Legend Removal - When the Legends Die (Part I of II)
When can legends be removed from restricted securities held by non-affiliates in the absence of an actual resale?

Before we get started, it is important to note that you are asking when it is appropriate to remove a legend under Rule 144 other than in connection with the resale of a restricted security. In other words, your question is when can a transfer agent be instructed to remove the legend just for the sake of removing the legend. This question is not academic because, all things being equal, a securityholder would rather hold an unlegended security in order to allow for an expeditious sale.

In its Adopting Release for the February 2008 amendments to Rule 144, the SEC stated it would not object if an issuer requested its transfer agent to remove the restrictive legend from a certificated security held by a non-affiliate “after all of the applicable conditions in Rule 144 are satisfied.” See Release No. 33-8869 at note 65. We believe the SEC Staff interprets this somewhat compressed phrase to mean: (i) the holder is not, and has not been for the immediately preceding 90 days, an affiliate of the issuer; and (ii) at least one year has passed since the date of acquisition of the securities from the issuer or an affiliate of the issuer. When Release No. 33-8869 was first published in February 2008, some practitioners initially took the view that note 65 could be interpreted to provide a basis for removing legends after six months in the case of securities issued by a reporting issuer that was current in its Exchange Act filings.1

The SEC Staff has not expressly endorsed that view, and we believe the current consensus among securities practitioners is that the one-year mark is the magic date for legend removal in the absence of an actual resale. For a general discussion of the requirements of Rule 144, see our client alert SEC Reduces Restrictions on Resale of Restricted Securities (March 2008).

In connection with any legend removal, the question arises whether the subject security was ever held by an affiliate. This is important because the six-month (for reporting issuers) or one-year (for non-reporting issuers) holding periods are restarted whenever an affiliate resells a restricted security. See 144(d)(1)(i) and (1)(ii). An affiliate of the issuer is any “person” who “directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer.” See Rule 144(a)(1). The definition of “person” in Rule 144(a)(2) includes any relative that shares the home of an affiliate as well as certain entities (other than the issuer) in which the person has a beneficial ownership of 10% or more. So, your analysis has to go beyond the record holder of the security because you must determine whether the record holder has a relationship with an affiliate of the issuer that results in the holder being deemed an affiliate.

Our next installment covers legend removal for debt securities.

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1   An issuer is a “reporting issuer” for these purposes under Rule 144 when it is (and has for a period of at least 90 days immediately before the sale been) subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. See Rule 144(d)(1). However, resales of securities of reporting issuers that are have not filed all required Exchange Act reports during the 12 months prior to the sale cannot be freely made until the expiration of a one-year holding period. Note that the SEC Staff takes the position that a voluntary filer is not “subject to” Section 13 or 15(d) of the Exchange Act, so the one-year holding period of Rule 144(d)(1)(ii) applies to restricted securities of voluntary filers. See C&DIs 131.07 and 132.09, respectively.