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What is a Form 144?


The following
is excerpted from the book
"Profit from Legal Insider Trading"


Form 144s are considered harbingers of future selling activity by insiders, and are even called "intent to sell" documents or "planned sales" when presented by some data services. These colloquialisms are misleading, however, and are far too simplistic descriptions that only confuse the uninitiated about the intelligence that can be garnered from the forms.

Form 144s are hardly harbingers of future sales and, as is often mistakenly thought, not all Form 144 filers are insiders.

Regarding the "harbinger" myth: a Form 144 does not commit the filer to sell the shares indicated. Technically it is only a notice of the filer's intent to sell. If the shares are not sold within a three-month period, another Form 144 must be filed to amend the previous one.

The larger problem with using 144s as a harbinger, however, is that the shares indicated on a Form 144 have probably already been sold by the time you see the Form. If the seller is an insider, they may actually file the Form 144 and Form 4 sale at the same time. This makes sense. After all, it is more likely that an insider wouldn't bother going through the annoying paperwork of a Form 144 unless they were ready to pull the trigger? So, to people who only think of 144s as "planned sales", this can cause the appearance of the same person selling the same amount of shares every quarter.

How do you know if the shares indicated on the Form 144 were sold? Well, if the person filing the 144 is an "insider" by the SEC's definition, you'll see a Form 4 filed documenting the sale. But not all holders are restricted stock are insiders. The only way you'll know if non-insiders really sold the shares indicated on their 144 is if you don't see an amendment within a few months.

Lest I have deflated your opinion of Form 144s altogether, know that I do look at them. Although factors mitigate the use of Form 144s as specific harbingers of future selling pressure and future Form 4 filings, they are still useful to look at. They still indicate that somebody has, or is expected to, sell shares. And that's useful information to at least keep in the back of you mind when researching a new investment idea, or following a stock you own.

The way I view Form 144s is as an adjunct to my analysis of Form 4 sales. After identifying a particularly onerous pattern of insider selling, I'll look at the Form 144s for an indication of if the selling pressure may continue.

But the fact is, Form 144s are most often use by stock brokers, not-for-profit organizations, and other fund-raising folks looking to hit up people for money. If a person files a 144, so these groups reckon, they have some extra money to invest, give to their alma mater, etc.

Why Is There A Form 144 Anyway?
Although colloquially termed "planned sales", Form 144s are more important from the filer's point of view for what they exempt them from. Technically speaking, a Form 144 is the final part of a process that exempts unregistered shares from needing to be registered with the SEC before being sold in the open market.

Form 144s were mandated by the SEC in 1972, when it passed Rule 144 to help clarify the Securities Act of 1933 (the 1933 Act). According to the 1933 Act, stocks, bonds, and other securities must be registered with the SEC before being issued to the public. Registration requirements include filing documents at the SEC that disclose the type of security being offered, how they will be distributed, and substantial financial information about the company behind the security.

Investors in a public offering of stock see all this information in the prospectus that is sent to them by the Wall Street firm underwriting the securities. With disclosure like this, the 1933 Act satisfies its stated purpose: "To provide full and fair disclosure of the character of the securities sold in interstate commerce and through the mails, and to prevent fraud in the sale thereof . . . "

But the SEC isn't so anal in its mandate to protect individual investors that it cannot see that this amount of disclosure doesn't make sense all the time. There are numerous exemptions from registration that give companies the ability to issue small amounts of shares directly to somebody as part of a private placement, a stock bonus, pension or profit-sharing plan, and a number of other reasons. The SEC's exemptions give a nod to the reality that companies issue shares outside of large public offerings, and that requiring the heavy registration disclosure in all instances would be a gruesome burden.

And if registering small, private issuances of shares is too onerous for the company, the people who receive these unregistered shares certainly can't be expected to do the paperwork when they finally sell the shares in the open market. Under Rule 144 of the 1933 Act, they are relieved of this burden.

As the SEC's own text of Rule 144 explains, this rule is "designed to prohibit the creation of public markets in securities of issuers concerning which adequate current information is not available to the public. At the same time, where adequate current information concerning the issuer is available to the public, the rule permits the public sale in ordinary transactions of limited amounts of securities owned by persons controlling, controlled by or under common control with the issuer and by persons who have acquired restricted securities of the issuer."

Basically, if the seller of a small number of unregistered securities isn't considered an underwriter, they are exempt from registering them.

Exemption from registering the shares doesn't necessarily mean holders have carte blanche to trade as they please, however. If there are less than 500 unregistered shares to be sold, and the total value of the shares is less than $10,000, they can be sold at will. But if both of these minimums are not met, the SEC's Rule 144 holds up numerous hoops for sellers of unregistered shares to jump through. These requirements aren't nearly as onerous as registering the shares, but they are enough to make sure that a company doesn't undertake a "stealth" offering of its shares by issuing them in dribs and drabs.

The conditions Rule 144 lays out are as follows.
1) The unregistered shares have to have been held by the selling party for at least one year. It was originally two years, but the SEC lessened the holding period with a 1990 rule change.
2) The sale must be made through a brokerage firm.
3) There must be information freely available to the public about the issuer of the securities.
4) The number of shares being sold cannot represent more than 1% of the issuer's shares outstanding, and also must be less than the average weekly trading volume of the shares over the preceding four calendar weeks.
If these criteria are met, a person may file a Form 144 with the SEC giving notice of their intent to sell a specified number of unregistered shares within the next three months.


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