may be reached at ecotton@b2b.legal.
This post is intended to provide you with general information regarding Series LLCs in Florida, yet its content does not constitute specific legal advice. Please reach out to us directly if you would like our attorneys to assist you.
